The Federal Reserve plays a central role in the U.S. economy through interest rate policy, inflation management, and market influence, while its independence from government ensures credibility and long-term stability.
July started off with a bang for U.S. stock investors, as the S&P 500 climbed to new heights, achieving a new all-time high 10 different times during the month. Quick as a firecracker, momentum shifted, leaving investors off the highs but still with a 2.24% gain for the month. Economic uncertainty caused by the ever-changing tariff policy continues to mystify investors and economists alike.
U.S. large-cap stocks benefited from optimism surrounding the massive tax and spending bill signed on the 4th of July. Additionally, stronger-than-anticipated earnings and a rebound in consumer sentiment helped to lift stocks early in the month.
Inflation Data Tempers Gains
Economic data changed momentum as the month progressed. The consumer price index (CPI) showed an increase in inflation, increasing concerns about the impact of tariffs. This initial concern was solidified by an increase in the Personal Consumption Expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation measure. Price inflation remains a key risk, especially with higher tariffs not yet fully implemented and large-cap U.S. companies trading at elevated valuations.
Mixed Employment Data and Fed Policy Weigh on Markets
Softer employment data from the Job Openings and Labor Turnover Summary (JOLTS), combined with the Fed keeping the short-term interest rate steady was enough for investors to push returns lower late in the month. This was despite 82% of companies beating earnings estimates and 79% beating revenue estimates for the second quarter, according to Fact Set.
Sector Performance: Tech Leads, Health Care Lags
From a sector perspective, Information Technology led the market, up 5.19%, powered by gains from Microsoft, Oracle, and Nvidia. Utilities ended the month up 4.94% as investors continued to push the sector higher due to power usage from data centers supporting artificial intelligence. Health Care was the month’s biggest laggard, down 3.26%, weakness from United Health Group led the decline.
Small and Mid-Caps See Modest Gains
Small and mid-sized US companies were affected by many of the same issues as their large company peers. Small companies ended the month up 0.93%, while mid-sized companies were up 1.62% based on the S&P SmallCap 600 and S&P MidCap 400 index returns.
Global Markets: Strong YTD, Tepid in July
International stocks have had a great run this year. Both developed and emerging market indexes have performed well above US indexes. Both were positive for July, although the S&P Developed Ex-US Broad Market Index only posted a 0.07% gain. The S&P Emerging Broad Market Index fared better, up 2.41% for the month. Trade and tariffs continue to take center stage, but inflation, weak growth, wars, and the dollar gaining strength late in the month kept a lid on foreign returns.
Bond Market Reacts to Fed Signals
The S&P US Aggregate Index finished the month down 0.23%, as bonds reacted to Fed’s interest rate policy and strong statements regarding the future path of interest rates from Chair Jerome Powell.
Debate Rages Over Fed’s Next Move
Whether Powell was speaking in a manner to assure markets of Fed independence or whether he really feels that rates need to be higher for longer than most market participants expect is up for debate. The CPI and PCE reports bolster the argument for keeping rates high.
However, for the first time since 1993, there were two Fed governors that dissented, believing the Fed should cut rates due to potential weakness in the job market. Both arguments have been validated by recent data, as reports show both higher inflation and weakness in the labor market. This has again given rise to concerns around stagflation, an economy experiencing inflation and weak growth.
Concerns about the ability of the Fed to conduct policy without political interference have reached a near fevered pitch. Even the two dissenters were looked upon skeptically by some economists and market participants due to beliefs that they are playing to the current administration in hopes of being nominated as the next Fed Chair in May 2026.
Precious Metals Stay Resilient Amid Uncertainty
Given the cross currents in the macroeconomic and geopolitical outlooks, the S&P GSCI Precious Metals index rose 0.10%, continuing to lead all asset classes with year-to-date gains of 24.40%. The price of gold has been consolidating throughout the year. Silver and platinum have outpaced gold’s gains so far this year. New developments in the Russia/Ukraine war, including a new timeline for a cease fire and the ability of Ukraine to use long range weapons into Russian territory provides reasons beyond monetary policy to continue holding precious metals.
Looking Ahead
July started off with a bang, but as the fireworks ended and the smoke cleared investors were left questioning the future.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
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