The markets in July felt like a rollercoaster ride with plenty of fireworks along the way. Earnings season started strong, with big banks reporting blowout financial performance, and the earnings momentum was sustained throughout the month. However, investors in big tech companies seemed more interested in future spending plans and forward guidance than past earnings, for good reason.
Tech’s spending spree on AI has led to significant borrowing, while investors worry about the future path of interest rates. The Iran war and its impact on oil prices and inflation have increased the odds of a rate increase. The result was an increase in long-term interest rates, with the S&P 500 Index losing 0.06% for the month.
AI Developments Pressure the Technology Sector
AI continues to dominate the narrative and drive sentiment. Global technology stocks declined following two announcements from China: a new semiconductor and a new, more powerful model announced by DeepSeek to compete with U.S. rivals. These developments have the potential to cause an oversupply of semiconductors. The combination rattled tech markets, with the Information Tech sector declining 3.43% for the month.
S&P 500 Sector Performance in July 2026
Seven of the 11 sectors of the S&P 500 ended the month with positive returns, led by Energy, Financials, and Health Care, gaining 12.40%, 6.16%, and 2.40%, respectively.
Energy continues to act as a risk hedge amid continued uncertainty in the Middle East and recent developments in Russia/Ukraine. It is estimated that Ukrainian strikes on Russia have led to a 30%–40% decrease in refining capacity. While it is difficult to verify the extent of the damage in Russia, given the issues in Iran, any impacts on the global oil trade are drawing considerable attention.
U.S. Stock Valuations and Market Concentration
We continue to remain cautious due to our concerns about valuations and concentration in large U.S. stocks. Forward earnings estimates, if realized, could make currently overvalued stocks much more reasonable. The broadening of returns is also positive, but given the current weight of technology, its impact on the returns of the overall index is difficult to mitigate.
Mid-Cap and Small-Cap Stocks Pull Back
Mid-sized and smaller U.S. companies saw their stocks impacted by higher interest rates and the sharp selloff in technology. For the month, both indexes declined: the S&P MidCap 400 dropped 2.38%, and the S&P SmallCap 600 fell 1.90%.
The combination of events took some excitement out of a strong run this year by smaller stocks, but we still continue to view these markets favorably.
International Markets and Global Diversification
Foreign markets were mixed, with Developed Markets posting a gain and Emerging Markets declining. The S&P Developed ex-U.S. Broad Market Index rose 0.30%. The sharp selloff in technology and increasing global interest rates impacted Emerging Markets, sending the S&P Emerging BMI down 0.33% for the month.
South Korea’s equity market declined during the month amid weakness in technology stocks. The market is relatively concentrated, with two technology companies accounting for more than 50% of total market capitalization.
Given the changes in the relationship between the U.S. and many other countries, we believe that foreign markets will continue to slowly decouple from the U.S. markets and provide some diversification to portfolios.
Bond Market Outlook and Federal Reserve Policy
It was also a tough month for bonds, as interest rates increased throughout the month. The 30-year U.S. Treasury bond hit yields last seen in 2007, as investors demanded higher compensation for inflation risk and what seems to be a less accommodative Federal Reserve.
For the month, the S&P U.S. Aggregate Bond Index suffered a 1.16% decline. The Fed held rates steady during its monthly meeting, which was widely expected. However, in his second conference, Fed Chair Kevin Warsh did little to comfort markets. His stance of not providing guidance is an abrupt departure from the past several Fed chairs, and markets are still incorporating the lack of communication into forecasts and expectations.
Shorter-Maturity Bonds in the Current Rate Environment
It is difficult to be excited about owning longer-dated bonds, even with higher yields, as there seems to be no real reason for longer-term rates to stop climbing. We continue to favor bonds that have relatively shorter maturities. However, we don’t believe that interest rates will climb indefinitely, as we look for signs of an entry point into longer-maturing bonds.
Precious Metals and Gold Performance
Precious metals regained a glimmer, posting a gain of 0.16% based on the S&P GSCI Precious Metals Index. Gold seems to be hovering between $3,900 and $4,150 per ounce.
The strength of the dollar and gold’s historically inverse relationship with interest rates have made any attempt to move higher difficult. However, there have been reports of resumed buying by central banks, which may have contributed to the monthly performance.
We continue to view gold and precious metals as an important diversifier in the portfolio and a buttress against continued monetary debasement from excess government spending.
Diversification Remains Important for Investors
Like an errant firework or the sudden drop on a rollercoaster, July provided some unanticipated outcomes, but diversification worked for investors.
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.
