Equity Recap – The Year Has Been a Great Lesson in Resilience: In July 2026, equity markets experienced a sharp internal rotation as investors pulled back from high-flying mega-cap tech and AI trades, favoring defensive, value, and quality equities instead. While the tech-heavy Nasdaq bore the brunt of this momentum unwind, the broader market proved remarkably resilient under pressure. All things considered, a flat month for the S&P 500 in July feels pretty heroic given the chaotic backdrop – ranging from a hedge fund implosion and historic Yen intervention to a post-FOMC breakout in 30-year yields, renewed Middle East tensions, and ongoing hawkish signaling from the Federal Reserve. Despite the swirling macro headwinds and volatile headlines, solid core earnings helped the market absorb the shockwaves and keep broader index losses in check.
Bond Recap: The U.S. Treasury market was defined by a dramatic bear steepening of the yield curve, driven by a heavy supply of long-duration debt, persistent inflation worries, and a sharp repricing of long-term risk. Short-term rates remained relatively anchored – with the 2-year yield holding around 4.28% as the Federal Reserve kept benchmark rates on hold – but the long end of the curve sold off aggressively. Heavy federal deficit issuance and corporate borrowing for AI infrastructure flooded the market with fresh paper, while renewed Middle East tensions and volatile energy prices stoked inflation expectations. This supply-demand imbalance culminated in a post-FOMC breakout that pushed the 30-year Treasury yield past 5.20% – a historic threshold not seen since 2007. Ultimately, this steepening reflects a growing demand by bond investors for a higher term premium, raising borrowing costs across the economy and putting direct pressure on corporate refinancing and long-term mortgage rates.
Aptus’ Phrase of the Year – Get Back to the Market Basics: When markets feel like they’re chaotic, focus on the basics, which are very simple:
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- Earnings Growth Continues to Trend Higher: With Q2 earnings season in full swing, the fundamental backdrop for equities remains supportive. As of the end of July, the ‘26 earnings growth stands at 29.6%. If there’s one area of fundamental risk, it’s the continued concentration within the index – it can drive markets higher or lower. For now, though, growth remains robust due to the strong operating leverage from those exact mega-caps.
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- Profit Growth Remains Strong: Simply said, when economic profitability is increasing or staying stagnant, historically it’s been difficult for the market to get into trouble. Not only is the market-cap weighted index, the S&P 500, witnessing operating margin expansion, but the average stock has also seen growth.
When the Biggest Names Stumble, the Rest Don’t Have to Follow: Historically, when mega-cap stocks have sold off, the instinct is to brace for a broader market collapse – but 2026 has challenged that assumption. As the largest technology and AI names pulled back sharply in June and July, Health Care, Industrials, and Financials held their ground, and the equal-weight S&P 500 continued to outperform its cap-weighted counterpart. Concentration cuts both ways: the same dynamic that makes a handful of stocks look like “the market” on the way up means their stumble doesn’t have to take everyone else down with them.
Why Has the Market Remained So Resilient? Three separate forms of economic stimuli are hitting the economy and markets. Combining these factors increases expectations for economic growth and corporate earnings sustainability.
Monetary stimulus: In September, the Fed cut rates, but more importantly, signaled that a rate-cutting cycle had started. That matters because it means monetary stimulus is now occurring, which is positive for the economy and, peripherally, risk assets. It tends to take 12 to 16 months for rate cuts to flow into the economy.
Fiscal stimulus is occurring via the passage of the “One Big Beautiful Bill”, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries.
Private stimulus, meanwhile, is occurring through massive AI-linked capital expenditures from major tech companies such as META, MSFT, AMZN, ORCL, and others (remember, these mega-cap tech firms could spend more than $750 billion on AI infrastructure in 2027).
The Kevin Warsh “Reaction Function”: Everyone wants Warsh’s “reaction function” – the rule (mathematical like Taylor’s, or gut-driven like Greenspan’s) that, combined with a forecast, becomes forward guidance. Some Fed Governors even want the Fed to publish it outright. But whose rule is the important question? Kevin Warsh just took three dissents and called the split a “design feature” – meaning there’s no shared rule across 12 voters; there are 12 different ones. Before Warsh can give us his function, he needs a metric behind it. And even then, 11 more voters remain a mystery on their respective reaction function. Markets have gotten spoon-fed the Fed’s rules instead of reasoning it out themselves – a dependency that cuts both ways. If you can call the Fed’s next move correctly, that’s where the real money is made and is called free market capitalism.
Moving Forward, Investors Need to Remain Optimistic: As long as earnings are growing, which they are, and as long as both monetary and fiscal policy are on the market’s side, the burden of proof will remain with the bears. We are still in a bull market – don’t fight it – but that doesn’t mean chase it or sell if there is weakness. It appears that the market is entering a period where it can see a moderation of the hard economic data, but not enough to warrant a recession. Meanwhile, forward-looking sentiment data should continue to improve as economic tail risks diminish, and expansionary fiscal policy is on the horizon. This, combined with ongoing AI-driven investment and innovation, should continue to support risk assets once we move beyond the current geopolitical tensions.
Words of Wisdom: As the market continues to evolve, there are always some core principles that should be the foundation of one’s mental game:
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- At the end of the day, the pursuit of perfection is an ultimate, pressurized failure mindset – it will eat every investor alive if they continue to chase it. Everybody wants to be the hero because they care and they want to win. But success doesn’t live in that realm.
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- Neither does comparison. Comparison is the thief of joy. If one continues to compare oneself, they’ll remain joyless.
S&P 500 EPS: ’27 (Exp.) EPS = $402.70 (+13.2%). ’26 (Exp.) EPS = $355.70 (+29.6%). ’25 (Exp.) EPS = $274.54 (+12.0%). ‘24 EPS = $245.16 (+11.5%).
Valuations: S&P 500 Fwd. P/E (NTM): 19.5x, NASDAQ: 21.3x, EAFE: 15.8x, EM: 10.2x, R1V: 17.8x, and R1G: 22.0x. *
*Source: Bloomberg and FactSet, Data as of 07/31/26
Disclosures
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.
The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2608-1.
