Market Recap – July 2025: July was a great month for risk assets. Historically speaking, when July is a good performance month, it tends to be a strong signal for the remaining part of the year. But, even with a strong month, investors will likely be focusing on the last week of the month as a sign of future market movement. The strong month ended with a legitimate “risk off” tone for the first time in what seems like forever, as a continuation of an unusually strong earnings season was offset by economic data that trended more “stagflationary” with the PCE price index coming in slightly higher than expected, while the labor market data and consumer spending were meaningfully weaker.
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- What Does This Mean for Markets? It means the market was pricing in near perfection after a historic rally from April lows as the combination of “Goldilocks” economic prints in April-July, with a remarkably impressive earnings season and firming of tariff rates, sent all indexes to P/Es well above long-term averages. Although earnings season has remained reasonably strong, weaker consumer spending/jobs data combined with concern that we may now see the inflation impact of tariffs in the coming months sent a “stagflation” fear through investors used to perfection. This is a simple reminder that markets can move fast in either direction.
The July Jobs Report Recap → What Does it Mean for Markets? First, the jobs report was a major disappointment, but job adds are still positive, so it’s not signaling any sort of recession or slowdown. Second, of all the economic reports, the jobs report is the most “inaccurate.” It’s prone to massive revisions (as we’ve seen) and can offer diverging signals between the “Establishment” and “Household” surveys, and has extreme seasonal volatility (usually in August/September, so right on cue). Importantly, no other labor market indicators are flashing a warning sign (no claims or JOLTS), and other economic metrics are stable, so the jobs report is not warning of a slowdown. Nonetheless, this will be used to argue for a rate cut in September.
Federal Reserve Meeting Update: The FOMC decision was slightly dovish, and it reinforced current expectations for a September rate cut. But neither the FOMC statement nor Powell’s press conference made a September rate cut dramatically more likely, and that is why stocks reacted negatively to the news, despite the slightly dovish decision. The main change in the statement came in the first sentence, as the Fed characterized economic growth as having “moderated” compared to the previous “expand at a solid pace.” That implies the Fed’s view on economic growth has been slightly downgraded and, as a result, the chances of a rate cut are slightly more likely. Additionally, as expected, we had two dovish dissents from Governors Waller and Bowman, who favored a 25-bps cut at this meeting. Again, that’s the first time two officials have dissented since 1993.
Bottom line, the change to the characterization of growth in the statement, combined with the two dissents for a rate cut, doesn’t dramatically alter the outlook for a September rate cut. But they do reinforce the consensus expectation that a cut will occur then.
Earnings Season Has Begun: It would be an understatement to say that this earnings season has seen a significant amount of stock dispersion. Looking at the facts: As of the month end, about 66% of the S&P 500 had reported earnings this quarter. So far, 74% beat on EPS, 77% beat on Sales, and 61% beat on both. For context, that trio of historical averages dating back to 2000, respectively, is 65%, 59% and 46%. In its simplest form, this has been a great earnings season that is besting expectations to a point where EPS growth on a year-over-year basis is now 7% (originally expected to be 4.8%). And that is why we have seen earnings beats being rewarded, rising +160bps relative to the market (that’s “normal” versus history).
Misses are getting absolutely crushed, falling -810bps, on average, post-print. This figure is well above historical norms and is a great representation of the difficult environment underneath the hood of the S&P 500. As a recap, in the Q1 reporting period, US mega cap tech companies delivered a show of force (amidst an easy setup).
In the Q2 reporting period, they delivered another very strong set of results (amidst a much more demanding setup). The Magnificent Seven (ex-NVDA) grew earnings by another 26%, compared to 4% for the rest of the S&P 500. More broadly, while this space is not immune to debate, we do think questions around the sustainability of AI capex will reappear at some point. The fact is these companies continue to tell a story around earnings and capital that no other cohort comes close to, and this is why the market breadth has been very narrow in recent data.
The Market Moving Forward: It appears that the market is entering a period where it can see a moderation of hard economic data, but not enough to warrant a recession. If markets price in deeper rate cuts off the back of this, combined with seasonally supportive flows, then this will only serve to ease financial conditions further. Meanwhile, the forward-looking sentiment data should continue to improve with economic tail risks diminishing and expansionary fiscal policy on the horizon. This, combined with continued AI-driven investment and innovation, should continue to support risk assets once we move beyond the current geopolitical tensions. We may be headed into a Goldilocks summer with both bond and equity markets performing well.
Politics and Markets: The market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns, or DEI initiatives. The market only cares about policies that:
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- Increase (or decrease) earnings, and
- Support growth (or hinder it).
Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years), and this will help us cut through the noise and stay focused on the policies that will impact markets.
S&P 500 EPS: ’25 (Exp.) EPS = $262.82 (+7.3%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%). 2021 = $206*
Valuations: S&P 500 Fwd. P/E (NTM): 22.2x, EAFE: 15.2x, EM: 13.0x, R1V: 17.3x, and R1G: 29.3x. *
*Source: Bloomberg and FactSet, Data as of 7/31/25
Disclosures
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This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.
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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-2408-5.
