Key Observations
- Markets were mixed in July as equities delivered modest positive returns amidst a favorable earnings backdrop and resilient economic data.
- Clarity around trade policy ahead of the August 1 deadline helped give investors a better grasp of what’s to come with key trade deals being made with the EU, U.K. and Japan.
- A disappointing July employment report heightened investor uncertainty and future path of interest rate decisions by the Fed.
Market Recap
July brought a mix of resilience and recalibration across global markets. Investors navigated a landscape shaped by ever fluent trade policy, ongoing geopolitical tensions and a resilient macro backdrop. Equity markets, for the most part, moved higher, buoyed by a strong start to earnings season and better than expected economic data. Additional clarity on trade policy helped as well, as deals were made with key partners such as the U.K., European Union and Japan before the August 1 deadline. As we move through August, we continue to hope for more trade clarity and their economic impact in preparation for the Federal Reserve’s next meeting in September.
Within the U.S. equity markets, the S&P 500 Index reached new highs, rising 2.2 percent to start the second half of the year. Technology and energy sectors were standouts, with the former gaining over 5.0 percent as AI-driven optimism persisted and the latter benefiting from rising oil prices amidst continued tensions in the Middle East. Small cap equities (Russell 2000 Index) modestly lagged their large-cap counterparts, gaining 1.7 percent in the month. As mentioned, the second quarter earnings season continues to deliver upside surprises with broad-based growth and strong beat rates. Tariff related concerns and the potential impact on higher cost of goods and inflation have investors wondering about the impact on company fundamentals. Additionally, as clarity around trade policy becomes clearer, it remains to be seen how companies will handle the added cost pressure. Margins remain healthy. The net profit margin for the S&P 500 is 12.3 percent, slightly down versus the prior quarter but above the 5-year average [1]. Fundamentals remain favorable yet valuations remain elevated. The forward 12-month P/E ratio for the S&P 500 hovers near 22 times earnings, well above long-term averages [2]. This premium reflects optimism but raises the bar for earnings to continue delivering. So far, the second quarter earnings results are broadly encouraging. Companies are managing costs well and delivering solid earnings growth.
Abroad, developed markets, as measured by the MSCI EAFE Index, slipped 1.4 percent. Currency effects weighed on returns, as the U.S. dollar strengthened modestly against major peers. Despite the modest pullback, international equities remain well ahead of domestic year to date. Emerging markets rose 1.9 percent in July. China was the standout, gaining almost 5 percent, driven by policy support and improving sentiment around regulation. Broader EM strength was also supported by gains in Korea, though India declined amid ongoing trade uncertainty and an increase in threatened tariffs.
Fixed income markets were mixed as the Bloomberg U.S. Aggregate Bond Index slipped 0.3 percent in July as investors digested mixed signals from the Federal Reserve. The FOMC held rates steady in July amid persistent inflation and uneven market data. It was not a unanimous decision as there were two dissenting votes, the first time since 1993. Rates moved higher over the course of the month, driven by lingering inflation concerns, deficit expansion and the markets reduced outlook for recession in the near term.
July Employment Report Creates More Uncertainty
There was no shortage of economic data released during the month but perhaps the most significant was the July unemployment report coming in at 4.2%. While on the surface the unemployment rate shows a resilient labor market, July brought a different perspective with only 73,000 new jobs added in the month, well below the consensus estimate of 115,000 [3]. While the miss is concerning, the largest takeaway from the report was the significant revision for May and June, reducing the combined number of jobs by 258,000(!) from what was originally released.
Additionally, U.S. GDP grew at 3.0 percent in the second quarter [4], driven primarily by consumer spending and a reduction in imports, and the labor market had continued to be resilient until the last week of the month (more on that below). However, first half GDP was +1.2% given the sharp decline in the 1st quarter, which is well below the historical trendline of 2-2.5% annual growth [5].
Up until recently, hard economic data had been resilient in the face of the Trump administration’s tariffs, but the revised data certainly begs the question, are we starting to see the impact already? Further, the recent jobs report fueled the volatility of market expectations for when the Federal Reserve would cut rates. As highlighted in the chart below, expectations had been above 50 percent heading into the FOMC’s July meeting, but following Powell’s press conference, which markets took to be “hawkish”, the probability dropped to below 40 percent. The roller coaster didn’t stop and following the recent employment report, expectations for a 25-basis point cut in September jumped to over 80 percent. The Fed has held steadfast in its “data dependent” approach with one additional employment report to digest before the next Fed meeting in September, but the July employment release will be difficult to ignore as the Committee balances its dual mandate of stable inflation and full employment.
Market Implied Probability of 25 bps cut at September FOMC
Outlook
Looking ahead, the global economic outlook remains cautiously optimistic. The IMF revised its 2025 global growth forecast slightly higher, citing improved financial conditions and fiscal expansion in key markets [6]. Still, risks remain. Inflation in the U.S. continues to run above target with the most recent CPI number for July coming in at 2.7%. Albeit smaller than many predicted, tariffs are starting to show up in prices, and consumers are responding to these price increases by cutting back on spending. In response, companies are slow to hire at risk of potential layoffs if conditions get worse. Finally, geopolitical tensions, from the Middle East to trade disputes, could quickly shift market dynamics. In this environment, diversification and discipline remain essential. July’s performance underscored the importance of balancing opportunity with risk, especially as markets evolve into a complex and uncertain investment landscape.
Sources
[1] FactSet Earnings Insight. As of July 25, 2025.
[2] FactSet Earnings Insight. As of July 25, 2025.
[3] BLS, FactSet. As of August 1, 2025.
[4] Bureau of Economic Analysis. Advance estimate for Q2 2025 GDP. As of July 30, 2025.
[5] Appleton Partners Review & Outlook August 2025
[6] IMF World Economic Outlook July 2025
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
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Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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