July served as a reminder that markets continue to navigate a complex environment where economic resilience, persistent inflation pressures, evolving monetary expectations, and geopolitical developments all compete for investor attention. An escalation in tensions involving Iran contributed to higher energy prices and increased volatility late in the month, while investors also digested another Federal Reserve meeting with mixed signals and lack of clarity on the direction of policy. The Federal Open Market Committee voted to keep the federal funds rate unchanged at 3.50%-3.75%, though a notable number of policymakers favored tighter policy, leading Treasury yields to move higher and weighing on interest rate sensitive asset classes.
U.S. equities finished modestly lower, but performance broadened beneath the surface. The S&P 500 declined 0.1% for the month, giving back a portion of its strong 10.1% year-to-date gains. The Russell 2000 fell 3.0% as rising bond yields and tighter financial conditions created a headwind for small-cap companies, resulting in year-to-date gains of 18.9%. The market's leadership continued to rotate away from some of the largest growth-oriented stocks that had led earlier in the year, while investors favored sectors tied to energy, financials and more value-oriented areas of the market.
International developed equities delivered positive results despite the uncertain environment. The MSCI EAFE Index gained 2.0% in July and is up 11.6% year-to-date, supported by strength across parts of Europe and the United Kingdom. A weaker U.S. dollar also provided a modest tailwind for U.S.-based investors. Emerging markets faced a more difficult month. The MSCI Emerging Markets Index declined 3.1% during the month, driven largely by weakness in several technology-heavy Asian markets as investors reassessed growth expectations. This was a significant pullback after a strong first half of 2026 but is still up 20% for the year.
Fixed income markets struggled as yields moved higher following the July FOMC meeting. The Bloomberg U.S. Aggregate Bond Index fell 1.3%, reflecting pressure across both Treasury and investment-grade corporate bonds. The market had a mixed interpretation of the Fed's messaging, particularly with inflation remaining above target and energy prices rising amid Middle East tensions. We continue to value real assts as a diversifier with lower correlation to public equities and fixed income.
Small-Cap Equities Providing Diversification Benefits
We highlighted in our 2026 Outlook the growing concern of AI concentration and elevated valuations within the U.S. large-cap equity market. As part of our AI Playbook, we advocated for diversifying positions in portfolios, such as both small-cap and mid-cap U.S. equity exposure, as well as international equity positions. We believed these companies would be a part of the AI flywheel, benefitting from the use of AI, despite not being the direct builders of AI. Attractive valuations of small-cap equities relative to large-cap further supported the case for allocating to these areas. Enthusiasm for AI has been a tremendous tailwind for many large-cap companies, but growing concerns about valuations and the path to monetization have put pressure on some of the mega-cap names that have led the market over recent years. Seven months into the year, we have been rewarded for having these diversified exposures within portfolios as small-cap and mid-cap stocks are up 18.9% and 14.6%, respectively, compared to large-cap up 10.1%.
Outlook
This year has reinforced the importance of remaining diversified as market leadership continued to broaden beyond the largest U.S. companies. The strong relative performance of small-cap and mid-cap equities year-to-date supports a key theme from our 2026 Outlook: investors do not need to rely solely on the largest AI beneficiaries to participate in the next phase of the cycle. As AI-related investment spreads across the economy, smaller companies, non-U.S. equities and real assets may all play a role in capturing a broader set of opportunities. With valuations still elevated in parts of the market, interest rates higher and geopolitical risks unresolved, we continue to favor balanced portfolios that can participate in broadening market leadership while maintaining exposure to high-quality managers and diversifying asset classes. Lastly, while the Fed remains on hold, Chairman Warsh and the other Fed governors will continue to rely on important unemployment and inflation numbers throughout the fall in order to determine the direction of their next move.
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.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
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.
Clarendon Private, LLC (“Clarendon Private”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Clarendon Private and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://www.clarendonprivate.com or the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Clarendon’s CRD # 316616