Stocks continued to rally in July, but complacency is creeping in. Below the surface, familiar concerns are returning: narrow leadership, policy uncertainty, and slowing inflation progress.
July 2025 Monthly Market Update
- Stocks: Markets powered higher in July, with the S&P 500 rising 2.3% in July and pushing its year-to-date growth to 8.4%.
- Mega-cap tech earnings, trade deals, and low volatility fueled the stock market surge. The Nasdaq and S&P both hit six straight record closes at month-end as growth continued to outperform value.
- International Stocks: International equities underperformed the S&P 500 as the U.S. dollar strengthened. Developed Markets fell 2.1%, while Emerging Markets increased by 0.7%.
- Bonds: Bonds remained under pressure and ended the month with a slight loss as Treasury yields rose. The US Bond Aggregate posted a decline of 0.3%.
Tech Leads, Again (With Some Help from Trade Agreements)
A familiar narrative returned in July – large-cap tech driving stock markets to new all-time highs. The S&P 500 and Nasdaq both logged six consecutive record closes late in the month. The “Magnificent 7” drove most of the returns in July (again), surging more than 5% as major AI-related companies reported strong results. Smaller companies briefly outperformed early in the month, but that reversed quickly by month-end.
In addition, markets responded positively to new trade agreements with Japan and the European Union. While the tariffs were less aggressive than anticipated, the effective U.S. tariff rate is still rising, putting long-term pressure on input costs, margins, and potentially inflation. For now, optimism from deal announcements continues to outweigh the risks, but the market may be underestimating the long-run economic effects of more protectionist policy. In addition, stagflationary concerns loom as the full impact of tariffs remains to be seen.
Market Valuations Back in Focus
This top-heavy dynamic continues to stretch market valuations. The S&P 500 now trades at over 22x forward earnings, well above the 16.8x long-term average and up sharply from 18x in April. With multiples elevated, future returns will depend more heavily on continued earnings growth.
Interest Rate Cuts on Hold, Again
After cutting interest rates by a full percentage point in late 2024, the Fed has held interest rates steady for five consecutive meetings. The reason? In our view it’s twofold:
- Core inflation has stalled around 3%, and
- The labor market remains resilient with unemployment near 4%.
While the market once expected rate cuts as early as March, those expectations have been continually pushed forward – first to May, then June, and now (maybe) September. Following the July Fed meeting, the probability of a September cut fell below 50%. Current consensus now calls for a single cut in October, followed by another in January 2026.
In our view, as long as inflation progress remains sticky and tariffs introduce new risks, the Fed will remain cautious. Policymakers have consistently emphasized the need for patience while they wait for more clarity in the data, and we have no reason to think different (at while Powell is in charge).
At Defiant Capital Group, we remain focused on positioning portfolios for resilience. Extended markets, unclear policy, and top-heavy leadership all demand caution and discipline.
This is not the time to chase headlines. It’s the time to sharpen focus.
Jonathan [email protected] Profile
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