July 2026: Stocks Survive Wild July

Global equities round-tripped in July to end lower (-0.9%) as the crowded chip trade unwound on worries about spiralling AI capex. Stocks found their footing only after Microsoft's backlog, Amazon's AI run rate pointed to better monetisation. What held up throughout was breadth: equal-weight S&P 500 outperformed, Japan’s broad TOPIX (flat) beat tech-focused Nikkei 225 (-7%). True diversification requires investors to go beyond the market-cap weighted index.

In macro, the focus has been on rising rates. With inflation elevated near 3.5%, markets are pricing in over 60% chance of a Fed hike by year-end. Less talked about is what that has done for starting yields. The longer you hold quality bonds, the more of your return comes from coupons – which is why starting yields strongly predict five-year returns. From today's ~5.4% on US investment grade bonds, history points to around 7.5% a year over the next five.

The risk is rising in the other direction. Much of the hike expectation in the price (5-year US Treasury yields +60bps YTD). Employment is weaker than it looks (June payrolls barely met half the projected number). Inflation is nuanced: energy is just 6% of CPI, and housing – a third of the basket – has largely been cooling. This could keep the Fed on hold into next year, and bring yields back down if disinflation returns – creating a window to capture income now.