Summer Strength: Markets Shine Amid Shifting Economic Currents

The month of July 2025 was marked by a mix of resilience and increased volatility in U.S. financial markets. Equities showed varied sector performances, with Utilities (+4.91%), Technology (+3.76%), and Industrials (+3.04%) leading gains, while Health Care (-3.23%) and Consumer Staples (-1.47%) lagged. This pattern reflected both changes in the macroeconomic environment and investor repositioning in anticipation of possible monetary policy shifts, such as FOMC rate cuts at the September meeting. Long-term U.S. Treasury yields rose steadily throughout the month, fueled by ongoing inflation concerns and substantial Treasury issuance, putting pressure on interest rate-sensitive sectors but also creating more yield opportunities in fixed income.

Drivers of Volatility

Several factors contributed to the choppier trading conditions in July:

Federal Reserve Outlook

Market participants weighed softer inflation readings against mixed economic activity data. While the Fed maintained its policy rate at 4.25%–4.50%, investors grew increasingly confident that a rate cut could materialize in September, contingent on labor market trends (we are starting to witness weakness within this data).

Earnings Season

The 2Q2025 earnings season brought an overall positive surprise rate above 80%, with notable strength in Communication Services, Technology, and Financials. However, energy and materials sectors posted weaker results, reflecting commodity price pressures and slowing global demand.

Geopolitical and Policy Risks

Tariff policy uncertainty and evolving trade dynamics, particularly in technology and industrial supply chains, influenced investor sentiment throughout the month.

Labor Market Inflection – August Non-Farm Payrolls

Early August brought the highly anticipated Non-Farm Payrolls report, which proved to be a turning point for market expectations. July payroll growth came in at +73,000, significantly missing consensus estimates of ~110,000. More impactful were the steep downward revisions: June was cut from +147,000 to just +14,000, while May saw an additional 125,000 job loss adjustment. These revisions amounted to a net negative 258,000 change, signaling a sharper-than-expected deceleration in labor market momentum.

The softer labor data reinforced the view that the Fed may need to act sooner to support economic activity, with market-based probabilities for a September rate cut rising sharply following the release (current probabilities are around ~90% for a September cut). Treasury yields on the short end fell in response, while equities displayed mixed reactions, with cyclical sectors under pressure but rate-sensitive areas finding support.

Fixed Income & Interest Rates

The rise in long-term Treasury yields during July reflected both supply pressures from elevated government borrowing and lingering inflation uncertainty. For fixed income investors, the upward shift in yields, particularly in the intermediate and long maturities, presented opportunities to lock in attractive income levels while positioning for potential price appreciation should the Fed begin its expected easing cycle.

Why Discipline Matters

Periods like July serve as a reminder that markets can pivot quickly in response to economic data and policy expectations. While volatility may create unease, it also offers opportunities, especially for portfolios positioned with a long-term strategic plan in mind. The investment strategy you built with your advisor is designed to withstand periods of uncertainty, balancing risk and opportunity in alignment with your goals, time horizon, and risk tolerance. It is by adhering to your plan that we can better provide you with Financial Peace of Mind.

Staying the Course – Next Steps

As we look ahead, it remains essential to avoid making reactionary changes based solely on short-term market swings or single data points. If recent developments have you questioning your current allocations, this is an opportune time to revisit your plan in a structured, deliberate manner. Please reach out to your advisor to schedule a review and ensure your portfolio remains appropriately positioned for the evolving economic landscape and reflects your current risk tolerance level. We hope that you are having a great summer and look forward to seeing you again soon!