Stocks Trade Higher on Strong Q2 Earnings and Trade Deals

Photo Credit: Kouji Tsuru, Unsplash

Monthly Market Summary

  • The S&P 500 Index rose +2.3% in July, pushing its year-to-date return to +8.4%. Large Cap Growth stocks led with a +3.7% gain, while Large Cap Value gained +0.6%.

  • Utilities was the top-performing sector, with the Technology, Industrials, and Energy sectors outperforming the S&P 500. Defensive sectors underperformed, with Health Care, Consumer Staples, and Communication Services all trading lower.

  • Bonds posted a modest loss as Treasury yields rose. The U.S. Bond Aggregate returned -0.3%, with longer maturity Treasury bonds underperforming the index. Corporate bonds outperformed as credit spreads tightened, with investment-grade posting a -0.1% total return and high-yield gaining +0.1%.

  • International stocks underperformed the S&P 500 as the U.S. dollar strengthened. Developed Markets fell -2.1%, while Emerging Markets returned +0.7%.


Strong Q2 Earnings and Trade Agreements Send Stocks to All-Time Highs

Stocks climbed to new highs in July, with the S&P 500 and Nasdaq both logging six consecutive record closes late in the month. Investor sentiment improved after better-than-expected Q2 earnings and trade agreements with Japan and the EU, with tariff rates on the deals less severe than feared. Market breadth improved early in the month as smaller companies outperformed the S&P 500. However, by month-end, market leadership was top-heavy again, with the Magnificent 7 gaining over +5% after leading AI firms reported strong Q2 earnings. Volatility remained subdued for most of July, and the VIX fell below 15, signaling investor confidence but hinting at potential complacency.

Stock valuations are stretched after the multi-month rally from April’s lows. The S&P 500 trades at over 22x its next 12-month earnings, up from around 18x in early April and well above the 16.8x average since 2000. Today’s extended valuations mean the market is more reliant on earnings growth to fuel gains, which gives companies less room to disappoint. Although the tariff rates in recent deals were lower than feared, the overall effective tariff rate has risen sharply this year. The higher effective tariff rate raises questions about the long-term impact on corporate earnings, consumer demand, economic growth, and the potential near-term impact on inflation.


Interest Rate Cuts Continue to Be Pushed into the Future

After cutting interest rates by a full percentage point in late 2024, the Fed has held interest rates steady through five meetings this year. The pause in the Fed’s rate-cutting cycle reflects two dynamics: inflation progress has stalled, with core CPI stuck near 3.0%, and the labor market remains solid, with unemployment holding near 4%. Policymakers are concerned that tariffs could reignite inflation, and they’ve consistently emphasized the need for patience while waiting for more data clarity.

From a market's perspective, rate cut expectations have been repeatedly delayed. An anticipated March cut was pushed to May, then to June, and then to September. The odds of a September cut fell below 50% after the July meeting, with the market pushing the rate cut to October. The market expects only one rate cut this year, followed by another in January 2026. The takeaway: with no clear signal from the data or the Fed, the market is taking it one meeting at a time.

US Sector Returns (July in %)

US Market Sector Returns Month to Date

US Sector Returns (YTD in %)

US Market Sector Returns Year to Date
 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.


Our Insights

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 22 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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Housing Activity, Trade Deals, Q2 Earnings, and Meme Stocks