The policy backdrop grew clearer. Early in the month, the US struck a trade deal with Vietnam, maintaining a 20% tariff rate and imposing 40% on trans-shipments. By month-end, similar agreements were announced with Japan and the European Union, setting tariffs on most imports at 15%, including automobiles. While these levels remain well above the pre-Trump average of 2.4%, the new terms reduced the risk of escalation and helped steady market sentiment.

Still, last month’s rally stretched equity valuations further. With global equities now trading at 20 times forward earnings, well above the long-term average of 16, markets appear to be pricing in a near-perfect outcome: faster growth, AI-led productivity gains, and inflation that stays contained. That optimism leaves little room for disappointment. Yet investors, both in the US and abroad, stayed focused on the path to 2026 and chose steady over spectacular.

Equities

Equity markets entered July with momentum but lacked a catalyst. The S&P 500 advanced a modest +0.7%, its narrowest monthly gain since February, as earnings season replaced macro speculation as the dominant driver. The tone of reporting was broadly constructive. With over two-thirds of the index reported by end of July, 63% of companies beat EPS forecasts, which is one of the highest surprise rates in over two decades. Importantly, 56% of firms offering guidance revised it higher, signaling resilience despite tariff headwinds and a maturing cycle.

Sector leadership rotated sharply. Utilities outperformed with a +4.9% gain, followed by industrials and materials, as investors shifted toward rate-sensitive areas. Meanwhile, the “Magnificent 7” continued to rally and pushed the Nasdaq up +2.4%, driven by robust earnings. Mega-caps delivered a combined Q2 EPS growth of near +26%, versus +4% for the rest of the index.

Valuations stayed elevated but stable. The S&P 500 forward P/E closed at 22x, supported by falling bond yields and robust margin guidance. Analysts now forecast +7% EPS growth for 2025, in line with revised corporate outlooks and supported by AI-linked investment, tariff mitigation strategies, and a still-accommodative fiscal stance.

In Europe, the STOXX 600 gained 1% and Financials as well as Industrials were the main drivers of the advance. Health Care remained the region’s weakest performer, down -5.34% year-to-date, as concerns over potential U.S. tariffs on pharmaceutical companies continued to weigh on the sector. Although corporate earnings in core economies exceeded expectations, the results were not strong enough to sustain a broader market rally.

Emerging markets posted solid gains, with the MSCI EM index up +2.0%, led by strength in Greater China and Korea. Improving sentiment, better-than-expected macro data, and a recovery in credit growth helped lift Chinese equities, while Taiwan and Korea continued to benefit from AI-linked investment flows.

Fixed Income

Bond markets faced a reality check in July. While the inflation narrative remained broadly supportive, renewed fiscal expansion and resilient growth data pushed yields higher. The global aggregate bond index fell 1.5% for the month, as rate expectations adjusted to the evolving macro backdrop and the U.S. dollar regained strength.

In the United States, Treasury yields moved higher across the curve. The 10-year closed at 4.32%, up nearly 20bps, reflecting both improved growth sentiment and renewed concern over deficit sustainability. The passage of the One Big Beautiful Bill Act, with its multi-trillion-dollar price tag, reinforced fears of continued heavy issuance and added to the term premium. Still, the market appears hesitant to fully price in aggressive rate cuts, as fiscal reacceleration complicates the Fed’s path.

Credit markets continued to outperform government bonds. Spreads narrowed modestly, supported by robust earnings and a relatively benign default environment. US investment-grade credit held firm, while high yield saw solid demand despite growing issuance volumes. In emerging markets, hard currency debt remained resilient, benefiting from carry demand and improving sentiment in Greater China.

In Europe, bond yields drifted higher, but more gently. The ECB held rates steady in July and signaled a pause in its easing cycle, citing mixed data and lingering policy uncertainty. Meanwhile, Eurozone PMIs surprised to the upside, helping to anchor spreads.

Commodities and Currencies

Brent crude fell -3.2% to close at USD 69.5 per barrel, as supply stability returned and inventory levels rose. At the same time, the U.S. decision to exempt refined copper and select rare earth metals from its 50% tariff announcement created temporary dislocations in base metals, but did little to support overall prices, with Copper ending the month down.

Gold was flat (+0.1%) as rising real yields and easing safe-haven demand kept gains in check. Silver extended its outperformance, rising +6.2% in July, supported by strong industrial demand and ongoing enthusiasm for AI-related infrastructure themes. Both metals remain well-supported year-to-date as investors continue to hedge macro and geopolitical risks.

The US Dollar regained ground after six months of declines. The DXY index rose +0.9%, driven by stronger U.S. macro data and a hawkish repricing of Treasury yields. The greenback’s rebound weighed on commodity prices and capped gains in emerging market currencies. The EUR slipped -1.2%, as the ECB paused its rate cuts and investors turned cautious on growth prospects in the periphery.

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