Investment Commentary - July 2026

Financial markets experienced a more mixed environment in July following the strong recovery seen during the second quarter. Geopolitical developments returned to the forefront as renewed tensions between the US and Iran pushed oil prices sharply higher, reviving concerns over inflation and the outlook for interest rates. At the same time, investors reassessed some of the assumptions underpinning the artificial intelligence investment cycle. This resulted in a significant rotation within equity markets, with technology and semiconductor stocks coming under pressure while more value-orientated sectors, including energy and financials, performed strongly. Government bond markets also weakened as higher energy prices and resilient economic data pushed yields higher.

Global equity markets produced divergent returns during July, with differences in sector composition having a significant influence on regional performance. In the US, the S&P 500 was broadly unchanged, returning -0.1% over the month, while the technology-heavy Nasdaq declined -3.2%. Despite the weakness in headline technology indices, market breadth remained relatively healthy, with the equal-weighted S&P 500 reaching a record high late in the month as investors rotated towards areas outside the largest technology companies.

The second-quarter earnings season remained strong, with corporate profits comfortably exceeding expectations. However, investors became increasingly selective about companies exposed to AI. Rather than representing a broad reversal in enthusiasm for the technology, attention shifted towards whether the substantial amounts being invested in AI infrastructure would ultimately generate sufficient returns. Semiconductor companies were particularly weak as high valuations, growing competition from China and concerns around supply constraints weighed on sentiment. The Philadelphia Semiconductor Index fell -20.6%, its worst monthly performance since 2008. More broadly, this rotation resulted in value stocks gaining +3.6%, compared with a -2.5% decline for growth stocks.

European equity markets proved more resilient. The STOXX 600 rose +1.3% in July, taking its gain for the year to +12.4%, while Germany's DAX advanced +2.5%. The UK was one of the stronger developed markets, with the FTSE 100 gaining +3.6%. Its relatively low exposure to technology and greater weighting towards energy and financial companies proved beneficial during the month. European banks were also particularly strong, gaining +6.4%.

Asian markets were considerably weaker, reflecting their greater exposure to semiconductor manufacturing. South Korea was particularly affected, with the KOSPI falling -22.2%, although it remained the strongest-performing major market for the year to date. Japan's Nikkei declined -8.1%, while the broader Japanese market was more resilient given its greater exposure to financials, industrials and domestically focused companies. Emerging market equities fell -3.0% overall.

Bond markets also faced a more challenging month. Higher oil prices renewed concerns over inflation at a time when economic data remained relatively resilient, prompting yields to rise across most developed markets. Although the major central banks left policy rates unchanged, investors continued to reassess the likelihood that monetary policy would remain restrictive for longer.

In the US, Treasury yields moved higher despite the Federal Reserve leaving interest rates unchanged. The 10-year Treasury yield rose by 27 basis points to 4.74%, while the 30-year yield reached 5.27%, its highest level since 2007. US Treasuries consequently returned -1.2% during July. European government bonds experienced similar weakness, with German Bunds returning -1.7% as the 10-year yield rose to 3.20%. UK gilts also declined -1.7%, although the Bank of England adopted a somewhat less hawkish tone than some of its peers.

Credit markets were also weaker, although shorter-duration high yield bonds generally proved more resilient than investment grade debt. US high yield declined -0.3%, compared with a -1.6% return from the broader US corporate bond market, while euro high yield also fell -0.3%. The higher income available from high yield and its lower sensitivity to rising government bond yields helped cushion returns despite some widening in credit spreads.

Commodity markets were dominated by the renewed rise in energy prices. Brent crude increased +23.6% during July, while WTI gained +21.8%, leaving both benchmarks almost 50% higher since the beginning of the year. Prices rose sharply as tensions between the US and Iran escalated and concerns resurfaced over disruption to supplies through the Strait of Hormuz. Brent briefly moved above $100 per barrel before retreating towards the end of the month as geopolitical tensions eased somewhat.

Other commodities were also generally stronger. Copper rose +4.4%, while agricultural prices benefited from geopolitical disruption and weather concerns. Wheat gained +10.1% and corn +6.8%. Precious metals were more subdued, with gold rising +1.0% while silver declined -1.7%.

Currency markets saw the US dollar weaken modestly, with the Dollar Index declining -1.3%. Sterling gained +1.7% against the dollar and the euro rose +0.9%. The Japanese yen was the strongest major developed-market currency, appreciating +3.3% against the dollar following an apparent intervention towards the end of the month after the currency had previously fallen to its weakest level since 1986.