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Updated: 6 days ago


Executive Summary

  • Equity markets trended sideways in July, as geopolitical news, artificial intelligence (AI) updates, and corporate earnings all drove market volatility.

  • Corporate earnings continue to be positive overall; however, the last week of July illustrated how volatile stocks can be around earnings announcements.

  • The Federal Reserve met in July and held interest rates steady, however, bond yields continued to climb afterward despite Chair Warsh’s hawkish language.

  • While investment markets continue to wrestle with whether the current level of AI spending is sustainable, several other AI stories surfaced in July that are worth watching.

Equity Markets Up YTD, But Sideways in July

As in June, most stock indexes trended sideways in July.  The “on-again/off-again” nature of the Iran conflict, now in its sixth month, added to volatility in both equity and energy markets during the month.  Since the collapse of the Memorandum of Understanding in mid-June, the region has oscillated between negotiations toward a durable peace agreement and periodic outbreaks of violence.  As of early August, President Trump has canceled a significant strike that was planned because of requests made by Middle East allies in the hope that a deal can be reached soon.[1]


Investors also wrestled with both positive and negative AI news throughout July.  Stories about the scale of capital expenditures by AI hyperscalers continue to create concern over economic sustainability.  For example, Alphabet was free cash flow negative in the second quarter for the first time since going public, as enormous capital expenditures on the AI infrastructure buildout more than offset cash flow from operations.  As a result, it has taken on debt and raised $85 billion in equity sales.[2]  Meta is also borrowing to help fund new data center projects; however, it has found financing costs to be higher than late last year when they issued bonds for the Hyperion project.[3]  Meta shares also fell sharply after the company reported lower earnings and issued a soft revenue outlook for the third quarter.[4]


On the other hand, both Microsoft and Amazon rallied during July after strong earnings reports helped calm nerves over the scale of the AI buildout. Both mega-cap companies reported strong revenue growth in AI products and services.[5]


US equity markets finished July mixed, with the S&P 500 and Dow Jones indexes (proxies for US large-cap stocks) ending the month essentially flat, while the Nasdaq Composite (a proxy for large US technology) and Russell 2000 (a proxy for US small-cap stocks) both retreated about three percent.  Non-US results were also mixed, as the MSCI EAFE (a proxy for developed international stocks) was up approximately two percent, while the more tech-heavy MSCI Emerging Markets index fell about three percent.[6] 


Despite the modest results in July, all six stock indexes are up year-to-date (see below).  However, but we did downgrade “Trend” in our Dashboard to neutral, and we reduced the Market gauge to 5/10 (from six last month). 



The Fed Held Interest Rates Again

The Federal Reserve (Fed) met in late July and held interest rates steady for the fifth consecutive meeting.  However, this meeting did not result in a unanimous vote as it did last month; three members dissented in favor of raising rates.[7]  In the press conference afterward, Chair Warsh again stated that the Fed is focused on reducing inflation but that a problem that was five years in the making cannot be fixed overnight:

 

“Let me reiterate: There is no soft inflation target, there is no soft implicit target — not on this Committee’s watch. There is only a target, and it is two percent. Not one of my FOMC colleagues is under any illusion. We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks — or by a single month of modest price decreases.”[8]

 

The 2-year, 10-year, and 30-year US Treasury yields all rose in July higher.  All three yields are also significantly above levels at the beginning of 2026, when markets were pricing in interest rate cuts before the Iran conflict broke out.  Whether this reflects a loss of Fed credibility, persistent inflation expectations, US fiscal concerns, or hyperscaler debt issuance (or some combination of the above) remains to be seen.[9][10]


Bonds (as represented by the Bloomberg US Aggregate index) fell during July as interest rates climbed and are now down slightly year-to-date.  Broad-based commodities (Bloomberg Commodities index) rallied again in July as oil prices rose when the Iran conflict escalated, finishing the month up more than 20 percent year-to-date.  Gold (S&P GSCI Gold index) rose slightly for the month but remains below its 2026 starting point.



The Path Forward

Artificial intelligence has been a major market storyline, maybe the major storyline, since the launch of ChatGPT in late 2022.  Initially, returns from the “Magnificent 7” stocks drove the market higher as investors poured money into large tech companies on the promise of AI advancement.  However, as we discussed in last month’s Dashboard, the AI story is now a major influence on the US economy as well, as data center spending is a meaningful economic driver. 


In our opinion, several important AI stories broke in July that received little attention.  First, both OpenAI and Anthropic, the two companies that have been battling for the lead as frontier model providers, announced that some of their most advanced models had autonomously hacked into other companies’ websites.  In both situations, models that were being tested internally found ways to escape the testing environment and exploit vulnerabilities of corporate websites to extract information needed to complete their test (conduct that would ordinarily violate computer-fraud statutes).  Both OpenAI and Anthropic subsequently released announcements stating that they’ve learned from the situations and will improve.[11]


The second story was the launch of Kimi K3, an advanced large language model from Chinese start-up Moonshot AI.  The open-weight model has narrowed the gap between Chinese models and frontier models from US providers Anthropic and OpenAI.  The DeepSeek R1 model announcement caused a short-term drop in AI stocks last year, and models that match frontier output at lower training cost could again threaten leading US model providers and semiconductor companies.  The timing of the K3 model launch is especially inconvenient for Anthropic and OpenAI, as both companies are considering initial public offerings, and the competition could weigh on their valuations.[12]



Above, you’ll see analysis from a recent JP Morgan piece that illustrates the gap between closed-weight models (e.g., Anthropic Fable/Mythos and OpenAI GPT 5.5) and open-weight models (e.g., Kimi K3 and DeepSeek).  The chart on the left illustrates longer-term Epoch capability scores, while the chart on the right shows leading frontier models of each in 2026 (Fable 5 as closed-weight, Kimi K3 as open-weight).  As you can see, the gap between the two is closing with experts estimating that open-weight models trail the leading closed-weight models by three-to-twelve months.[13]  To quote Daniel Remler, a former State Department AI policy official now at the Center for a New American Security, in a recent Bloomberg article:


“This episode should crystallize that we are going to have a Chinese Mythos by the end of the year or first quarter next year,” he said, referring to an Anthropic model that the company said was so powerful it couldn’t release it widely."[14]


AI has been a blessing over the past few years for both markets and the economy, as we wrote last month. However, we also need to consider the risks associated with the technology.  Cybersecurity is certainly one; the market and economic concentration that has accompanied the AI infrastructure buildout is another.  In our opinion, prudent investing often requires striking a balance between contradictory viewpoints.


As always, we appreciate your continued trust and welcome the opportunity to speak with you in greater detail regarding your specific situation.


[1] Source: Financial Times, “Donald Trump says he cancelled Iran strikes after Middle East allies’ request,” August 1, 2026.  https://www.ft.com/content/9cb84920-075e-4fa4-b1cb-dfc55d5845f4?syn-25a6b1a6=1 

[2] Source: Financial Times, “Google burns through $6bn in cash as AI spending climbs again,” July 23, 2026.  https://www.ft.com/content/b02f972c-c764-4006-9377-42563d9d5530?syn-25a6b1a6=1  

[3] Source: Financial Times, “Meta faces higher borrowing costs in latest $12bn data centre financing,” July 24, 2026.  https://www.ft.com/content/822628c5-4f9c-47db-bd27-f3ad7f841700?syn-25a6b1a6=1 

[4] Source: YCharts, “Nasdaq Composites Snaps 6-Day Slump as Microsoft Soars,” July 30, 2026. https://ycharts.com/news/story/MT-A3679275 

[5] Source: YCharts, “S&P 500 Posts Weekly Gain Amid AI Monetization Optimism,” July 31, 2026. https://ycharts.com/news/story/MT-A3680656 

[6] Source: YCharts, August 1, 2026.

[7] Source: Financial Times, “US borrowing costs hit 19-year high as Federal Reserve defies inflation fears,” July 30.  https://www.ft.com/content/f5fc02ce-03ed-4d92-9bbf-910ea1cdd431?syn-25a6b1a6=1

[8] Source: FHN Financial, “Economic Weekly,” July 31, 2026.  https://docs.fhnfinancial.com/?9691a2d1-6ef0-43f5-97fd-00ffc221e439 

[9] Source: Apollo, “Macroeconomic Indicators & Trends,” July 31, 2026.  https://www.apollo.com/wealth/insights-news/insights/daily-spark/higher-for-longer-continues-7-31-26 

[10] Source: Financial Times, “US borrowing costs hit 19-year high as Federal Reserve defies inflation fears,” July 30, 2026. https://www.ft.com/content/f5fc02ce-03ed-4d92-9bbf-910ea1cdd431?syn-25a6b1a6=1 

[11] Source: Bloomberg, “Anthropic, OpenAI Cyber Failures Point to US Security Risks,” July 31, 2026.  https://www.bloomberg.com/news/articles/2026-07-31/anthropic-openai-cyber-failures-point-to-us-security-risks?srnd=phx-technology 

[12] Source: Financial Times, “The US may find it hard to shrug off Moonshot’s AI shockwaves,” July 23, 2026.  https://www.ft.com/content/ce76ec03-b80f-4348-82b2-d23de0ac11f2?syn-25a6b1a6=1 

[14] Source: Bloomberg, ““Anthropic, OpenAI Cyber Failures Point to US Security Risks,” July 31, 2026.  https://www.bloomberg.com/news/articles/2026-07-31/anthropic-openai-cyber-failures-point-to-us-security-risks?srnd=phx-technology


Important Information

Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.

 

Content is provided by Investment Research Partners, LLC. All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. IRP shall not in any way be liable for claims, and makes no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced, and such data and information are subject to change without notice.

 

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