Wall of Worry?
July 11, 2025
Quick Take
U.S. stocks advanced in July, with the S&P 500 gaining 2% and hitting ten new all-time highs, supported by strong second-quarter earnings, resilient economic data, and optimism over trade agreements.
Economic indicators showed steady GDP growth and moderate inflation, but hiring slowed sharply; the Federal Reserve held rates steady while signaling the potential for cuts if conditions soften further.
Trade progress with key partners, new tariff measures, and significant policy changes added to an environment of elevated uncertainty, underscoring the importance of diversified, long-term investment strategies.
July was a strong month for U.S. stocks, with the S&P 500 recording ten new all-time highs - six of them consecutively in the latter half of the month - driven by robust corporate earnings, resilient economic data, and optimism over new trade agreements. The S&P 500 gained 2% in July and is now up 9% year-to-date. U.S. bonds were relatively muted in July, but returned 4% to date.
Corporate Earnings
Second-quarter earnings season continued to surprise to the upside. With over one-third of S&P 500 companies reporting, 80% have beaten earnings-per-share estimates, delivering blended growth of 6.4% year-over-year (strongest since late 2022). Technology and “Magnificent 7” stocks remained the primary contributors to the earnings uplift, with AI-related momentum lifting Microsoft and Meta to record valuations - Microsoft joining NVIDIA above $4 trillion in market cap. However, the rest of the S&P 500 showed more modest growth. Industrials led all sectors to date returning 16%, followed by technology, while health care and consumer discretionary lagged.
Economic Resilience & Fed Policy
U.S. economic data continued to reflect underlying resilience despite emerging signs of softening in the labor market. GDP grew at a 3% annualized rate, supported by steady consumer activity and a sharp drop in imports, while inflation, measured by the Fed’s preferred Personal Consumption Expenditures (PCE) index, held at 2.6% year-over-year - above the 2% target but well below the highs of recent years. However, hiring slowed sharply, with just 73,000 jobs added in July and prior months revised downward, bringing job growth below the historic average.
The Federal Reserve kept rates steady for the fifth consecutive meeting, balancing concerns about tariff-related price pressures with evidence of cooling employment. While dissent within the Fed signaled some readiness to ease policy, officials appear inclined to wait for more clarity on the inflationary impact of new tariffs before making significant rate cuts.
Trade Developments & Policy Changes
Trade developments were a key market driver, with the U.S. reaching agreements with the European Union, Japan, and South Korea - moves that eased earlier fears of escalating trade tensions. Negotiations with China remain ongoing, but the Yale Budget Lab estimates that consumers face an overall effective tariff rate of 20%, the highest since 1911. These measures are beginning to influence goods prices, though many companies have so far absorbed the additional costs rather than passing them fully to consumers.
Policy changes during the month also included the GENIUS Act, establishing regulations for stablecoins, and a sweeping tax bill that permanently extended key provisions of the Tax Cuts and Jobs Act - reducing near-term tax uncertainty but raising concerns about the long-term fiscal outlook.
Looking Ahead
The path of U.S. monetary policy will hinge on incoming data, particularly the balance between moderating inflation and signs of labor market weakness. Should hiring trends remain soft while price pressures ease, conditions could support a shift toward rate cuts later in the year, which would influence borrowing costs, stock valuations, and bond yields. At this moment, the financial markets are pricing in at least a couple rate cuts before year-end given the softening in the labor market.
The newly announced tariff rates, along with ongoing trade negotiations - especially with China - will remain in focus for both markets and corporate earnings. Higher tariffs have the potential to further influence supply chains, input costs, and consumer prices. Meanwhile, recent tax policy changes and the GENIUS Act introduce both regulatory clarity in some areas and long-term fiscal considerations that could shape investment, spending, and capital allocation decisions.
While corporate earnings momentum remains strong, particularly in technology and industrials, the market’s performance will continue to be shaped by a mix of economic resilience and policy uncertainty. Elevated readings in the Economic Policy Uncertainty index suggest potential for market volatility, making diversification and disciplined risk management key in navigating crosscurrents. Markets will be watching closely for updates on trade, employment, and inflation data in the months ahead, as these factors collectively set the tone for the next phase of the market cycle.
What It All Means
July’s market performance reflects a balance between enduring strengths and emerging headwinds. Robust corporate earnings, steady GDP growth, and moderating inflation have provided a constructive backdrop for stocks, while new tariff measures, policy uncertainty, and a cooling labor market underscore the potential for shifting conditions ahead.
For investors, the takeaways are twofold: first, staying invested across sectors, asset classes, and geographies remains critical to capturing opportunities while spreading risk; second, maintaining a disciplined, long-term perspective can help avoid overreacting to short-term data or headlines. By combining participation in growth trends with prudent risk management, portfolios can be better positioned to navigate the evolving market and economic landscape.
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