Historically, July has been a positive month for markets, but that did not prove to be the case in 2026.Despite strong earnings reports from many major market participants, unrest in the Middle East ruled the tape. Hostilities revived as the previously agreed upon Memorandum of Understanding faded into unresolved conflict, nearly halting commerce through the Strait of Hormuz. This spiked oil prices, denoted by West Texas Intermediate, to $93.50 on July 23rd, representing a 39% increase from recent lows. In turn, equity markets traded lower. The Nasdaq Composite, pressured by technology stocks, sunk 2.1% in just one week, and the S&P 500 experienced an intra-month decline of roughly 3%. This downward pressure was bolstered by the massive capital expenditure guidance given by many “AI hyperscalers” (companies such as Google, Amazon, Meta, and Microsoft who operate data centers at an enormous scale). Markets began to fear that these companies are spending too much on the AI buildout – sacrificing positive cash flows now for unclear returns in the future. In the short term, these fears over massive expenditures outweighed the otherwise positive results these companies were reporting. In fact, according to FactSet, the year-over-year earnings growth rate for the S&P 500 is 37.9%, which has the potential to be the highest earnings growth rate for the index since the third quarter of 2011.
To start August, markets responded sharply higher following July’s volatility. The major indices posted their best weekly performances since April, rising close to all-time highs. The previously noted fears about AI spending subsided. Commentary from companies as they reported earnings proved to be valuable in providing additional strength to markets, along with economic readings that surprised to the upside. For example, Caterpillar (the heavy equipment maker and beneficiary of spending on physical infrastructure) provided positive commentary around the overall economic benefit of immense demand for construction and the July ISM manufacturing report came in higher than consensus, positing the best headline result since May 2022. To cap off the first week of the month, the BLS employment report came in with less job creation than expected, which actually spurred markets even higher as interest rates fell. This dynamic, which seems incongruent, has surrounded employment reports over the past several years in an interest rate sensitive environment - mild economic reports can encourage markets because they discourage the Fed from increasing interest rates. But, employment is just one side of the Fed’s mandate; inflation is also a key focus of the Fed. In turn, markets remain focused on July CPI data, which came in largely as expected, easing fears of rate hikes and shifting attention back to strong earnings growth.
Data sourced from Janney's “August Investment Perspectives"
