Market Commentary | July 2026

Market Commentary – July 2026

If we just closed the books with this letter on July 31^st, it would have been a ho-hum reflection on the month with the S&P 500 little changed and it was a rally in the last two days of the month that brought it back to that.¹ It didn't stop there though as in the first three trading days of August, as of this writing, the S&P 500 rallied to a record high.² While the tech trade contributed, it was a broadening out into other things that really helped, such as the financials as an example. With respect to the GenAI tech trade, what a wild month it was.

Let's take the DRAM etf as a proxy of the memory and storage semiconductor trade which includes names like Micron, Western Digital and Sandisk. From April 2^nd when this etf first started trading through mid June, it rallied by 190%, only to drop by 44% by July 29^th and then rebounded by 20%.³ Fasten your seat belt if you own/trade those stocks. They, along with other areas of the semi business along with parts of tech and overall construction that are selling their products, equipment, materials, and services feeding into the build out of data centers are the recipients of the large CapEx spend on GenAI.

The spenders, otherwise known as the hyperscalers such as Microsoft, Meta, Google/Alphabet, Amazon and Oracle, are committing massive amounts of capital to this endeavor of either building models and/or hosting computing power. Estimates on Wall Street for the combined spend in 2026 is about $700 billion and expected to go north of $1 trillion in 2027.⁴ The level of CapEx has eaten into the free cash flow of these businesses to such an extent that for some, it is going negative and they are having to tap the public markets for more funding to finance it. Also, some of the hyperscalers have been relying on off balance sheet entities so as not to further clog up their balance sheets. This exposure though still gets captured in lease obligations among others and some estimate it is as large as $1.75 trillion.⁵

The US economy, as said here for a while, has become very reliant on this construction. Some economists estimate the contribution could be as high as 40-50% of GDP growth.⁶ Jefferies estimates that investment in IT equipment and software as a percent of US GDP in Q1 was 4.91%. That compares with 4.46% in Q4 2000 at the peak of the internet buildout back then.⁷ Broadening out the view on the economy, US manufacturing, after three years of contraction, has now expanded for 7 straight months according to the ISM.⁸ Inventory rebuilding and data center suppliers are driving the rebound. With the help of high stock prices, upper income spending remains vibrant and the healthcare sector continues to be the main contributor to monthly job growth. The labor market overall is seeing a modest pace of firings and a decent but not robust rate of hirings. The housing market remains a challenge due to continued affordability issues.

The move higher in longer dated interest rates was a big market story in July. And it was a global phenomenon too. The US 10 yr yield rose another 27 basis points to 4.74%, the highest since January 2025 before backing off to 4.62% as of this writing.⁹ For perspective, it was at 3.94% on the last trading day of February, the weekend before the war in the Middle East began but interestingly since then, inflation expectations in the TIPS market have not risen at all.¹⁰ What that means is the rise in long-term rates has been solely in REAL (inflation adjusted) and nominal rates. I know that is counterintuitive with inflation still a persistent problem and with the rise in energy prices. The question then is why?

We can all speculate. I'll join that game and I point my finger to investors that are much more reluctant to take duration risk in lending money to those countries with excessive debts and deficits. We're seeing higher rates too in Japan, France, the UK and Germany to name some culprits. Germany in particular has a relatively low debt to GDP ratio but they have really ramped up their spending. I'll also cite the huge amount of debt being issued by the hyperscalers as another form of credit supply that is overwhelming investor appetite. Lastly, we watch the goings on in Japan closely, particularly the yen and the JGB market as that is also very impactful on global capital flows as Japan is the 3^rd largest creditor nation in the world with foreign investments outside of Japan about $3.5 trillion greater than foreign investments in Japan. This includes the $1.1 trillion of US Treasuries that Japan owns.¹¹

It is this large ownership of US Treasuries, the largest of any foreign owner, that triggered the US Treasury to intervene to help the Japanese in stemming the yen weakness which at its lows was at a level last seen 40 years ago vs the US dollar.¹² Japan first initiated intervention by buying yen and selling dollars to finance it and in attempt to discourage them from selling more US Treasuries. The US Treasury intervened too by selling euros they held to buy yen and with the Federal Reserve are offering the Japanese a repo facility to raise money for further intervention.

Furthermore on interest rates, the Federal Reserve gathered again in mid-July and left the fed funds rate unchanged as expected but three members voted to raise.¹³ We are not used to this level of dissent as the inflation debate is rather intense. Notably, Kevin Warsh is sticking to his fresh approach of not guiding markets to where he wants interest rates to be and rather encouraging markets to figure it out themselves. I think this is a healthy development as I believe markets became too addicted to everything the Fed said and did and now they are left a bit more on their own in terms of pricing the cost of capital and risk.

Lastly on the macro, oil prices fell back below $80 as it seems that we are on the cusp of a fresh deal with Iran to fully reopen the Strait of Hormuz.¹⁴ I know we've been here before only to reverse it so we'll watch to see for confirmation. Regardless, I still think oil prices will settle out at well above the $60-65 it stood at prior to the beginning of the war as global inventories have really been drained and need to be replenished which according to Saudi Aramco, could take 18 months to get back to pre-war levels.¹⁵

Conclusion

It's an interesting moment in markets with this early August breakout to see whether it holds or not. Much will depend on the GenAI tech trade and the direction of interest rates from here. With AI, and something said here for a while now, so goes the enormous pace of spending on developing it, so goes the economy and stock market.

I'll also repeat what I said last month, the one thing I'm confident in is the incredible technological advancements that it brings and the productivity and efficiency gains we all benefit from, as technology always has done in the history of mankind. The disruption concerns are completely understandable and for some worrisome, but we also don't believe this time is different and over time it will create more new jobs we can't even currently think of, than those that will get displaced.

Regardless of how all the above plays out, it remains essential that investors maintain adequate short-term liquidity to cover two to three years of spending needs. Knowing that near-term period is secured allows the rest of a portfolio to be viewed with a longer perspective, and a long-term time horizon is always an investor's best friend.

^1-15 Bloomberg

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