July was marked by an increase in geopolitical uncertainty following the escalation of the conflict between the United States and Iran, which triggered a sharp rally in oil prices and placed inflation back at the centre of market attention. The breakdown of the ceasefire reignited fears of energy supply disruptions and led investors to revise upwards their expectations for further rate hikes by major central banks.

At the same time, the start of the corporate earnings season introduced a fresh source of uncertainty. Although global economic activity continues to display remarkable resilience, markets began to question whether the heavy volume of investment in artificial intelligence will successfully translate into a sufficient improvement in earnings over the coming financial years. Consequently, July was characterised by greater dispersion across sectors and geographies.

United States: solid economy, inflationary pressure, and higher requirements for tech

Barely a month after the signing of the memorandum of understanding between the United States and Iran, the agreement was broken and hostilities resumed in the Middle East. The escalation of the conflict caused a surge in oil prices and an increase in volatility across financial markets, as it reignited fears over potential energy supply disruptions and a fresh surge in inflationary pressures.

In this context, the US economy once again demonstrated remarkable strength during July, with indicators showing a robust labour market, resilient private consumption, and inflation falling from 4.2% in May to 3.5% in June. Core inflation also moved favourably, declining from 2.9% to 2.6%.

In the domain of monetary policy, the Federal Reserve kept interest rates unchanged, in a decision that was widely anticipated by the market. Nevertheless, the tone of the statement was cautious, reflecting the persistence of inflationary risks stemming from the rally in energy prices and the strength of the US economy, which leads us to anticipate a rate hike this year, perhaps in September.

Despite this, US equities lost momentum during the second half of the month. On the one hand, the S&P 500 fell by 0.1%, while the Nasdaq 100 dropped by 6.6%. The sharp adjustment in the Nasdaq was primarily a response to very demanding valuations in the technology sector, which prompted the market to penalise any sign of a slowdown in growth or lower profitability on artificial intelligence investments.

During the month, the “Magnificent Seven”, with the exception of Nvidia, reported earnings. Overall, the accounts were solid and, in most cases, exceeded market expectations, supported by robust revenue and profit growth. Nevertheless, the stock market reaction was mixed, as demanding results and elevated valuations meant the market penalised any sign of deceleration or margin pressure.

In this context, Microsoft and Amazon stood out in particular; their publications were received very favourably by the market, recording gains close to 15% in the session following their earnings releases. The publication of results refocused investors’ attention on the ability of large corporations to monetise the significant investments made in artificial intelligence. The adjustment was particularly severe in the semiconductor sector, which suffered its worst month since the year 2000.

Europe: activity improves, but the ECB remains cautious

In Europe, the ECB kept interest rates unchanged during July, although it left open the possibility of further action if energy tensions end up persistently transferring into inflation. The institution adopted a cautious tone, mindful that the conflict in the Middle East continues to represent a significant risk to price stability.

From a macroeconomic perspective, data provided somewhat more constructive signals. Eurozone inflation dropped from the 3.2% recorded in May to 2.8% in June, whilst core inflation fell from 2.6% to 2.4%. As for economic activity, the services PMI returned to expansionary territory, whereas the manufacturing PMI remained below the 50-point threshold, although it recorded a slight improvement compared to the previous month.

Taking all this into account, European equities remained stable throughout the month. The MSCI Europe rose by 0.9%, while the Euro Stoxx 600 advanced by 1.2%.

Asia: institutional support in China and continuity of the tech cycle

The performance of Asian markets was once again mixed during the month. The MSCI China advanced by 8.6%, whereas the MSCI India recorded a gain of 1.5%. In the case of China, equity performance was backed by support measures implemented by the authorities, most notably share purchases by state institutional investors, fresh liquidity injections, and various policy messages aimed at boosting market confidence. These actions particularly favoured the technology sector.

Portfolio Implications

Market behaviour during July reinforces our constructive outlook on equities. We consider that the corrections observed over the past two weeks, particularly in the US market, should be interpreted as an opportunity to selectively increase equity exposure, with a special emphasis on the technology sector. Solid corporate fundamentals and earnings growth continue to underpin our conviction in this segment over the short and medium term.

At the same time, the month has once again highlighted the value of geographical diversification. Exposure to markets such as Europe and China has helped cushion the greater weakness seen in US equities in recent weeks, reducing portfolio volatility and contributing to a more balanced overall investment performance.