Monthly Market Insights July 2026
Greetings Team,
Like the Spanish Inquisition - you can't expect it, but when it does show up, it doesn't show up with pillows! My oh my, how the landscape has changed!
July arrived with summer optimism yet delivered a month that felt more like a surprise interrogation than a beach vacation. After June's healthy rotation out of mega-cap growth, many expected small caps and cyclicals to carry the torch. Instead, July reminded us that markets rarely follow a straight line. The pullback in AI leaders was expected; but July ended up being the worst month on record for smaller, momentum driven companies. That was the Inquisition - unexpected, sharp, and anything but gentle, reflecting carnage for anyone looking under the hood. Further enhancing that “under the hood” volatility was hedge funds using leverage in many of the market’s favored names. This confusion and uncertainty will most likely continue, always keeping TSG on guard.
July Performance and the Great Rotation Reversal: Why the S&P 500 is Now Your 401k’s Worst Performer
Markets delivered a mixed, risk-off tape that punished last month's leaders while rewarding defensive pockets:
📉 S&P 500: 7,489.72 (-0.13% MoM)
📈 S&P 500 Equal Weight: 8,705.93 (+0.80% MoM)
📉 NASDAQ Composite: 25,373.85 (-3.31% MoM)
📈 Dow Jones Industrial Average: 52,485.03 (-0.31% MoM)
📉 Russell 2000: 2,931.34 (-3.1% MoM)
The headline indices masked a violent undercurrent. June's winners (Nasdaq and Russell 2000) became July's laggards, while the Equal Weight S&P 500 and the Dow quietly advanced. This was not a "risk-off" panic - it was a risk-recalibration. Investors didn't flee equities; they fled speculative premium and sought proven earnings and dividend safety. The 1.0% gain in Equal Weight is particularly telling: the average stock held its ground, even as the largest names stumbled. Similar to the late 1990s, we are finding most fund managers are maintaining concentration in a few holdings, furthering our broader concerns.
Key Observations
Earnings Season: A Tale of Two Guides. July's Q2 earnings kickoff was a mixed bag. Financials largely beat, but cautious forward guidance on net interest income weighed. Consumer discretionary reported resilient revenues but flagged softening margins. The market punished misses harshly and rewarded beats tepidly - a classic sign of peak valuation sensitivity.
Breadth Rollercoaster: After June's breadth improvement, July saw the percentage of S&P 500 stocks above their 50-day moving average peak near 65% mid-month, only to fall back to 48% by month-end. The rotation out of small caps was particularly acute, driven by a resurgence of recessionary whispers and a steepening yield curve that spooked leveraged balance sheets.
Key Themes
AI: From Correction to Question Marks
The Magnificent 7 gave back another leg in July, with the group now off over $3 trillion from June peaks. The narrative shifted from "capex skepticism" to "ROI timeline." The market is demanding proof of monetization this year, not next. We view this as a necessary digestion phase. AI is not dead; the free call option on AI valuations is. Selective accumulation of quality AI infrastructure names on weakness remains prudent, but patience and deeper dives are required.
The Consumer: Cracks or Creases?
Travel and services data softened more than expected in July, with airline and hotel booking commentary sounding cautious notes on the low-to-mid tier consumer. The "three-speed consumer" narrowed further: high-end spending remains impervious, while the lower end is increasingly reliant on credit. We are watching delinquency trends closely - they are stable but not improving.
The Fed: Warsh Holds Firm, Markets Squirm
Chair Warsh remained steadfast in July, reiterating the "higher for longer" mantra. The 10-year Treasury yield oscillated between 4.40% and 4.70%, ending the month near 4.75%. Market pricing for a year-end cut fully evaporated, replaced by a 35% probability of a hike. This repricing weighed heavily on small caps and high-duration growth names. Our view remains: the Fed is data-dependent, and with inflation sticky but not resurgent, the next move is likely a long pause, not a hike. Holding rates steady, in my opinion is the optimal route as other parts of the economy are showing signs of weakness and demand destruction (as it always historically has) will solve the inflation problem. In addition, the limited increase helps Uncle Sam’s interest expense.
Oil and Geopolitics: The Calm After the Storm (and the Storm Within)
Oil initially stabilized in the $75/barrel range after June's precipitous drop, offering a reprieve to consumers. That reprieve came to a crashing halt as July progressed, with prices skyrocketing back toward $100/barrel. The catalyst was twofold: fresh OPEC supply constraints layered onto stubborn seasonal demand, and a sudden geopolitical risk premium following renewed disruptions to key transit chokepoints. Lower energy prices had been a net positive for the inflation outlook, until that narrative reversed sharply.
Speaking of geopolitics: tensions escalated yet again, disrupting supply chains alongside seasonal demand. However, as I write this, headlines are oscillating toward a potential de-escalation phase. Predicting this daily swing is futile. We suspect we may have to wait until the post-summer political calendar, including potential shifts in Israel’s leadership and the US midterm elections in November for any sustained resolution or material repricing of the geopolitical risk premium.
SBOT (StevenBot) Update
July's choppy, rotational environment proved challenging for AI-driven strategies. SBOT's alpha capture moderated a bit mid-month before capturing month-end positivity holding most of the winners during earnings season. Critical analysis- which involves identifying companies in all sectors of the economy where AI capex is providing a return on investment, tactical position management and our inherent risk controls prevented deep drawdowns, and SBOT accelerated further ahead of its benchmark year-to-date. Return on investment is becoming apparent already in industries such as insurance and human resources management where massive data collection is retained. Periods like July reinforce why we do not rely on a single factor - adaptability is the engine of our process. There is no doubt AI is a generational investment trend; however, as the dichotomy continues to grow between the winners and the laggards, SBOT will remain ahead of the AI curve with a focus much broader, disciplined, and unique than simply buying into the “AI ecosystem”.
Passive vs. Active Flows
The passive mega-cap inflow narrative reversed sharply in July. Active managers, having added small caps in June, were forced to trim those positions amid the Russell's swoon, while simultaneously adding to healthcare, utilities, and consumer staples. Interestingly, the final week saw a resurgence of passive flows into the Dow and Equal Weight ETFs, suggesting the "broadening" trade is not dead - it is simply taking a pause to catch its breath. Sunshine will return in August, once the smoke clears.
Outlook: Navigating the Dog Days
July taught us that summer trading can be treacherous, as we warned. Valuations are elevated, liquidity is thinner, and the market is hyper-reactive to every data point. However, the bull case is not broken - it is maturing, requiring further skill as a money manager. The recent underperformance of initial public offerings coming to market is a clear indication of limited liquidity driving potential return on investment.
Given this backdrop, we have made specific tactical adjustments: we have taken profits on a portion of our overextended consumer discretionary holdings, added to healthcare and utilities for their defensive yield, and are selectively initiating small positions in beaten-down small caps with solid balance sheets.
We are watching four factors closely into August:
- Jobless Claims & The August Employment Report - A softening but not breaking labor market remains the Goldilocks scenario. As the younger generation views “employment” in a different paradigm, gig and contract work are growing faster than Bureau of Labor Statistics payroll surveys capture. I wonder if historical metrics like the U-3 unemployment rate need to be adjusted to truly reflect health of the labor market.
- Consumer Confidence & Back-to-School Spending - Retailers' guidance will set the tone for Q3 earnings expectations.
- Geopolitical "Activity" - Any further escalation in the Middle East or Ukraine would be the true Inquisition we can't price in. As I write this, we could be reversing course, yet again to a de-escalation phase. We may have to wait until the Israel elections later October and/or US Mid-term elections for any material adjustment in our path forward.
- The “Ripple Effect” – a weak stock market wouldn’t be the only painful outcome of a Mag Seven collapse. It could risk tipping the economy into recession and the overall indices into a correction.
Seasonally, August can be sleepy, but this year's setup - post-correction, with improved valuations in small caps and a Fed on hold - offers entry points for patient capital. We are maintaining our quality bias, selectively adding to beaten-down small caps with strong balance sheets, and keeping powder dry for any volatility spikes.
Markets may not react rationally…. but we here at The Schmitt Group do! It’s not the destination, it’s the journey.
The last four months have reinforced that conviction is not stubbornness; it is the ability to adapt to climates without abandoning discipline. We cannot predict the Spanish Inquisition, but we can prepare for it - with diversified portfolios, dry powder, and a clear-eyed view of what matters: earnings, cash flow, and the long-term resilience of the American economy.
As the summer heats up and the Olympics capture our collective attention, we wish you and your family a safe, enjoyable, and restful end to the season.
Onward and Upward, Always!
Steven
STEVEN W. SCHMITT, MBA, CFP®, CPM®, CRPS®, ADPA®
Managing Director
Private Wealth Advisor
CA Insurance # 0G61253
The Schmitt Group of Raymond James
Raymond James & Associates, Inc. // 3CV
61 S. Paramus Road Suite 360, Paramus NJ 07652
Direct 551.497.5531 // Text 201.559.0775 // eFax 201.291.4298
steven.schmitt@raymondjames.com
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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