July was characterised by two distinct market narratives. Early in the month, escalating tensions between the US and Iran briefly pushed Brent crude above $100 per barrel, lifting energy prices and commodities (+7.5%). As geopolitical concerns eased, attention shifted back to second-quarter earnings and the sustainability of returns across the AI investment cycle.
Rather than signalling a broad retreat from AI, the earnings season prompted investors to become more selective about where future profits were likely to accrue. While a couple of the largest hyperscalers proved relatively resilient, semiconductor companies and other AI beneficiaries came under significant pressure as elevated valuations, concerns over export controls and China’s technological progress weighed on sentiment. Forced deleveraging by some hedge funds further amplified the sell-off, with the MSCI World Semiconductors Index falling 13.2% and the MSCI World Information Technology Index declining 4.1%. This weakness in technology, combined with strong gains in energy (+8.8%) and financials (+6.5%), saw value stocks (+3.6%) outperform growth (-2.5%) by more than six percentage points over the month.
In fixed income, the Bloomberg Global Aggregate Bond Index fell by 0.5% as investors reassessed the outlook for inflation and interest rates. Higher energy prices and resilient economic data contributed to a broad-based rise in government bond yields.
Equities
Performance across regional equity markets reflected meaningful differences in sector composition during July. The UK FTSE All-Share outperformed most developed market peers, rising 3.7%, benefiting from its relatively low exposure to technology and greater weight in sectors that performed well during the month. Strong performance in energy stocks, supported by higher oil prices, alongside gains in financials, helped offset weaker returns elsewhere.
Japanese equities were mixed over the month. The TOPIX finished broadly flat, while the technology-heavy Nikkei 225 fell by almost 8% as semiconductor companies came under pressure. The divergence between the two benchmarks reflected differences in sector composition, with the TOPIX’s greater exposure to industrials, financials and domestically oriented companies helping to offset weakness in technology.
European equities were broadly flat over the month. The region sits somewhere between the UK and the US in terms of sector composition, with exposure to industrials and financials helping to offset weakness in technology-related companies.
Despite a strong second-quarter earnings season, the S&P 500 was also broadly flat over the month. At the time of writing, 63% of the index has reported, with earnings on track to grow 36% year-on-year. 85% of companies exceeded analysts’ expectations, despite the fact that expectations had already risen going into reporting season, bucking the usual trend. For many of the largest technology companies, simply beating earnings forecasts was not enough to reassure investors. Instead, markets were looking for evidence that continued increases in capex spending in AI would generate an attractive return on investment.
Beneath the surface, earnings growth also remains heavily concentrated. Information technology and communication services accounted for around three-quarters of aggregate S&P 500 earnings growth, while the “Magnificent Seven” continued to outpace the broader market. Some of the headline strength was also flattered by one-off investment gains at several hyperscalers.
The weakest performance came from emerging markets, with the MSCI Emerging Markets Index falling 3.0% and the MSCI Asia ex-Japan Index falling 3.2%. Unlike the US, where AI exposure is concentrated in hyperscalers and software platforms, emerging markets are more heavily exposed to the semiconductor manufacturing supply chain. Concerns surrounding advanced semiconductor technology from China triggered steep sell-offs in SK Hynix (-35%) and Samsung Electronics (-21%), with leveraged single stock ETFs exacerbating the declines. As a result, Taiwan (-5.3%) and South Korea (-17.1%) underperformed, more than offsetting China’s (+9.0%) positive contribution to the index over the month.
Fixed income
Government bond yields moved higher across developed markets as rising energy prices and resilient economic data prompted investors to reassess the outlook for inflation and interest rates. Although the major developed market central banks left policy rates unchanged, a broadly hawkish tone reinforced expectations that interest rates will remain higher for longer, with markets continuing to price in hikes from the major central banks over the next 12 months.
Japanese government bonds outperformed over the month. However, the headline return masked significant intra-month volatility following government announcements of additional fiscal stimulus, which initially pushed yields higher before the move partially reversed.
Despite the Federal Reserve leaving policy rates unchanged, both two-year and 10-year Treasury yields moved higher over the month as markets repriced the expected path of monetary policy. Although inflation continued to moderate, resilient economics data and higher energy prices reinforced expectations that interest rates and inflation will be higher for longer.
Italy experienced the largest increase in 10-year yields. This did not reflect renewed concerns over Italian public finances. Rather, it largely reflected the fact that Italian government bonds typically move more than core European bonds when investors reprice the outlook for euro area interest rates.
Across fixed income sectors, performance largely reflected differences in duration rather than credit quality. Although high yield spreads widened by more than investment grade spreads over the month, the shorter duration and higher carry of the high yield indices helped cushion the impact of rising government bond yields. By contrast, investment grade credit experienced larger losses. Within investment grade, technology spreads widened relative to the broad index as large debt issuance from the US hyperscalers to fund continued investment in AI infrastructure increased the supply of bonds coming to market.
Conclusion
In summary, July highlighted how quickly markets can pivot between geopolitics and the AI-led investment cycle. A brief oil spike revived inflation concerns and pushed bond yields higher, while equities rotated away from semiconductor companies toward value-oriented sectors such as energy and financials. These differences were also reflected in regional returns, with the UK FTSE All Share and Japanese TOPIX proving relatively resilient and emerging markets underperforming due to their heavier reliance on the semiconductor supply chain. Looking ahead, markets are likely to remain sensitive to both energy-driven inflation risks and the sustainability of AI-related earnings. As we discussed in our Mid-Year Outlook, these risks call for different diversifiers: government bonds remain the most effective protection against a growth slowdown driven by a reversal in AI enthusiasm, while real assets can provide resilience should inflation prove more persistent than expected.