A month of reckoning

July 2026 prompted investors to pause and think about the risks ahead. The month opened with hopes that the U.S.–Iran memorandum of understanding would put the Strait of Hormuz on a path toward normalization. Instead, renewed hostilities returned energy security to the center of the market debate. At the same time, investors continued to reassess the economics of artificial intelligence (AI), while U.S. Federal Reserve (Fed) Chair Kevin Warsh faced an increasingly complicated inflation backdrop. The result was not a single dominant market story, but a series of reckonings across geopolitics, technology and policy.

The Strait closes again

The most important reversal in July came in the Middle East. The U.S.–Iran Memorandum of Understanding (MOU) signed in mid-June briefly reduced the most acute tail risk to global energy supply, but the détente did not hold. Renewed military confrontation in July again disrupted traffic through the Strait of Hormuz, with shipowners and insurers reassessing whether the route was safe enough to use. Market attention quickly shifted back from “reopening” to “execution risk”: Even if a new agreement is reached, normalizing physical flows, insurance costs, inventories and petrochemical logistics will likely take time. This concern is exacerbated by the Houthis attacking Saudi Arabian tanks coming through the Bab El-Mandeb Strait, the southern outlet of the Red Sea.

This matters because the Strait is not only an oil story. It is also a liquefied natural gas, fertilizer, petrochemical and shipping cost story. A renewed disruption props up headline inflation. The U.S. average gasoline price has returned to above USD 4 per gallon, and this could keep headline inflation at around 3.5% for the next 1–2 months, at least. This also raises the risk that food and input cost pressures appear with a lag. For central banks, that complicates the usual trade-off: Higher energy prices argue for vigilance on inflation, while weaker confidence and supply constraints can weigh on growth. The global economy may still avoid a stagflationary outcome, but July showed that the margin for error remains narrow.

AI: From CTOs to CFOs

AI remained the market’s structural growth story, but July brought more scrutiny over how that growth will be monetized. The first phase of the AI trade rewarded companies exposed to compute, semiconductors, data centers and cloud demand. The next phase is becoming more demanding. Chief Technology Officers (CTOs) may select the models, but Chief Financial Officers (CFOs) ultimately hold the purse strings. As enterprise adoption broadens, investors are paying closer attention to token costs, return on investment and whether productivity gains justify the scale of spending.

This does not mean the AI theme is broken. Rather, it suggests that the market is becoming more selective. Frontier models should still command demand from advanced users, while cheaper and more specialized models may be sufficient for many corporate applications. Chinese AI models and open-source alternatives are also increasing competitive pressure by offering lower-cost options and allowing companies to keep proprietary data closer to home. For U.S. hyperscalers, the implication is clear: Capex plans will need to be justified not only by future demand but also by credible evidence of monetization. Market reactions to 2Q earnings reflect this level of healthy skepticism. 

Warsh’s Fed faces a stickier inflation test

The June Federal Open Market Committee (FOMC) meeting had already signaled a more hawkish communication style under Chair Kevin Warsh. July made that stance easier to understand. Renewed energy volatility, the possibility of tariff-related price pressure and still-solid growth left the Fed with little incentive to sound dovish. The Fed kept policy rates unchanged in its July meeting, and the policy statement also reiterated its read of solid growth, stable labor markets and elevated inflation. However, three members dissented in favor of raising rates by 25 basis points (bps), and Warsh also sounded tough on inflation, despite being optimistic about AI-led productivity gains. We still see no urgency for a 2026 rate hike, but the decision has become more finely balanced. If the Fed does tighten later this year, it would likely be precautionary rather than the start of an aggressive hiking cycle.

Warsh’s task forces on communications, balance sheet management, AI’s labor-market impact, inflation measurement and the monetary policy framework also remain important. They may not change the Fed’s dual mandate, but they could change how the Fed explains itself to markets. A shorter, more guarded communication style can be useful if it restores policy flexibility. It can also raise volatility if investors feel they have less guidance on the reaction function. July therefore reinforced a familiar message: Monetary policy is not the source of the shock, but it will determine how financial markets digest it.

A rotation toward non-tech

Equity markets entered July with strong first-half gains and considerable confidence in the resilience of corporate earnings. The renewed pressure on energy supply and the reassessment of AI economics did not eliminate that confidence, but they did encourage more differentiation. Technology and semiconductor leaders still benefit from powerful structural demand, especially in Taiwan, South Korea and the U.S. However, investors are increasingly distinguishing between companies with clear pricing power and cash flow visibility and those whose valuations rely heavily on future capex translating into future profits.

The broadening of market leadership remains a constructive development. A more stable global growth backdrop allows investors to revisit cyclical sectors, financials, defense, selected industrials and parts of Asia outside the technology complex. China and selected ASEAN companies also deserve attention where earnings revisions, policy support or domestic demand trends are improving. This broadening is healthy, but it should not be confused with an “all clear.” Higher short-term yields, energy uncertainty and questions around AI monetization can still produce sharp rotations.

What does this mean for investors?

July’s events reinforce the central message of our 2026 Market Outlook: Investors should stay invested but stay disciplined. The case for risk assets has not disappeared. Global growth remains positive, AI continues to support capital spending and earnings, and corporate balance sheets are generally resilient. Yet the path is likely to be noisy because energy security, trade policy and central bank credibility are all moving parts.

Diversification remains the first line of defense. Investors should avoid allowing strong equity returns to push portfolios too far away from long-term objectives and risk tolerance. Rebalancing across regions, sectors and asset classes can help capture a broader opportunity set while reducing dependence on any single theme.

Income generation also deserves renewed attention. If policy rates stay higher for longer, corporate bonds, selected emerging market debt, private credit, high-dividend equities and option-overlay strategies can provide useful cash flow. A steady global economy should help keep corporate default rates contained, while higher yields can make fixed income more competitive again after a strong equity-led first half.

Private markets remain relevant as well. The wave of large technology IPOs is a reminder that many companies generate value before they reach public markets. For suitable investors, private equity, private credit and infrastructure can complement public market exposure, especially when volatility creates opportunities for long-term capital deployment.

Global economy

• The July FOMC meeting delivered a hawkish hold, with the Fed leaving rates unchanged as expected but facing three dissents in favor of a 25 bps hike. Fed Chair Warsh emphasized the Fed’s commitment to price stability while avoiding explicit forward guidance, contributing to uncertainty around the reaction function.
  (GTMA P. 25, 26)
• The European Central Bank (ECB) kept the deposit rate unchanged at 2.25% following June’s 25 bps hike, but Lagarde’s press conference leaned hawkish. The Governing Council maintained a meeting-by-meeting approach amid energy price volatility and Middle East uncertainty, while removing language on downside growth risks and emphasizing that second-round inflation effects still need monitoring. Markets took the “hawkish hold” largely in stride, with limited movement in rates.
  (GTMA P. 17, 18)
• In China, growth momentum slowed as real gross domestic product (GDP) rose 4.3% year-over-year (y/y) in 2Q26, below expectations and down from 5% in 1Q26, though first-half growth of 4.7% remained within the government’s 4.5%–5.0% target range. Exports and high-tech manufacturing remained the key supports, helped by strong demand for AI hardware, semiconductors and advanced equipment, while domestic demand stayed weak amid soft retail sales, contracting investment and continued property-sector pressure. The GDP miss is likely to increase expectations for targeted policy support at the July Politburo meeting rather than a broad-based stimulus package.
  (GTMA P. 4, 8, 9)
• The Bank of Japan (BoJ) kept its policy rate on hold at 1%, as widely expected, but delivered a hawkish signal on normalization, with an 8-1 vote and one member favoring a move to 1.25%; it also flagged the risk that underlying inflation could potentially hit its 2% target. Takaichi continued to vow for advancing the USD 2.3trillion stimulus plan with a temporary food sales-tax cut. Authorities also conducted currency intervention to support the Japanese yen (JPY), pulling the currency away from a four-decade low.
  (GTMA P. 14)

Equities

• MSCI World was flat in July, with the S&P 500 and Nasdaq both down for a second straight month, though the equal-weight S&P 500 outperformed the cap-weighted index as market breadth improved. AI remained the key under-the-surface theme, but leadership rotated sharply as semiconductors and memory stocks sold off on concerns around AI capex returns, valuation and crowded positioning, while energy, financials, real estate, healthcare and staples outperformed.
  (GTMA P. 28, 29, 44, 47)
• Asian equities declined in July, with the MSCI Asia Pacific ex Japan index lower, though performance was highly dispersed across the region. South Korea and Taiwan lagged amid extreme volatility in AI- and chip-linked shares, while Australia, Singapore and parts of Southeast Asia outperformed, supported by strength in energy, financials, local currencies and more resilient domestic sentiment.
  (GTMA P. 28, 35)
• Greater China was mixed, with Hong Kong rallying strongly as sentiment improved and investors rotated into the market, while mainland technology-heavy benchmarks sold off sharply on concerns over valuation, positioning and AI-related crowding. Broader China macro data remained soft, with weaker consumption, property pressure and disappointing investment offsetting resilience in industrial production and exports.
  (GTMA P. 35, 39)
• Japan was mixed in July, with the Nikkei declining sharply while the broader Topix posted a modest gain, reflecting rotation away from more growth- and technology-sensitive areas. Macro policy remained a key focus as the BoJ held rates steady but kept the door open to further normalization, while JPY weakness prompted direct FX intervention and fiscal policy headlines added upward pressure to bond yields.
  (GTMA P. 35, 41)

Fixed income

• The U.S. Treasury (UST) yield curve bear-steepened in July, with 2-year and 30-year yields up 12 bps and 32 bps, respectively. Amid a sharp increase in energy prices and more hawkish Fed policy expectations, these have weighed on the short-end of the curve. And additional pressure was placed on long-end yield, which reflects market questions around the Fed’s credibility to commit to its inflation mandate, following Warsh’s lack of forward guidance at the press conference. With Overnight Index Swap (OIS) markets already pricing in a full rate hike by this year end, the risk of further tightening is now pushed into next year with 53 bps of rate increase priced in by June 2027.
  (GTMA P. 54, 55, 59)
• Credit spreads nudged higher toward late July, as increased bond issuance from tech hyperscalers weighed on top of market’s hawkish pricing, although the impact remains manageable as markets focus on robust balance sheet fundamentals. As such, global investment grade and high yield spreads marginally widened by 2 bps and 7 bps, respectively, but remains near the tight end of historical range.
  (GTMA P. 61, 62, 63)

Alternatives

• According to PitchBook data, the number of global private equity deals in 2Q26 is estimated to have increased to 5,672, up from 5,552 in the last quarter. Momentum on deal value stalled, however, with deal activity estimated to amount to USD 420billion in 2Q26, lower than USD 544billion in the last quarter. Exit activity in global private equity also slowed, with USD 275billion across 948 exits estimated in 2Q26, down from USD 343billion across 1,000 exits in the last quarter.
• As for the U.S. middle market, the J.P. Morgan Private Assets Index-Middle Market recorded a 17.5% trailing 12-month return as of June, with revenue growth, net debt change and multiple expansion contributing 10.6%, -2.4% and 9.0%, respectively.
  (GTMA P. 73, 74)
• Based on the KBRA DLD Direct Lending index, the trailing 12-month default rate was flat over June at 3.9% excluding non-accruals and 6.1% including non-accruals on a par-weighted basis, while yield to maturity rose 7 bps to 9.14%. (GTMA P. 75, 76)

Other financial assets

• Oil prices moved sharply as renewed U.S.–Iran confrontation in July again disrupted traffic through the Strait of Hormuz, reversing the brief relief from the mid-June MOU and shifting market focus back to execution risk around physical flows, insurance costs, inventories and petrochemical logistics.
  (GTMA P. 70, 72)
• USD momentum reversed over the month, as the FOMC meeting raised renewed questions around its credibility and commitment toward its inflation targets, with the DXY index down 1.3% to 99.9 by July-end. As for other developed market currencies, most gained over the month, with the EUR up 0.6% and the GBP up 1.4%, while the CHF fell 0.3%. Asian currencies similarly gained, with the JPY most notably up 2.1% on the intervention efforts by both governments and the KRW up 8.8% on a hawkish Bank of Korea and domestic risk-off flows. The CNY also gained 0.6% over the month in accordance with the People’s Bank of China’s (PBoC’s) fixing, while the INR fell 0.8% and marked one of the weakest currencies in Asia. 
  (GTMA P. 67, 68, 69)

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