Following the extraordinary dominance of mega-cap technology stocks during the first half of the year, investors increasingly rotated equity portfolios into broader segments of the market. A symbol of this shift in sentiment was hedge fund Situational Awareness, whose highly leveraged portfolio was forced into liquidation after suffering heavy losses in technology stocks and facing mounting margin calls. The S&P 500 declined 0.1% in July, while the technology-heavy Nasdaq Composite fell 3.2% and the Russell 2000 lost 3.1%. By contrast, the equal-weighted S&P 500, as measured by the Invesco S&P 500 Equal Weight ETF (RSP), gained 1.1%. Year-to-date performance now stands at +18.1% for the Russell 2000, +12.2% for the RSP ETF, +9.4% for the S&P 500 and +9.2% for the Nasdaq Composite.
European equities benefited from the sector rotation. The STOXX Europe 600 advanced 1.2% and reached fresh record highs, while Switzerland’s Swiss Leader Index (SLI) gained 0.7%. Asian equity markets, by contrast, remained highly volatile. Japan’s Nikkei 225 declined 8.1% in July, while China’s Shanghai Composite remained down 3.4% year to date. South Korea (KOSPI +57%) and Taiwan (TAIEX +49%) continued to lead global equity markets this year, while the Nikkei still remained approximately 28% higher despite the recent correction.
Global government bond markets came under significant pressure in July as yields on 10-year sovereign bonds rose to new highs for the year in many major markets. In the United States, the yield on the 10-year Treasury note climbed to 4.75%, while the two-year Treasury yield increased to 4.29%. European bond yields continued to move higher, with Germany’s 10-year Bund yield reaching 3.20%, its highest level in 15 years. Swiss government bonds were not immune to the global repricing, although yields remained significantly lower than elsewhere. The yield on the 10-year Swiss Confederation bond ended July at 0.41%, while Japan’s 10-year government bond yield rose to 2.80%, its highest level since the Bank of Japan abandoned its negative interest rate policy.
Credit markets remained remarkably resilient despite higher government bond yields. US high-yield spreads ended the month at 2.84%, compared with 2.65% for European high-yield bonds. Since the beginning of the year, high-yield bonds on both sides of the Atlantic have generated total returns of around 1.2%. Investment-grade bonds posted a modest gain of 0.2% in Europe, while their US counterparts remained down 2.2% year to date.
Commodity markets were mixed. Gold stabilised around the USD 4,000 per ounce level, ending July at USD 4,043, up 0.9% during the month but still 6.3% lower year to date. Brent crude oil surged more than 23% to around USD 90 per barrel, marking its strongest monthly gain since March. Copper advanced 3.4%, lifting its year-to-date gain to more than 13%.
Currency markets showed signs of a trend reversal towards month-end. The US Dollar Index (DXY) declined 1.3% in July but remained 1.6% higher year to date. The euro strengthened to 1.153 against the US dollar. The Swiss franc appreciated modestly against the US dollar, ending the month virtually unchanged at 0.808. Against the euro, the franc extended the previous month’s recovery, with EUR/CHF finishing July at 0.931 – almost exactly where it began the year. The most notable move, however, occurred in the Japanese yen. After USD/JPY briefly approached 164 in mid-July, its highest level in four decades, coordinated intervention by the Japanese authorities and the US Treasury reversed the trend. Within just a few trading sessions, the exchange rate fell to 157.6.
US real GDP growth for the first quarter of 2026 was confirmed at an annualised 2.1% in the final estimate. Although the first estimate for second-quarter growth, at 1.5%, came in somewhat below expectations, the underlying picture remained considerably stronger once the negative contribution from net exports and the modest decline in government spending are excluded. Private consumption and business investment expanded at an annualised rate of 3.9%, underscoring the resilience of domestic demand. Meanwhile, the Atlanta Fed’s GDPNow model is currently projecting third-quarter growth of 5.0% (as of 30 July), suggesting that recession concerns have receded significantly. Inflation also continued to move in the right direction. Headline CPI slowed to 3.5% in June, while core inflation eased to 2.6%. The Cleveland Fed’s Inflation Nowcasting model projected a further moderation in July to 3.4% and 2.5%, respectively (as of 31 July).
The euro area’s economy also proved more resilient than expected in the second quarter. GDP expanded by 0.4% quarter-on-quarter (approximately 1.6% annualised), following stagnation at the beginning of the year. Economists expect growth to accelerate further to around 0.6% (approximately 2.4% annualised) in the third quarter. Euro area inflation eased to 2.8% in June, although a modest increase to 2.9% was expected for July. Several economists nevertheless anticipated inflation moving back above the 3% threshold as early as August.
Against this backdrop, interest-rate futures continued to price in slightly higher policy rates by year-end. Market attention is focused on the September meetings of the European Central Bank and the Federal Reserve, with investors assigning a high probability to a further 25 basis point increase by both institutions. In Switzerland, by contrast, markets continue to expect the Swiss National Bank to keep its policy rate unchanged at 0% through the end of 2027.
Many market participants interpreted the sharp rise in longer-dated Treasury yields following the Federal Reserve’s policy decision on 29 July as evidence of rising inflation expectations. They argued that Federal Reserve Chair Kevin Warsh had failed to present a sufficiently credible strategy for bringing inflation under control. We do not share that assessment.
The crucial point is that market-based five- and ten-year breakeven inflation rates remained remarkably stable at between 2.25% and 2.30%. Instead, it was real yields that moved higher. In our view, this reflects improving expectations for real economic growth rather than mounting concerns about inflation. We therefore expect the Federal Reserve to leave its policy rate unchanged at its September meeting. By contrast, we expect the European Central Bank to raise its key policy rate by a further 25 basis points.
Based on the evolving monetary policy backdrop in the United States and the productivity gains expected from the broader adoption of artificial intelligence, we continue to expect a Goldilocks scenario through year-end, characterised by solid economic growth and gradually moderating inflation. Such a backdrop should remain supportive of risk assets, particularly equities. While volatility could emerge in the run-up to the US midterm elections in November, we would view any market weakness as a selective buying opportunity rather than the beginning of a new bear market. Within equities, we continue to favour the financial sector, which should benefit from a steeper yield curve and a resilient macroeconomic environment. We also remain firmly convinced of the long-term investment case for information technology. In addition, industrials, energy and materials appear well positioned to benefit from the current economic backdrop.
We continue to maintain an allocation to government bonds for diversification purposes, with a preference for intermediate maturities. While we do not anticipate significant capital appreciation, the higher level of yields now provides an attractive source of carry and helps stabilise overall portfolio returns. Should economic growth slow more sharply than expected, government bonds are also likely to reassert their traditional role as an effective portfolio diversifier. As a hedge against unexpected inflation shocks, we hold a modest allocation to inflation-linked bonds.
Within fixed income, we continue to favour investment-grade over high-yield credit. Although we do not expect a meaningful widening of credit spreads in the near term, we believe the risk-return profile remains more attractive in equities. We also remain highly selective in the private credit segment.
Gold remains a strategic portfolio holding. The USD 4,000 per ounce level has repeatedly proven to be a robust support area in recent weeks. A decisive break above USD 4,200 would likely reinforce the medium-term uptrend. By contrast, we expect oil prices to trend lower over the remainder of the year. We remain constructive on copper.
In foreign exchange markets, we continue to expect a gradual weakening of the US dollar through year-end. We see the greatest appreciation potential in the Japanese yen, followed by the euro and the Canadian dollar. By contrast, the Swiss franc may surrender part of its safe-haven premium as investor risk appetite continues to improve.