Markets experienced a challenging environment in July with major indices ending the month slightly lower. However, this is in the context of healthy year-to-date gains and a broad market that is not far from its all-time high. A number of factors drove day-to-day moves, including new concerns around AI investments, Treasury yields climbing toward multi-year highs, oil prices rising following a breakdown in the Middle East ceasefire, and the Federal Reserve keeping rates unchanged.

Many of these events reflect longer-term themes that could continue to drive short-term volatility in the coming months. At the same time, these trends have also propelled markets this year, highlighting the importance of portfolio balance and maintaining a longer-term perspective.

AI investment fuels mixed results across the tech sector

Corporate earnings reports for the second quarter raised new questions around AI investments. This caused market swings, primarily reflecting investor concerns over the free cash flow of large technology companies, often referred to as “hyperscalers.” These companies continue to invest hundreds of billions in new data centers and AI infrastructure, which the market is scrutinizing to determine whether these massive capital expenditures will translate into profits. At the same time, spending on data centers alone has become a meaningful contributor to U.S. economic activity, surpassing all other categories of office construction.

The Federal Reserve holds rates amid a divided committee

At its July meeting, the Federal Open Market Committee (FOMC) kept the federal funds rate unchanged within a range of 3.50% to 3.75%, despite concerns over higher inflation. This led to additional market volatility as bond yields rose and investors tried to gauge when the Fed might begin raising rates. 

Specifically, new Fed Chair Kevin Warsh has intentionally reduced communication around how the Fed may act at future meetings. Not only is the FOMC statement much simpler, but he has avoided questions on how the Fed might react to different economic scenarios. Less “forward guidance” means that investors may be less sure about how the Fed might respond to higher inflation, a slower labor market, and other factors.

The immediate market reaction was a jump in bond yields, with both nominal and real Treasury rates climbing to their highest levels in recent years. Market-based expectations also suggest the Fed could raise rates once by October, and possibly twice by the middle of 2027.

New tariffs add more economic uncertainty

New tariffs added further complexity to the economic backdrop in July. After the Supreme Court ruled that last year’s reciprocal tariffs under the International Emergency Economic Powers Act were illegal, the administration responded by implementing new tariffs under a different trade law, Section 122 of the Trade Act of 1974. Those tariffs expired in July, resulting in the White House implementing additional new tariffs under Section 338 of the Tariff Act of 1930, citing what the administration described as discriminatory treatment of American products.

Today many countries now face tariffs ranging from 10% to 12.5%. Additionally, certain countries face much higher rates, including a 50% tariff on certain Canadian goods such as cement, dairy, and alcohol.

Middle East conflict briefly pushes oil back above $100

The ongoing conflict in Iran also led to short-term market moves. Tensions reignited mid-month when the U.S. conducted more airstrikes against Iranian military sites, leading to slower traffic through the Strait of Hormuz, a critical chokepoint for global oil. The conflict also expanded when another waterway, the Bab al-Mandeb Strait in the Red Sea, also came under fire after Yemen’s Houthi forces struck Saudi Arabian oil tankers.

In response, Brent crude jumped above $100 briefly before settling back to roughly $90 by month-end. In comparison, oil had fallen to as low as $72 per barrel in early July. Higher energy prices matter for the broader economy because they directly raise fuel costs for households and businesses. Gasoline prices are still hovering around $4.10 per gallon across the country, which could potentially keep headline inflation higher..

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