Loud Month, Solid Fundamentals
July was a volatile month, though less uniformly negative than the sharpness of the tech correction might suggest. The S&P 500 ended the month essentially flat, down just 0.1%, while the Nasdaq Composite fell around 3.2% and the Nasdaq 100, more concentrated in semiconductors, dropped nearly 7%, its worst monthly performance since March 2025; intramonth, the index briefly traded more than 10% below its all-time high. The Dow Jones, by contrast, rose about 0.3% and extended its winning streak to a fourth consecutive month. In Europe, the Stoxx 600 gained roughly 1.3% for the month, also its fourth straight monthly gain, closing at a fresh record late in the month, and the DAX likewise set a new all-time high on July 6 before easing back slightly to end the month near its peak.
The catalyst for the tech correction came from TSMC’s results. They were better than expected, but the increase in planned capex reignited concerns about the return on investment of AI spending, more than about demand itself. That repricing, however, deserves to be viewed in context. After the sell-off, valuations now look more reasonable: semiconductors trade at around 25 times 2027 earnings, broadly in line with software, while memory trades at only around 7 times 2027 earnings, a level that stands in sharp contrast with its central role in AI infrastructure.
We see this dispersion as meaningful. It suggests that the market has already priced in a cautious scenario for memory, even though physical DRAM prices continue to rise strongly, with quarterly contract prices up 20% to 30% and volumes already locked in by several hyperscalers for years ahead. There is therefore a clear disconnect between the equity re-rating and the sector’s fundamentals, which leads us to view this more as a positioning unwind than as a structural break in the cycle.
Importantly, this correction has not reflected a broad rejection of risk. While Nasdaq and semiconductors sold off sharply, the Dow Jones moved higher, supported by a rotation into cyclicals, industrials, financials and consumer staples. This suggests that liquidity is being redeployed rather than withdrawn.
On the geopolitical front, the situation with Iran deteriorated markedly late in the month. After the June truce already began to fray in early July, a genuine military escalation unfolded later in the month, with Iranian missile strikes on US positions and US retaliatory strikes targeting numerous Revolutionary Guard assets. For now, both sides appear to be avoiding civilian or major energy infrastructure, which has limited the scale of the oil shock compared with other episodes in this conflict, though the direction of travel is clearly toward greater risk rather than de-escalation. That escalation, in turn, kept the indices in an almost constant back-and-forth throughout the month, with markets swinging within hours between relief and risk aversion depending on the day’s headlines, to the point of overshadowing an otherwise solid earnings season: Microsoft, Amazon and Alphabet all surprised to the upside on their cloud businesses, and 2026 S&P 500 earnings growth continues to be revised higher. Even strong results, then, did not always translate into a lasting market direction, as the conflict repeatedly took precedence over corporate fundamentals.
On the macro side, the Fed meeting confirmed an important point: the market continues to test new Fed chairs very hard. Kevin Warsh chaired his second monetary policy meeting, where members voted 9 to 3 to keep rates unchanged. The market lowered expectations for near-term hikes, but long-end Treasury yields moved higher after his press conference, which points to some uncertainty around his policy direction. Warsh also declined to specify what would prompt him to raise rates, consistent with his distance from traditional forward guidance. That is starting to raise questions about his credibility and about his ability to lead a committee that appears visibly divided.
Historically, this kind of transition is often accompanied by a period of stress in risky assets before a more readable regime is established. Warsh remains firm on the 2% inflation target, but he also stressed that there is no quick fix and no “magic wand” to bring inflation back to target.
We agree with that reading. Underlying inflation continues to normalize, with the three-month annualized core CPI running at levels that are broadly consistent with a less restrictive policy stance. Housing is also trending weaker, which limits the risk of a renewed inflation reacceleration in the near term. In other words, the inflation backdrop looks more constructive than recent volatility might suggest.
That said, we do not think this is yet a case for calling a full recovery. The market remains highly dependent on liquidity, positioning and leverage, and the recent correction in the most crowded segments makes that clear. Margin calls, concentration in a handful of very popular themes, ongoing uncertainty around the new Fed chair and the escalation in the Middle East can still trigger sharp moves in the short term.
Our view therefore remains constructive, but cautious. We believe the current correction is more about normalization after excesses in positioning and valuation than the start of a major trend reversal. At this stage, volatility remains a risk, but it also continues to create attractive entry points for patient investors, especially in the segments where valuations have moved most back in line with fundamentals.
