The stock market continued its accent during the month of July, with the S&P 500 advancing 2.24%, the NASDAQ 100 (QQQ) rallying 4.58%, while bonds were flat. The rest of the developed world (CWI) declined around .30 for the month, and small caps (IWM), having rallied earlier in the month, settled with a gain around 1%. Large value and S&P 500 equal weight advanced less than 1% in July.

Growth outpaced value and small caps, and the U.S. outpaced the rest of the world.

Best performing sectors were Info Tech (5.19%), utilities (4.94%) and industrials (3.01%) while the worst performing sectors were materials (-.44%), consumer staples (-2.37%) and health care (-3.26%)

For July, TWG growth, moderate and conservative portfolios gained 1.7%, 1.6% and 1.2%, outperforming their respective benchmark returns of 1.52%, 1.24% and .97%.

For June, TWG growth, moderate and conservative portfolios gained 4.73%, 4.07% and 3.51%, outperforming their respective benchmark returns of 4.43%, 3.95% and 3.47%.

For the trailing 3 months (May/June/July), TWG Growth, moderate and conservative gained 11.7%, 10.1% 8.3% respectively.

WHAT MOVED THE MARKETS

Strong corporate earnings were a significant driver of the market rally, particularly in the tech sector.  Many companies reported better than expected quarterly results, boosting investor confidence.

Also boosting investor sentiment was a temporary pause in some U.S. tariffs and the announcement of a framework for a trade deal with the European Union.  Even with the looming August 1 deadline imposed by the administration to implement tariffs, the market remained focused on fundamentals (ie: earnings), though several tariff agreements made during the month provided some sense of progress.

The Fed held rates steady, as expected, even in the face of pressure from Trump demanding that Powell lower rates. A stronger than expected GDP report and stubborn inflation data led to a tempering of expectations for a rate cut at the next meeting, causing some pressure on the markets future rate cut expectations.

Speaking of GDP, after a negative Q1 print the second quarter GPD report of 3% reflected a strong rebound, providing a source of optimism for investors and averting a technical recession.

Despite the positive GDP report, there were signs of a slowing labor market, as July’s report showed a modest hire rate and downward revisions for the previous two months. This raises concerns about a weak labor market and perhaps increases the likelihood of a Fed rate cut in 2025.

PORTFOLIO ADJUSTMENTS

The portfolio initially comprised a diversified mix of ETF’s with a heavy emphasis on growth and broad market exposure. The largest allocation was to QQQ, providing strong exposure to the tech industry, reflecting an orientation toward growth-oriented equities.  Complementing this were large-cap U.S. equity exposures through SPLG (S&P 500) and IWF (Russel 1000 growth index). Additionally, sector-specific and style-specific focused ETF’s like RPG (pure growth), IEV (Europe), VTV (value), IWP and IWS (mid cap) rounded out the portfolio. This composition resulted in a moderately aggressive equity sleeve skewed towards growth and U.S. large caps, with supplemental international and value diversification.

By the end of the month, the portfolio experienced a notable reallocation. The weight of RPG nearly doubled, signaling a strategic emphasis in growth, aiming to capture a more focused factor exposure to growth outside of mega cap technology. In contrast, QQQ’s allocation shrank substantially, reducing the single-largest concentration in the portfolio and thereby lowering undiversified risk tied to Nasdaq-100 dynamics. Similarly, IWF declined, indicating a marginal reduction in mid-to-large cap growth exposure.  Significantly, SPLG saw a sharp increase, as the position in IEV (Europe) was eliminated as European equities lagged through the month.  These shifts are intended to ground the portfolio more firmly in broad market equities, likely to stabilize returns and reduce idiosyncratic risk. Overall, concentrated risk was reduced, and profit was captured, while core holdings were increased.

LOOKING AHEAD

In contrast to the booming stock market, the economy is starting to show some signs of a slowdown. The final week of July contained a multitude of earnings reports, policy announcements and economic data.

Importantly, the Bureau of Labor Statistics reported that the U.S. economy only created 73,000 jobs in July, well below the 110,000 expected. Further, May and June jobs numbers were revised down dramatically, reducing the two-month numbers from 291,000 to 33,000.  This is a significant revision, and points to corporate America’s reluctance to hire given the uncertainty around what the tariff policies will be and its impact on margins, earnings, and consumer spending.

While the on-and-off tariff policies are not as bad as originally suggested in early April, the effects are just starting to be felt, primarily by corporate America as their frontloading imports ahead of April have enabled them to NOT pass costs on to the consumer — but this may be changing.

GPD was a bright spot, growing 3% annualized in the second quarter. This is a big jump from the slightly negative GDP print in April, but the volatility between the prior two quarterly figures is unusual and reflects a tug of war between consumer spending and business spending. Private purchases were up just 1.2% year over year, and consumption rose 1.4%.  Respectable, but not impressive. Business investment, however, fell flat and spending on imports fell sharply. Most of the boost in overall GDP growth seems to be from the massive spending on AI, and much of the rest of the country is not participating.

Current earnings report 10% year-over-year growth, well above the 5% expected. Much of the excess earnings come from big cap technology, as the mega caps are on pace to spend another $350 billion on AI during 2026. We are grateful for our outsized allocation to the tech sector, which helps smooth out the tug of war between the tariff drag and the resilience driven by AI.

Thus, we believe that the big swing in GDP growth is a function of how businesses are responding to tariffs. Tariffs may also start eating into company profits. During their earnings announcements, Black and Decker, Ford and Proctor and Gamble all said that tariffs are hurting earnings. P&G and Adidas have said that they will have to start raising prices. Prices for goods overall have increased 3% year over year.

Consumers are being more cautious in their spending, which was reflected in the consumer sentiment index. This index is better than it was in April, but still down around 7% from a year ago.

While average hourly earnings are up 3.9% year over year, a typical response to uncertainty is caution. We believe this is justified, as policy seems to change daily.

Even with more certainly as to where tariff rates will likely settle in August, the level is much higher than it was to start the year. The consumer will be the key to keeping the stock market elevated but are showing some signs of slowing.

While the macro is not disastrous, there is reason to be cautious as we enter the seasonally weak period of the year. The market has been on a tear since the post liberation day lows, and it is not unexpected for the market to take pause or even pull back 5% in the months ahead.

There are positives as well.  The tax bill has passed, which will maintain current tax rates. Regardless of the impact on our deficit, had the bill not passed, then almost everyone would be confronted with higher taxes, all things equal. Higher taxes yield less disposable income, leading to lower consumption, likely lower earnings and thus perhaps lower stock prices.

Deregulation from the government should help spur additional growth in certain sectors that have been subject to anti-growth regulation.

Given the weak jobs data of late, the likelihood that the Fed will start cutting rates in September is much higher than just last week. Lower rates are somewhat stimulative and should reduce borrowing costs that will presumably be a tailwind to earnings growth.  Lower rates should also help sentiment, which is often a large driver of stock prices.

However, until the stock market reflects this supposed slowdown in consumer and business spending, we will maintain a fully invested, growth-oriented posture.  Weaknesses will ultimately show up in earnings, and stock prices, should the economy begin to wobble further. We will be prepared to manage risk exposure as the effects of tariffs begin to rear their head in the months ahead.