Stock markets rallied during most of July, driven by renewed enthusiasm that tariff rates will be much lower than some had feared. That said, by the end of the month investors had started to price in the reality that tariffs are here to stay, resulting in markets selling off in early August.
US equities via the S&P 500 rose 2.2%, Australia’s ASX 200 rallied 2.4%, while the best-performing major market was China’s CSI 300, up 4.3%. Broader Emerging Markets were up less, at 1.9%.
Sector-wise, US tech once again led over the month, up 5.2%, also dragging Utilities up 4.9%, on AI-related energy demand. Defensive US sectors lagged: Healthcare was down -3.4% and Consumer Staples fell -2.5%. In Australia, there was a mixed bag: Healthcare led the way, up 8.7%, while all sectors were positive apart from Financials, which dropped -1%, taking some wind out of the banks trade.
Government bond yields were mostly higher over the month, driven by signs that tariffs are starting to pass through to inflation data, potentially keeping central banks on hold for longer than markets expect. US yields rose +15bps, Australia +10bps; and Japan by +13bps as the BoJ continues to signal further hikes. As a result, July’s yield moves mean several markets now have higher yields than at the start of the year — including Canada, Germany, the UK and New Zealand – while Australia and the US remain lower (-10bps and -20bps, respectively).
Currency markets saw a reversal of recent trends, with the USD Index rallying 3.2%, moving 3-month figures into positive territory. USD strength was broad-based: JPY -4.7%, EUR -3.2%, while commodity-linked currencies fared slightly better (CAD -1.8%, NOK -2.6%, AUD -2.4%).
In the US, the first estimate of Q2 GDP came in slightly above expectations at +3%, while real-time estimates for Q3 GDP declined another 0.5% to 2.3% over the month. Inflation came in at expectations, though deeper analysis shows signs that tariffs are beginning to push prices higher. Payrolls released in early August were a shocker: much weaker than already-soft expectations, combined with significant downward revisions to prior months.
In Australia, household spending for May surprised to the upside, but June’s labour market stats disappointed. A sharp drop in full-time employment led to the unemployment rate rising to 4.3% — the fourth consecutive monthly increase and the largest monthly rise in over a year.
The momentum trap: When markets go too fast
Momentum can be a powerful driver of market performance. When fundamentals are strong, sentiment is positive, and price action follows through: things click. Markets feel like they’re in sync. That’s healthy momentum.
But momentum can also turn dangerous, especially when it builds too fast.
Think of a race car taking a corner. You need some speed to stay on track, but if you accelerate too swiftly, you risk losing control. The very force that helped you grip the road can now send you spinning out.
That’s how current market dynamics are starting to look. The S&P 500 just clocked six straight record highs, powered by mega-cap tech and AI euphoria. But under the hood, the fundamentals aren’t accelerating at the same pace.
Valuations are stretched. Participation is narrow. And much of the recent price action looks more like performance-chasing than a broad-based economic uplift.
For contrast: while the S&P soars, the Russell 2000 – a proxy for smaller, more economically sensitive companies – hasn’t made a new high in over 900 days. That divergence speaks volumes. The rally is being pulled by a few fast cars, not the full field.
Meanwhile, mispricing risks are emerging across asset classes:
Equities: Investors’ focus on a handful of AI-linked stocks has left large swathes of the market undervalued or ignored. Many defensive sectors look cheap, but they could stay that way if risk appetite remains extreme.
Bonds: Despite higher yields, markets continue to price in rate cuts that central banks are clearly resisting. If inflation stays sticky or tariffs drive prices higher, current expectations for rapid easing could prove misplaced.
Currencies: The recent surge in the USD is partly justified by US economic resilience, but also risks overshooting if global growth surprises to the upside or if geopolitical tensions ease.
These disconnects can persist for a while, but when reality reasserts itself, corrections tend to be sharp and disorderly. Historically, periods of extreme momentum with narrow leadership have often ended with significant repricing across markets.
Markets are full of contradictions. Optimism and risk can co-exist. But when so many warning lights are flashing – from tariffs, to labour market softening, to yield curve signals – experienced investors don’t just floor it. They ease up. They read the dashboard.
That’s our approach right now: defensive positioning, selective exposure, eyes on the road.
We’re not sitting out, but we are driving with caution, to ensure we’re well-positioned when the next leg of the race begins. This mindset served us well in Q1, and we believe it will do so again in the quarters ahead.