August 6, 2026
Mid-Year Consolidation: Earnings Strength Meets Sector Rotation
The month of July brought a shift in market dynamics as equities entered a period of digestion following last quarter’s historic momentum. The S&P 500 slipped a modest 0.1% for the month, while the tech-heavy Nasdaq declined 3.2%. Despite this summer’s pullback, year-to-date performance remains robust, with the S&P 500 up 9.4% and the Nasdaq gaining 9.2% through the end of July.
July ended up resetting the table for the ongoing bull market, propelling the S&P 500 to a new all-time high during the first week of August.
Beneath the surface of headline indexes, market churn has been significant. The S&P 500 has effectively moved sideways around the 7,500 level since mid-May, yet the underlying rotation of sector leadership has improved market breadth. The S&P 500 Equal Weight Index gained 12.1% and the small-cap Russell 2000 ended July near record territory, up 18.1% for the year.
This leadership shift hit the semiconductor industry hardest, where the artificial intelligence pendulum swung from aggressive buying back toward consolidation. After a historic run in Q2, the Philadelphia Semiconductor Index fell 20.6% in July, marking its worst monthly decline since 2008, according to the Wall Street Journal.
The catalyst for this divergence was a shift in investor focus from AI demand toward AI monetization. Market participants increasingly questioned the timing of returns on massive capital spending, as the four largest hyperscalers committed nearly $2.4 trillion in infrastructure spending over the coming years.
Concerns regarding a 1999 style tech bubble look increasingly unfounded. Profits are up and valuations are down. According to Yardeni Research, the Information Technology sector forward P/E stands at 20.0, just 0.6 points above the broad market 19.4, compared to a 30-point gap at the 2000 market peak.
The broader fundamental picture across corporate America remains exceptionally strong. According to FactSet, with 61% of S&P 500 companies reporting Q2 results through July 31, 86% have beaten EPS estimates while 77% have topped revenue expectations, both significantly above five and ten year historical averages. Reporting companies are delivering profit surprises 31.4% above consensus estimates, driving the blended Q2 earnings growth rate up to 47.4% year over year.
However, Wall Street has taken note that the +40% growth is inflated by the hyperscalers’ investments in private AI companies OpenAI and Anthropic. Goldman Sachs’ research shows Q2 S&P 500 EPS growth is tracking at 26% year-over-year even when those investment gains are stripped out, with the median company growing earnings by 12%. Still impressive and healthy growth rates.
July’s batch of economic data suggests the US economy remains on solid footing. Domestic demand is strong, and the labor market continues to show resilience.
Interest rates remain an ongoing headwind and the most likely threat to equity prices the rest of the year.
Monetary policy remains firmly in focus under new Fed leadership. At the July 29 meeting, the FOMC held rates steady. Fed Chair Kevin Warsh maintained a hawkish tone, reiterating the central bank’s commitment to its 2% inflation target. He failed his first credibility test: the bond market did not believe him and drove rates higher.
The 10-year Treasury yield rose to 4.75%, its highest level since early 2025. The 30-year Treasury increased to 5.27%, a level not seen since 2007 prior to the Great Financial Crisis. Yields face pressure from federal debt issuance, corporate bond sales, and sticky inflation dynamics. Any march higher to 5.00% on the 10-year Treasury will bring downward pricing pressure on stocks.
Overall, the bull market that began in the fourth quarter of 2022 remains on solid ground, backed by exceptional earnings growth and resilient economic fundamentals. While we continue to monitor the tech sector for any systemic risks that could threaten this expansion, we maintain active, disciplined oversight to keep your long-term financial strategy on track.
