Financial markets remained caught between geopolitical developments and monetary policy uncertainty throughout July. The renewed escalation of the conflict in the Middle East, together with ongoing disruptions around the Strait of Hormuz, led to increased volatility in energy markets. Oil prices ended the month significantly higher than in June.
The Federal Reserve left its policy rate unchanged, reiterating its commitment to bringing inflation sustainably back to target. Likewise, following its rate hike in June, the European Central Bank kept interest rates unchanged in July.
Equity markets continued to be supported by a solid second-quarter earnings season. Although many companies exceeded earnings expectations, market reactions remained muted. Particularly within the technology sector, investors are demanding ever stronger earnings growth, while the sustainability of the AI-driven investment cycle is increasingly being questioned.
The second-quarter earnings season has been exceptionally strong so far. Approximately 86% of the S&P 500 companies that have reported results exceeded earnings expectations, with aggregate earnings coming in around 31% above consensus estimates. Current forecasts imply year-over-year earnings growth of approximately 38% for the S&P 500, representing the strongest growth rate since 2021. Despite these encouraging fundamentals, equity market performance remained restrained. Particularly in the technology sector, even substantial earnings beats no longer automatically translate into positive share price reactions. Investor expectations regarding the AI cycle and the future returns on massive infrastructure investments have become increasingly demanding. Additional debate emerged following reports of a potential financing arrangement between Nvidia and OpenAI for one of the world's largest AI data centres in Ohio. Critics have drawn parallels to historical forms of "vendor financing," where suppliers indirectly finance demand for their own products. Regardless of the final structure of the transaction, the discussion illustrates that investors are becoming increasingly critical of the sustainability of the current AI investment boom. The momentum factor also came under significant pressure during July. According to Barclays, its Momentum Factor Index declined by around 20% during the month, marking one of its sharpest corrections since 2004. Following the prolonged dominance of technology and AI-related stocks, markets experienced a pronounced factor rotation as rising real interest rates and elevated valuations led investors to reassess the AI investment cycle more critically. Such temporary setbacks are an inherent characteristic of systematic momentum strategies and have historically been closely linked to the long-term momentum premium and the factor's ability to outperform broader equity markets over time. For long-term investors, consistently following a disciplined investment process is therefore considerably more important than attempting to time market reversals. This principle applies broadly to long-term investing.
The Federal Reserve kept its policy rate unchanged at 3.75% in July. The central bank continued to describe the U.S. economy as resilient, supported by solid economic activity, productivity gains and strong investment spending. At the same time, it reaffirmed its commitment to returning inflation sustainably to target. The subsequent press conference offered few additional signals regarding the future path of monetary policy. Nevertheless, financial markets reacted noticeably. While short-term Treasury yields declined modestly, longer-term yields rose sharply. The yield on 30-year U.S. Treasury bonds exceeded its previous highs from 2007. As a result, the yield curve steepened significantly, reflecting continued investor concerns about long-term inflation and fiscal risks. The Bank of Japan also left its policy rate unchanged at 1%, in line with market expectations. A further rate increase is not anticipated before September at the earliest. Meanwhile, interventions in the foreign exchange market temporarily helped stabilize the weak Japanese yen. Oil prices rose by more than 20% during the month. Precious metals stabilized following the sharp correction experienced in the first quarter and began to establish a potential price floor. After declining by approximately USD 5,500, we believe the asset class has become more attractive from a valuation perspective.
Geopolitical risks remain a significant source of uncertainty for financial markets. In particular, the conflict in the Middle East could continue to influence market sentiment in the near term. Iran retains an important strategic lever through its ability to affect global oil supplies via the Strait of Hormuz. At the same time, the U.S. administration faces an increasingly complex political environment ahead of the upcoming midterm elections. Consequently, oil prices are likely to remain an important indicator of either easing or escalating geopolitical tensions. Despite these risks, the global economy continues to demonstrate resilience. Current corporate earnings data point to ongoing solid profit growth. Against this backdrop, we currently see no reason to reduce equity allocations solely because of short-term uncertainties. Over the long term, equities remain the cornerstone of real wealth creation. Through broad portfolio diversification, we continue to address the current market environment while maintaining our focus on real assets and a disciplined, long-term investment strategy.