Markets ended July mixed with the Dow Jones Industrial Average up and the S&P 500 and Nasdaq Composite finishing lower. Strong underlying economic growth supported by consumer spending and AI-related business investment helped push the economically sensitive Dow higher. However, lingering questions over AI capital spending, Middle East tensions, and interest rates cast a cloud over markets as we closed out the month.
Key Highlights:
- The Federal Reserve voted 9-3 to hold interest rates steady at a range of 3.50% to 3.75%. While a hold may seem like good news, the details rattled investors as three members dissented, voting for an immediate rate hike. The three dissents suggest members remained divided on the path forward on inflation.
- Gross domestic product, the official report card of the economy, grew at a seemingly soft 1.50% annual rate in the second quarter. The headline figure however is deceiving as the major drag came from stronger imports which coincidentally are fueling the AI boom while smaller inventory replacement shaved 1.7 percentage points off economic growth. If the trade deficit and inventories had been unchanged, the economy would have posted a much healthier growth rate of 3%+ boosted by consumer spending and AI business investment.
- A temporary lull in the war with Iran in June sent gas prices and inflation lower for the month. The PCE Index slipped 0.10% from May, bringing the annual rate to 3.70% from 4.10%. Meanwhile, the core PCE Index, the Fed’s preferred inflation gauge rose 0.10% on a monthly basis, bringing the annual rate to 3.30%. Still, the rate remains well above the Fed’s 2.00% target level.
Fed Inaction Roils Markets
It was a roller coaster of a week for markets as investors closed the book on July trading. On Wednesday, the Federal Reserve voted to hold rates steady at their FOMC meeting. However, it was the three dissenting votes in favor of a rate hike that rattled markets, sending the Dow Jones Industrial Average down 1,153 points and the 30-year Treasury yield spiking to 2007 highs. The moves come as investors have grown increasingly concerned the central bank has fallen behind the curve in its fight against inflation and rate hikes may be necessary to break the persistent pricing pressures. Middle East tensions, which have sent energy prices higher in recent weeks, have been among the main drivers of inflation. The conflict seemed as if it were drawing to a close in June. However, with both sides ramping up attacks in recent weeks, energy prices have rebounded, putting pressure on the Fed to act. Thursday brought some relief to investors with the Dow Jones Industrial Average surging 613 points as MAG-7 member, Microsoft, reporting strong growth from its Azure cloud computing and Copilot business. Investors rewarded the company’s results, with the software giant’s shares jumping 15.51% on the news. Microsoft’s performance gave a much-needed boost to chip stocks, which closed the session up 8%. On the economic front, it was business as usual this month as the twin engines of consumer spending and AI business investment remain robust. Controlling for net imports, which are a subtraction from the GDP calculation, the U.S. economy would have grown a robust 3%+. While imports are factually a negative in terms of production, the irony is that they indicate strong consumption and AI infrastructure investment, the latter of which should result in stronger production long term.
Despite healthy economic momentum, 2H 2026 is off to a rocky start. It was a mixed close for the month for the major indices with the Dow up and the S&P 500 and Nasdaq lower. The Nasdaq slipped 3.20%, a quick reversal given that investors have been piling into tech stocks all year long on the AI buildout story. However, AI stocks have been priced to near perfection and as it happens, downside momentum begets more momentum. This week’s downdraft wiped out one of Silicon Valley’s hedge fund darlings, who found itself on the wrong end of its leveraged bets on Thursday. In retrospect, Situational Awareness – founded by effective altruism and AI wunderkind Leopold Aschenbrenner – should have been more situationally aware, having had to sell billions in assets in a fire sale to Citadel Capital and locking in a -67% loss on the month. Considering the strong 1H 2026 and this week’s GDP print, the recent volatility is less a cause for alarm and more of a healthy reset for the market, particularly as it comes to AI stocks. Markets are likely to find their footing once the shooting dies down and energy prices and inflation stabilize.
The Week Ahead
Key reports include nonfarm payrolls, manufacturing, and services.
Save the Date: An Evening at the Meadows Museum
This fall, we look forward to welcoming friends, colleagues, clients, and business partners for an evening of art, conversation, connection, and celebration at the Meadows Museum in Dallas. When choosing a venue for our event, our team searched for a setting that would feel both memorable and inspiring. The Meadows Museum certainly fits the bill. It is affectionately known as the “Prado on the Prairie” for housing one of the largest and most comprehensive collections of Spanish art outside of Spain. The museum will be open for private gallery viewing for guests of Probity Advisors during our event.
Guests will have an opportunity to experience works dating from the 10th to the 21st centuries with pieces by renowned artists including El Greco, Velázquez, Murillo, Goya, Dalí, Miró, and Picasso, among many others. The museum’s exceptional collection offers a rare opportunity to encounter the depth and range of Spanish art close to home.
The Meadows Museum was founded through the vision and generosity of Dallas philanthropist Algur H. Meadows and has become an important cultural destination for Texas. Its striking architecture and inviting galleries make it an ideal place to gather.
We hope you will join us this fall on Wednesday, October 7th, for an evening surrounded by remarkable art and even better company. Invitations will be mailed in August to arrive by early September so keep an eye on your mailbox.