July 2026 Review and Outlook
Executive Summary
S&P 500 Equal Weight Index records best relative performance on record
Semiconductors correct 25% following record-setting Q2 (+88%)
Value relative performance reaches 99th percentile versus Growth
30YR UST yield breaks out from multi-year range to highest level since 2007
S&P 500 corporate earnings on pace for strongest earnings surprise on record
The artificial intelligence (AI) pendulum swung the other way in July following last quarter’s historic run. In Q2, Nasdaq’s Philadelphia Semiconductor Index (SOX Index) registered its best quarterly performance since its inception in 1994, while the Nasdaq 100 Index (+28%) cemented its second-best quarter in 25 years. In July, however, the SOX Index declined 25% from its June high, or -20.6% for the calendar month, and the Nasdaq 100 declined 6.6%.
In contrast, equal-weight, value-oriented and more cyclical benchmarks held up considerably better, led by the S&P 500 Equal Weight Index (+1.0%) and the Dow Jones Industrials (+0.6%). While those gains appear modest on an absolute basis, the relative performance was the best month on record. In July, the S&P 500 Equal Weight Index outperformed the Nasdaq-100 Equal Weight and Nasdaq-100 indexes by 5 and 7.5 percentage points, respectively. This marked the single best monthly outperformance for the S&P 500 Equal Weight Index since the inception of the Nasdaq-100 Equal Weight Index in 2005.
The primary catalyst behind the divergence was a shift in investor focus from AI demand toward AI monetization. Market participants increasingly questioned the timing and magnitude of returns associated with unprecedented capital spending plans. Concerns surrounding valuation levels, expanding industry competition and AI commoditization contributed to the sharp correction across portions of the technology ecosystem. Importantly, the pullback appeared driven more by positioning and multiple compression than by any material deterioration in underlying business fundamentals.
Monetary policy was another important influence on market performance. On July 29, the Federal Open Market Committee (FOMC) voted 9-3 to hold the federal funds rate steady at 3.50%–3.75%, marking the fifth consecutive meeting without a change. The post-meeting statement was virtually unchanged from June and included no forward guidance. Chair Kevin Warsh reiterated the Fed's firm commitment to the 2% inflation target and warned that persistently high inflation would create pressure to raise rates. The ensuing Q&A highlighted central bank credibility concerns given the hawkish commentary, lack of policy action and withdrawal of forward guidance. Warsh countered that forward guidance is a crisis-era tool, not appropriate for normal circumstances, and that markets should price risk without being "coddled" by Fed signaling. He also noted that the rise in nominal and real yields between meetings was, itself, a form of tightening.
Treasuries responded swiftly, with long rates accelerating higher. In the days following the July 29 FOMC meeting, the 30YR UST yield made a “bullish breakout” above its post-COVID high of 5.18%, previously set in October 2023, before ending the month at 5.27%, its highest level since June 2007. Rising long-term rates created an additional headwind for long-duration growth assets and reinforced investor rotation toward sectors with greater sensitivity to nominal economic growth and higher interest rates.
Growth & Value
The rotation from growth to value accelerated meaningfully last month. In July, large-cap value (+3.8%) outperformed growth (-5.9%) by 8.5 percentage points after outperforming in June by 4.8 percentage points. For the combined two months, value outperformed growth by 13.2 percentage points. On both a one- and two-month basis, value's outperformance ranks among the five strongest relative performance events since 1979, placing each within the 99th percentile of all observations. Value’s historic outperformance in July is not a new phenomenon. While the AI theme led growth to strongly outperform value in April and May, value has outperformed growth in seven of the prior nine months since November 2025. What may come as a surprise to many is that value has outperformed growth over the prior 3M, 6M, 12M, and 24M time frames.
The relative performance chart below plots the weekly ratio of the Russell 1000 Value Index (RLV) to the Russell 1000 Growth Index (RLG), which made its cycle high during the final week of October 2025. In early January, it broke below its 40-week SMA, synonymous with the 200-day moving average, and currently stands at the prior cycle high from November 2021.
Large-Cap Sectors
Seven of 11 large-cap sectors finished in the green, led by the Energy sector (+12.6%) on renewed tensions in the Middle East. For the year, the Energy sector’s 34.7% total return YTD is more than double any of the remaining ten sectors. Financials (+6.2%) notched their best month since January 2025, benefiting from rising yields and strong Q2 corporate earnings. Many banks reported robust capital markets activity (FICC trading, debt issuance, M&A and IPO deals), improving NII and NIMs, and lower provisioning trends. Insurance stocks continued their uptrend. After a gain of 10.3% in June, the S&P Insurance ETF (KIE) gained 5.3% in July while “breaking out” from a 20-month sideways range to new all-time highs.
Small-Cap Sectors
Small-cap sector performance in July generally reflected many of the same forces observed across large caps. A rise in Treasury yields benefited financials while pressuring longer-duration growth stocks. Strength in energy prices supported commodity-linked sectors and reinforced value leadership. The month also appeared to be characterized by profit-taking after an unusually strong first half for small caps, with investors rotating away from some of the year's biggest winners and toward more cyclical and value-oriented areas of the market.
Community banks have been a notable source of leadership in 2026; a trend often viewed as supportive of a constructive economic outlook given their sensitivity to local business activity and loan demand. Through the end of July, the Nasdaq Community Bank Index (ABQI Index) had a YTD total return of 23.9%, more than double the S&P 500’s +10.1% and nearly 2x the Nasdaq 100’s +12.4%. As seen in the weekly period chart below, the ABQI reached its prior cycle high 4½ years ago in January 2022. It then retested that high in November 2024 (“Trump Bump” era) and February 2026 before failing to break out and reversing lower. However, in June, the ABQI achieved its bullish breakout, signaling a key technical shift. Its relative strength chart, which plots a ratio to the S&P 500 Equal Weight Index, is currently above its 40-week SMA, synonymous with the 200-day moving average, and near the upper bound of a two-year range. A breakout above this range would signal that a longer-term trend of outperformance could be underway.
Q2 corporate earnings season has been exceptionally strong so far. As of July 31, 61% of S&P 500 companies had reported Q2 2026 results. Of those companies, 86% exceeded EPS estimates while 77% exceeded revenue estimates, both well above historical averages. According to FactSet, the 86% EPS beat rate compares to 5- and 10-year averages of 78% and 76%, respectively, while the 77% revenue beat rate compares to 70% and 68%.
The magnitude of the surprises has also been notable. Reporting companies are delivering earnings 31.4% above consensus estimates, far exceeding the 5-year average surprise of 7.0%. Revenue surprises are averaging 2.9% above estimates, also ahead of long-term norms. FactSet notes that if these figures hold, the earnings surprise would be the largest since it began tracking the metric in 2008. As a result, the blended Q2 earnings growth rate for the S&P 500 has risen to 47.4% year-over-year, up sharply from the 23.2% growth rate expected on June 30. The blended revenue growth rate has also accelerated to 14.1%, which would be the strongest top-line growth since Q4 2021.
Earnings strength has been broad-based across sectors, with 10 of 11 S&P 500 sectors reporting year-over-year profit growth and eight posting double-digit gains. Energy (+135%), Communication Services (+110%), Consumer Discretionary (+91%), and Information Technology (+69%) have led earnings growth, while Financials have delivered robust upside surprises from several large banks and brokers. Beat rates have also been strong, highlighted by Health Care (100%), Industrials (90%), Information Technology (89%), Materials (89%), and Financials (87%) all seeing the vast majority of reporting companies exceed earnings expectations. Revenue trends remain favorable as well, with all eleven sectors reporting year-over-year sales growth, led by Information Technology, Energy, and Communication Services.
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either with respect to a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. Advice from a securities professional is strongly advised.