Oasis of positive market sentiment in July might not Live Forever

Following a strong run in May and June, markets maintained their upward momentum in July, with risk assets once again delivering healthy returns. Equities benefited from a combination of easing global trade tensions, resilient corporate earnings, and greater policy clarity, particularly from the US. While concerns around inflation and government borrowing remain, investors found several reasons to stay positive on the outlook.

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US Policy clarity points the way

One of the key macro developments came from the United States, where the “One Big Beautiful Bill Act” (OBBBA) was passed. The bill outlines front-loaded tax cuts paired with long-term spending reductions, signalling a more expansionary fiscal stance. While the initial market reaction included a sell-off in US Treasuries as investors digested the long-term implications for debt, equities rallied as the bill was seen as reducing short-term political and economic uncertainty. 

Markets also welcomed progress on trade. Although the temporary pause on reciprocal tariffs between the U.S. and China is set to expire in early August, July brought signs of cooperation. Renewed trade dialogues with Japan, Vietnam and the EU supported risk sentiment. 

Equities and Bonds - A positive picture, generally!

Equities continued their upward march. Global developed markets rose by 5% in July (in sterling terms), with U.S. stocks once again leading the way. The S&P 500 reached new highs as nearly 80% of reporting companies exceeded both earnings and revenue expectations for Q2 2025. The so-called "Magnificent 7" tech giants continued to outperform, though strength was also seen in cyclicals and financials. 

UK equities benefited from a rally in energy and materials companies, which continue to trade on low valuations. Notably, both BP and Shell saw gains over the month. At the same time, signs of a revival in the Chinese economy - driven by improving activity and ongoing policy support boosted Chinese equities and supported broader Emerging Market performance.


Figure 1. Regional equity returns (Source: Pacific Asset Management, July 2025). 

While equity markets rallied, bond markets were more mixed. U.S. Treasury yields rose again as investors grappled with an uncertain inflation outlook and reassessed the likelihood of interest rate cuts in light of fresh fiscal stimulus. This debate played out publicly within the Federal Reserve, which elected to keep rates on hold despite two Governors - Bowman and Waller - dissenting and voting for a cut, marking the first dual dissent since 1993 (see Figure 2).


Figure 2. Federal Reserve voting record: Number of dissents (Source: Pacific Asset Management, July 2025). 

European yields also edged higher, while U.K. gilts came under pressure following a hotter-than-expected inflation print, with core CPI rising to 3.7%. In Japan, 10-year government bond yields reached 1.6%, the highest level in years, as markets priced in sticky inflation and growing political uncertainty. 

In contrast to sovereign debt markets, corporate credit held up well in July. Credit spreads tightened modestly, supported by strong earnings, healthy balance sheets, and continued demand for yield. Both investment-grade and high-yield bonds saw steady inflows, highlighting investor confidence in the underlying fundamentals of corporate issuers.

The outlook for the year - steady as she goes!

As we head into the latter part of the year, investor sentiment appears cautiously optimistic. The strong performance of risk assets over recent months has been underpinned by solid earnings, stable economic data, and improving global trade dynamics. However, with equity markets pricing in a relatively positive outlook, the bar for up-side surprises is getting higher. 

Inflation remains a key variable to monitor. While headline inflation has eased significantly across most regions, underlying pressures particularly in labour and services remain persistent in some economies. Central banks continue to walk a careful line, trying to support growth while ensuring inflation expectations remain controlled. Whether this delicate balancing act can continue without unsettling markets is likely to be a central theme in the months ahead.

Fiscal policy will also be an area of ongoing focus. The ‘OBBBA’ and similar initiatives elsewhere reflect a broader willingness among governments to support growth through targeted stimulus. While these measures have helped underpin market confidence in the short term, they also bring questions about long-term debt sustainability. At present, markets appear comfortable with that trade-off, but investors will be watching closely for signs of strain.

For now, financial markets are navigating these conflicting drivers with a sense of cautious confidence. Earnings remain a key support, and global growth, while not without challenges is holding up better than many had feared earlier in the year. 

As always, a diversified approach and close attention to the evolving macro and policy landscape will be key to managing portfolios through what remains a complex and fast-moving environment.

If you have any questions or concerns about your investments or your future plans, don’t hesitate to get in touch with your TPO Adviser or contact us centrally through our website.

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This information in this article is correct as at 08/08/2025.

This market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.