As we’ve passed the halfway point of 2026 and head into Fall, the stock market continues to reward investors, but not without a cacophony of noise. Record earnings, geopolitical headlines, a new Federal Reserve chair and upcoming Mid-term elections are giving investors a lot to think about. How are we looking at these markets?
The S&P 500 finished July essentially flat. But beneath the surface was a sharp rotation that rewarded investors who diversified outside of mega-cap tech stocks.
Source: Ycharts. Data as of 7/31/2026. Large Cap: S&P 500 TR, Small Cap: Russell 2000 TR, EM Equity: MSCI EM TR, DM Equity: MSCI EAFE TR, Comdty: Bloomberg Commodity TR, High Yield: Bloomberg US Corporate HY, Fixed Income: Bloomberg U.S. Aggregate, REITs: DJ US Real Estate TR, 60/40 is a blend of 60% MSCI ACWI (global stock market) and 40% Bloomberg U.S. Aggregate.
A Flat Month That Wasn’t
Technology stocks fell 8% in July, the worst of all 11 S&P 500 sectors, and momentum (the factor that just buys whatever has been working) dropped more than 12%. Meanwhile energy stocks gained 12%, financials gained more than 6%, and value stocks outpaced growth for the month.
Source: Ycharts. Data as of 7/31/2026. Sectors represented by State Street SPDR ETFs.
We’ve emphasized in recent updates the need to diversify alongside the large cap technology companies rather than out of them. That paid off in July. A portfolio holding only the winners of the last three years had a rough stretch, while a portfolio that owned the rest of the market enjoyed some ballast.
What I Heard on the West Coast
I spent time recently with employees at several large technology companies. I went expecting confidence. That’s not what I found.
Almost none of them are sure their own employer is certain to win. They’re smart, they work hard, and they’re honest that the outcome is unknowable. What surprised me more: people sitting on stock that had multiplied several times over were ready to sell. Usually that conversation is “I know I should diversify, but I won’t.” This time it was “What do I need to do?”
I won’t over-read a handful of conversations. But it tells you how the people closest to this see it. The spending is enormous, the payoff is real but unevenly spread, and nobody knows which names survive. That’s not a reason to avoid the theme. It’s a reason not to bet your retirement on any single piece of it.
The Bond Call, One Month Later
In our midyear letter, we said higher yields made this a reasonable moment to trim appreciated stocks and add to bonds. Then bonds fell again. The aggregate bond index dropped 1.3% in July, driven by a sell-off in long-term Treasuries as long-term yields rose.
When you buy a bond, the yield you buy at is the return you’ve largely locked in if you hold it. Falling prices this month mean better prices for anyone buying today.
Long-term inflation-protected Treasuries are offering close to 3% above inflation. Think about what that arithmetic does for a retirement plan built on drawing 4% or 5% a year. We haven’t had that option available to us in a very long time.
Source: Board of Governors of the Federal Reserve System (US). Market yield on 30-year Treasury Inflation Protected securities. Chart prepared by Quotient Wealth Partners.
The Jobs Number Nobody Liked
The labor market weakened in July. Payrolls shrank by 23,000, missing every forecast in Bloomberg’s survey of economists, and May and June were revised down by a combined 103,000.
The unemployment rate fell to 4.1% — which sounds good but isn’t. It fell because 264,000 people left the labor force altogether. Labor force participation dropped to 61.4%, the lowest in more than five years.
Source: U.S. Bureau of Labor Statistics. Unemployment rate and labor force participation rate. Shaded areas indicate U.S. recessions. Chart prepared by Quotient Wealth Partners.
We’ve flagged this gap for months. The headline number keeps saying the labor market is healthy. The participation number keeps saying fewer people are working at all. They’re not getting a paycheck either way.
The Fed is caught in the middle. Chair Warsh held rates steady in July, but three regional presidents dissented in favor of a hike — the most one-directional dissent the committee has seen since 2016.
Inflation cooperated, with June CPI easing to 3.5%, though most of that improvement came from energy prices that have since reversed. By month-end, markets put the odds of a September hike at over 70%, down from a near-certainty going in.
Source: Fed funds futures-implied probabilities for the December 9, 2026 FOMC meeting. Provider and as-of date to be confirmed. Chart prepared by Quotient Wealth Partners.
Nobody in that room knows what they’re doing next. That’s not a criticism. It’s the honest read of a labor market and an inflation picture pointing in opposite directions.
Upcoming Elections
We’ve discussed this in prior updates, but we don’t typically view elections as market moving events in isolation. While control of congress could change hands, but with a Republican president it’s probably unlikely for many legislative changes to come from such an event, if it does happen. As the below chart shows, over the long-term, control of government by one party or another has not portended a particularly better or worse market outcome.
Sources: Clearnomics, Standard & Poor’s. S&P 500 average annual total returns by government control since 1933, excluding 2002 and 2008. Latest data point is December 2025. Chart prepared by Quotient Wealth Partners.
Bottom Line
How do we continue to manage around a US stock market concentrated in a few large tech stocks? We continue to diversify client portfolios into a broader range of equity investments including value and smaller market capitalization companies.
Importantly, what in your portfolio actually goes up when the market goes down? Not what holds steady, not what falls less. What actually rises.
For most portfolios the answer is high-quality bonds, and that’s precisely why we own them. Not for the yield or to keep up with stocks in a good year, but for the one year in ten when they’re the only thing working.
July showed how hard a market can rotate without going anywhere. It won’t always be that gentle. If you’re not sure how much risk you’re carrying into the fall, that’s the conversation to have with your advisor now, while things are calm and the decision is yours to make rather than the market’s.
Enjoy the last of the summer.
Tim
