Earnings Deliver but the Long End Pushes Back. Will Profits Be Enough?

• The Fed's July vote was 9-3 to hold rates (versus June's unanimous decision), with market pricing implying 65% probability of a 25 bps hike in September as inflation remains elevated at 3.7% headline and 3.3% core PCE
• Technology companies beating EPS estimates underperformed the S&P 500 by 3.3% on average around earnings reports, the weakest in seven years, as mega-cap firms like Alphabet and Meta saw free cash flow pressured by record capex spending
• China's AI models now account for 46% of tokens routed on OpenRouter versus 36% for US models, while CXMT became China's largest DRAM producer with 8% global market share and closed 466% above its IPO price in July

Market Summary: Earnings Deliver but the Long End Pushes Back

Key Market Performance:

The Nasdaq-100 declined approximately 7% in July, marking its worst month since March 2025, while the S&P 500 fell 0.1%. US value stocks (+2.1%) outperformed, while small-caps (-1.9%) and mid-caps (-2.3%) lagged. Bonds struggled, with the US Aggregate Bond Index down 1.3%. Crude oil surged 21.4%, while broad commodities gained 7.1%.

Federal Reserve Policy:

The Fed held rates steady at 3.50%-3.75% for the fifth consecutive meeting, though three members favored a 25 bps hike, marking a shift from June's unanimous decision. June headline PCE inflation registered 3.7% year-over-year, with core at 3.3%. Chair Warsh emphasized commitment to 2% inflation without a "soft" target. Markets price a 65% probability of a September rate hike.

Treasury Market Volatility:

The 30-year Treasury yield reached 5.27%, its highest level since 2007, while the curve steepened significantly. The Fed's reduced forward guidance appears to be increasing market volatility as investors independently interpret economic data.

Corporate Earnings:

Q2 earnings showed strong growth, with the blended S&P 500 rate reaching 47.4% (28.8% excluding one-time gains at Alphabet and Amazon). However, technology companies beating estimates underperformed the S&P 500 by 3.3% on average, suggesting investor concern over record AI capital expenditures. Alphabet and Meta saw share price pressure despite revenue beats due to massive capex increases that reduced free cash flow.

China Competition:

Chinese AI models now account for 46% of tokens routed on OpenRouter versus 36% for US models. ChangXin Memory Technologies debuted up 466%, becoming China's fourth-largest DRAM producer with 8% global market share.