August 2026
US Economy: Inflation remains in focus.
July delivered some welcome improvement of the inflation picture. Headline CPI fell 0.4% in June as energy prices reversed, leaving year-over-year inflation at 3.5%. Core inflation also slowed with the Fed’s preferred core PCE inflation measure running at 3.3%, which is reflective of prices falling for core goods and medical care alongside modest slowing in housing. Meanwhile, the first estimate for Q2 US GDP growth registered a tepid 1.5% annualized though personal consumption (3.2%) continued to underscore resilience.
US Stocks: Small caps, Semis give some back.
Through July, small cap stocks have gained roughly 19% year-to-date, outpacing S&P 500 by 9%, and highlighting much broader market participation that has characterized the last year or so. However, the prospect for higher interest rates diminished small cap enthusiasm in the month. July also showed that the AI trade is becoming less forgiving: semiconductors stocks fell roughly 21% on valuation and capex durability concerns even as financials, health care, consumer staples and other parts of the market held up.
Foreign Stocks: Developed markets buck trend.
Foreign equities have been more than competitive with US large cap stocks year-to-date and developed stocks remained so in July, posting a 2% gain versus losses most elsewhere. Meanwhile, emerging markets stumbled, hurt by technology-heavy Asian markets such as South Korea (-22%) and some skepticism over semiconductors. China remained the exception but to the positive this time, rising about 9% in July on the back of expectations for additional policy support and better earnings expectations from Alibaba, Tencent and others.
Fixed Income: Policy uncertainty hinders bonds.
Bond investors have earned income but little if any price appreciation in 2026. Core taxable and tax-exempt bonds prices have fallen modestly year-to-date through July. The 10-year Treasury ended the month near 4.7%, while the 30-year remained above 5.2%, as inflation, fiscal supply and an uncertain Fed path under the new Kevin Warsh regime kept pressure on longer maturities. Interest rate volatility rose through July and may remain elevated until investors have a better sense of Fed policy and whether recent signals of inflation cooling persist.
Real Assets: Infrastructure and real estate stand out.
Real asset results have been unusually dispersed. US infrastructure strategies have gained roughly 10% year-to-date while listed real estate rose about 18%, benefiting from capital spending, power demand and a broader rotation away from megacap growth. Commodities were the strongest performers in July although gold remained modestly negative after its sharp reversal since its January high. Oil meanwhile surged back above $90 amid resumed Iran conflict before falling back toward the mid $80s as hostilities appeared to pause again.
Alternatives: Hedge funds deliver, private liquidity waits.
Hedge funds have generated returns soundly above bonds in 2026 although they have lagged equities as expected in strong market rallies. Meanwhile, private markets told a different story. Deal values remained concentrated in a handful of large transactions, while first-half exit volume fell to its slowest pace in more than a decade in Q2. The contrast reinforces the importance of manager selection, liquidity planning and distinguishing between reported values and realized cash flows.
Source of data: Bloomberg
Equities Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (0.1%) | 10.1% | 19.5% |
| U.S. Small Cap | (3.0%) | 19.0% | 34.3% |
| U.S. Growth | (4.8%) | 0.8% | 8.6% |
| U.S. Value | 3.6% | 20.8% | 31.6% |
| Int’l Developed | 2.0% | 11.6% | 24.3% |
| Emerging Markets | (3.1%) | 20.0% | 36.4% |
Fixed Income Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (1.3%) | (0.7%) | 2.7% |
| TIPS | (0.7%) | 0.5% | 2.6% |
| U.S. High Yield | (0.3%) | 1.6% | 5.0% |
| Int’l Developed | (1.4%) | (1.4%) | (1.8%) |
| Emerging Markets | 0.0% | 1.4% | 2.2% |
| Tax-Exempt | |||
| Intermediate Munis | (0.9%) | 0.0% | 2.2% |
| Munis Broad Mkt | (1.7%) | 0.4% | 5.3% |
Non-Traditional Assets Total Return
| JUL | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 7.5% | 23.0% | 35.5% |
| REITs | 2.4% | 17.7% | 19.5% |
| Infrastructure | 0.2% | 10.2% | 16.8% |
| Hedge Funds | |||
| Absolute Return | (0.3%) | 0.8% | 3.6% |
| Overall HF Market | (1.3%) | 3.4% | 7.2% |
| Managed Futures | (1.1%) | 8.2% | 16.0% |
Economic Indicators
| JUL-26 | JAN-25 | JUL-25 | |
|---|---|---|---|
| Equity Volatility | 16.0 | 17.4 | 16.7 |
| Implied Inflation | 2.3% | 2.3% | 2.4% |
| Gold Spot $/OZ | $4046.2 | $4894.2 | $3289.9 |
| Oil ($/BBL) | $90.1 | $70.7 | $72.5 |
| U.S. Dollar Index | 120.7 | 119.2 | 123.4 |
Our Take
The year-to-date scoreboard tells a different story from the one investors had become accustomed to over the past several years. The S&P 500 has performed well, but it has not been the dominant trade. US small cap, emerging markets, infrastructure, real estate and diversifiers such as hedge funds have all produced competitive or superior risk-adjusted results, while core bonds have been roughly flat. In other words, 2026 has rewarded portfolios drawing from more than one source of return. To that point, the strength in small caps is one of the more important year-to-date developments, even if it lost some luster in July. It suggests that investors are recognizing opportunities beyond the largest technology companies, including financials, industrials, health care and businesses tied to domestic capital spending – a welcome development of market participation broadening.
While a broadening of results is encouraging, it shouldn’t be confused with an “all-clear.” Much of the previous bull market was built on a relatively narrow set of assumptions: that AI capital spending would continue to rise rapidly, that mega-cap earnings would repeatedly exceed already-high expectations, and that financing would remain available on reasonable terms. Those assumptions remain in play, but July’s volatility showed that the market is becoming more selective about which companies will ultimately capture the economics of AI (again, another good development) and how quickly those economics will arrive: The technology may be revolutionary while individual investments still prove overvalued, poorly financed or simply premature. Moreover, can those economics survive a minefield of geopolitical and economic chokepoints in their path?
In combination, the concept of chokepoints, discussed in depth in our most recent commentary, represent the greatest antagonist to the, “all gas, no breaks” AI boom narrative. Energy costs, semiconductor capacity, supply chain fragility, capital availability and the continued AI buildout increasingly run through a relatively narrow group of companies, regions and physical assets. And none of those pressure points must necessarily be broken for portfolios to wreak havoc on market sentiment. In fact, in a narrative-driven market like this one, strong performance can quietly create what might be called implicit leverage: not the leverage that appears on a balance sheet, but a portfolio that has become highly dependent on the same assumptions continuing to work.
Implicit leverage in mind, periods of strong performance like this can be an especially useful time to revisit risk tolerance. When markets are near highs, recent experience can begin to shape expectations. What has worked feels likely to keep working, and risks that seemed obvious during more volatile periods fade quickly from view. The practical question is not simply whether investors feel comfortable today, but whether their portfolios would still feel aligned with their objectives if the market environment looked very different tomorrow. This is not a call to step away from the market. The long-term case for innovation and many of the areas driving markets today remains compelling. It is however, an argument for calibrating those exposures thoughtfully and ensuring that public equities do not have to carry the entire load. The opportunity set remains compelling, but navigating it may require more patience, greater selectivity and awareness of where risks are accumulating.
So don’t chase the current leaderboard. A strong year in small caps or emerging markets is not, by itself, a reason to abandon large U.S. companies, just as a difficult period for bonds does not automatically make those exposures unnecessary. Instead, the year-to-date results are an argument for revisiting concentration, rebalancing appreciated positions and making sure the portfolio contains a thoughtful mix of complementary ingredients. Yes, a wide-open race may give investors more ways to win, but it also raises the value of disciplined portfolio construction. Markets have rewarded discipline so far in 2026; the more important benefit of that discipline may still lie ahead.
