Institute Alert

• Several factors are magnifying financial and commodity market uncertainties and creating market volatility:
• First, the Federal Reserve (Fed) held its interest rate target steady and reiterated its inflation concerns, but these decisions only reinforced market concerns about the pace and timing of future rate hikes.
• Second, several other factors have combined to pile on financial market uncertainties and to lift the 10-year U.S. Treasury yield to 4.73% on July 31, its highest since January 14, 2025. These include rising energy-price driven inflation expectations, and especially the bond market’s unease with recently heavy U.S. Treasury issuance and tighter cash available for investors to borrow.
• Added to these questions, the Bank of Japan’s belated efforts to sell U.S. dollars to shore up its weakening yen currency have weighed on the U.S. dollar, which ticked lower as measured by the U.S. Dollar Index.¹
• Third, strong second-quarter (Q2) earnings helped ease concerns over weakness in South Korean technology stocks, yet uncertainties remain regarding Chinese artificial intelligence (AI) competition and the future profitability of AI capital spending.
• Since its all-time high on June 2, 2026, the Information Technology sector has been the worst performing S&P 500 Index sector, while Health Care and Financials have outperformed², reflecting a rotation toward sectors with more attractive valuations as of July 31.

• This combination of inflation risks, monetary policy uncertainties, and questions about future AI profitability have left equity and fixed income markets off balance.
• We expect Middle East tensions to keep energy prices elevated near term, while the bar for Q2 technology earnings is undoubtedly high, which can create room for volatility if earnings results disappoint.
• Even amid these near-term questions about interest rate risks and the profitability of capital spending, we maintain a positive outlook on Information Technology, supported by double-digit earnings growth.
• We caution that mid-term elections could add to further market volatility over the coming months and believe financial markets will need time to gain clarity on the present uncertainties.

• We believe the recent technology driven sell-off may create an opportunity to add exposure to U.S. Large Caps and the Information Technology sector, both of which we rate favorable.
• We believe investors concerned with valuations may find opportunities in Financials, Materials, and Utilities sectors of the S&P 500 Index.
• Investors worried about inflation may benefit from allocations to Commodities, in our view.
• U.S. Taxable Short-Term Fixed Income can offer attractive yields with relatively lower interest rate risks relative to longer-term bonds.

The Fed’s decision to hold interest rates steady in July was widely expected, but concerns about persistent inflation and a prolonged higher-rate environment remain. Energy prices have become increasingly volatile amid ongoing geopolitical tensions — particularly as global reserves sit near multi-year lows. Refined products such as gasoline and diesel have been especially sensitive, with the rise in prices outpacing crude oil. Even if oil supply risks ease in the near term, constrained global refining capacity could keep energy prices elevated for longer.

In turn, these inflation risks increase the likelihood of a higher-for-longer interest rate environment, which could make investors reevaluate the sustainability of costly AI-related capital expenditures. Especially as reportedly lower-cost Chinese AI models emerge.³

While these risks could fuel near-term uncertainty, we do not believe they undermine the broader fundamentals supporting U.S. equities. We view the drawdown as a reassessment of expectations rather than a fundamental break in the AI growth story and expect double digit earnings growth, a resilient economy, and accommodative financial conditions to drive S&P 500 Index performance to our year-end target of 7,800 – 8,000. Similar concerns over the profitability of AI spending amid lower cost alternatives emerged during the DeepSeek-driven selloff in early 2025, but technology stocks ultimately rebounded as AI adoption and infrastructure investment continued to accelerate and support strong earnings.

Over the coming months, we believe these uncertainties leading up to mid-term elections will continue to fuel heightened volatility in financial markets. While we expect equities to trend higher through year-end, more clarity on these issues will likely be needed before the volatility settles.

For investors concerned with tech valuations, we recommend considering Financials, Materials, and Utilities, which offer more attractive valuations. Additionally, we recommend that investors add exposure to Short-term Fixed Income, which can offer attractive yields and help preserve flexibility over longer-dated bonds — allowing investors to take advantage of potential opportunities as they emerge. Commodities may also provide another source of diversification that can potentially benefit from continued geopolitical and inflation risks, in our view.

¹ The ICE U.S. Dollar Index is a weighted average of the value of the U.S. dollar relative to a basket of U.S. trade partner currencies, composed of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc. A higher index value indicates dollar appreciation.

² Bloomberg data from June 2, 2026 – July 31, 2026.

³ Reuters. “China's Moonshot unveils world's largest open AI model, closing in on US rivals,” July 16, 2026.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

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