July Economic Update

Market Summary

While optimism grew surrounding a U.S.-Iran agreement and ceasefire talks, bringing a temporary sigh of relief to energy markets, the broader stock market underwent a massive internal rotation. The heavy concentration in mega-cap technology and AI-related infrastructure paused, as investors heavily took profit and rotated into cyclical, value, and small-cap names. There were illusions of progress with the Iran war that were ultimately proved to be just another mirage. The S&P 500 ended the month down -1.37%, the Nasdaq down -0.82%, while the small cap Russell 2000 index surprised to the upside gaining 4.09%. (1)

Sector Rotation and a Tech Bear Market

Very notable selling moves have taken shape in the tech sector which had been the driver of the market upside for several years now. The S&P 500 tech sector, which currently comprises over one third (35%) of the entire S&P 500 US large cap stock index, has seen several of its holdings fall precipitously. The percentage of stocks in that sector with a 20% pullback or more from their highs, which officially places them into a bear market, has risen to 59%, while 80% of tech stocks in the sector have seen declines of at least 10%, putting them into correction territory. (2,3)

Iran War

On June 17, 2026, the United States and Iran signed a historic 14-point Memorandum of Understanding (MOU) that established an immediate, permanent ceasefire to end their military conflict on all fronts. This high-level political commitment opened a critical 60-day window for both nations to negotiate a comprehensive, final peace settlement and to reopen the Strait of Hormuz. Unfortunately - and quite predictably at this point - the Strait never reopened and as of the writing of this newsletter, President Trump has stated everything is off the table for the MOU and military strikes on Iran are resuming.

Inflation and the Federal Reserve

On the inflation front, the backward-looking data released in June still reflected the heat of the prior months' energy spike. The headline Consumer Price Index (CPI) climbed to a blistering 4.2% year-over-year - the highest annual rate seen since early 2023 - while the core Producer Price Index (PPI) signaled sticky underlying pressures by reaching 5.1% year-over-year.

Federal Reserve officials responded with a distinctly new era of communication under newly confirmed Fed Chair Kevin Warsh. Holding his first official press conference following the June FOMC meeting, Chair Warsh delivered a starkly hawkish message, maintaining the benchmark interest rate at 3.50% to 3.75% and vowing an "unambiguous and unanimous" commitment to the Fed's 2% inflation target. Notably, the Fed's communication style has shifted dramatically away from the lengthy, forward-guided hand-holding of the past. Under Warsh's pure data-dependent stance, the committee's updated dot plot revealed that half of the FOMC participants now anticipate at least one more rate hike before the end of 2026, completely wiping out any lingering market expectations for rate cuts this year.

Looking Forward…

Stock market valuations at the index level remain historically stretched, but the June pause in AI mega-caps suggests the nosebleed speculation and "Dot Com" level hype may finally be facing a healthy reality check. As capital increasingly diversifies into neglected value and mid-to-small cap sectors, the third quarter will likely test whether corporate earnings margins can expand broadly enough during this upcoming earnings season to support this sudden rotation.

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Monthly Financial Tip:

Review your 401(k) contribution rate after receiving a raise or bonus. Increasing your retirement contribution by just 1% each year can significantly improve long-term retirement savings while often having only a modest impact on your take-home pay.

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Citations:

1. Schwab, June 30, 2026

2. MacroMicro July 06, 2026

3. Barchart July 06, 2026

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.