A few trade deals getting done, strong earnings from key AI stocks and a resilient economy powered strong stock market performance in July. But the market is now counting on the AI boom continuing.
Fund investors enjoyed gains. Still, the average U.S. diversified equity fund's 1.5% July advance and 4.7% year-to-date gain trails the S&P 500's 2.24% return in July and 2025 gain of 8.59%, according to Lipper Refinitiv data.
The S&P 500 finished with 10 new highs in July, according to S&P Dow Jones Indices. The rally took flight with President Donald Trump inking trade deals with Vietnam, the European Union and Japan. Better-than-expected profit reports from AI leaders Meta Platforms (META) and Microsoft (MSFT) near month-end also breathed life into the bullish AI investment trend.
"There was a lot of big expectations going into earnings season," said Doug Rogers, manager of Eaton Vance Focused Growth Opportunities Fund (EIFGX). "I think those expectations were largely met, especially on the AI side."
But storm clouds appeared at the end of July and early August when Trump followed through with higher tariffs on other trading partners. A weak July jobs report also gave investors pause, raising concerns about the health of the economy and reigniting a debate about Federal Reserve interest rate policy.
From a sector standpoint, utility funds won big in July. They surged 4.36%. Rising demand for energy to power data centers and the AI buildout has driven utility funds to a 12.9% year-to-date gain. The other big sector winner are industrials funds. They gained 2.96% to extend their 2025 gain to 15.68%, the best year-to-date gain of all sectors. Industrials got a lift from Trump's "Big Beautiful Bill." The bill included an array of tax incentives to spur U.S. manufacturing growth, as well as more expected infrastructure business related to AI.
"It's a little bit of the picks and shovels sort of argument," said Rogers. "You've had HVAC companies doing very well just building out the cooling for the data centers. And you have to supply power to the data centers. So, utilities have been working well, too."
Science and technology funds were up 2.62% in July, stretching their 2025 gain to 11.84%.
The AI boom continues to be a tailwind for the U.S. stock market. The large hyperscalers and megacap techs — Microsoft, Meta, Amazon.com (AMZN), Alphabet (GOOGL) and Broadcom (AVGO) — continue to spend heavily on AI chips, AI-focused software, and other related technologies to bolster the next wave of growth, says Rogers.
Rogers notes that capital expenditures by the five top hyperscalers were less than $200 billion at the beginning of 2024 and estimates are for $422 billion by the end of this year. "Those are big, big numbers," said Rogers.
That spending, Rogers says, feeds into the tech ecosphere and other sectors of the economy, fueling growth. "That's a lot of revenue to be spread around a lot of different sectors," said Rogers. "It's a little bit of a rising tide lifts all boats story."
For the market to continue to trade upward, AI must continue to be a tailwind, says Rogers.
"It's hard to see a market that works well, that doesn't include continued growth in the AI space," said Rogers. A big reason is the Magnificent Seven stocks now account for a huge weighting in key market benchmarks like the S&P 500 and the Russell 1000 Growth index, where the seven megatechs make up more than 50% of the index.
Rogers says there is a big catalyst coming for AI in August, most notably the Aug. 27 quarterly earnings report from AI chipmaker and $4 trillion market-cap company Nvidia (NVDA).
As has been the case for some time now, big companies and growth stocks outpaced smaller stocks and value names.
Large-cap growth funds gained 2.94% in July, pushing their 2025 gain to 10.02%. In contrast, large-cap value funds rose just 0.74% last month and are up just 7.56% for the year. Small-cap growth funds rose 1.38% in July to put them up 0.2% for the year.
Vanguard Growth Index ETF (VUG) rallied 3.75% in July and is now up 11.06% in 2025. In contrast, Vanguard Value Index ETF (VTV), eked out a 0.16% gain last month and is up only 5.7% this year.
Diversifying abroad was more of a mixed bag in July, although the average world equity fund's 15.03% year-to-date gain through July tops the S&P 500's 8.59% rise and the average U.S. diversified fund's 4.7% advance.
Last month's foreign stock winners included China region funds. They gained 3.94% to extend their 2025 gain to 17.48%. Despite a 2.44% drop last month, European region funds still sport solid gains of 22.02% for the year. European equities have come back into favor as Germany and other European allies boost their defense spending.
Bond fund investors eked out gains or suffered minor losses. General domestic taxable bond funds inched 0.2% higher in July and are now up 3.91% on the year. High yield bond funds, which invest in companies with lower credit ratings and therefore typically have higher yields than investment grade bonds, rose 0.47% last month. High-yield funds are up 4.59% on the year. So-called core bond funds, which invest in a diversified basket of investment-grade bonds, dipped 0.22% in July, trimming their year-to-date gain to 3.8%.
Vanguard Total Bond ETF (BND) fell 0.3% in July but is still up a solid 3.73% on the year. The iShares Core U.S. Aggregate (AGG) dipped 0.25% in July but is 3.75% higher on the year.
The big news for bond investors, however, came on Aug. 1 in the form of a weaker-than-expected July jobs report, according to Thomas Urano, co-chief investment officer, managing partner at Sage Advisory Services.
"This jobs number and restatement kind of reset the way the market is thinking about the labor market," said Urano. It calls into question the strength of the economy and job market. And that could pave the way for Federal Reserve rate cuts. "The rate cuts are coming," said Urano.
A big catalyst for markets in the months ahead could be more certainty on the policy front, Rogers says. "If there's any resolution to all the uncertainty, I think that helps drive markets higher," said Rogers.
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