“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Geopolitics, energy prices, inflation, interest rates, and monetary policy all complicate the near-term outlook.
We expect earnings results to continue exceeding expectations, but the market may be setting up for a near-term pullback. We are increasingly cautious short-term, but remain optimistic over the rest of the year.
Our playbook remains focused on “real economy” industrials like transportation and machinery, as well as on potential buying opportunities driven by heightened market volatility.
The re-escalation of the conflict in the Middle East has darkened the macroeconomic backdrop at a time when resilient economic data is already complicating the path forward for global central banks.
First, the data: S&P Global Purchasing Managers’ Index™ data for Europe has continued to improve, while US initial jobless claims fell to 187,000 for the week ending July 18 — the lowest level since September 1969. That strength is encouraging from a growth perspective, but it risks awakening the “good news is bad news” dynamic as policymakers contend with sticky inflation, another rise in energy prices, and a new round of tariffs. The resulting jump in interest rates over the past few weeks has been growing into a near-term headwind, and a further move in the 10-year US Treasury yield toward 5% would be particularly problematic for risk assets.
That said, the good news is that positioning has continued to normalize across the broader market and is now sitting at neutral, although technology remains extended and semiconductors still cannot seem to catch a break.
How much longer can the market stomach rising rates?
Yields since the begining of 2025
Source: Bloomberg, as of 7/21/2026.
More importantly, the fundamental backdrop remains strong: Blended S&P 500 Index earnings growth is running at 37.9%, well ahead of the 23.2% expected entering the quarter, while margins sit at record levels. With more than 30% of the S&P 500 reporting this week, earnings should remain the ultimate arbiter of the market’s direction. We expect results to continue exceeding expectations, but it is becoming increasingly difficult to ignore the possibility that the market is setting up for some form of pullback. In the near term, we would lean cautious but not defensive – continuing to use downside opportunistically and building balanced exposure to durable growth across sectors, market capitalizations, and geographies.
Expectations for meaningful inflation relief have once again proven to be short-lived. The escalation in the Middle East has renewed upward pressure on energy prices, with further disruption through the Red Sea and Bab el-Mandeb Strait representing an additional risk.
At the same time, the latest round of Section 301 tariffs — and the prospect of more duties in coming weeks — adds another layer of uncertainty, even if the effective tariff rate has changed little in aggregate.
Against that backdrop, the European Central Bank’s hawkish July meeting may offer a preview of what is to come from the Bank of England, Bank of Japan, and US Federal Reserve (Fed) this week, as policymakers are increasingly reluctant to look through persistent inflation risks.
Financial conditions, however, have already tightened considerably without any action from the Fed. Markets have increasingly interpreted Fed Chairman Kevin Warsh’s rhetoric as pointing to a higher policy-rate path, pushing 10-year real yields toward 2.40% and 30-year real yields close to 3%. In our view, that repricing has moved too far relative to the underlying macro evidence: Inflation expectations have barely budged despite crude oil approaching $90 per barrel, and the latest tariffs do not materially raise the effective rate. The Fed may hesitate to push back forcefully against tighter conditions, but we continue to believe markets are pricing an overly aggressive path of hikes this year. That leaves room for some relief if the incoming data remains resilient without delivering a renewed acceleration in inflation. Either way, we must wait and see. Don’t be surprised by sideways movement or additional choppiness in the short term.
The earnings backdrop remains strong and increasingly broad, even if the market has become far less forgiving of anything less than stellar results. The blended S&P 500 net profit margin now stands at 15.7%, which would mark a record high, while all 11 sectors are reporting year-over-year revenue growth, led by information technology, energy, communication services, and financials.
Yet with expectations elevated coming into the quarter, both positive and negative surprises are being punished more severely than usual. Alphabet was emblematic of that dynamic: Google Cloud growth exceeded 80% year over year and the backlog climbed to $514 billion, but the capital expenditures (capex) required to support that opportunity was penalized — and even the expected beneficiaries of those rising budgets failed to rally.3 That leaves the artificial intelligence (AI) complex in a difficult position unless the remaining hyperscalers deliver something closer to a Goldilocks outcome this week — such as strong beats across all business segments coupled with modest capex increases.
Encouragingly, the strength in the macro backdrop has shown up in industrial and financial earnings, and those companies have been rewarded. That helped drive positive breadth last week, with nearly 60% of S&P 500 constituents advancing while the index finished lower, with breadth led by utilities, energy, industrials, and materials. Broader participation is welcome, but this remains a market of balance rather than one of binary rotation: Breadth can support returns, but it will be difficult for the index to make sustained progress unless the mega-cap leaders stabilize and begin working again. We expect capital ultimately will recognize and return to the durability of this group’s earnings, and we continue to look selectively for opportunities to buy weakness.
Catalysts are plentiful this week, and we continue to favor leaning into less-concentrated positioning and waiting on the sidelines with ample cash to take advantage of opportunities created by the market.
The pain across technology and AI is very real – the median first-day earnings-per-share reaction to tech earnings has been approximately 300 basis points to the downside, the worst in at least the past 50 quarters. Last week was also the weakest relative performance of the Magnificent Seven versus the S&P 500 in the past four years. This type of damage will take time to heal and will not just reverse like we’ve seen in the past.
In the meantime, we’ve highlighted potential opportunities across the non-AI industrial complex and saw strong earnings from this cohort last week. This remains an area of interest going forward, especially to complement AI exposure. It could take some time to see a recovery in the AI capex beneficiaries, particularly semiconductors, given that it’s unlikely we see any multiple expansion from here and need to wait for earnings results. Here’s more detail on these areas of focus:
Leaning into possible market downside: We still believe that the market ends earnings season higher than when it began. However, from a distributional perspective, if a large move occurred, we think it is more likely to be to the downside. Equities’ sensitivity to oil and interest rates is currently more pronounced than in the run-up to the March sell-off. Despite softer Consumer Price Index and Producer Price Index inflation data earlier in July, inflation-sensitive macro assets and market expectations for the Fed’s July meeting have remained hawkish. A robust earnings season and positive earnings revisions have helped support equities — the S&P 500 remains within striking distance of its June all-time high – but realized and implied correlations remain at extremely low levels. That means that if the current narrow de-risking broadens, it could create a much more explosive environment for volatility. We saw this happen in the summer of 2024 and the first quarter of 2026, both of which ultimately proved to be good buying opportunities.
Listen to what companies are saying. Leaders of ASML and Taiwan Semiconductor both confidently stated during their earnings calls that the AI capex cycle is still early, which was consistent with comments from Micron Technology last month.3 Hyperscaler capex came in 51% above consensus forecasts a year ago and the outlook has been revised higher every quarter since the first quarter of 2024. It’s unlikely we will get a sudden pivot this quarter, especially since there is still a $2 trillion backlog at the main cloud providers. Recent concerns about tokenmaxxing – maximizing the use of AI tokens as a sign of productivity – and the recent benchmark results from the Kimi K3 AI model are red herrings. Lower-cost models and intensifying competition are more likely to accelerate adoption of AI tools and fragment AI buildouts as companies and countries seek greater control and less reliance on foreign infrastructure. This should reinforce demand for local/friendly compute, memory, chips, and data centers. Investors should consider backing companies addressing scarcity rather than worrying about picking application winners right now.
Industrial strength in the ‘real economy’: AI-adjacent industrial companies have been caught up in the unwinding of momentum, but “real economy” industrials have held up quite nicely. The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey rose to its highest pace of growth since November 2021, echoing strength from the Empire State Manufacturing Survey. There is also a nascent capex cycle starting outside of the AI complex, fueled by high profit margins, the necessity of energy and mineral security, increased focus on national defense, and the restructuring of international supply chains. We’ve seen strong transportation traffic, growth in commercial and industrial loans, and strong sales revisions across transportation and machinery companies. Valuations are still attractive and the non-AI industrials are still broadly underowned. We started to see positive earnings results from some transportation and machinery companies last week, which is encouraging for this theme.
Earnings — The busiest week of the summer includes earnings reports from more than one-third of the S&P 500 by market capitalization, including four of the Magnificent Seven, plus SK Hynix and Samsung in South Korea.3 As the tug-of-war continues between robust actual earnings and lofty expectations, there is scope for volatility to pick up, especially with continued uncertainty coming from the Middle East.
Monetary policy — The Federal Reserve, Bank of England, and Bank of Japan all will meet and assess the economic impact of the recent jump in energy prices.
Economic data — Both the US and euro area release first readings of second-quarter gross domestic product (GDP). The US Personal Consumption Expenditures (PCE) excluding Food and Energy Price Index (core PCE) and the Eurozone Harmonised Index of Consumer Prices are also worth watching.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 10, 2026.
3 This is not a recommendation to purchase or sell the companies or investment products mentioned herein.
Risk Information:
M-976628 Exp. 11/27/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
The broad market has remained remarkably resilient despite this month’s historic reversal in technology momentum.
The most important risk now is whether heightened anxiety around artificial intelligence (AI) spills into the broader market.
Our investment playbook includes big banks as an AI-adjacent sector, companies that address AI scarcity, industrials outside of AI, and international equities in developed markets with solid fundamentals.
Divergences remain the defining feature of this market. There may still be excess positioning to work through before we can sound the all-clear, but our playbook is unchanged: use downside opportunistically and focus on the companies with the most durable and still-accelerating earnings.
Momentum continued to unwind last week, with the most acute pain concentrated across semiconductors and the broader artificial intelligence (AI) capital expenditures (capex) complex. By some measures, the reversal in technology momentum has been historic, far exceeding what we saw during the dot-com collapse. Yet the broader market has remained remarkably resilient: The S&P 500® Equal Weight Index reached an all-time high earlier last week, while the cap-weighted S&P 500 Index remained just 2% below its early-June peak.
That resilience matters. It suggests that the pressure across the AI winners is still better understood as a positioning reset than as a deterioration in the fundamental backdrop. Earnings have been strong, running roughly 12% ahead of expectations thus far, while results from the large banks confirmed that the underlying economy remains on solid footing. Earnings from ASML and Taiwan Semiconductor Manufacturing further reinforced that demand across the AI ecosystem remains durable.3
What goes up...
Index drawdowns since the beginning of 2023
Source: FactSet, as of 7/17/2026.
All the major hyperscaler platforms report earnings this week and next. Those results should help determine how quickly fundamentals can reassert themselves over positioning, but once the excesses built over the last quarter are cleared, the outlook remains constructive.
Expectations were elevated heading into the quarter, yet companies delivered in the first week of earnings season: Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of those surprises have run above recent averages. As a result, second-quarter earnings estimates have moved higher from both the end of last week and the end of the quarter, with the S&P 500 Index now tracking toward year-over-year earnings growth above 20% for the second consecutive quarter.
Banks and capital markets firms were the primary focus last week. Their results and guidance reinforced the resilience of the macroeconomic environment. Management teams offered constructive commentary on the consumer and expressed confidence in the durability of the AI capex cycle.
The disconnect has been in the market’s response. Despite strong results, reporting companies have declined an average of 0.9% the following day, tracking toward one of the weakest post-earnings reactions on record, while average moves of 5.2% the next day after those declines were notably larger than the historical norm of 3.9%. That combination speaks more to lofty expectations and elevated positioning than to a deterioration in fundamentals. We have long maintained that earnings are the ultimate arbiter of the market, and if results and guidance continue to surprise to the upside, they should provide the foundation for the market to eventually emerge from this consolidation and move to new highs.
The most important risk facing the market is structural: whether heightened anxiety around the AI trade eventually spills over into the broader market that has so far benefited from improving breadth and rotation.
Interest rates have retreated from their recent highs but remain in an uptrend, with escalating geopolitical tensions adding another potential source of pressure. At the same time, implied and realized correlations across global equity indices are near record lows, creating the conditions for a more explosive volatility event should the concentrated de-risking in semiconductors begin to broaden. Investor positioning has declined meaningfully over the past few weeks, but exposure still appears too elevated to signal an all-clear, particularly when viewed against the depth and duration of prior positioning unwinds.
Systematic flows are also unlikely to provide the same degree of buying support that helped propel the market higher last earnings season. Still, the path forward does not require an immediate return to broad-based risk appetite. If earnings remain resilient and credit spreads stay contained, the market should be able to consolidate, absorb the remaining excess positioning and eventually resolve to new highs. In the meantime, investors should be prepared for continued near-term choppiness and preserve dry powder to take advantage of opportunities created by the recent dislocation.
Rotation from momentum to low beta is occurring everywhere globally. As semiconductors and AI capex beneficiaries decline, their prices are starting to approach oversold levels.
Until then, we continue to follow our playbook for the summer – seek opportunities to diversify portfolios not only across asset classes, but across sectors, industries, geographies, and market capitalizations. We continue to favor increasing exposure to banks and health care, particularly biotechnology and pharmaceuticals. Small caps also remain attractive, but investors might consider waiting for internal market resolution before adding exposure given current market dynamics. While positioning still has room to fall, we believe there is an increasing likelihood that equities leave earnings season at a higher level than where they started it. However, if a large move occurs, we think it is more likely to be on the downside. Now is the time to think about decreasing concentrated positioning and waiting to use downside opportunistically. In the interim, areas to consider leaning into include:
Big banks have become an AI-adjacent sector. Results across the money center banks were quite strong, particularly for their investment banking and capital markets businesses, which are closely tied to AI. There has been approximately $190 billion of AI debt issuance since March. The initial public offering (IPO) cycle also has ramped up, creating significant wealth that needs to be managed. These trends have provided tailwinds to asset management businesses that have already been experiencing organic growth through exchange-traded funds (ETFs) and tax management solutions. Most notably, trading activity surged amid volatility, which significantly focused on the AI trade. Management teams were broadly optimistic that tailwinds would continue from AI parts of the market, but importantly, these banks also have benefitted from integrating AI into their own businesses.
Listen to what companies are saying. Leaders of ASML and Taiwan Semiconductor both confidently stated during their earnings calls that the AI capex cycle is still early, which was consistent with comments from Micron Technology last month.3 Hyperscaler capex came in 51% above consensus forecasts a year ago and the outlook has been revised higher every quarter since the first quarter of 2024. It’s unlikely we will get a sudden pivot this quarter, especially since there is still a $2 trillion backlog at the main cloud providers. Recent concerns about tokenmaxxing – maximizing the use of AI tokens as a sign of productivity – and the recent benchmark results from the Kimi K3 AI model are red herrings. Lower-cost models and intensifying competition are more likely to accelerate adoption of AI tools and fragment AI buildouts as companies and countries seek greater control and less reliance on foreign infrastructure. This should reinforce demand for local/friendly compute, memory, chips, and data centers. Investors should consider backing companies addressing scarcity rather than worrying about picking application winners right now.
Green shoots for industrials. AI-adjacent industrial companies have been caught up in the momentum unwind, but “real economy” industrials have held up quite nicely. The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey rose to its highest pace of growth since November 2021, echoing strength from the Empire State Manufacturing Survey. There is also a nascent capex cycle starting outside of the AI complex, fueled by high profit margins, the necessity of energy and mineral security, increased focus on national defense, and the restructuring of international supply chains. We’ve seen strong transportation sector traffic, rising commercial and industrial loan growth, and strong sales revisions across transportation and machinery companies. We believe valuations are still attractive and the non-AI industrials are still broadly under-owned.
International equities can complement portfolios. With rising stock-bond correlations, investors may want increase their focus on other portfolio diversifiers. International equities fit quite well, particularly countries with strong historical risk/ return metrics as well as lower correlation to the S&P 500. We’ve highlighted markets like Japan, India, and the UK in the past, and we continue to believe their fundamentals remain solid. Japan has the highest earnings revision ratio outside of the US. Meanwhile, the UK has a bit more political clarity now and has a market dominated by “old economy” sectors such as banks, health care, and commodity-related companies that can provide diversification to the AI narrative. The UK also ranks high for risk-adjusted returns over the past five years and has a relatively lower correlation to the US than Europe or Latin America.
Earnings – More financials, notably regional banks, will report earnings, along with the first two members of the Magnificent Seven. With the latter, expect a focus on capex guidance and on further signs of monetization from previous spending.
Overseas, the European Central Bank is widely expected to hold rates.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 10, 2026.
3 This is not a recommendation to purchase or sell the companies or investment products mentioned herein.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Any forecasts, figures, opinions, or investment techniques and strategies set out are for informational purposes only. There is no assurance any estimate, forecast or projection will be realized.
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce
return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Definitions
Empire State Manufacturing Survey – A monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.
Federal Reserve Bank of Philadelphia Manufacturing Business Outlook Survey – A monthly survey in which manufacturers in the Third Federal Reserve District, which includes Pennsylvania, New Jersey, and Delaware, indicate the direction of change in overall business activity and in various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.
Indices
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
S&P 500® Equal Weight Index – An index that includes the same constituents as the capitalization-weighted S&P 500 Index, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight.
Goldman Sachs High Beta Momentum Pair Trade Index – An index measuring a custom basket pair trade that represents an equal notional pair trade of going long a basket of high beta momentum and short a basket with inverse characteristics. Performance reflects each side rebalanced back to equal notional at the close of each trading day.
M-972688 Exp. 11/20/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Recent market volatility reflects crowded positioning more than a meaningful deterioration in the fundamental economic backdrop.
Watch interest rates. Equities are likely to be increasingly sensitive to any further upward moves with the 10-year US Treasury yield pushing toward its 2026 highs.
Earnings expectations are high, meaning misses may be punished harder while beats could be rewarded less enthusiastically.
Along with artificial intelligence, our playbook is focused on small- and mid-caps as complements to AI, plus international equities as portfolio ballast.
The market has continued to look past the growing macroeconomic noise, with renewed volatility across leadership, rising uncertainty in the Middle East, and upward pressure on interest rates doing little to derail the S&P 500 Index’s push higher.
That resilience matters, but so does the nature of the recent choppiness. The volatility of the past few weeks reflects extended positioning more than a meaningful deterioration in the fundamental backdrop. Concentrated positioning has normalized from extreme levels, but it remains elevated in the highest-momentum areas of the market, especially semiconductors. This means the path higher is unlikely to be a straight line.
Earnings season now becomes the next key test. The bar is high, particularly after consensus estimates moved higher throughout the second quarter and following one of the strongest reporting seasons on record. That creates some asymmetry: Misses could be punished severely, while beats may be met with a more muted response given elevated expectations and more neutral positioning.
Still, we remain constructive and continue to favor using downside opportunistically to add exposure to durable secular growth themes across the market. That has worked well in areas like cybersecurity, the Magnificent Seven, and even semiconductors most recently, while also providing opportunities in non-tech areas such as financials and health care. There are plenty of risks to monitor, but unless earnings start to undermine the fundamental story, investors should think about staying the course and being ready to execute on their shopping lists when volatility provides potential opportunity.
A key risk to monitor right now is interest rates, which are currently an outsized driver for equities. With the 10-year US Treasury yield pushing toward the highs of the year, equities are likely to be increasingly sensitive to any further upward moves. This is particularly true for parts of the market that recently have been stabilizing like software, where higher rates will force investors to reassess valuation multiples.
Higher yields also pose a challenge to the broadening narrative — the rate-sensitive corners of the market need lower yields for the fundamentals to work. Moreover, an easing in rates would support the funding mechanism underwriting the artificial intelligence (AI) build-out.
Additionally, higher yields pose a challenge to traditional portfolio diversification. The realized correlation between equities and 10-year rates is at a 10-year low (this is the positive stock-bond correlation we’ve highlighted all year). S&P 500 3-month realized correlation is at -0.5, and it is even more extreme for small- and mid-cap stocks, with a 3-month Russell 2000® Index/US 10-year correlation at -0.68. This week’s Consumer Price Index (CPI) data for June could serve as a critical catalyst for rates. This is why we have continued to advocate for finding diversification opportunities across other asset classes like commodities and real assets, as well as between geographies, market capitalizations, and across different sectors and industries.
Earnings season could provide the most clearly bullish signal for investors. The estimated year-over-year earnings growth rate for the S&P 500 in the second quarter is 23.6%. That would mark the second consecutive quarter of earnings growth above 20% for the index.
Based on the average beat percentages, we could see earnings growth exceeding 29%. Financials will be in focus this week with many of the money center banks reporting results. Commentary from bank CEOs will be most important to follow to get an update on the underlying economy as well as deal activity outside of the mega initial public offerings (IPOs) that have been in focus lately.
Will the S&P 500's strong, surprising, earnings growth march on?
FactSet end of quarter estimates vs. actual earnings growth
Source: FactSet, as of 7/10/2026.
The biggest challenge is elevated expectations, which set the stage for misses to be punished severely while limiting the upside from beats. This is especially true for companies in the AI halo, where stellar beats and raises will be critical to further gains in share prices. Investors should also watch capital expenditures (capex) guidance from the hyperscalers when they report later this month, and study market reaction as a guide for how the next leg of the AI trade could unfold.
We remain bullish. Consider the strong fundamentals: Absent a recession or financial shock, betting against this profit backdrop could be expensive. The central tendency for stocks is higher, with the broadening trade favoring domestic cyclicals alongside technology rather than the more binary rotation we saw at the start of the year. The limited damage from the re-escalation of the US-Iran conflict further highlights that the focus is on fundamentals rather than geopolitical risk. US banks kick off earnings season on Tuesday and the last two weeks of July will be the busiest, with most S&P 500 members — including six of the Magnificent Seven — reporting results. Below we highlight the key areas in focus right now as part of our investment playbook.
We still see opportunities in AI. Crowding and extreme sentiment triggered a sharp unwinding of momentum, with levered exchange-traded products exacerbating moves in a market challenged by quarter-end rebalancing. While momentum volatility and sector dispersion appear likely to remain elevated throughout the summer, we favor selectively adding on weakness to past winners. Bottlenecks are still extreme and visibility into earnings is strong. However, semiconductors and hardware stocks may get hit during earnings season due to elevated expectations and continued profit-taking. We expect those dips would be buyable as long as the fundamentals haven’t cracked. We’ll get a preview for how this part of the market might behave when a leading semiconductor manufacturer reports results this week. Additionally, the hyperscalers have underperformed as the AI capex return on investment debate continues to unfold, which could incentivize more visibility and transparency going forward. The intrinsic value of the cadence of frontier large language model innovation appears to support ongoing corporate investment, and these companies have transitioned to being value plays for longer-term investors. We expect AI capex momentum to remain firm, which would support and, we hope, reinvigorate many of the downstream capex beneficiaries.
Small- and mid-caps as a complement to AI. Low volatility factors have rallied sharply over the last month, and they have outperformed what would be expected given their beta to the broader equity market. Instead of using low volatility to hedge risks that the AI capex boom may slow, we would argue that US small- and mid-caps might be a more asymmetric hedge. Higher exposure to sectors like financials and health care, coupled with lower liquidity, could set the stage for a continued rally if there is more of a rotation out of the mega-cap tech stocks. We also see these parts of the market as providing strong earnings growth that could eventually outpace that of the S&P 500 later this year. US economic activity has remained firm — for instance, the ISM® Manufacturing PMI® Report has been rising — and that should support continued small-cap outperformance relative to large-cap stocks.
International equities as portfolio ballast. With rising stock-bond correlations, investors should consider increasing their focus on other portfolio diversifiers. International equities fit quite well, particularly countries with strong historical risk/return metrics as well as lower correlation to the S&P 500. Markets like Japan, India, and the UK are all well positioned today. Japan has the highest earnings revision ratio outside of the US, and falling energy prices should provide additional support for the domestic economy and profit margins. Markets like the UK might not be top of mind considering a challenging domestic economic backdrop, but that is well discounted at this point. The UK market is also dominated by “old economy” sectors such as banks, health care, and commodity-related companies, which provides diversification to the AI narrative. It also ranks high for risk-adjusted returns over the past five years and has a relatively lower correlation to the US compared to the likes of Europe or Latin America.
Economic data — June CPI on Tuesday. June Producer Price Index on Wednesday. Retail sales on Thursday.
Fed commentary — This week features 15 scheduled US Federal Reserve speaking events, with Chairman Kevin Warsh delivering the Semiannual Monetary Policy Report to the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday (both at 10 a.m. EST). Other potentially market-moving speakers this week include Fed Governor Christopher Waller Monday at 12:30 p.m. EST, Vice Chair Philip Jefferson (Thursday at 7 p.m. EST), and Federal Reserve Bank Presidents John Williams (New York), Lorie Logan (Dallas), and Jeffrey Schmid (Kansas City), who are expected to discuss economic and monetary policy outlooks.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 10, 2026.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Any forecasts, figures, opinions, or investment techniques and strategies set out are for informational purposes only. There is no assurance any estimate, forecast or projection will be realized.
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce
return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Definitions
Consumer Price Index / CPI — Measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.
ISM® Manufacturing PMI® Report — A report compiled by the Institute for Supply Management based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month for new orders, backlog of orders, new export orders, imports, production, supplier deliveries, inventories, employment, and prices. A Manufacturing PMI® reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining.
Producer Price Index / PPI — A report published monthly by the U.S. Bureau of Labor Statistics that measures the average change over time in the selling prices received by domestic producers for their output.
Indices
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&&P 500 represents approximately 80% of the investable U.S. equity market.
Russell 2000® Index — Measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2026. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
M-967076 Exp. 11/13/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Our investment playbook for the balance of 2026 includes favoring core overweights in US equities, small caps, and artificial intelligence capital expenditures beneficiaries.
Our overarching themes: Balancing growth and value and leaning into megatrends such as power, infrastructure, and robotics.
Our favored tactical satellites: Select international, healthcare, and financials.
Major risks to monitor: Systemic leverage, the dollar’s continued rise, yields’ ascent, and tight credit spreads.
All year, the market narrative has been dominated by artificial intelligence (AI) and momentum, but over the past few weeks it has become increasingly clear that investors are beginning to test the durability of that leadership.
Equities just capped off an undeniably strong quarter, with the S&P 500 and Nasdaq-100 indices gaining 14.9% and 27.5%, respectively, their best quarterly performances since the second quarter of 2021, while the PHLX Semiconductor Sector Index™ posted a record quarterly gain of 87.8%. Technology has been the clear leader across styles and market capitalizations, but the performance gap between AI winners (semiconductors) and losers (software) has pushed dispersion within the sector beyond levels seen during the dot-com era.
Given how crowded positioning had become, the sharp reversal during the first few trading days of July was hardly surprising, as investors trimmed first-half winners to fund exposure to lagging parts of the market. June had already hinted at this transition, with several short-lived and largely catalyst-free attempts at rotation that repeatedly faded as investors returned to momentum leadership. We suspect this positioning reset has further room to run, particularly in some of the more extended areas of the memory and semiconductor ecosystem, but we continue to view it as a healthy consolidation rather than as a deterioration in fundamentals. Importantly, the earnings backdrop supporting many of these AI leaders remains firmly intact, with hyperscaler spending, positive earnings revisions, and strong backlog visibility continuing to reinforce the longer-term investment case.
At the same time, improving market breadth has created potential opportunities beyond the AI ecosystem, with the Russell 2000® small-cap and the S&P 500® Equal Weight indices finally beginning to deliver more sustained outperformance. If there is one lesson from the opening days of the quarter, it is that balance matters. Investors do not need to choose between AI leadership and improving breadth — they can own both. We expect positioning to continue normalizing over the coming weeks, with the second-quarter earnings season ultimately determining whether improving earnings breadth can translate into more durable price breadth.
Beyond positioning, the macroeconomic backdrop has quietly become more supportive of broader market participation.
We’re now two weeks into the latest ceasefire, and despite a few inevitable headlines along the way, markets have taken the geopolitical developments largely in stride. Given that the ceasefire is set to expire on Aug. 21, it’s somewhat surprising to see oil prices already back at pre-conflict levels. With the consensus already expecting disinflationary forces to continue pulling core inflation lower over the balance of the year, falling energy prices provide an additional tailwind and should further temper calls for another US Federal Reserve (Fed) interest rate hike this year.
On the other side of the Fed’s mandate, June’s labor market report showed the US adding just 57,000 jobs, roughly half the 110,000 expected by consensus. Although the unemployment rate unexpectedly ticked down to 4.2%, the broader report did little to suggest an imminent need for tighter monetary policy. We continue to believe the Fed remains on hold through year-end, diverging from market pricing that still reflects more than one full 25-basis point hike by December. As expectations for a 2026 hike have become increasingly the consensus, the front end of the Treasury curve has repriced meaningfully higher and, before reversing late last week, the yield curve had reached its flattest level since March 2025. We continue to expect additional resteepening as investors reassess both Fed and inflation expectations, a backdrop that could remain supportive of financials — particularly banks — in the second half of the year.
Technology returns dispersion is higher than during the dot-com era
Rolling 3-month performance gap, top decile less bottom decile
Source: Bloomberg, as of 6/30/2026.
One macro risk we continue to monitor closely is the US dollar. While longer-dated Treasury yields eased following the ceasefire announcement, the dollar has yet to experience a similar repricing and remains in a shorter-term uptrend. Until the longer-term downtrend resumes — potentially aided by budget negotiations and the upcoming midterm election cycle — we believe a stronger dollar will continue to act as a modest headwind for global risk assets.
Against this backdrop, tail risks continue to dissipate, but we still believe patience is warranted before aggressively rebuilding exposure to the most crowded momentum trades. July has historically been one of the strongest months for the broader equity market — the S&P 500 has been positive in each of the last 10 Julys, and it ranks as the index’s second-best month on average — but seasonality has been less forgiving for momentum strategies.
Rather than chasing near-term rebounds, we would welcome additional consolidation as positioning continues to normalize ahead of earnings season. The encouraging news is that investors have no shortage of potential opportunities to consider in the meantime. We’ve become increasingly constructive on healthcare, particularly biotechnology, as well as financials, where improving fundamentals and a steeper yield curve should continue to support earnings.
Small caps remain another area of conviction for us. This is the most sustained period of small-cap outperformance in years, and with earnings season representing the group’s most important near-term catalyst, we continue to expect improving fundamentals to support additional upside.
Finally, one of the market’s most important battlegrounds remains the Magnificent Seven. While recent positioning-driven weakness has weighed on the group, these companies now trade at roughly 23.8x forward earnings — much closer to the broader market’s valuation than many investors appreciate — while continuing to possess some of the highest-quality business models and strongest secular growth profiles in the world. Should earnings continue to validate those fundamentals, they remain well positioned to stabilize, reinforcing the case for maintaining balanced exposure rather than making binary allocation decisions.
While it’s likely that we’re in for some short-term turbulence as momentum churns and investors shore up positioning for the third quarter, we maintain our broad optimism in this bull market.
The next major catalyst for equities is earnings season, which kicks off in earnest next week with the megacaps reporting at the end of July. The S&P 500 is expected to post 23.3% earnings growth for the second quarter, which would mark a second consecutive quarter of earnings per share (EPS) growth above 20%. Notably, and dissimilar to history, earnings estimates for the second quarter have risen 3.4% since March 31. Typically, analysts reduce earnings estimates over the course of the quarter with the 5-year and 10-year average change to estimates being -2.0% and -2.7%. That makes 3.4% the largest increase to estimates since the second quarter of 2021, with the largest revisions being within energy, information technology, communication services, and materials. After the first quarter’s historically large EPS surprise, valuations have already been reset meaningfully: The S&P 500 is trading at a 20.4x forward price-to-earnings (P/E) ratio versus 5- and 10-year averages of 19.9x and 19.0x. Considering all of the above, we expect the second-quarter earnings season to support further market gains. As earnings strength becomes increasingly broad-based, we also expect participation beyond AI-related stocks to continue expanding.
For the second half of 2026, here are our high-level calls and thoughts on positioning:
We expect further upside in equities, driven by strong earnings growth.
Consider selectively buying the dip in momentum and AI capital expenditure (capex) beneficiaries as well as leaning into markets with the highest EPS revisions such as the US and Japan.
The AI capex trade isn’t done, but we’re watching for earnings breadth to finally translate to more sustainable price breadth.
We favor overweights to small caps and biotech, leaning into financials, and looking overseas, particularly at Japan and select European markets.
Mind the positive stock-bond correlation.
Think about overweighting equities relative to bonds, diversifying within and across asset classes, and layering in metals/gold and real assets.
A normalization of geopolitical volatility.
Don’t chase upside, use downside opportunistically.
The Fed probably stays on hold through year end, so consider positioning for a resteepening of the yield curve and owning banks.
Economic data — ISM® Services PMI® Report on Monday.
The Fed — June Federal Open Market Committee (FOMC) meeting minutes are released on Wednesday. Going forward, FOMC minutes could be a risk event given the Fed’s limited communication style under new Fed Chairman Kevin Warsh. Three FOMC members are scheduled to speak — Fed Governor Christopher Waller, Federal Reserve Bank of New York President John C. Williams, and Federal Reserve Bank of Dallas President Lorie Logan. We also could also learn more about the Fed’s new task forces.
Global — The 2026 NATO Summit kicks off in Turkey on Tuesday. This could renew attention around defense spending.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 2, 2026.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Any forecasts, figures, opinions, or investment techniques and strategies set out are for informational purposes only. There is no assurance any estimate, forecast or projection will be realized.
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce
return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Definitions
ISM® Services PMI® Report — A report compiled by the Institute for Supply Management based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month for business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment and supplier deliveries. An index reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining.
Indices
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&&P 500 represents approximately 80% of the investable U.S. equity market.
S&P 500® Equal Weight Index — An index that includes the same constituents as the capitalization-weighted S&P 500 Index, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight.
S&P 500 Information Technology — A sector index comprising companies included in the S&P 500 that are classified as members of the GICS® information technology sector.
PHLX Semiconductor Sector Index™ — A modified market capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.
Russell 2000® Index — Measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2026. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
M-959645 Exp. 11/6/2026
