Market Update 7/30/26

Market Update

The Fed left rates unchanged at its July meeting, though it was far from unanimous. Below are our key takeaways and thoughts on what the decision means for markets and portfolios.

• Our long-term investment outlook remains unchanged: we believe our well-constructed, broadly diversified portfolios are well positioned to navigate the current environment while remaining focused on helping clients achieve their long-term financial goals.
• The Fed held interest rates steady, citing a resilient economy, solid business investment, and inflation that remains above its long-term target, while signaling a continued commitment to price stability.
• The underlying composition of the recently released Q2 GDP report indicates strength in the underlying economy, with robust consumer spending and business investment reinforcing our view that the U.S. economy continues to expand at a solid pace.
• We expect one additional rate hike this year, supported by a strong economic backdrop, persistent inflationary pressures, and increasing support among Fed policymakers for tighter monetary policy.
• Return dispersion across asset classes remains elevated, reinforcing the importance of broad diversification and our disciplined approach to portfolio rebalancing, which creates opportunities to systematically buy lower-performing assets and trim stronger-performing ones.

No Change in Rates, Though Three Dissents

The Fed held rates steady at its July FOMC meeting, maintaining the target range for the federal funds rate at 3.50%–3.75%. While the decision was broadly in line with expectations, it was by no means a foregone conclusion. Ahead of the meeting, markets assigned roughly a two-thirds probability that rates would remain unchanged and approximately a one-third probability of a 0.25% rate increase. The split in expectations was also reflected in the Committee’s vote, with three of the twelve voting members dissenting in favor of raising the federal funds rate by 0.25%.

The FOMC statement noted that economic activity continues to expand at a solid pace, supported by strong productivity growth and business capital investment despite elevated uncertainty surrounding the Middle East. The labor market remains well balanced, although inflation continues to run above the Fed’s 2% objective. Accordingly, the Committee reiterated its commitment to restoring price stability.

During his press conference, Fed Chair Kevin Warsh highlighted continued strength in business capital investment – particularly in technology – which he noted has been an important driver of recent economic growth. The composition of the subsequent Q2 GDP report (released today) appears to reinforce that view, pointing to continued strength in the underlying economy despite a softer-than-expected headline growth figure.

While he avoided providing explicit forward guidance, Warsh noted that financial markets have adjusted to stronger-than-expected economic data, with both nominal and real interest rates moving higher across the yield curve. In effect, hinting that tighter financial conditions have done some of the Fed’s work since the June meeting. He also emphasized the robust policy discussions taking place within the FOMC and expressed a willingness to consider reforms to the Committee’s current processes.

Strong Consumer and Business Investment

While first estimate Q2 GDP growth came in below expectations, increasing +1.5% versus consensus expectations of +2.1%, the headline number was weighed down by government spending and the more volatile net exports component. Looking beneath the surface, the report painted a more constructive picture. Consumer spending – the largest driver of U.S. economic activity – rose a stronger than expected +3.2% quarter-over-quarter, while business investment increased a robust +8.4%. In our view, the composition of the report is more encouraging than the headline number suggests and is broadly consistent with the Fed’s assessment of an economy that continues to expand at a solid pace.

Hikes Expected

As of writing, markets are pricing in one to two additional 0.25% rate increases through year-end. The Fed’s most recent Summary of Economic Projections (“dot plot”), published in June, similarly points to one additional rate hike. Given the resilient economy, balanced labor market, still-elevated inflation, and the presence of three dissents at the July meeting, we believe one rate increase by year-end may be the most likely outcome.

Middle East, Return Dispersion

Elsewhere, continued uncertainty surrounding the Middle East has contributed to elevated market volatility, with oil prices moving higher following the recent escalation in hostilities. At the same time, return dispersion across asset classes remains significant. Value stocks continue to outperform Growth stocks year-to-date, Small Cap stocks have outperformed Large Cap stocks, and International and Emerging Markets have outperformed U.S. equities. These dynamics reinforce the importance of maintaining a broadly diversified portfolio with dedicated allocations across multiple asset classes and investment styles.

Importance of Rebalancing

The increased dispersion in performance has also created additional portfolio rebalancing opportunities, highlighting the importance of our disciplined investment process. Systematic rebalancing allows us to trim areas that have outperformed and add to areas that have lagged, helping maintain target allocations while taking advantage of relative valuation opportunities. Periods like the current environment – when asset class performance diverges more meaningfully – often create the greatest opportunities for disciplined rebalancing.

We continue to monitor developments closely and believe our broadly diversified portfolios remain well positioned to navigate the current environment while helping clients achieve their long-term financial goals.

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