Executive Summary
US financial markets demonstrated remarkable resilience in July 2025 despite underlying economic fragility, with equity markets posting solid gains while July payrolls revealed significant labor market weakness. The passage of transformative fiscal legislation and historic Federal Reserve dissent signals a pivotal policy inflection point, as recession probabilities decline to 25% to 30% at Apollo and Goldman respectively amid rumored “stagflationary” pressures.
The S&P 500 delivered a +2.17% return in July and +9.64% year-to-date performance, driven by technology sector leadership and notable rotation into utilities (+4.9%). This performance occurred against a backdrop of the strongest quarterly earnings growth since Q1 2022, with 11% year-over-year S&P 500 earnings expansion and broadening participation beyond the Magnificent 7 technology stocks. However, the July employment report revealed concerning underlying weakness with only 73,000 payrolls added well below expectations, unemployment rising to 4.2%, and massive downward revisions totaling 258,000 jobs for May and June combined.
Structural policy shifts reshape the landscape
The landmark “One Big Beautiful Bill Act” signed July 4th represents the most comprehensive tax and spending reform since 2017, featuring $4.46 trillion in tax revenue reductions over 10 years and permanent extension of Trump-era tax cuts. Key provisions include new deductions for tips ($25,000 cap), overtime pay, and car loan interest, alongside increased SALT deduction caps and permanent 100% bonus depreciation for businesses. The legislation’s $3.0 trillion net deficit increase occurs alongside projected tariff revenue of $2.3-3.3 trillion, creating complex fiscal dynamics that institutional managers must navigate.
Federal Reserve policy reached a historic inflection point with the July 30th FOMC decision to hold rates at 4.25-4.50%, marked by the first multiple dissenting votes since 1993 as Governors Bowman and Waller advocated for immediate 25bp cuts. Chairman Powell’s characterization of current policy as potentially “not far above neutral” suggests growing FOMC recognition of weakening economic momentum. Market pricing now reflects 75.5% probability of September rate cuts, with institutional forecasts converging on 1.5-2.0 total cuts by year-end. Goldman and Apollo both project 25 to 50 b.p. cuts at most in 2025. We agree. Inflation is increasing due to tariffs and the economy appears stable, so the need for a rate cut is not imminent or pressing.
Labor market deterioration challenges Fed’s hawkish stance
July’s employment data revealed structural weakening beyond headline numbers. The three-month average hiring pace collapsed to just 35,000 jobs from 150,000 before revisions, while labor force participation declined to 62.2% – the lowest since November 2022. Particularly concerning, health care and social assistance accounted for 94% of private sector job growth, indicating narrow hiring concentration. Goldman Sachs Asset Management noted this drops employment growth “below the critical 80K-100K replacement level, flashing warning signs” that challenge the Fed’s cautious approach.
Housing market conditions remained severely constrained with mortgage rates at 6.78% and JP Morgan analysis showing over 80% of borrowers more than 100 basis points “out-of-the-money” on refinancing. The housing market remains effectively “frozen through 2025” according to institutional consensus, with builders offering incentives to 62% of customers and 38% reducing base prices by 5% on average.
International markets navigate trade policy evolution…
Global equity performance reflected successful navigation of trade policy uncertainty, with Japan’s Nikkei hitting multiple record highs above 42,600 benefiting from successful US-Japan trade negotiations. European markets posted modest gains with STOXX 600 up 0.4% in July, while China’s Q2 GDP growth of 5.2% exceeded expectations despite persistent deflationary pressures and retail sales deceleration. Chinese economic data showed H1 2025 exports up 7.2% to RMB 13 trillion despite ongoing trade tensions, while industrial production expanded 6.4% year-over-year. However, real estate investment declined 11.2% and consumer confidence remained subdued with CPI at just 0.1% annually, highlighting domestic demand challenges.
…while fixed income positioning reflects policy uncertainty.
Treasury markets remained range-bound with 10-year yields around 4.32%, as institutional managers maintain shorter duration positioning given elevated policy uncertainty. Credit markets showed resilience with investment grade spreads remaining historically tight, though PIMCO reduced corporate exposure as “credit spreads tightened.” High yield spreads at 2.88% reflect continued institutional confidence in corporate fundamentals, with second quarter earnings showing positive momentum across the asset class. BlackRock advocates “prioritizing income over duration” while maintaining overweight positions in US agency mortgages and European fixed income ahead of expected ECB rate cuts to around 2%.
Commodity divergence reflects global growth dynamics
Precious metals significantly outperformed energy in 2025, with gold up 24.3% in the first half and reaching new highs around $3,342.75/oz. JP Morgan forecasts gold averaging $3,675/oz by Q4 2025 with potential to reach $4,000 by mid-2026, supported by central bank demand averaging ~710 tonnes quarterly. Energy markets faced abundance concerns, with WTI crude at $63.35/bbl (down 13.23% year-over-year) as IEA projections show world oil supply rising 1.8 mb/d to 104.9 mb/d in 2025. Industrial metals led by copper gained 25.0% in the first half, supported by AI infrastructure and energy transition demands.
Capital markets surge reflects institutional optimism
July marked exceptional capital markets activity with 26 IPOs representing the highest monthly total for 2025. Year-to-date IPO volume reached 137 offerings compared to 150 total in 2024, with technology sector capturing 38% of large deals and 50% of proceeds. Strong aftermarket performance with median first-day gains exceeding 20% reflects robust institutional demand.
Global AI investment has reached $280 billion in 2025, representing 40% growth from 2024’s $200 billion milestone. Healthcare maintains leadership at $31 billion while autonomous systems emerged as fastest-growing segment at $22.8 billion. The United States captured $109.1 billion (54.5% global share) with 82% concentrated in San Francisco Bay Area, creating geographic concentration risks.
Forward-looking risk assessment and strategic positioning
Institutional recession probability assessments converged around 40% following successful trade negotiations, down from 60% peaks during maximum tariff uncertainty. JP Morgan’s base case projects stagflationary environment with core PCE reaching 4.4% by end-2025 versus current 2.8%, presenting Fed policy dilemmas. BlackRock maintains tactical overweights in US equities supported by AI earnings themes, short US Treasuries given reduced Fed cutting expectations, and inflation-linked bonds over nominal duration. Morgan Stanley recommends overweight positioning in US and Japan equities while maintaining neutral stance on European markets given trade exposure risks.
Strategic implications for institutional portfolios
The institutional consensus emphasizes several key strategic themes for the remainder of 2025. AI investment transition from pure infrastructure toward application deployment creates selective opportunities, while sector rotation toward utilities, industrials, and quality defensive names reflects broadening market participation beyond technology leadership. Fixed income strategy focuses on intermediate maturities and credit quality given elevated policy uncertainty, with PIMCO and BlackRock favoring shorter duration positioning while maintaining overweights in agency mortgages and European fixed income. Commodity allocation emphasizes precious metals as stagflation hedges while remaining cautious on energy given supply abundance. Risk management priorities center on portfolio diversification away from technology concentration, geographic rebalancing given US market dominance, and defensive positioning in credit markets. The combination of strong corporate fundamentals, elevated valuations, and policy-driven uncertainty requires sophisticated institutional navigation of both tactical opportunities and structural risks through the remainder of 2025.
This document is being issued by Appomattox Advisory, Inc. and is for private circulation only. The information contained in this document is strictly confidential and may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Appomattox Advisory, Inc. This document does not constitute or form part of any offer of asset management products or services in any jurisdiction. Furthermore, this document does neither constitute an offer of asset management products or services.
The value of investments and any income generated may go down as well as up and is not guaranteed. You may not get back the amount originally invested. Past performance is not necessarily a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.
The information and opinions contained in this document are for background purposes only, and do not purport to be full or complete. No representation, warranty or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Appomattox Advisory, Inc., its partners or employees and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document.
Significant differences in returns, risks and correlations may occur within sub-periods of the periods shown. Historical investment performance and market characteristics may not be indicative of future investment performance or market characteristics. There are frequently sharp differences between the hypothetical performance results and the results subsequently achieved by any particular trading or investment program.
