July Market Commentary

JULY MARKET COMMENTARY

July had the energy of summer’s final sprint. Markets set fresh highs, Washington passed one of the most expansive tax bills in years, and economic data delivered its fair share of surprises. Beneath the surface, however, the story is more complicated. While the AI and tech boom continued to capture headlines and returns, the broader economy is showing signs of fatigue.

Market Recap: Growth Returns With a Few Speed Bumps

July delivered good news for investors as markets built on Q2’s momentum. The S&P 500 rose 2.17%, the NASDAQ jumped 3.70%, and even small caps showed signs of life, with the Russell 2000 up 1.68%. (1) Much of the rally was driven by strong corporate earnings, record-level share buybacks, and cooling inflation. But outside the tech-led rally, gains were thinner, reflecting a weakening economic backdrop.

Bond markets reflected this mix of optimism and caution. Yields rose modestly, with the 10-year U.S. Treasury moving from 4.23% to 4.36%, pushing the Bloomberg Aggregate Bond Index down 0.3%. Investors continued to favor credit over duration, bracing for higher long-term yields as uncertainty around Fed policy lingers. The Federal Reserve maintained its “wait and see” approach, leaving rates unchanged at the July meeting despite dissenting votes and pressure to cut rates.

Fed Chair Jerome Powell is now facing discord within the Fed. Recent developments suggest the economy may be weaker than the market consensus, raising the risk of a “growth scare” if investors shift to the contrarian view that inflation is no longer the primary concern and that the slowdown is deeper than widely believed. Such a shift could set the stage for a highly anticipated rate cut in September. Notably, two Fed governors, Michelle Bowman and Christopher Waller, broke from the majority by voting to lower rates by a quarter point. Both expressed concerns about a cooling labor market and the potential for further economic weakening, arguing that temporary price increases from tariffs should not overshadow the need to support employment. Their dissent underscores growing division within the Federal Reserve at a time when political pressure for lower rates is intensifying.

Tariff worries remained a persistent drag on sentiment. As with any tax, tariffs tend to suppress what they target, creating ripples through supply chains and consumer behavior. Inflation readings, meanwhile, are stable, trending lower, and consistently surprising to the downside. The headline CPI undershot the expected 2.8% coming in at 2.7% year-over-year, with core at 2.9%. While these numbers are above the Fed’s 2.0% target, they are down from levels earlier this year and consistent with a gradual cooling trend. Tuesday’s inflation numbers helped ease those fears further, coming in tamer than expected. Investors are now pricing in a nearly 91% chance of a rate cut next month, assuaging concerns that tariffs would reignite price pressures. Without fresh fuel from monetary easing or fiscal stimulus, sustained inflation seems less likely in the near term.

The economy grew 3.0% in Q2, rebounding from a modest contraction in Q1 of -0.2%. Consumer spending improved across both goods and services. However, the Fed lowered its 2025 GDP forecast from 1.7% in March to 1.4%, reflecting expectations of slower economic growth and a softening labor market. Job growth in June was steady at 147,000 new jobs, matching the past year’s average, but signs point to a cooling labor market. The unemployment rate edged down slightly to 4.1%, yet long-term unemployment rose, the labor force participation rate slipped, and the average workweek shortened. Wage growth also slowed, with hourly earnings up just 0.2% in June.

The housing market also showed softening demand linked to elevated mortgage rates and economic uncertainty. Declining building materials spending and a cooling labor market, with July payrolls at a mere 73,000, suggest potential challenges ahead.

In short, July’s market gains masked an economy undergoing a slow weaning from years of stimulus. The AI and tech boom continues to drive market leadership, but its narrowness could become a risk if growth fears intensify. With valuations stretched and underlying economic data softening, a near-term pullback is possible.

The “One Big Beautiful Bill Act” (OBBBA)
Significant Changes Ahead for Taxes and Planning Opportunities

While markets kept moving in July, Washington made headlines of its own. Congress passed what it’s calling the One Big Beautiful Bill Act (OBBBA), a sweeping tax package poised to reshape planning for families, investors, retirees, business owners, and high earners alike.

Here are some of the most impactful highlights:

For Everyone:

• The standard deduction increased to $31,500 for joint filers, inflation-adjusted (starting 2025)
• Charitable giving above-the-line $1,000 deduction ($2,000 for joint filers), plus a 0.5% floor for itemizers.

• Interest on auto loans for U.S.-assembled new cars becomes deductible up to $10,000, but phases out for high earners

For Families & Parents:

• Child Tax Credit made permanent, increased to $2,200, inflation-adjusted, and must have a valid Social Security Number (beginning 2026)

For Workers:

• Up to $25,000 in tips and $12,500 in overtime are deductible (double for couples), but phaseouts kick in over $150,000 AGI and vanish at $300,000 (2025-2028)

For Seniors (65+):

• A new $6,000 senior deduction (per person), phases out at $75,000 MAGI and vanishes at $150,0000 (2025–2028)

For Investors & Entrepreneurs:

• QSBS 1202 exclusion (100% tax-free) is enhanced, but still only applies to certain C-corps.

• Opportunity Zone incentives made permanent and expanded for rural areas
• Top capital gains tax remains 23.8% above $600,000 (joint filers)

• Business owners retain 20% QBI deduction (sec. 199A), 100% bonus depreciation, expanded Sec. 179 made permanent, fully deductible R&D expensing (Sec. 174), and EBITDA-based interest limitations return in 2025.

For High-Income Earners & Homeowners:

• SALT deduction cap raised to $40,000, phases out starting at $500,000 MAGI and vanishes at $600,000 (2025-2029)
• Mortgage interest deduction capped at $750,000 made permanent
• AMT thresholds permanently raised to $1,000,000 (joint) / $500,000 (single), indexed for inflation
• Itemized deductions limited to 35¢ per dollar in the top tax bracket

For Estate Planning:

• Estate & gift tax exemption increased permanently to $15,000,000 (single) / $30,000,000 (joint) in 2026, permanently indexed
• Opens up planning for basis step-up strategies, rather than just “gifting it away,” consider keeping highly appreciated assets until death for heirs to wipe out capital gains

For HSA Users & Clean Energy Shoppers:

• HSAs now available to those with ACA Bronze & Catastrophic plans (beginning 2026)
• Telehealth & Direct Primary Care are eligible for pre-deductible use of HSA funds
• 30% solar & energy efficiency credits expire after 2025
• EV tax credits ($7,500 new / $4,000 used) expire after Sept. 30, 2025, with delivery required before the deadline
• Home charger credit ($1,000 cap) ends after 2025

“Trump Accounts” for Minors

• New custodial IRAs for minors born 2025-2028, with $5,000 annual limit, adjusted for inflation, and $1,000 birth-year credit for US citizens with a Social Security number
• The details are unclear. There are age restrictions on withdrawals and investment restrictions, and it may phase out for high-income earners.

What This Means for You

The OBBB’s passage has bolstered market sentiment but introduced fiscal concerns, contributing to volatility. Equity markets remain resilient, but elevated valuations, a softening labor market, and a cooling economy signal caution. Bonds face pressure from rising yields, and the housing market’s outlook hinges on potential Fed rate cuts.

The One Big Beautiful Bill presents planning opportunities, but many benefits phase out at higher income levels. Whether it’s optimizing charitable giving, revisiting your estate plan, or acting before specific incentives expire, we are ready to explore which changes apply to you personally.

Your updated portfolio reports are now available in your eMoney vault. If you’d like to review your report or discuss how the new legislation, or any of the recent market developments, might impact your financial plan, we’re always happy to schedule a conversation, whether in person or by phone.

With summer beginning to wind down and back-to-school season around the corner, it’s a natural time to pause and reflect, not just on financial goals, but on what matters most. We also want to take a moment to extend our heartfelt condolences to the families affected by the severe flooding over the Independence Day weekend. A few of our clients and friends were directly affected, and our thoughts and prayers are with everyone who is navigating loss or recovery in the wake of those devastating storms.

As always, thank you for your continued trust.

____________________________________________________________________________________

1. The Dow, NASDAQ, S&P 500, and Russell 2000 – are unmanaged groups of securities considered to be representative of the stock market in general