Nasdaq-100 slides 7% in worst month since March 2025

The Nasdaq-100 fell 7 percent in July, its worst month since March 2025, as AI spending scrutiny and Fed policy uncertainty weighed on tech valuations. The S&P 500 finished the month down 0.1 percent, while the S&P 500 Equal Weight Index gained 1.0 percent, outperforming its market-cap-weighted counterpart for the second consecutive month.

"There is no 'soft' inflation target," Fed Chair Kevin Warsh said at the July FOMC press conference, reiterating that the Committee remains committed to returning inflation to 2 percent. The Fed held the federal funds rate at 3.50%-3.75% for the fifth consecutive meeting, though the 9-3 vote marked a notable shift from June's unanimous decision, with Presidents Beth Hammack, Neel Kashkari, and Lorie Logan favoring a 25 basis point hike.

US value stocks gained 2.1 percent, the only segment to post a positive return, while US small-caps fell 1.9 percent and US mid-caps dropped 2.3 percent. Bonds struggled as investment grade corporate bonds and municipal bonds each fell 1.6 percent, 7-10-year US Treasuries declined 1.4 percent, and the US Aggregate Bond Index decreased 1.3 percent. Crude oil rose 21.4 percent, broad-based commodities gained 7.1 percent, and gold added 0.9 percent, while silver fell 2.1 percent.

The 30-year Treasury yield closed the month at 5.27 percent, its highest level since 2007, as the long end priced greater compensation for uncertainty over the policy path and longer-run inflation. Market pricing via the CME FedWatch Tool implies roughly a 65 percent probability of a 25 basis point rate hike at the September meeting.

Earnings Beat, But Rewards Diverge

Second-quarter earnings have been strong. With 61 percent of S&P 500 companies having reported, the blended growth rate has risen to 47.4 percent from an estimated 23.2 percent at the end of June, the highest since 2021. Excluding one-time gains at Alphabet and Amazon, blended growth would be 28.8 percent.

Strong results, however, have not been consistently rewarded. Technology companies that beat EPS estimates underperformed the S&P 500 by an average of 3.3 percent around their reports through July 28, the weakest reading in seven years of data. Alphabet posted an 82 percent jump in Google Cloud revenue but record capital expenditures left free cash flow negative for the first time as a public company, and the stock fell as much as 7 percent. Meta saw free cash flow decline 91 percent as capex climbed, with shares off 8 percent.

Microsoft and Amazon were received differently, with the distinction resting on whether spending is converting into profitable growth. Microsoft's Azure grew 43 percent, its fastest pace since early 2022, and the stock rose 15.5 percent the following day for its largest one-day gain since 2008. Amazon's AWS accelerated to 37 percent growth with segment operating income of $16.6 billion, a margin near 39 percent, and the stock gained roughly 15.3 percent the following day even as trailing free cash flow swung to a $7.6 billion outflow.

China's Memory Push Adds Pressure

China is re-emerging as a competitive force across both AI software and semiconductors. Chinese AI models now account for roughly 46 percent of routed tokens on OpenRouter versus about 36 percent for US models. ChangXin Memory Technologies, the country's largest DRAM producer and now the fourth largest globally with roughly 8 percent of the market, closed 466 percent above its offer price in its July 27 Shanghai debut, becoming the most valuable company listed on China's A-share market.

The listing, alongside record quarterly results from SK Hynix that nonetheless fell short of consensus, contributed to a semiconductor-led selloff that triggered circuit breakers on the KOSPI multiple times during the month. CXMT still trails well behind in advanced high-bandwidth memory, where Samsung, SK Hynix, and Micron remain dominant, but rising Chinese capacity could weigh on conventional memory pricing, margins, and valuations across the industry.

With the S&P 500 up 9 percent year-to-date and at record highs, August and September historically represent the weakest stretch of the year for equities. Midterm years have produced the lowest average returns of the four-year presidential cycles for the last three decades, with intra-year drawdowns often exceeding double digits. The S&P 500 has already seen a 9 percent drop this year, though it has rebounded far quicker than prior midterm years.

This article is for informational purposes only and does not constitute investment advice.