Wealth Insights

Stocks Commentary

Stocks: Earnings Impressive, But A Challenging Seasonal Stretch, Midterm Elections Loom

August 2026

July failed to live up to its historical billing as a positive month for stocks as U.S. equity indices struggled amid flaring tensions in the Middle East, monetary policy uncertainty stemming from the FOMC’s more hawkish tone in June, and fears of increased AI competition coming from China. The S&P 500 fell by less than 0.1% on a total return basis during the month as weakness in the information technology sector weighed on the index, with the sector posting a -3.4% monthly return as semiconductor and memory stocks fell sharply as capital rotated into relative value plays. Encouragingly, the equally weighted S&P 500 gained 1% in July and beneath the surface we view breadth as constructive. At the sector level, consumer staples, energy, financials, health care, and real estate all finished the month with gains of 2% or more. This transition highlights the importance of diversification and the potential pitfalls of concentrating portfolios in one sector and/or crowding into recent winners as lost momentum can lead to heightened volatility and unsettling drawdowns if risk isn’t managed appropriately.

With approximately 89% of the S&P 500 having posted quarterly results at the time of this writing, year-over-year earnings growth was tracking at a jaw-dropping 51% - more than double the 21.9% growth expected at the end of June. However, the S&P 500’s reaction to this awe-inspiring growth has left much to be desired, evidenced by the index ending July effectively unchanged. This is largely a function of just how ridiculously high the bar for companies closely associated with the AI buildout was set coming into this earnings season, but market participants also appear increasingly skeptical that sales growth and/or profit margins can improve from here. Much of the weakness in many of the high-flying stocks associated with the buildout and adoption of AI during July appears to have been a byproduct of overcrowding and poor risk management/usage of leverage, which resulted in forced selling both stateside and in Korea. The July shakeout will likely prove to be a healthy event as it removes ‘froth’ and resets sentiment and positioning. To us, there are minimal signposts to suggest this is a burst of any perceived ‘AI bubble.’

The S&P 500 has historically struggled to make gains in the August- September timeframe in the ‘average’ year, and in midterm election years, such as 2026, lackluster performance from the back-half of August through mid-October has become the norm, with classically defensive sectors such as consumer staples, health care, and utilities often leading an otherwise unimpressive tape. Following midterms, we tend to see portfolio re-risking and a rally into year-end as market participants digest the new balance of power in Washington D.C. While U.S. equity indices have certainly acquitted themselves quite well thus far in August, we expect geopolitical and monetary policy uncertainty to remain elevated as market participants digest Middle East headlines and a more uncertain path forward for both Fed communications and monetary policy, and with earnings season winding down and the calendar turning less kind for stocks later this month, risk appetite could remain subdued for a bit longer. However, impressive earnings results and signs that hyperscalers are already generating an ROI on AI investments leave us constructive on the outlook for capex spending. We are of the view that material downside for the S&P 500 is unlikely to materialize so long as the Mag 7 is garnering inflows and acting as a stabilizing force for U.S. indices.

Developed Markets Quietly Building Momentum As Cyclical Exposure Helps Diversify AI. Weak price action in July held back the tech-centric NASDAQ and the adjacent semiconductor stocks in emerging markets, but the foreign-developed MSCI EAFE index played valuable defense last month, rising by 2.0% while broader equities struggled. The resurgence in international equities brought the index back to all-time highs after nearly 6-months of consolidation with the prior peak coming in February just before the Iran conflict kicked off. Investors seem more focused on valuations after shakeouts in more volatile growth and AI-related segments of the global equity market increased the demand for stability. That preference in investor positioning suggests that should a broader sell-off in thematic stocks tethered to artificial intelligence crop up again, the haven trade could be in foreign equities known for their consistent cashflows. From a technical perspective, new highs are an overt positive, especially when taking that price action alongside improving breadth and above-average fundamentals. Developed international equites still appear primed to serve as a worthwhile stabilizer in portfolios, even if they don’t carry the same earnings growth power evident in AI-related technology companies.

Emerging Market Rotation And Currency Strength A Positive Signal—But Momentum May Not Immediately Return. Technology tailwinds turned against global equities last month and leaders became laggards as emerging market equities were some of the hardest hit in July, with the MSCI Korea index declining by 23.7%, finishing the month in a 29.3% drawdown. Tech hardware struggled broadly as concerns surfaced around AI Cap-Ex and how more efficient models might dampen semiconductor company profits, but this was exasperated by the rampant leverage in South Korea that unwound in July. That deleveraging was tough on concentrated investors, but the broader MSCI EM index was only lower by 3%, as the old guard carried the mantle with China, Brazil, and India partially offsetting substantial losses in Korea and Taiwan. The MSCI China index specifically had its best month since September, as recent AI model developments reminded investors that Chinese companies are going to push for market share by launching lower cost alternatives to the domestic frontier AI models. Technically speaking, the recent momentum in China hasn’t been enough to turn around its declining primary trend, as the MSCI China index remains 2.8% below its 200-day moving average. Emerging equities got cleared out last month, but this does not guarantee a V-shaped recovery, as momentum traders may be slow to rush back into high-flying semiconductors as the toll of leverage is fresh in investor psyche.

As of August 14, 2026