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  • Writer: Investment Research Partners
    Investment Research Partners
  • Aug 5
  • 4 min read

Updated: Aug 6


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Executive Summary

  • The equity market continued to rally through July, as the S&P 500, Nasdaq Composite, and MSCI ACWI indexes ended the month at or near all-time highs.

  • Artificial intelligence (AI) has reemerged as one of the primary drivers of market returns, as evidenced by Nvidia, Meta, and Microsoft, all involved in the AI space, advancing more than 20% year-to-date.[1]

  • While investors got some clarity on issues such as tariffs and taxes in July, helping to lessen the heightened level of volatility that defined the first half of 2025 somewhat, uncertainty still remains.[2]

  • However, softer-than-anticipated employment and growth data warrant watching, as we see how the global economy digests higher levels of tariffs and growing US deficits.

AI Back in Focus

Artificial intelligence dominated market headlines as July came to an end.  Strong earnings reports from mega-cap technology companies Nvidia, Meta, and Microsoft helped propel their stock prices higher and briefly pushed Microsoft above the $4 trillion market cap mark (Nvidia is the only other $4 trillion company).  As major constituents of market-capitalized indexes like the S&P 500 and Nasdaq Composite, their rally helped boost index returns for the month, as well.


Demand for artificial intelligence is driving capital expenditures by technology firms to levels that we find difficult to comprehend.  For example, the chart below illustrates how personal consumption, which makes up about two-thirds of the US GDP, and technology spending have impacted growth in US Gross Domestic Product (GDP) over time.[3][4]  In the first half of this year, spending on technology was a greater contributor to economic growth than all personal consumption spending.


It is clear from the chart above that many companies, both large and small, are making big bets on AI.  While we find it to be an incredibly powerful tool, it will be interesting to see how companies plan to monetize AI.  Without greater clarity on how to generate revenue from the technology, it’s difficult to know whether this astronomical level of spending is justified.

 

Investors got greater clarity over the past month on two issues that drove much of the uncertainty in the first half of 2025 – tariffs and taxes.  The One Big Beautiful Bill Act (OBBBA) became law in early July, permanently extending individual tax rates that were introduced during President Trump’s first term.[5]  While lower tax rates are good news for individuals and businesses, the Act is expected to significantly expand the deficit over the next decade, based on Congressional Budget Office projections.[6] 

 

We also got greater clarity on many of the trade deals that underpin the President’s reset of global trade.  Tariffs of 10% appear to be the floor for countries, with those rising to 15% or more for countries that have significant trade surpluses with the US (ex., Switzerland at 39%).[7]  Those tariffs are set to go into effect on August 7. 

 

As illustrated in the map below, deals have yet to be announced with many countries, however.[8]  Further complicating matters, court cases challenging the legality of the President's use of emergency powers as the basis for the tariffs continue.


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Economic Update

Economic growth, which contracted during the first quarter of the year because of a ramp-up in imports ahead of the Liberation Day tariff announcement, rebounded in the second quarter.  However, even with the rebound, US economic growth was modest in the first half of the year (only about 1.25% for the period).[9] 

 

Additionally, the Bureau of Labor Statistics (BLS) reported weaker US employment data than markets expected last week.  The slowdown marked the weakest hiring data since the Covid-19 pandemic, as May and June hiring data were revised sharply lower.  President Trump subsequently fired BLS chief Erika McEntarfer, citing partisan politics as the rationale.[10]


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The slowdown in economic growth and hiring brings additional pressure on the Federal Reserve, especially Chairman Jerome Powell.  The Fed held interest rates steady yet again in July, however, Governors Waller and Bowman dissented, preferring to lower rates immediately.  While investors will have to wait until the Fed’s next meeting in September for their next decision, Chairman Powell is scheduled to speak on August 22 in Jackson Hole.  If changes are coming, he may use that as an opportunity to set the stage with his messaging.[11]


The Path Forward

While market participants have gotten additional information over the past month, mixed signals make the path forward anything but certain.  We believe there are positive indicators, such as AI capital expenditures contributing to GDP growth, corporate earnings remaining solid, and unemployment at relatively low levels.  Conversely, both economic growth and hiring appear to be softening, the US deficit is expected to expand with the OBBBA signed into law, and the impact of tariffs may not yet be fully reflected in economic data.

 

Unfortunately, the data rarely point exclusively in one direction or the other; otherwise, investing would be simple.  Given how many major changes have already occurred in 2025, we believe remaining diversified and waiting to see how the economy and markets digest the changes is as important now as ever.  We appreciate your continued trust and welcome the opportunity to speak with you in greater detail in the context of your specific situation. 


[2] Source: YCharts

[9] Source: YCharts


Important Information

All investments contain risk and may lose value.  Past performance is not an indication of future performance.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate.  There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all clients and each client should evaluate their ability to invest for the long term, especially during periods of downturn in the market.  Outlook and strategies are subject to change without notice.


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Click below to watch our August 2025 Market Outlook video


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