July was a relatively quiet month for the headline stock market indices, but there was plenty of movement beneath the surface. U.S. large-cap stocks finished essentially flat, while investors rotated away from growth and technology stocks and into value-oriented areas of the market. Meanwhile, rising interest rates weighed on bonds as investors continued to digest inflation, economic growth, geopolitical developments, and the Federal Reserve's next move.
U.S. large-cap stocks declined 0.1% in July and remain up 10.1% for the year. However, the headline number masked a significant shift in market leadership. U.S. value stocks gained 3.6% during the month, while growth stocks fell 4.8%. The 8.5% monthly gap between value and growth was the widest in more than 25 years and the sixth-largest monthly difference in data dating back to 2000, highlighting just how dramatic the rotation was beneath the surface.
The dispersion was also evident at the sector level, with seven of the eleven S&P 500 sectors finishing higher. Energy and Financials were among the strongest performers, gaining approximately 12.0% and 6.0%, respectively, while Technology declined roughly 8.0%. Concerns surrounding valuations and the enormous amount of spending associated with artificial intelligence weighed on several of the market's largest technology companies, offsetting strength across much of the rest of the market.
Despite July's decline, broader market participation remains evident year-to-date. Value stocks are up 20.8% compared with just 0.8% for growth stocks. Mid- and small-cap stocks also took a breather after strong performance earlier in the year, declining 2.4% and 1.9%, respectively. Both remain well ahead of large caps year-to-date, with mid caps up 14.5% and small caps up 21.6%.
Results were mixed overseas. Foreign developed stocks gained 2.0%, while emerging markets declined 3.0%. Despite the monthly pullback, emerging markets remain one of the strongest areas of the global market in 2026, up 20.3% through July.
Bond investors had a more difficult month as Treasury yields moved higher. The 10-year Treasury yield rose roughly 30 basis points during July, finishing near 4.8%, contributing to a 1.3% decline in the U.S. Aggregate Bond Index.
Headline inflation eased in June as energy prices declined, although inflation remained above the Federal Reserve's 2% target. Consumer prices fell 0.4% from the prior month but remained 3.5% higher than a year ago. The labor market also showed signs of moderating, while the first estimate of second-quarter GDP showed the economy expanding at a 1.5% annualized rate, down from 2.1% in the first quarter.
At its July meeting, the Federal Reserve left interest rates unchanged at 3.5%-3.75%. Interestingly, three Fed officials dissented in favor of a 0.25% rate increase, highlighting the continued uncertainty surrounding inflation and the future path of monetary policy. .
July was another reminder that looking only at the headline indices can obscure important changes underneath. Market leadership has broadened considerably in 2026, while inflation, interest rates, geopolitical developments, and economic growth remain important variables. As we move through the second half of the year, these crosscurrents will continue to shape the investment landscape.