In Short

• U.S. equities rose in July, with the S&P 500 hitting a record high, despite market uncertainty from tariff policy, an unclear Fed rate outlook, and growth concerns.
• The U.S. labor market exhibited some weakness as job growth disappointed and prior month data was revised meaningfully lower, increasing expectations for Fed rate cuts this year.
• Q2 S&P 500 earnings are strong so far, especially for AI-driven companies, but some tariff impacts are starting to show below the hood in specific sectors and industries.

The Month in Markets

The major indices moved higher in July, with the S&P 500 reaching a new all-time high, continuing an eventful summer that has reflected anything but the doldrums. With speculation on the outcome of tariff policy and the unclear path of rate cuts, the broader question seems to be whether the U.S. economy can grow at a modest pace despite policy uncertainty alongside ongoing deficit concerns. Clearly, there have been plenty of variables to digest, and yet markets have continued to move higher, with the S&P 500 up +8.6% year-to-date through July (up +2.2% during the month). AI-related tailwinds continued to boost returns, with the market-weighted index now outperforming the equal-weighted index by +2.8% year-to-date.

However, there were some bumps throughout the month. Rumors of President Donald Trump aiming to fire Fed Chair Powell caused a strong market reaction, and while those concerns have since settled, Trump has continued to speak out against the Chairman and about the central bank’s decision to hold rates steady in 2025. Further on Fed-related news, Federal Reserve Governor Adriana Kugler resigned, which will give the U.S. President a nominee on the Committee. Trump has been very clear about his desire for interest rates to move lower, and two of his prior appointees, Michelle Bowman and Christopher Waller, voted against the decision to hold rates steady during the recent FOMC meeting – the first time two members dissented in over 30 years.

In addition, concerns of a softening labor market began to materialize after a disappointing jobs print; only 73k jobs were added in July compared to a 104k consensus. Perhaps more concerning were the significant downward revisions to May and June, as the three-month average job gain was reduced to just +35k, the lowest since 2020. However, contrasting the disappointing print were stable job openings and unemployment claims. Following the jobs report, the probability of a rate cut during the Fed’s September meeting jumped to upwards of 80% and back to 100% for October. With expectations for two rate cuts by the end of the year, upcoming inflation data and the Fed’s Jackson Hole event later this month will become even more critical for policy direction, and unsurprisingly, U.S. Treasury yields have moved lower across the curve, with the 10-year yield at around 4.2% compared to almost 4.5% earlier in the month.

U.S. Labor Market Slow Down Accelerated In Last 3 Months

 

Source: Bloomberg as of July 2025

Impact of Tariffs on Inflation and Earnings

Another point of caution is whether tariffs are beginning to bite after a longer-than-expected lag. While the U.S. has continued to announce various major trade deals, including a deal with the European Union that features a 15% tariff rate on E.U. goods and an extension of the tariff truce between the U.S. and China, it is still unclear whether the price of goods will continue on a disinflationary path, if growth will be significantly impacted by a higher cost of trade, and if companies and/or consumers around the world will struggle to stomach the new levies.

U.S. Inflation – Goods vs Services (YoY%)

 

Source: Bloomberg as of June 2025

Corporate earnings may help justify the resilience of the equity market. Q2 earnings season is in full swing, with 66% of the S&P 500 reporting through the end of July. 82% of companies have reported a positive EPS surprise, with a blended earnings growth rate of +10.3% for the index. If this growth rate holds, it would mark the third consecutive quarter of double-digit earnings growth for the index -significantly ahead of consensus expectations for ~5% growth coming into the quarter.

This growth comes despite a meaningful potential overhang in tariffs, which based on this quarter’s investor calls are definitely top of mind. The average number of mentions of “tariffs” per earnings call has spiked to 9 compared to 3 at its previous peak in 2019. There are also some areas of weakness in sectors and industries that are more immediately exposed to the increase in customs duties. For example, for both S&P 500 and MSCI EAFE companies, the Automobiles industry has seen negative earnings growth in Q2, with various major automakers – both domestic (Ford, General Motors) and international (Mercedes-Benz, Volkswagen) citing the impact auto tariffs have had on earnings thus far.

Conversely, the Magnificent 7 have led the way in reporting growth above expectations as capex on AI continues to expand at a rapid pace – Meta, for example, has more than doubled its AI capex from last year. Expectations for AI to boost future productivity have lifted the basket of stocks¹, now up +7.7% year-to-date through July after being down over 25% through April 8 the post-Liberation Day market bottom.

As we continue into the second half of the year, more surprises may come, and history tells us that August and September can bring volatility. Going back to 1950, the average monthly return for the S&P 500 is only 0.02% in August and -0.68% in September – among the worst months of the year in terms of seasonality. However, we believe that most of the noteworthy headlines on trade and tariffs are behind us. With U.S. large-cap equities sitting near all-time highs—buoyed by a generally solid round of second-quarter earnings—we believe the focus will increasingly shift to how tariffs are being absorbed by companies and consumers, and how that translates into hard data in terms of inflation, earnings and employment.

Our view is that the longer-term outlook will be supported by solid liquidity, a healthy capital cycle driven by AI and other innovative investments, and a supportive fiscal and monetary policy backdrop around the world once the tariff noise is digested. Many of the hard data releases so far appear to support this thesis. We still recommend adhering to long-term asset allocations and believe that diversification across asset class, sector, size and style, and utilizing active management where appropriate, may help mitigate downside risks during periods of volatility.

Portfolio Implications

Equities were higher, led by domestic growth stocks. We are broadly positive on global equities and developed non-U.S. equities due to continued monetary policy easing, pro-growth fiscal policies, and solid corporate earnings prospects in major economies. We maintain an overweight to small- and midcaps despite recent disappointing performance as we anticipate improved gains against a backdrop of lower policy rates, deregulation and pro-business elements from the U.S. tax and spending law. Otherwise, we maintain an “at-target” view across equities. Admittedly, short-term volatility related to the end of the 90-day tariff pause, coupled with historical volatility in August due to seasonality factors, may create some pressure. However, any larger pullbacks (10% or more) could be an appropriate trigger to add risk, especially for those holding excess cash. In this more challenging environment, we favor employing active management to select companies with high earnings visibility.

Fixed Income was generally flat in July but saw some rate volatility following the July jobs report due to fluctuating rate cut expectations. We are more constructive on investment-grade fixed income as yields are close to fair value, with shorter-dated bonds in particular presenting little downside risk, in our opinion. With the spread of bond yields over cash rates likely to widen further, we see opportunities to deploy cash tactically, adding and/or shortening duration based on the movement of rates. Expected cuts of U.S. policy rates by the Fed in the second half should help boost performance of U.S. fixed income, but the OBBBA has added a level of uncertainty to the mix, as investors may continue to demand higher term premiums to compensate for the risk of holding long-term government bonds at a time when large federal deficits are creating uncertainty about future economic stability. Multi-sector bond funds may be an appropriate vehicle to consider, given the levers a manager can opportunistically pull across sector, duration profile and region.

With a fading liquidity drought and a more recent pickup in mergers and acquisitions and other deal activity, we believe significant opportunities still exist within Private Markets, as investors should expect new buyout activity and an unlocking of distributions. That said, liquidity and capital solutions providers will likely remain important to work through the substantial backlog of legacy investments. As a result, we continue to see compelling opportunities across secondaries, mid-life co-investments and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors and, particularly, real estate secondaries. Neuberger Berman’s deep relationships and unique position within the private equity ecosystem have translated into record levels of deal flow across our platform.

Index Returns as of July 2025

Source: Bloomberg, Total returns as of July 31, 2025. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.