July Market Review

July was an intense month in financial markets, with record highs despite the uncertainty sparked by Trump’s tariff announcements. Fixed income fell slightly in local currency, dragged down by declining yields across all maturities from one year onwards.

• S&P 500: +2.17%
• Nasdaq: +2.38%
• Stoxx Europe: +0.88%
• All Country World Index EUR: +3.95% (the US dollar rose 3.16%, the index in USD rose 1.28%)
• Global Fixed Income Index EUR: +1.03% (USD up 3.16%, index in USD fell 0.31%)

Why are global equity markets performing so well amid geopolitical tensions and macro uncertainty?

Investors usually price the market based on a series of subjective assumptions—economic growth, controlled inflation, stable interest rates, low debt levels, etc.

But what happens when uncertainty is introduced to one of those variables—economic growth, inflation, interest rates, and so on? If I have a lifelong friend, a responsible and trustworthy person, and he asks to borrow money, I lend it without hesitation. But imagine one day he starts behaving suspiciously—going out every night, drinking too much, missing work… My perception of his ability to repay the loan changes. I’ll probably impose stricter conditions and ask for interest—because I now perceive a higher risk.

That’s precisely what happens in financial markets when uncertainty rises: risk premium increases. But whose premium? We could call it the new required return. If the market is trading at a P/E (Price-to-Earnings) of 20x, I’m paying 20 times a company’s annual earnings—that’s like asking for a 5% return (because the inverse of the P/E, earnings/price, gives the expected return). Is 5% acceptable? It’s a consensus of all participants at that moment, but as with any consensus, it might be wrong.

If we add uncertainty—like Trump’s tariff announcements or geopolitical tensions—it’s logical that we would require more from the market. How? By selling. That pushes prices down. If prices drop, so does the P/E ratio, and consequently, the implied return increases. For example, if the P/E drops to 18x, the expected return rises to 5.55%, reflecting a higher risk premium.

Has that actually happened? Sort of. Initially, yes. But then? Not only did the risk premium not go up—it actually declined. Here’s the chart showing the inverse of the S&P 500’s P/E (i.e., the required return):

Source: Bloomberg

As you can see, after Trump’s tariff announcement, the required return spiked above 4.60%. But it has since returned to pre-announcement levels.

So… is there uncertainty or not? The market doesn’t seem to think so. True—but I find it odd. Let’s break it down.

The positives:  

• Tariffs: The initial tension has eased. Trump started unilateral negotiations with several countries (though not all, e.g., China).
• Corporate Earnings: Strong performance. This chart shows U.S. corporate earnings have grown 10.3% compared to the expected 4.9% as of June 30.

Fuente: Factset

The negatives:

• Tariffs (again): While uncertainty has decreased, it hasn’t disappeared. Higher tariffs are still bad for global trade. For example, Japanese car imports will face a 15% tariff instead of the previously threatened 25%. Better, yes—but still costlier for the U.S. consumer. Ironically, if Trump wants cars built in the U.S., it’s difficult when American manufacturers like Ford and GM pay a 50% tariff on imported materials like steel.
• Inflation: Despite Trump’s pressure on the Fed to cut rates, Powell hasn’t acted yet. The Fed remains uncertain about how tariffs will affect inflation and left the door open for a rate cut in September—if data supports it. Inflation is ticking up in tariff-affected goods. This chart from Oxford Economics shows prices rising month by month.

Source: Oxford Economics/Haver Analytics

These products include appliances, home equipment, furniture, decorative items, recreational gear, and video games, among others.

Many companies built up inventory before tariffs were imposed, but they’ll eventually need to restock. During Q2 earnings calls, several firms noted uncertainty over how tariffs will ultimately be implemented.

In short, much of the market is anticipating that the Fed will lower interest rates. Lower rates would mean more liquidity, potentially pushing asset prices (i.e., the stock market) higher.

In fact, after a weak U.S. jobs report in early August, market expectations for a September rate cut jumped from 45% to 90%—and the market rallied.

But is that the only reason? I think there’s more to it. Trump’s pressure on Powell may stem from the fact that debt servicing costs are limiting his spending ability—spending that shows no signs of slowing, as seen in his spat with Musk.

Is it likely a politician will reduce spending? Highly doubtful, especially since spending is a powerful tool to win votes.

The U.S. deficit continues to rise. Current figures:

• National debt: $36.2 trillion
• Deficit: $1.7 trillion (6.4% of GDP)
• Interest payments: $1 trillion
• Congressional Budget Office (CBO) projects debt could reach 156% of GDP by 2025 (vs. 118% today)

This is not just a U.S. problem—it’s global.

There’s growing fear that the dollar and other currencies will lose value due to governments’ fiscal irresponsibility.

Are there limits to debt and spending? Yes, and here are the options:

1. Balanced budgets: Highly unlikely.
2. Inflation: Helps reduce debt burden, but comes with serious risks.
3. Debt forgiveness (haircut): Extremely dangerous.

Debt forgiveness might sound attractive, especially when politicians suggest that public money “belongs to no one.” But that’s false—it comes from taxpayers.

When a country issues debt, it’s supposed to repay it. If it doesn’t, future borrowing becomes very costly—or outright impossible. Consequences include:

• Higher borrowing costs → higher financial burdens for everyone.
• Higher taxes → we already pay more than half our income in taxes; raising them further could spark backlash.
• Money printing → unless there’s enough demand for currency, this leads to inflation.

If deficits continue, distrust will rise, leading to currency devaluation and future inflation.

A key signal of distrust in government debt is the divergence between sovereign and corporate bonds. The credit spread—i.e., the extra return investors demand from corporates vs. “risk-free” government bonds—tells the story.

Normally, if the spread narrows, it suggests corporate bond demand is rising (healthy economy). This time, the spread is narrowing because corporate bond yields are falling (prices rising) while government bond yields are rising (prices falling).

This chart illustrates the divergence:   

Source: Bloomberg

Spreads are near all-time lows. Past spikes occurred during the 2008–09 housing crisis and 2020 COVID crash—periods of distrust in corporate finances. Now, the opposite: distrust in government debt.

Other market signals include rising safe-haven assets like gold, bitcoin, and real assets (e.g., equities).

 If that’s what’s happening… what should we do? Defend ourselves from currency depreciation. How? By investing. This explains current market complacency despite perceived risks. Where to invest?

• Equities: Absolutely—but choose wisely. Not all businesses are equal. Look for strong models at good prices.
• Avoid sovereign debt: U.S. Treasuries might be an exception given global demand for USD.
• Fixed income: Provides portfolio stability—but again, select the right companies.
• Gold: When cash isn’t needed, consider replacing it with gold—or even keeping it as a core holding alongside equities and bonds.

To illustrate gold’s strength: here’s a table showing how many ounces of gold are needed to buy certain goods since 1970 [2]. The prices fall in gold terms.

If someone had held 485.7 ounces of gold in 1970 (at $35/oz, the price of a NYC house back then: $17,000), today they’d own $1.64 million in gold—enough to buy nearly two homes worth $878,000 each. That’s the power of real assets. 

Source: Perplexity

There’s too much noise in financial markets—whether from excess information or manipulation. It’s essential to understand what’s really going on, to seek truth and invest with freedom rather than following the crowd.

Don’t get me wrong—I don’t claim to possess the truth. But I do have a deep desire to find it. As Saint John Paul II wrote in Veritatis Splendor, no. 35: “Without truth, freedom loses its foundation, isolates itself and becomes mere whim… Truth and freedom either go together or perish together in misery.”    

[1] Don’t take it literally—these are references meant to provide a foundation for making investment decisions, but they are only approximate.

[2] 1970 is chosen because the following year, Richard Nixon announced the “temporary” suspension of the dollar’s convertibility into gold. It wasn’t temporary.