Inflation, Earnings, and the Fed: What's Really Driving Markets in July 2026

If you only read the headline numbers, July 2026 looks straightforward: earnings are booming, the economy is strong, and a geopolitical flashpoint just resolved itself. Underneath, the picture is more layered — and it explains why interest rates spent the first half of the year climbing to levels not seen in nearly two decades before easing back in June.

Commodities: relief, but not resolution

The Bloomberg Commodity Index posted a 25% return over the trailing year — but the path was choppier than that headline number suggests. Brent crude fell 20% in the second quarter alone (still up 43% over one year) as the reopening of the Strait of Hormuz in late June eased a supply shock that had been building for months. Copper gained 9% for the quarter and 38% over the trailing year, reflecting continued demand from data center and energy infrastructure buildouts. Gold, often a hedge against currency and policy uncertainty, fell 14% for the quarter but remains up 22% over one year.

Source: YCharts. Data as of June 24, 2026.

The relief is real, but the underlying drivers of commodity price pressure haven’t disappeared. Global technology capital expenditures and energy infrastructure buildouts continue to increase demand. Monetary and fiscal policy continue to drive currency hedging and demand for precious metals. And an inflation spiral is still pushing up inventory storage, transportation, and extraction costs.

Inflation cooled in June, but the trend is murky

The Cleveland Fed’s June CPI Nowcast came in near flat, but the trailing 12-month inflation rate still sits around 4% — above the Fed’s comfort zone. Wars, a weak dollar, tariffs, global trade friction, geopolitical tension, rising input and labor costs, and ongoing fiscal and monetary stimulus have all conspired to keep inflation elevated. The late-June easing tied to the Strait of Hormuz reopening is a genuine positive, but it’s one data point, not a trend reversal.

A genuinely strong economy — and genuinely strong earnings

The ISM Manufacturing PMI, a leading indicator, hit a four-year high this quarter. Employment, manufacturing, consumer spending, and government spending all remain strong. That strength is showing up directly in corporate results: year-over-year S&P 500^® Index earnings growth hit 28% this reporting season, the fastest pace in five years.

Source: FactSet Earnings Insight, May 21, 2026.

What’s notable is that this earnings strength isn’t confined to the mega-cap technology names driving index headlines. The Russell 2000 Index is expected to deliver 44% year-over-year earnings growth — nearly double the large-cap pace — while international stocks are projected to post 15–20% earnings growth. These results are arguably the real story behind equity outperformance this year, and a reminder that earnings strength is broader than the narrow, semiconductor-led rally suggests.

Bond vigilantes and the “higher for longer” case

The obvious risk to rising asset prices, a strong economy, and rising commodity prices is rising interest rates — and 30-year Treasury yields hit their highest level in 19 years in May before falling back as inflation pressures eased in June.

U.S. Treasury yield curve change: rising rates in the belly of the curve
Source: YCharts. Data as of June 29, 2026.

We’ve written before about how bond vigilantes are pushing the Fed’s hand, and that dynamic remains firmly in place. Investors are demanding higher yields to compensate for massive government deficits, forcing rates higher independent of what the Fed itself wants. Layer on surging commodity prices, growing isolationism and trade protectionism (which permanently raise manufacturing and labor costs), and a booming economy and stock market that give the Fed room to tighten without triggering recession — and the case for “higher for longer” remains intact even after June’s relief rally in bonds.

Despite all of this, yields have remained surprisingly resilient. The broad U.S. bond market held up well over the past six months given renewed inflation concerns and increased government borrowing — a positive structural stress test for the Treasury market even as it fights considerable negative investor sentiment.

What this means for portfolios

We think this is an environment where active fixed income management continues to earn its keep. Indexes are built to a targeted duration, while active managers can lower duration to manage rate risk. For a deeper dive into how we’re framing this backdrop, see our take on how to think about interest rates now. Sector divergence has also created opportunity: while the broad Bloomberg Aggregate has been roughly flat, credit-sensitive sectors like high-yield bonds and bank loans have remained resilient, supported by the strong economy. And when large swaths of the market index at the same time, security selection can uncover mispriced opportunities that a passive approach simply can’t access.