July 26, 2025 Market Update

Stocks rose this week, continuing a mid-summer rally that has been buoyed by strong earnings and improving economic sentiment.  The S&P 500’s price to peak earnings ratio reached its highest level since 2000, while the Nasdaq Composite crossed above 21,000 for the first time.  Market optimism was boosted by trade deal announcements, a sharp rebound in semiconductor sales, and a surprise jump in new home sales.

Bond yields remained elevated as Mr. Market reassessed his outlook for Federal Reserve policy.  Economic data released during the week, including durable goods orders and jobless claims, were positive, suggesting a rate cut by the Federal Reserve is not imminent.  The yield on the 10-year Treasury briefly climbed to 4.44%, the third such spike in less than a month.

While investors remain focused on growth and earnings momentum, Fed officials continue to signal caution as inflation stays above target.  Next week’s PCE inflation report could provide clearer guidance on how the Fed might balance those competing signals.

The past few years have been unusually tough for bond investors.  Since the start of 2020, the Bloomberg U.S. Aggregate Bond Index—a widely followed benchmark for investment-grade bonds—is down about 7%.  That’s the worst five-year stretch for core bond returns in decades.

Most of the damage to the bond market has come from rising interest rates.  As the Federal Reserve raised rates to combat inflation, bond prices fell as new bonds were issued with higher yields.  That has challenged the traditional role of bonds in diversified portfolios and left many investors wondering whether to lower the allocation to fixed income in their portfolios.

While the recent experience has been disappointing, the path ahead may look quite different.  Yields today are far higher than they were five years ago.  Historically, when starting yields have been this elevated, future returns for bond investors have tended to improve—not decline.

Finally, on a personal note, I would like to give a shout out to my son Jake (who is a quantitative analyst for The Milwaukee Company) and his fiancé, Karla, who are getting married today.  Congratulations!  I look forward to seeing you grow together.

Have a great weekend and invest wisely my friends.