Every economic signal this month seems to be arguing with another. The U.S. labor market quietly buckled in July — payrolls fell instead of grew, and steep downward revisions to May and June dragged the 12-month hiring average to just 34,000. This occurred even as consumers kept spending and GDP, while missing forecasts, showed the underlying economy holding up better than the headlines suggested. Europe split down the middle too, with the eurozone as a whole beating growth expectations while its two anchor economies, Germany and France, continued to tread water. Asia diverged further still: China’s factories slipped back into contraction just as Taiwan and South Korea rode a semiconductor and AI export boom to double-digit growth. Markets registered all of this by doing something they hadn’t in a while — rotating hard out of the AI-fueled growth trade and into value, with value trouncing growth across every market cap in July even as hyper-scalers kept pouring record sums into capex financed increasingly by debt rather than free cash flow. For all of these crosscurrents, 2026 remains a year in which almost every asset class — from real assets to high yield to international equities — has found a way to add value. Staying connected to what’s actually driving markets, rather than the headline of the week, has never mattered more.
US Economic Growth Holds Up as the Labor Market Weakens
- The U.S. economy unexpectedly lost 23,000 jobs in July, well below the forecast of 83,000 jobs gained. In addition, May and June job gains were revised downward, bringing the 12-month average down to just 34,000. The unemployment slipped to 4.1% as the labor force participation rate fell further to 61.4%, its lowest in more than five years, another indication that fewer Americans were working or looking for jobs. The July decline was led by a 50,000 decrease in local government positions and a loss of 19,000 retail jobs. Average hourly earnings were weak last month with the annual rate falling to 3.2%, the lowest reading since May 2021.
- U.S. GDP growth of 1.5% in Q2 was below the 1.8% expectation and the 2.1% annualized rate reported in Q1. While the GDP number was below expectations, the miss appeared to come from a decline in federal government spending and inventories. Other parts of the economy appeared strong. Personal spending rose 2.1% after eking out a 0.4% gain in Q1. However, inventories fell 0.7% and federal spending fell 0.3%.
US Inflation Remains Above the Federal Reserve’s 2% Target
- Consumer prices rose 3.5% annualized in June, less than expected as energy prices eased to near pre-war levels. The June CPI report showed headline inflation fell 0.4% month-over-month (M/M) but rose 3.5% year-over-year (Y/Y). Core CPI was flat M/M but increased at an annual rate of 2.6%. The easing of prices came from a notable decline in energy and a decrease in services costs, particularly for housing. Energy declined 5.7% M/M, but still gained more than 15% Y/Y. Food prices jumped 0.2% in June and shelter costs increased just 0.1%. The Fed’s preferred inflation gauge, the PCE Index, showed headline inflation of 3.7% Y/Y in June with core PCE coming in at an annualized rate of 3.3%. While these metrics are all slightly different in their calculation methodology, they all remain stubbornly above the Fed’s 2.0% inflation target.
Growth in average hourly earnings in the U.S. — Year-over-year percent change, Jan. 2022–July 2026. Source: U.S. Bureau of Labor Statistics
Eurozone GDP Growth Beats Expectations Despite Weakness in Germany and France
- Eurozone economic growth beat expectations, but growth by member countries was all over the map. Growth of 0.4% quarter-over-quarter (Q/Q) was better than the 0.2% estimate and the flattish growth reported last quarter. Germany and France both reported subdued growth of 0.2%; Germany’s growth slowed from Q1 and France remained weak overall. However, the eurozone flash composite PMI returned to expansion territory in July, hitting a five-month high reading of 51.9 (up from 50.0 in June). The increase in output reflected both a renewed rise in services business activity and a faster expansion in manufacturing production. The solid growth in manufacturing output seen in July was the sharpest since March 2022. Germany, saw business activity increase for the first time in four months. Meanwhile, French output continued to fall, but only marginally. The latest data suggest eurozone growth of about 0.3% Q/Q in Q3, but geopolitical uncertainty may continue to provide a headwind.
European Corporate Earnings Rise as Energy Profits Surge
- With 74% of companies in the STOXX Europe 600 having reported their Q2 results, FactSet data show aggregate earnings growth of 19.1% and revenue growth of 7.8%. The Q2 results are the best since Q3 2022. Energy has emerged as the clear standout, posting reported EPS growth of 116% against a sales increase of 36%. At the opposite end, Consumer Discretionary has reported a 25% earnings decline alongside a 1% sales drop. Expectations are high, so companies missing on their results have been punished by investors while those beating expectations have seen muted stock price reactions.
STOXX600 Reported Earnings Growth: Q2 2026. Source: FactSet
China’s Economy Weakens as Taiwan and South Korea Benefit from the AI Boom
- China’s official manufacturing PMI fell back into contraction territory, largely due to a slump in domestic demand and typhoon-related production disruptions. The official reading came in at 49.2 in July, down from 50.3 in June. The headline figure was dragged down by the new orders sub-index, which fell to 48.5, the lowest in 38 months. The RatingDog China Manufacturing PMI declined to a four-month low of 50.9 in July 2026 from 51.7 in June, as output and new orders grew more slowly. China’s official Non-Manufacturing PMI fell to 49.0 in July 2026 from 50.2 in June, pointing to a renewed contraction after two months of expansion. Business activity, new orders, and employment all weakened.
- South Korea’s economy grew faster than expectations in Q2, driven by a semiconductor export boom powering AI and digital infrastructure. GDP rose 0.6% Q/Q or 3.7% Y/Y. Growth was driven by a 1.4% gain in exports. Taiwan saw its third straight quarter of double-digit economic growth with an annualized reading of 12.9% in Q2. Exports were strong, but domestic demand also provided a strong boost in Q2.
How Could the Growing U.S. Debt Burden Affect the Economy and Markets?
- The U.S. Treasury must roll over $6T of debt every three months in an increasingly skeptical market, as well as issuing $2T of new debt annually to cover the widest structural deficit in U.S. peacetime history. Treasury Secretary Scott Bessent has been concentrating ever more borrowing on short-term bills to keep a lid on the spiraling interest cost of the U.S. national debt, which has quadrupled to $1T over the past decade. Interest on the national debt now exceeds the U.S. defense budget and is fast heading towards 4% of GDP. While external players have pulled back from Treasury purchases, the void has been filled by levered hedge funds seeking arbitrage opportunities.
Interest cost on national debt as share of GDP. Source: GAO
Could Rising AI Capital Spending Create New Risks for Financial Markets?
- U.S. investors have grown accustomed to having a significant market tailwind in the form of corporate share buybacks. The massive amount of capital needed for the AI/digital infrastructure buildout in the U.S. has caused many of the highest quality technology companies to shift from share repurchases and incredible cash flow generation to higher capex spending and equity and debt issuance. The tailwind from share buybacks has not disappeared, but it remains an unlikely backstop for the main hyper-scalers.
- U.S. corporations raised $252B of equity in Q2, eclipsing the previous quarterly record of $234B set in Q1 2021. Economists expect hyper-scaler capex spending of $1.1T in 2027, $150B more than the total operating cash flow from the underlying companies. Economists project 35% of that capex spending amount to be financed through debt. $1.4T in share buybacks are still forecast for the S&P 500 this year, despite the pullback from the hyper-scalers. We believe some investors have grown uncomfortable with this significant shift away from cash flow generation towards higher capex spending and debt issuance. While equity issuance was up in Q2 due to the SpaceX IPO in June, other key private companies are rumored to be coming to the public markets in the next few quarters.
Quarterly US equity issuance by type (billions). Source: Goldman Sachs, Dealogic
