Key ETF Asset Class Performance

US equities posted modest gains in July, with the S&P 500 up 2.3%, primarily driven by large-cap tech and AI-benefiting sectors, while small caps continued their significant underperformance, highlighted by the Russell 2000 finishing July year-to-date in the red and small-cap value down 6.4% for the month. Internationally, performance diverged sharply as China surged over 4% in July and 23.75% year-to-date, contrasting with declines in many developed markets. Early August saw a market shift, with defensive sectors like Consumer Staples and Health Care showing resilience amid broader market declines.

Analysis

The July market performance reveals significant divergence beneath the surface of modest US equity gains. While the cap-weighted S&P 500 (SPY) rose 2.3%, its equal-weight counterpart (RSP) gained only 1%, indicating the rally was driven by a narrow set of large-cap stocks. This concentration is further evidenced by sector performance, where areas benefiting from the AI build-out, such as Tech (XLK), Industrials (XLI), and Utilities (XLU), rallied, while defensive sectors like Consumer Staples (XLP) and Health Care (XLV) sold off. The persistent underperformance of small-caps is stark, with the Russell 2000 (IWM) ending July with a year-to-date loss and the small-cap value ETF (IJS) down 6.4% for the month, trailing the large-cap SPY by nearly 15 percentage points YTD. Internationally, the divergence was even more pronounced; China (MCHI) surged over 4% in July to a 23.75% year-to-date gain, while the all-world ex-US ETF (CWI) fell 1.1% and key markets like Germany (EWG), Japan (EWJ), and India (INDA) posted declines. The start of August signals a potential shift, with the broader market falling while the previously lagging defensive sectors demonstrated resilience.

Key Decisions for Investors

• Given the market's narrow leadership, investors should re-evaluate their exposure to large-cap technology and AI-related themes, as this concentration is both the primary performance driver and a source of risk.
• The profound underperformance of small-caps (IWM) and small-cap value (IJS) suggests caution, but contrarian investors may want to monitor this segment for a potential mean-reversion trade should market breadth improve.
• The stark performance gap between China's equity market (MCHI) and other international markets, including developed Europe and India (INDA), necessitates a highly selective approach to global allocations rather than broad-based indexing.
• The reversal on August 1st, where defensive sectors (XLP, XLV) held up during a market plunge, warrants monitoring for a potential rotation out of July's winners into more risk-off assets.