Monthly Economic and Market Summary

• Equity Markets Soften – The S&P 500 declined 0.06% in July as tensions in the Middle East resumed and second-quarter earnings season commenced. Performance among the Magnificent 7 stocks varied widely given skepticism around AIrelated investments while semiconductor stocks sold off meaningfully. Within equities, foreign developed markets were the only major asset class to post positive returns in July, gaining 1.98%, while all other major equity indices finished lower.

• Bond Yields Rise Post FOMC Meeting – The bond market weakened in July with the 10-year Treasury yield touching 4.7%, an increase of 26 basis points in the month. Treasury yields, particularly on longer-dated maturities, surged after the July FOMC meeting in which rates were left unchanged. The market has been building expectations for at least one rate increase by yearend. The new Fed Chair, Kevin Warsh, reiterated his commitment to a 2.0% inflation target and suggested higher Treasury yields could be part of the solution to persistent inflationary pressures.

• Economic Growth Resilient – Initial secondquarter real GDP growth of 1.5% came in below consensus expectations for 2.1%, with the shortfall attributed to lower government spending and trade activity. Under the surface, AI-related capex and consumer spending remained solid, suggesting the overall U.S. economy continues to demonstrate resilience. Roughly half of real GDP growth was attributable to the ongoing AI-related buildout.

• June Inflation Levels Off – Core Personal Consumption Expenditures (PCE), the Federal Reserve’s preferred inflation measure excluding food and energy, increased at an annual rate of 3.3% in June and decreased 0.1% month-overmonth from May. Inflation has remained above the Fed’s 2.0% target for over five years.

• Manufacturing Expansion Continues – The ISM Manufacturing PMI came in at 55.6 in July, surpassing both consensus expectations for 54.0 and June's reading of 53.3. The latest manufacturing PMI report marked the seventh straight month of expansion for U.S. manufacturing. A reading above 50 indicates expansion in the U.S. manufacturing sector.

The rise of emerging market concentration

One of the defining themes in global equity markets has been the rapid rise in index concentration, not only in the U.S., but also across emerging markets. While investors have focused on the dominance of the “Magnificent Seven” in the U.S., a similar trend has emerged overseas, where a handful of Asian semiconductor companies have become outsized contributors and primary drivers of benchmark returns. The chart below illustrates the magnitude of concentration among the largest holdings in three well-known indices.

The MSCI Emerging Markets Index exhibits the highest concentration, with both the largest individual stock weighting and the greatest combined weight of its top three holdings. The MSCI Emerging Markets Index has gained 22% year-to-date, with roughly 14% of that return attributable to just three companies: Taiwan Semiconductor Manufacturing (TSMC), Samsung Electronics, and SK Hynix.

By the end of the second quarter, these three companies alone accounted for nearly 30% of the MSCI Emerging Markets Index and the technology sector represented approximately half of the index's total allocation. As a result, emerging market performance has become increasingly tied to the success of a small group of technology companies rather than serving as a broad reflection of economic growth across developing economies. Country concentration has increased as well, with nearly 70% of the index invested in China, South Korea, and Taiwan.

These developments have important implications for investors seeking diversification within emerging markets. While broad market indices remain an effective way to access emerging market opportunities, investors should periodically evaluate concentration risk within their portfolios. Maintaining disciplined position sizing and evaluating when a more targeted or actively managed approach may be appropriate can help mitigate the risk that a reversal in a highly concentrated area of the market disproportionately affects overall portfolio returns.

Weight of the Largest Stocks in the Respective Indices (Expressed as %)