In the final trading week of July 2026, the three major U.S. stock indexes saw mixed performance, with the market oscillating between tech sector earnings divergence and Fed policy signals. As of the close on July 28, the S&P 500 edged down 0.2%, the Dow Jones Industrial Average rose 0.6%, and the Nasdaq Composite fell 1.3%. This reflected a tug-of-war between investor concerns over an AI bubble and expectations of rate cuts.

Big Tech Earnings Divergence: AI Leaders Face Growing Pains

In mid-July, several tech giants released Q2 earnings, marking a watershed for market sentiment. AI hardware and application leaders like Nvidia and Microsoft beat revenue expectations but saw sell-offs due to slowing growth. Nvidia's data center revenue growth fell to single digits quarter-over-quarter, fueling worries that AI capital expenditure has peaked. Meanwhile, consumer electronics giants Apple and Google issued weak revenue guidance due to inflation and extended replacement cycles. However, Amazon's cloud business grew 15% against the trend, indicating accelerating enterprise cloud migration. The sector divergence dragged the Nasdaq about 5% from its mid-July record high.

Analysts note that AI concept stocks' valuations have already priced in years of future growth, and now require substantial profit validation. Morgan Stanley strategist Michael Wilson wrote in a research note: "The market is shifting from 'AI storytelling' to 'AI earnings watching,' and any data missing expectations will trigger sharp adjustments." However, some funds took this opportunity to flow into small- and mid-cap tech stocks, with the Russell 2000 Growth Index rising 3% over the past two weeks, indicating the market is seeking better value.

Fed Policy Pivot: Probability of September Rate Cut Surges to 70%

The core driver of U.S. stock market's underlying logic remains monetary policy. On July 26, the U.S. June core PCE price index rose 2.4% year-over-year, the lowest since 2023 and below market expectations for three consecutive months. The CME FedWatch tool showed traders pricing in a 70% probability of a 25-basis-point rate cut at the Fed's September meeting, with the probability for a November cut exceeding 90%.

Several Fed officials have softened their tone recently. Atlanta Fed President Raphael Bostic said: "We see substantial progress on inflation, and policy should avoid over-tightening." Markets reacted sensitively: the U.S. dollar index fell from the 107 mark to around 105.5, and the 10-year Treasury yield dropped below 4.1%, boosting interest-rate-sensitive sectors like real estate and utilities. Among Dow components, traditional blue chips like Home Depot and UnitedHealth Group rose over 4% for the month, providing key support for the index.

Notably, while rate-cut expectations boost confidence, some analysts warn they may be overpriced. Goldman Sachs' global fixed income head said: "If inflation remains sticky in the services sector, the Fed may cut rates only once and then pause, posing a repricing risk for markets."

Macro Environment: Soft or Hard Landing?

This week's preliminary U.S. Q2 GDP showed an annualized growth rate of 2.1%, above the expected 1.8%, but consumer spending growth slowed to 1.5%. Meanwhile, the July Markit manufacturing PMI preliminary reading was 49.8, remaining in contraction territory for the third consecutive month. The data presents a pattern of strong services, weak manufacturing, widening market divergence on the economic outlook.

On one hand, the job market remains tight, with June nonfarm payrolls adding 208,000 and wage growth staying above 4%, supporting consumer spending. On the other hand, corporate profit margins are squeezed, with 30% of S&P 500 companies cutting Q3 forward guidance. Nomura economists believe the U.S. economy is entering a phase of mild stagflation – growth below potential but inflation still above target. In this scenario, U.S. stocks may enter a wide-range consolidation in the short term.

Capital Flows and Sector Rotation: Defensive and Value Styles Return

As tech stock volatility increases, capital is flowing from high-growth stocks to defensive sectors and value stocks. Over the past two weeks, healthcare, energy, and financial sectors saw net buying, while the information technology sector saw outflows of $12 billion. Within the S&P 500, the energy sector rose 2.5% due to a rebound in crude oil prices (Brent crude back to $85 per barrel); the healthcare sector performed well driven by accelerated new drug approvals.

Additionally, small-cap stocks are seeing catch-up gains on rate-cut expectations. The Russell 2000 Index has risen 4.5% for the month, significantly outperforming the Nasdaq. Strategists believe that if the Fed cuts rates as expected, lower financing costs will benefit small and medium enterprises, and small-cap stocks could sustain excess returns over the next quarter.

Vietnam Perspective: How Do U.S. Stock Swings Affect Emerging Markets?

U.S. stock volatility transmits globally through exchange rates and capital flows. The rising Fed rate-cut expectations weakened the dollar, with the Vietnamese dong appreciating from a low of 25,300 against the dollar in early July to 24,700, benefiting import-oriented companies. Meanwhile, Vietnam's stock market saw net foreign buying for three consecutive weeks, with tech and industrial sectors most favored. A Hanoi securities analyst said the tech sell-off in the U.S. is driving global capital to seek alternative markets, and Vietnam, as a manufacturing relocation destination, is attracting some long-term allocation funds.

However, if the U.S. economy enters a recession, Vietnam's exports will face challenges. Vietnam's export growth to the U.S. in July has fallen from 18% in Q1 to 9%, reflecting slowing overseas demand. Investors should closely watch signals from the August Jackson Hole central bank symposium to adjust positions.

Outlook and Investment Strategies

Looking ahead to August, the core contradictions for U.S. stocks will focus on three aspects: first, whether the magnitude and pace of rate cuts are overpriced; second, whether tech stocks can hold key support in the tail end of earnings season; third, whether geopolitical risks (such as the Middle East situation) will trigger risk-off sentiment. Investors are advised to stay flexible, appropriately reduce concentration in growth stocks, increase allocation to high-dividend sectors like healthcare and utilities, and arrange hedging tools when the VIX is elevated.

For long-term investors, the current market correction offers an opportunity to allocate to quality blue-chip stocks. J.P. Morgan Asset Management suggests focusing on companies with stable cash flows and reasonable capital expenditure, avoiding those overly reliant on AI narratives. In short, U.S. stocks are moving from a euphoria phase to a validation phase, and rationality and discipline will be key to success in the second half of the year.

As of press time, the S&P 500's forward P/E ratio is around 21x, slightly above the five-year average of 19x. Short-term sentiment is driven by policy, but corporate earnings fundamentals will still determine market direction.