Welcome to the monthly market update from Midland Wealth Management. I’m Nicholas Hinkebein, Senior Portfolio Manager. Today, I’ll share the Investment Team’s latest market and economic views.

Inflation and the Federal Reserve

The conflict between the United States and Iran remained July’s largest geopolitical wildcard. Continued strikes and renewed Houthi activity raised concerns around shipping through both the Strait of Hormuz and the Red Sea, keeping pressure on energy markets and complicating the inflation outlook.

Yet June’s inflation report offered some relief. Core PCE rose just 0.1% for June; however, it remains above the Fed’s 2% annual goal, with prices increasing 3.3% on a year-over-year basis. Wage growth, resilient consumer spending, and rebounding energy prices suggest inflation pressures have not fully disappeared.

At its July meeting, the Fed voted nine to three to hold rates steady at 3.50% to 3.75%. Three officials dissented in favor of a 25-basis-point increase, reinforcing the view that policy risks remain tilted toward tighter conditions if inflation fails to improve further.

Equities and the AI Trade

The more visible market story in July was the sharp reassessment of the AI trade. Investors are no longer rewarding companies simply for announcing larger investments in artificial intelligence. Instead, they are demanding clearer evidence that those investments can generate sustainable revenue, improve margins, and ultimately produce attractive returns.

That shift was clear throughout earnings season. Alphabet, Meta, Oracle, and TSMC all faced pressure as capital spending expectations moved higher, even when underlying results remained strong. Big technology companies are now expected to spend more than $700 billion on capital expenditures in 2026.

The challenge is that higher capital spending reduces free cash flow. That leaves less cash available for share repurchases, dividends, acquisitions, and other priorities. As a result, companies are being held to a higher standard. Beating earnings expectations is no longer enough if management cannot explain when the spending will begin to translate into stronger cash generation.

South Korea became the clearest global example of that tension. The Kospi entered July as the world’s best-performing major equity benchmark after doubling during the first half of the year. Heavy exposure to Samsung Electronics and SK Hynix made the market one of the strongest expressions of enthusiasm around semiconductors, memory chips, and AI infrastructure.

That concentration also made it vulnerable. Crowded positioning and record margin borrowing helped amplify the sell-off as investors reduced exposure to AI-related stocks. The Kospi fell 17% over three trading sessions and finished July down roughly 22%, its worst monthly decline since 2008.

The month ended with an equally dramatic reversal. The Kospi surged 18% in a single session as Samsung and SK Hynix rebounded sharply. Strong earnings from Amazon and renewed confidence in AI-related demand helped stabilize sentiment, while foreign investors returned to the market.

The rebound was historic, but it did not erase the month’s losses. Instead, it highlighted how sensitive markets have become to every development surrounding AI spending, earnings, and monetization.

Corporate Earnings

Importantly, the underlying AI buildout remains intact. Semiconductor and technology hardware companies continue to report strong demand. Average year-over-year earnings growth for these firms is over 100%, though only half of the firms have reported. However, the market is becoming more selective about which companies are likely to benefit and which may struggle to earn an acceptable return on their investments.

Outlook

Looking ahead, our team remains focused on whether inflation continues to moderate, how the Fed responds to persistent wage and demand pressures, and whether companies can convert record AI spending into durable cash flow.

July demonstrated that the AI theme remains a powerful driver of markets, but also that high valuations, crowded positioning, and aggressive capital spending leave little room for disappointment. We continue to favor diversified, high-quality portfolios that can participate in long-term innovation while managing concentration risk and valuations.

Thank you for joining us for this month’s market update. If you would like to discuss what these developments mean for your portfolio, please reach out to your Wealth Advisor or Relationship Manager.