Market and economic commentary
July 2026

July market overview

Markets saw a reversal in July as artificial intelligence ("AI") names faced a bit of a reckoning. Markets seem to be collectively asking, “show me the money” as they have second thoughts on the ROI of their AI investments. The stock markets and bond markets were both negative, which brought Compass Portfolios underwater with its July numbers. Up-to-date performance data for all ATB Funds (the Funds)¹ can be found here.

Below are index one-month total returns in Canadian dollar (CAD) terms for July 31, 2026:

Markets took a tumble in July—particularly notable in the AI space. When one looks at the market fundamentals for answers, it might be a bit hard to make sense of it all. 

Economic growth is still at attractive levels

Attractive growth of corporate earnings has been and continues to be a significant tailwind as S&P 500 Q2 earnings are running at over a 40% year-over-year clip as of July 31. For the past few quarters, we’ve been expecting it to taper and go back to more sustainable levels, but the forces in play just won’t seem to slow down. The fact that economic growth remains at attractive levels and there doesn’t appear to be a recession on the horizon are both positive indicators. Geopolitics has been a messy affair for as far back as we can remember—peace deals appear to come and go on a weekly basis when it comes to the Battle for the Strait of Hormuz—but as time goes on, the shocks from the news cycle are making smaller and smaller ripples in the market. 

Deep plunges across broad global markets

Fundamental and macro backdrops remain encouraging. However, nothing moves in a straight line. July gave us a perfect storm of escalating geopolitical conflict, tech repricing (after a prolonged period of extreme strength), hawkish monetary signals (much ado about a pause), and a mismanagement of leverage by overconfident hedge fund investors (where have we heard this before?). This led to deep plunges across broad global markets and the NASDAQ entering correction territory. 

Experience teaches us that these summer storms come and go. The rapid rebound we are seeing thus far appears to validate our longer term positive outlook. This market continues to be well supported from both a fundamental and macroeconomic perspective—hence the bullish overtones in Compass Portfolios. 

July did offer an interesting case study on leverage and risk management. If only markets moved up in a straight line through the cycle, investing would be child's play. But it is not to be. Monetizing an investment thesis, even one that is ultimately correct, still takes robust portfolio construction and proper risk management. Excessive leverage in these volatile moments proved challenging —see South Korea and Leopold Aschenbrenner’s hedge fund as the poster child in July. It seems the textbook lessons of yesteryear–‘98 Long Term Capital Management / ‘08 GFC–needs to be relearned every decade. 

Storms can come and go quickly

Looking closer  at Leopold’s hedge fund rapid unwind, let’s also note that it occurred during a time when VIX was below 20 (indicating relatively calm markets) alongside only a modest increase to rates on the long end. This is emblematic of the concentration and leverage in certain parts of the market. Leopold’s thesis on AI may very well turn out to be correct. However, he will be remembered for lacking the “Situational Awareness” in 2026 to manage leverage rather than his prescient pattern recognition and market insights—if only he could have held on for two more days.

These storms can come and go quickly. Having the discipline to price in some excess market volatility in the portfolio construction process even in a go-go market environment is prudent to manage performance. Markets can typically stay irrational longer than one can remain solvent. 

Warsh looks to de-emphasize the balance sheet

There’s a new world order for bond investors as US Federal Reserve (Fed) Chair Kevin Warsh settles into his role. From his first two meetings as chair, it’s become abundantly clear that he is looking to bring about a fundamental shift on policy and tone. The post-GFC era of “government knows better” is coming to a close as Warsh looks to de-emphasize the balance sheet and limit blank-cheque fiscal policy. He wants to allow the natural free market forces to dictate how and where they trade. 

Eschewing the era of Bernanke, Yellen, and Powell when forward guidance became a crutch for investors, Warsh prefers a stripped-back communication style that prioritizes absolute discretion and flexibility over constant updates on forecasts based on incorrect outdated data. Warsh’s style represents a large pivot from the past. Free market over government edict seems to be his fundamental view. 

This will take some time for investors to get accustomed to as they retrain their muscle memory. That likely explains the sharp market response over the July Fed meeting about a pause, which in itself should not have been a surprise outcome. Time will tell if Warsh is ultimately successful, ousting 20 years of Fed policy and habits—it represents a desire to decrease government power, a rare trait for anyone holding office. Fed policy has been on pause at 3.75 level for the past eight months. 

Compass Portfolios Series F1 - Returns net of fees (%)

ATBIS Pools Series F1 - Returns net of fees (%)

ATB Monthly Income Portfolio Series F1 - Returns net of fees (%)

¹ Using F series returns