July 2026 Market Update

The July FOMC meeting was the second meeting for new Federal Reserve Chairman, Kevin Warsh. The Committee decided to leave interest rates unchanged at 3.50%-3.75%. Interest rates have risen since the end of the FOMC meeting. 30-year interest rates are now at the highest level in nineteen years.

30 year interest rate

Despite Chairman Warsh's desire to shrink the Federal Reserve’s balance sheet, it continues to grow. The financial system is extremely dependent on the small asset purchase program (QE) the Fed initiated at the December 2025 FOMC meeting. The small asset purchase program will need to grow much larger in the months ahead to support a deteriorating consumer economy and the stock market, which has exacerbated inflation and affordability conditions consumers are experiencing.

Fed Balance Sheet & Reserves Balances

The Taylor Rule, a formula which incorporates the unemployment rate, GDP, and the inflation rate to compute what level interest rates should be, currently suggest interest rates should range between 4.8%-6.1%. The Fed is currently at 3.50%-3.75%, a full point below the most conservative Taylor Rule estimate.

Taylor Rule Estimates

The interest rate market is currently tightening financial conditions for the Fed, without them having to raise interest rates. Mortgage rates are near a two-year high, despite the Fed cutting interest rates over the past few years. As the saying goes; “high prices cure high prices.”

The market conundrum continues, as stated in the June Market Update (https://www.macrovex.com/post/june-2026-market-update),

“The Trump administration is operating the economy with an elevated level of spending, debt, and deficits. The government’s subsidization of Ai has created inflation and helped twenty or so large technology companies lead the stock market higher but has hurt the real economy and consumer with affordability issues. Running the economy hot to inflate the government’s way out of debt typically results in shrinking of the middle class and causes consumers to pullback on consumption, which usually requires higher debt and deficits to stimulate the economy. A sort of conundrum. This conundrum of high debt and deficit spending is hurtful to the real economy and consumer, and may force new Fed Chair Warsh to abandon his plans of shrinking the Fed’s balance sheet, increasing purchasing power, reducing inflation, and providing price stability. Short term interest rates may decline, but the only way longer term interest rates and mortgage rates are going to substantially decline is with a strong economic downturn and/or recession, combined with fiscal discipline. Given the current level of housing unaffordability, if a recession were to begin tomorrow and government quickly responds by printing money to stimulate the economy the day after, the cost to build housing and mortgage rates would likely rise, and the American economy would struggle to grow its way out of an economic downturn. The U.S. economy and American households have become more dependent on the stock market than ever before. The government will do whatever it takes to keep asset prices such as real estate and stocks up, even if that means ruining the purchasing power of the wages working Americans earn. Investment Advisers and Stock Index Managers have in a strange way become government employees under this new paradigm, which is a major reason gold has outperformed stocks over the past twenty years.”

The currency debasement comments below are very important for investors to understand.

Due to the market conundrum described above, the debasement trade could soon begin to take on a new form whereas real interest rates decline while nominal interest rates rise because inflation is rising faster than nominal interest rates. This would be a form of currency debasement asset valuations do not like.

Currency debasement with rising nominal interest rates should compress asset valuation multiples for stock and real estate markets. If this were to occur the wealth effect from stocks and real estate would work in reverse until the market forces the Fed to cut interest rates faster than inflation is declining. This policy could spark capital flight from the U.S. and would likely be very positive for gold prices. We believe this is very possible and the market will be forced to shift away from its belief that the Fed will raise interest rates two to three times this year and shift toward the Fed cutting interest rates at least once before the end of 2026.

The only option for the government to avoid the above outcome would be to increase purchasing power by raising interest rates immediately. But that option would be extremely harmful to the highly indebted U.S. government by increasing the real value of its debt while shrinking its tax revenue. Instead, the government and Fed are choosing to debase the currency by letting inflation rise faster than nominal interest rates. The result should provide a reset mechanism whereas the asset bubble pops, resulting in an economic slowdown which lowers inflation so the Fed can cut nominal interest rates below the inflation rate and once again provide low interest rates for the government to continue borrowing or refinance its debt.

Many independent investors, financial advisers, and speculators disagree with our market and economic assessment to remain disciplined investors, concentrated on value, but Warren Buffett and Berkshire Hathaway seem to agree, Berkshire Hathaway currently holds approximately forty percent of its assets in cash, the highest level in its history.

The following charts are important to consider for investors choosing an asset allocation mix. Investing in the S&P 500 at a price to earnings ratio of twenty-two times or greater has historically led to a negative 10-year return. The valuation at which an investor enters the stock market significantly matters to their performance and return.

S&P 500 10 Year P/E Ratio & Buffett Indicator Standard Deviation from Long Term Trend

Bloomberg, Rand Group and Advisor Perspectives Valuation Metrics

Our MacroVex Capital, S&P 500 fair value estimate model currently indicates fair value for 2025 earnings of $272 and 2026 earnings of $328 between 4,155 and 5,046, down -44.5% and -32.6% from the S&P 500, 2026 July closing price of 7,489.

We believe throughout the rest of 2026 there will be major fiscal and monetary changes that provide great investment opportunities. Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off, cash, T-bills, money market funds, short to mid-term 1-10 year U.S. treasury bonds and 10-30 year U.S. treasury bonds at positive carry, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2026.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice