Data Dependency Takes Center Stage

AI Theme: Growth Driver or Valuation Ceiling? The AI narrative has been a dominant force in equity markets, driving significant gains in tech and related sectors. The question now is whether this momentum can continue amid macro uncertainty. Valuations in AI-related names are elevated, and any disappointment — whether in earnings or broader economic conditions — could trigger a pullback.

For investors, this means balancing client enthusiasm for AI exposure with prudent risk management. Diversification and valuation discipline remain critical. On this front, we believe it is important to monitor earnings guidance from major AI players, capital expenditure trends in cloud and semiconductor sectors, and broader market sentiment toward growth vs. value.

Bottom Line: The upcoming month or so is all about data dependency. Markets could be highly sensitive to signals that confirm or challenge the Fed’s September easing timeline. At the same time, thematic plays like AI remain powerful but increasingly vulnerable to macro headwinds.

— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation

AI-RELATED INVESTMENT HAS SUPPORTED MORE THAN JUST THE MARKETS

Interest Rates

We took the main messages from the July FOMC meeting to be: (i) despite still-elevated macro uncertainty, policymakers view the economic data since the June meeting as supportive of maintaining the current policy stance, and (ii) they believe more data is needed to assess inflation, economic activity, and the timing of the next rate cut. The vote was not unanimous — Governors Waller and Bowman supported a ¼ point reduction in the target range. Chair Powell’s press conference relayed several helpful comments around the current state of the economy and monetary policy. Echoing recent meetings, he described the “…current policy stance as appropriate to guard against inflation risks, [while also being] attentive to risks on the employment side of [the] mandate.”

What does this mean for the portfolios we manage? We interpret Powell’s comments as consistent with our view that the Committee remains focused on both sides of its mandate. While uncertainty remains elevated, we see current rates as close to fair value and are therefore neutral on duration across the fixed income portfolios we manage.

— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income

A DUAL MANDATE

The Fed is attentive to both inflation and employment.

Source: Northern Trust Asset Management, Bloomberg. PCE = Personal Consumption Expenditure. Data from 12/31/2023 through 6/30/2025 for inflation and 7/31/2025 for the unemployment rate. Historical trends are not predictive of future results.

• We took Chair Powell’s comments throughout his press conference as consistent with our view that the Committee remains attentive to risks on both sides of their mandate.
• The vote was not unanimous, with Governors Waller and Bowman voting in favor of a ¼ point reduction in the target range.
• We view current rates as close to fair value. We are neutral duration across our fixed income portfolios.

Credit Markets

Risk-on sentiment in July extended into credit markets, with high yield fixed income posting a solid gain of 0.5%. This performance outpaced more duration-sensitive segments such as investment grade credit (-0.3%) and U.S. Treasuries (-0.4%). Spreads tightened across both investment grade and high yield credit, with the strongest returns and most pronounced spread compression observed in lower-rated credits — continuing a trend seen over the past year (see chart). High yield issuance activity has remained robust relative to typical seasonal patterns. The volume of new deals and the nature of the use of proceeds in July suggested a supportive risk environment.

The start of August brought a modest pullback. High yield declined 0.1% on August 1st, following weaker-than-expected U.S. labor market data. Despite this, the asset class demonstrated relative resilience compared to U.S. equities, which fell 1.7% on the same day. This equates to a -0.5 standard deviation move for high yield versus -1.4 standard deviations for equities. Looking ahead, barring significant economic deterioration, we believe the strong income profile of high yield credit can continue to offer attractive returns in the current environment.

— Ben McCubbin and Sau Mui, Co-Heads of High Yield

LOWER LEADS

Lower quality credits outperformed in July.

Source: Northern Trust Asset Management, Bloomberg. Data for Bloomberg U.S. Aggregate Index for Investment Grade and Bloomberg U.S. Corporate High Yield Index for High Yield as of 7/31/2025. Historical trends are not predictive of future results. It is not possible to invest directly in any index.

• After a strong June, high yield continued to move higher in July.
• Lower quality credits generally outperformed in July – continuing a trend over the past year.
• We reaffirmed our equal-weight tactical positioning in high yield.

Equities

Markets climbed in July, with several global indices hitting new highs. U.S. equities rose 2.3%, while developed ex-U.S. fell 1.2% and emerging markets gained 2.0%. A stronger dollar pressured returns for international markets. Leadership remained narrow overall. July marked a record 29th straight 6-month period where the S&P 500 outperformed its equal weighted counterpart. Volatility was low, with no daily moves above 1%. That calm was briefly disrupted on August 1st by a weak jobs report and tariff concerns, but markets rebounded the next trading day.

Late June and July saw renewed attention on meme stocks, driven by social media hype around names with high short interest, low liquidity, small size, and low prices. While most have pulled back from their peaks, they remain elevated relative to Q2 levels. This lottery-ticket seeking activity reflects a familiar behavioral bias that has not paid off over the long run. U.S. fundamentals remain strong, supported by a solid start to Q2 earnings. However, with valuations near recent highs—particularly in growth stocks, we see more attractive risk-reward opportunities abroad. As a result, we maintain a neutral stance on U.S. equities and an overweight to developed ex-U.S. equities.

— Jordan Dekhayser, Head of Equity Client Portfolio Management

MOMENTUM IN NARROW LEADERSHIP

Cap-weighted has persistently outperformed recently.

Source: Northern Trust Asset Management, S&P Dow Jones. From 12/31/1989 through 7/31/2025. Past performance is not indicative or a guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.

• Markets extended their gains in July, though dollar strength weighed on international performance.
• Leadership remained concentrated overall.
• Despite a brief macro-driven wobble in early August, the market’s swift rebound reinforces our conviction in our current positioning.

Real Assets

The global energy landscape is undergoing a profound transformation, driven by the explosive growth of AI. This surge in electricity demand is placing unprecedented pressures on energy infrastructure and natural gas is emerging as a critical fuel. The Mag 7 companies alone spent over $100 billion on data centers / energy over the past 3 months, highlighting the scale of transformation.

Globally, the demand for natural gas is strong in both developing and emerging economies. Over three-quarters of natural gas demand growth in 2024 came from developing economies, with industry and power sectors accounting for 75% of incremental consumption. Liquified Natural Gas (LNG) exports is a relatively new business, but they now represent 11% of U.S. demand. Infrastructure expansions — including natural gas export facilities and terminals, storage facilities, and long-haul pipelines — are already underway to accommodate this shift. Natural gas has become a cornerstone of the AI-powered future. As the world races to meet the energy needs of tomorrow’s technologies, natural gas infrastructure will be essential in delivering reliable, scalable, and flexible power.

— Jim Hardman, Head of Real Assets, Multi-Manager Solutions

FUME FRENZY

Growth in natural gas demand has risen significantly.

Source: Northern Trust Asset Management, EIA, Williams, Cohen & Steers. NG = natural gas. Cumulative growth from 2013 through 2024. Historical trends are not predictive of future results.

• AI-driven electricity demand is straining infrastructure; natural gas is emerging as a key fuel for scalable power.
• Natural gas and LNG demand is driving infrastructure expansion.
• We reaffirmed our overweight to global listed infrastructure and market weight positioning in natural resource equities.

Source: Northern Trust Capital Market Assumptions Working Group, Investment Policy Committee. Strategic allocation is based on capital market return, risk and correlation assumptions developed annually; most recent model released 1/15/2025. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment strategy. Asset allocation does not guarantee a profit or protection against a loss in declining markets. GLI = Global Listed Infrastructure, GRE = Global Real Estate, NR = Natural Resources. Unless otherwise noted, the statements expressed herein are solely opinions of Northern Trust. Northern Trust does not make any representation, assurance, or other promise as to the accuracy, impact, or potential occurrence of any events or outcomes expressed in such opinions.

Unless noted otherwise, data is sourced from Bloomberg as of August 2025.

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