Index Market July 2026 Report

Market Performance: United States and Europe

Index performance summary 

• S&P 500: +2.1% MoM and +21.0% YoY to 7,537 
• Nasdaq 100: +2.6% MoM and +30.9% YoY to 29,698 
• FTSE 100: +3.0% MoM and +21.2% YoY to 10,674 
• DAX 40: +4.3% MoM and +8.5% YoY to 25,818

Technology sector rotation

Subdued late-period S&P 500 performance stemmed primarily from large-cap IT firms. The Information Technology sub-index showed only +0.2% monthly change:

• Semiconductors and equipment declined 11.6% from their June 2nd peak
• Software applications fell 3.8%
• Software systems retreated 5.7%

Conversely, the S&P 500 equal-weighted index (+3.8%) and Russell 2000 (+6.2%) significantly outperformed, indicating broader market participation beyond dominant tech giants and evidence of sector rotation.

Investor sentiment and speculative positioning

Overall sentiment assessment

Investor sentiment remains notably robust. The Conference Board's Survey shows 26.3% of respondents anticipate US equities will strengthen over the coming year - comfortably within the top 10% of historical observations (long-term average: 8.3%).

Short-term caution is evident, however. The AAII weekly survey indicated net bullish sentiment at -10.9% in early July, below its historical average of +6.5%, aligned with increased put-call ratios and elevated VIX levels peaking near 23%.

Speculative exposure levels

• Cash positions: 4.2% net among fund managers, below historical average of 4.8%
• Retail leverage: Broker account debit balances reached $1,415.6 billion in May - a 53.7% YoY surge to all-time highs, with logarithmic deviation from trend at +34%

• Futures positioning: Net short positions in e-mini futures at 32.3 thousand contracts

   

Valuation concerns: stretched multiples ahead

Valuation metrics

S&P 500 valuations signal increasingly stretched conditions:

• Trailing P/E: 25x (current)
• Forward P/E: 20.5x vs. post-millennium average of 17x (implying ~20% overvaluation)
• CAPE ratio: 39.5x, approaching the dot-com bubble peak of 44.2x
• Price-to-book: ~5.5x, elevated by historical standards

These multiples imply constrained long-term returns, with flat-to-negative annualized gains over the coming decade.

Real return outlook

When deflated and de-trended logarithmically, the S&P 500 trades approximately 64% above its long-run trend - higher than both the late 1960s "Go-Go era" and the dot-com bubble. Such overvaluation implies long-term returns near zero after correction.

FTSE 100: valuation metrics and fair value assessment

Performance and market perception

The FTSE 100 has demonstrated strength, rising to 10,674 (+3.0% MoM, +21.2% YoY), with 74 of 100 constituents posting monthly gains. Trading above its 200-day moving average (10,459), the index targets its all-time high of 10,935.

The Deloitte Survey of UK Chief Financial Officers reveals 23.6% of respondents consider UK equities undervalued, with an additional 16.7% viewing them as very undervalued.

Valuation assessment

• Forward P/E: 12.6x vs. historical average of 13.5x (implying ~9% undervaluation)
• CAPE ratio: 18.4x vs. average of 17.6x (4% overvaluation, but consistent with 7.5% annualized forward returns)
• Equity risk premium: 3.16% vs. long-term average of 3.01% (implying 2% undervaluation)

Dividend discount model valuation

Given the UK market's strong dividend history, the DDM provides robust valuation. With current yield at 3.06%, assuming 8% annual growth for two years, 5% for the next five years, and 4% terminal growth, the model calculates fair value at approximately 13,300 - implying 21.5% undervaluation at current levels.

DAX40: rally amid sectoral challenges

Market performance

The DAX 40 has demonstrated impressive resilience, rallying to an all-time high of 25,818 (+4.3% MoM, +8.5% YoY), outpacing US counterparts. Performance was driven by exceptional individual performers: Bayer (+42.1% MoM), MTU Aero Engines (+24.4%), and Deutsche Bank (+18.2%), offset by notable laggards including BMW (-14.6%), Volkswagen (- 13.8%), and SAP (-12.3%).

Sectoral headwinds

Automotive: Volkswagen announced significant restructuring with plant closures and potential luxury brand spin-offs. BMW issued a major profit warning, projecting EBIT margins to fall to 1-3%.

Software: SAP's share price has declined ~50% from its February 2025 peak due to investor concerns over forward orders and spiraling AI-related capital expenditures, though 12-month forward EPS growth remains solid at 16.6% YoY.

Economic recovery signals

Despite headwinds, recent improvements in global asset volatility and easing geopolitical tensions have rekindled strength:

• German composite PMI: 49.5
• Manufacturing PMI: 50.3 (expansionary)
• ZEW economic sentiment: +10.5

Manufacturing typically leads DAX 40 EPS by six months, suggesting transitory weakness in mid-late 2026 before rebound.

Valuation and growth outlook

• Forward P/E: 15.1x vs. long-term average of 12.1x (moderately overvalued, ~20% correction needed)
• EPS growth: 6.8% YoY in July; 12-month forward expectations at 12.2% YoY vs. average 9.8%

Market summary and investment perspective

Conclusion

While US equities grapple with stretched valuations and structural base effects, the UK market offers a fundamentally undervalued entry point supported by dividend strength and policy recovery. The German market showcases operational resilience despite deep automotive and technology sector adjustments, with improving economic indicators suggesting further upside potential.

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