Federated Hermes: Weekly markets wrap up 30 July 2026
In this week's markets wrap up, our investment teams weigh in on the Fed's decision to hold rates and the evolving dynamics within the AI trade.
Karen Manna, Portfolio Manager for Fixed Income at Federated Hermes
Federal Reserve Holds Rates Steady
Following one of the more consequential and difficult-to-interpret FOMC meetings in recent memory, the Committee voted to leave interest rates unchanged despite renewed inflation concerns stemming from higher energy prices and disruptions through the Strait of Hormuz.
While Chair Warsh and several Federal Reserve Bank presidents remain focused on inflation risks, the Chair has also begun laying the groundwork for a broader review of the Fed's policy framework. Policymakers are likely to wait for a clearer trend in the data before making significant adjustments.
Policy is further complicated by questions surrounding temporary supply shocks, AI-driven investment, and evolving communication practices. With less forward guidance, the range of potential outcomes has widened, reinforcing the value of active and tactical portfolio management.
With additional inflation data available before the September meeting, that decision will remain very much "live." That said, we believe the Treasury market has been overly responsive to incoming data this year and continue to see value in the 1–3-year maturity segment of the curve.
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes
Case for Selectivity in AI Trade
It’s always easy with hindsight to say a market has over-run, and so of course the AI (and the memory) trade was running too hot. However, in the second quarter high-momentum stocks outperformed broader indices by near-record margins, and that type of extreme signal tends to be followed by a sharp reversal. We think a cooling off is healthy even if the AI trade continues from here.
Korea has been volatile given the influence of retail investors and unwinding leveraged ETFs. The market is also driven by just two names, both of which look cheap after recent falls. If these typically cyclical names can extend their elevated growth beyond the next two years, then current valuations represent true bargains. Of course, that’s a big “if” and represents the key question for investors.
Perhaps more broadly on the AI trade, it’s becoming more important to be selective as to which names or sub-cycles to favour within the overall theme.
In many markets, measures of index volatility remain subdued, yet at the single stock level - volatility is increasing. But as the market becomes stressed, correlations may spike and volatility could emerge rapidly. We’re already seeing portfolio tracking errors spike higher.
In this environment, traditional risk models may be less useful and can provide false reassurance.