Market Momentum and Policy Tailwinds in Early July 2025: A Convergence of Earnings, Fed Signals, and Sector Rotation

In the ever-evolving landscape of investing, July 2025 has emerged as a pivotal inflection point. A rare alignment of corporate earnings strength, Federal Reserve policy signals, and sector rotation dynamics is creating a compelling case for risk-on assets. This article dissects the forces at play and outlines how investors can position for the next phase of market momentum.

Earnings: A Mixed but Resilient Picture

The second-quarter earnings season for U.S. companies began with a mix of optimism and caution. While the S&P 500's projected 5.6% year-over-year earnings growth is the lowest since late 2023, certain sectors are defying the headwinds. Aerospace & Defense and Technology have shown resilience, with companies like RTX Corporation (RTX) and Honeywell (HON) reporting robust revenue and margin expansions.

For example, RTX's Q2 2025 revenue of $21.6 billion—up 9% year-over-year—was driven by a $236 billion backlog, with $92 billion in defense contracts. Similarly, Honeywell's adjusted EPS of $2.75 (up 10% YoY) and 8% revenue growth highlight its ability to navigate macroeconomic challenges. These results suggest that capital-intensive sectors with long-term demand drivers (e.g., defense spending, AI infrastructure) are better positioned to outperform.

Conversely, Intel (INTC)'s GAAP loss of $(0.67) per share and flat revenue underscore the fragility of sectors reliant on cyclical demand. Intel's 15% workforce reduction and $1.9 billion in restructuring charges signal a broader trend: companies are prioritizing cost discipline over growth, at least for now.

Historically, when RTX and HON have exceeded earnings expectations, their stocks have shown a consistent positive response. RTX, for instance, has a 55.67% win rate over three days following a beat, with an average gain of 0.30%. HON has demonstrated a 58.33% win rate in the same period, with an average gain of 0.38%. Over longer horizons, RTX's 30-day win rate reaches 64.31%, while HON's stands at 41.67%. These results underscore the reliability of earnings beats as a catalyst for sustained stock price appreciation in these companies.

Fed Policy: Disinflation and the Road to Rate Cuts

The Federal Reserve's June 2025 FOMC meeting provided clarity on its evolving stance. With PCE inflation projected to decline from 3.0% in 2025 to 2.0% by 2027, the Fed is inching closer to a rate-cutting cycle. The median federal funds rate is expected to fall from 3.9% in 2025 to 3.0% in the long run, with two 25-basis-point cuts anticipated in 2025 itself.

This policy shift is critical for risk-on assets. Lower rates reduce the discount rate for future cash flows, making equities and long-duration bonds more attractive. Additionally, the Fed's acknowledgment of inflationary pressures from tariffs (expected to add 1 percentage point to inflation by late 2025) suggests policymakers are prepared to act swiftly if disinflation stalls.

Sector Rotation: Aerospace, Tech, and Industrial Enablers Lead

Historical patterns during disinflationary periods—such as the 2020-2022 era—show that sectors with structural growth drivers outperform. In early July 2025, Aerospace & Defense, Technology, and Industrial Conglomerates are capturing this narrative.

• Aerospace & Defense: With global defense budgets rising and RTX's $236 billion backlog as a case study, this sector is insulated from short-term economic cycles. Companies like Lockheed Martin (LMT) (14.83% beat in Q1 2025) and Northrop Grumman (NOC) (5.5% EPS growth) are benefiting from geopolitical tensions and long-term procurement contracts.
• Technology: AI enablers and semiconductors remain in demand, even as Intel's struggles highlight near-term risks. Honeywell's $10.35 billion in Q2 sales and 10% adjusted EPS growth underscore the sector's ability to adapt to macroeconomic shifts.
• Industrial Conglomerates: Firms like Caterpillar (CAT) and Honeywell are capitalizing on infrastructure spending and industrial automation trends, with organic sales growth outpacing broader economic indicators.

Meanwhile, sectors like Materials and Utilities are underperforming. The latter faces headwinds from falling commodity prices and margin compression, as seen in chemical producers like Dow (DOW).

The Confluence: A Compelling Entry Point

The interplay of these factors creates a unique opportunity. Strong earnings in select sectors, a Fed poised to cut rates, and a rotation toward long-term growth drivers are aligning to support risk-on assets. Here's how to position:

1. Overweight Aerospace & Defense: Companies with strong backlogs and recurring revenue streams (e.g., RTX, LMT) are well-positioned for sustained earnings growth.
2. Tech Sector Selectivity: Focus on AI enablers and industrial tech firms with resilient cash flows, such as Honeywell or Applied Materials (AMAT).
3. Hedge Materials Exposure: Reduce exposure to materials-heavy sectors or consider short-term derivatives to mitigate near-term risks.
4. Duration Play in Fixed Income: With the Fed signaling cuts, extend durations in sectors like Mortgage-Backed Securities (MBS) or utility bonds, which benefit from lower rates.

Conclusion

July 2025 is shaping up as a turning point. While the broader market grapples with a 5.6% S&P 500 earnings growth rate, the convergence of sector-specific strength, disinflationary tailwinds, and a Fed pivot toward easing provides a roadmap for capturing upside. Investors who act decisively in aerospace, technology, and industrial enablers—and hedge against overexposure in vulnerable sectors—stand to benefit from a market poised for transformation.

The key is to balance caution with conviction: the data suggests that risk-on assets are entering a phase of favorable momentum, but discipline in sector selection and risk management will define long-term success.