Differentiation Matters as Moat Stocks Lead in July

Key Takeaways

• Solid earnings, tax cut extensions and AI momentum lifted U.S. equity markets for a third consecutive month of gains in July.
• The Moat Index’s differentiated exposure led to outperformance against the broad market.
• Strong stock selection in consumer staples and industrials, led by Teradyne and Huntington Ingalls, offset the Moat Index’s underweight to mega-cap tech.
• SMID Moat Index topped small- and mid-cap benchmarks, led by Norwegian Cruise Line and Chart Industries.

In July, U.S. equity markets continued their summer advance, marking the third straight month of gains as the S&P 500 rose 2.2% and set a fresh new record high. The Nasdaq Composite gained 3.7%, while the Dow Jones Industrial Average ended the month largely flat. Investor sentiment was bolstered by strong corporate earnings, positive GDP data, and the passage of the One Big Beautiful Bill, which enacted new tax legislation extending previous cuts. However, renewed tariff discussions with multiple countries and a softer-than-expected jobs report toward month's end introduced volatility. The Technology sector remained at the forefront, propelled by AI developments, even as the Federal Reserve once again kept interest rates unchanged. Continued large downward revisions in jobs data did, however, boost market expectations for possible rate reductions later in the year.

The Morningstar Wide Moat Focus Index (the “Moat Index”) gained more than 3% in July, outpacing both the broad market S&P 500 as well as the equal-weighted variant. The outperformance came despite the Moat Index’s structural underweight to top mega-cap technology names. Strong stock selection during the month, particularly within the consumer staples and industrial sectors, more than offset sector allocations. The strategy continues to provide differentiated exposure, which has become increasingly difficult for investors to find, amid historical levels of concentration in the U.S. equity markets.

Smaller stocks also saw advances during the month, but like much of the year so far, the cohort’s performance lagged relative to large-caps. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) posted a 1.9% gain in July, outpacing both the broad small- and mid-cap benchmarks which returned 0.9% and 1.6%, respectively. Despite their muted performance, many are keeping a close eye on small- and mid-caps as the segment’s prospects could improve with a dovish pivot by the Fed.

Moat Stocks Lead the Pack in July

Source: Morningstar. Data as of 7/31/2025. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see index definitions and other important disclosures at the end of this content. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333.

Moat Index July Highlights: Chips and Ships Steer Gains

In July, the Moat Index benefited from strong stock selection, as several companies delivered solid earnings results that prompted the market to revalue their shares more in line with Morningstar’s fair value estimates. This earnings-driven rerating more than offset headwinds from the Index’s equal-weighted construction in the current mega-cap driven market. As a result, the Index outpaced the broader, tech-heavy market while continuing to provide differentiated exposure.

Wide-moat semiconductor testing leader Teradyne (TER) was the top contributor to the Moat Index in July, with shares rising nearly 20% following second-quarter earnings and positive forward commentary. While sales declined year over year, management’s guidance pointed to a return to growth in the second half of 2025, and upbeat messaging around demand for AI chip testing and robotics drove a sharp rerating. Morningstar believes Teradyne is well positioned to benefit from growing complexity in semiconductors, particularly in high-bandwidth memory and custom AI accelerators, and sees a recent robotics design win as a meaningful growth driver heading into 2026. With its leading market share, sticky customer relationships, and a robust R&D pipeline, Morningstar maintains a $115 fair value estimate, suggesting there may still be additional upside ahead.

Defense contractor Huntington Ingalls (HII) was also a key contributor to Moat Index performance in July, with shares gaining on the back of strong quarterly results and guidance. While quarterly profit declined due to temporary shipbuilding delays, revenue rose modestly, and management highlighted the arrival of key components that should allow construction to accelerate in the second half of the year. Morningstar expects gradual margin improvement over the coming years, driven by more efficient throughput and higher-margin contracts, particularly in submarine programs. With the U.S. Navy continuing to invest in shipyard capacity and submarine production, Morningstar sees durable long-term demand for Huntington Ingalls’ uniquely positioned shipbuilding operations. Following the update, Morningstar raised its fair value estimate to $324 per share, suggesting shares remain attractively priced.

Other top contributors within the Moat Index during the month include global prestige beauty market leader, Estee Lauder (EL), security products and solutions company, Allegion (ALLE), as well as semiconductor design software provider, Synopsys (SNPS).

Companies detracting the most in July came from a mix of sectors, with industrials accounting for two of the five names on the list: United Parcel Service (UPS) and fluidics equipment manufacturer IDEX Corp. (IEX). Other notable detractors included fixed-income trading platform MarketAxess (MKTX), software and analytics giant Adobe Inc. (ADBE), and enterprise cloud leader Salesforce Inc. (CRM).

Moat Index Top Contributors and Detractors - July 2025

Contributors

Detractors

Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

SMID Moat Index July Highlights: Travel Strength and M&A Activity Shine

The SMID Moat Index outpaced both the small-cap and mid-cap benchmarks in July, driven by strong stock selection across several parts of the portfolio. Industrials and consumer discretionary were standout areas, with four of the month’s top five contributors coming from these two sectors.

Norwegian Cruise Line Holdings (NCLH) topped the SMID Moat Index in July, marking its second consecutive month as a leading contributor. Shares rallied 26% as investor confidence grew around the company’s consistent pricing strength, robust travel demand, and expanding onboard spend. Morningstar believes Norwegian remains well positioned to deliver improving returns on invested capital, supported by efficient scale, cost advantages and brand loyalty across its portfolio. The company’s younger fleet and pipeline of new ships provide ongoing pricing power, while cost initiatives and scale benefits continue to support margin expansion. Morningstar maintains its fair value estimate of $31.50 per share, suggesting shares may still have room to run.

Chart Industries (GTLS), a provider of cryogenic equipment and specialty solutions used across LNG, hydrogen, and industrial gas markets, was also a top contributor to SMID Moat Index performance in July, with shares jumping 20% following news that the company had entered into a definitive agreement to be acquired by Baker Hughes. The all-cash deal, valued at $13.6 billion or $210 per share, marked a premium over Chart’s prior trading levels and sent the stock sharply higher. Morningstar views the offer price as aligned with its fair value estimate and sees the acquisition as a positive outcome for Chart shareholders, offering greater certainty than a prior bid from Flowserve. Despite softer second-quarter sales, the company’s aftermarket service business remains a key strength, and Morningstar continues to believe Chart’s specialty products and repair-driven revenue model support its economic moat.

Companies detracting the most in July within the SMID Moat Index included two names from the auto industry, with auto retailers Lithia Motors (LAD) and CarMax (KMX) weighing on performance during the month. Other notable laggards were toy manufacturer Mattel (MAT), health care supplier Baxter International (BAX), and communications provider Charter Communications (CHTR).

SMID Moat Index Top Contributors and Detractors - July 2025

Contributors

Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

Choose Your Moat Strategy

VanEck’s suite of moat investing strategies is powered by Morningstar’s equity research team, which seeks quality companies trading at attractive valuations. The below ETFs offer access to US moat companies:

VanEck Morningstar Wide ETF (MOAT): companies with a wide moat rating, which means Morningstar believes the company is likely to sustain its competitive advantage for at least the next 20 years.