Three major catalysts hit tonight: US CPI, the Wash hearing, and the earnings season

Original title: 《This evening: the three major tests for global markets—US CPI, the Waller hearing, and earnings season?》

Original author: Xu Chao, Wall Street Insights

Rate-hike expectations at the Fed suddenly surged, the banking earnings season officially kicked off, and the new chair made his first appearance before Congress—three variables stacking within the same time window has made Tuesday the single most decisive day for markets in recent times.

This Tuesday, the US June CPI data will be released first at 8:30 AM Washington time, followed by Federal Reserve Chair Kevin Waller’s first appearance before Congress as the newly appointed chair at a hearing of the House Financial Services Committee. On the same day, five major banks—JPMorgan, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup—will concentrate their disclosures of Q2 results, launching this round of earnings season. BMO Capital Markets’ US rates strategist Ian Lyngen said, “The combination of CPI data and Waller’s testimony will significantly change the probability of rate hikes in one direction or another.”

On Monday, Federal Reserve Governor Christopher Waller clearly laid out the conditions for a rate hike, saying that if this week’s core inflation data is “again on the hot side,” the FOMC will need to consider tightening monetary policy in the near term. This statement quickly reshaped market pricing: the implied probability of a July rate hike in the money markets jumped from under 10% to about 50%, and the yield on the 2-year US Treasury touched 4.28%, the highest level in more than a year. Meanwhile, tensions between Iran and the Middle East again escalated, with Brent crude’s largest intraday jump nearing 10%, as inflation expectations were hit by a double shock.

On the earnings front, Goldman Sachs expects the year-over-year growth rate of S&P 500 earnings in Q2 to reach 22%, and AI-infrastructure-related stocks are expected to contribute about 50% of the growth in earnings across the index. However, Goldman Sachs also warned that if the Fed starts a rate-hike cycle, pressure on growth expectations, rising capital costs, and the historical fragility of the market with high valuations would pose threefold headwinds to US equities.

CPI forecast: energy drags the overall figure, but core inflation remains the core contradiction

Market consensus generally expects that June CPI’s month-over-month change will be about -0.2%, with year-over-year slowing from May’s 4.2% to 3.8%. This would be the first time since the COVID-19 outbreak in 2020 that monthly negative growth appears; the main driver is a decline in gasoline prices—regular gasoline prices fell by about 15% cumulatively from mid-May to the end of June.

Goldman Sachs forecasts overall CPI month-over-month at -0.11% and core CPI month-over-month at 0.17%, below the broadly expected 0.2%.** Goldman Sachs economists pointed out that in the coming months, the room for inflation to improve comes from several aspects: airfares will fall as jet fuel prices retreat; hotel prices—measured by booking prices—will drop from their peak during the World Cup period; and rent inflation will continue to slow.**

However, the improvement speed of core PCE inflation is expected to be slower than that of core CPI. Goldman Sachs expects core PCE’s average monthly increase over the next three months to be about 0.23%. Part of the reason is that the implied prices of financial services continue to rise due to the stock market rally, as well as software and ancillary product price increases—this category’s weight in core PCE is 30 times that of core CPI.

In terms of PPI data, the situation is more complex. The energy shock triggered by the Iran war is still transmitting along the supply chain. Core PPI’s 12-month year-over-year growth rate is expected to accelerate from 4.9% to 5.2%.

Waller’s first congressional appearance: forward guidance cut intensifies policy uncertainty

Waller will attend hearings in the House of Representatives and the Senate on Tuesday and Wednesday, respectively—his first public testimony on monetary policy since taking office as Fed chair in May.

Unlike the Powell era, Waller had previously stated clearly that he would trim forward guidance on the interest-rate outlook. That stance makes it difficult for the market to anchor policy expectations. Columbia Threadneedle portfolio manager Ed Al-Hussainy said bluntly, “The probability of a July rate hike is higher than no hike,” while also noting that to bring inflation back to 2%, “we will need some luck.”

Lyngen said that even if CPI data is soft, the market may still maintain some pricing for a July rate hike to a certain extent, and the possibility of an unexpected rate hike by the Fed when markets have not fully priced it in cannot be ruled out.

Bloomberg’s chief US economist Andrew Sacher’s view is relatively more moderate. He believes that to significantly raise the probability of rate hikes, both conditions—an “unexpectedly hot CPI” and Waller’s clearly hawkish remarks—must occur at the same time, and the probability of both appearing together is low. The current implied 24% probability of a rate hike already reflects the mainstream’s reservations about hikes in the near term.

Earnings season kicks off with five big banks: high earnings growth and policy uncertainty square off

The opening lineup for this earnings season is unprecedentedly dense. JPMorgan, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will disclose their results in a concentrated fashion before the market opens on Tuesday. Afterwards, ASML and TSMC’s results later this week will directly test global AI chip demand conditions.

Based on Goldman’s trading desk calculations, market consensus expects S&P 500 earnings year-over-year growth of about 22% in Q2, the highest level since 2021. But over the past 11 quarters, consensus expectations have been beaten continuously—among them, actual growth in one quarter reached 27%, about 15 percentage points above expectations, with the upside mainly coming from AI-related sectors.

In the banking sector, one of JPMorgan’s focal points is the potential impact of Marianne Lake’s departure on management premium; at Bank of America, the visibility of fee expenses and the NII outlook is viewed as a core variable that will determine that day’s stock performance. Citigroup benefits from the ECB’s rate hikes providing a positive boost to Services NII, and market expectations for capital markets are relatively low, so there may be more upside room. Goldman Sachs is widely seen as a core beneficiary of the AI capital markets cycle, with its equities trading business drawing particular attention. For Wells Fargo, whether the 2026 NII target can be realized still faces risks in the second half, including insufficient deposit growth.

Goldman’s market analysis warns that this earnings season may lack the incremental catalyst effect brought by a big upward revision to prior-quarter AI capital expenditure expectations. With the macro policy environment moving toward tighter conditions, the market’s reliance on earnings continuing to lead the index higher faces higher difficulty in execution.

Waller draws a trigger line for rate hikes, and the policy balance clearly tilts

Waller’s speech to the New York Association of Business Economists on Monday was interpreted by the market as the clearest rate-hike warning so far.

He said that the core personal consumption expenditures (PCE) index’s year-over-year increase through May has already reached 3.4%, and it has continued to rise since January, showing an upward trend even before the outbreak of the Iran–US conflict. Factors driving inflation include tariffs, energy prices, and large-scale construction of AI infrastructure. “No matter how you measure it, inflation this year is moving higher,” he said. “I’m currently concerned about the trajectory of core inflation being too high.”

Waller also cited the policy mistakes of 2021 to 2022 when inflation got out of control as a precedent, warning that back then the FOMC faced widespread criticism for not raising rates quickly enough, and such errors should not be repeated. He said clearly that if he could see cooling data for multiple consecutive months, he would support staying on hold, but the conditions are stringent.

The remarks above are consistent with the direction of last month’s FOMC meeting minutes—the minutes showed that among 18 officials, already half expect at least a 25-basis-point rate hike at some point this year. The option of hiking is moving from a fringe issue to the center of policy discussion. Based on analysis by Goldman Sachs economist Jan Hatzius’s team, Waller’s latest remarks together with the June meeting minutes jointly confirm that the committee’s openness to restarting rate hikes is rising significantly.

Triple pressure on the risk of rate hikes: growth, capital costs, and historical precedents

In its latest weekly equity market strategy report on the US stock market, Goldman Sachs explicitly pointed out that if the Fed restarts rate hikes, US stocks will face threefold pressure in the near term.

First, tighter policy will directly suppress growth expectations. Although for equities, the importance of economic growth outweighs the level of interest rates, with other conditions unchanged, monetary tightening will drag the market’s assessment of growth prospects.

Second, the capital intensity of this economic cycle has risen significantly. AI-infrastructure-related stocks currently account for 42% of the total market value of the S&P 500, and are expected to contribute about 50% of earnings growth for the index in 2026. Goldman Sachs data shows that this year the capital expenditures of mega-cap cloud computing companies are expected to be equal to 100% of operating cash flow, and their net debt reached $239 billion in Q1 2026, surging about 190% year over year. At the same time, total US equity financing in Q2 reached $252 billion, setting a historical record and surpassing the previous high in Q1 2021. Any increase in capital costs will hit directly the most important growth engine of this cycle.

Third, historical data suggests that Fed rate hikes are an important precursor to the topping of bull markets with high valuations and high concentration. Rate-hike cycles in 1929, 1972, 1987, and 1999 all appeared before the bull market peak; in 2022, the market peaked ahead of time along with interest-rate expectations. Goldman’s rate strategists estimate that if the volatility of interest rates rises to the level seen during the rate-hike cycle from 2022 to 2023, it would correspond to an about 6% contraction in the S&P 500 price-to-earnings ratio, i.e., roughly one turn of valuation.

Goldman Sachs’s current year-end target for the S&P 500 is 8,600, and its 12-month target is 8,300—representing about 14% and 10% potential upside, respectively, compared with the current 7,544. But strategists also emphasize that achieving the above targets depends on there being no substantial tightening in the macro policy environment— and that condition will be tested most directly within the next two days this week.

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