Tonight, the triple test for global markets: US CPI, Walsh hearing, and earnings season

Original Author: Xu Chao

Original Source: Wallstreetcn

A sudden surge in Federal Reserve rate hike expectations, the official start of bank earnings season, and the new Chair's first appearance before Congress — three variables converging in the same time window make this Tuesday the most decisive single day for the market in the near term.

This Tuesday, the US June CPI data will be released first at 8:30 AM Washington time, followed by Federal Reserve Chair Kevin Warsh's first congressional testimony as the new Chair before the House Financial Services Committee. On the same day, five major banks — JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup — will simultaneously report their second-quarter earnings, kicking off the current earnings season. Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets, stated, "The combination of CPI data and Warsh's testimony is bound to significantly alter the probability of a rate hike in one direction or another."

Federal Reserve Governor Christopher Waller clearly defined the trigger conditions for a rate hike on Monday, stating that if this week's core inflation data is "hot again," the FOMC will need to consider tightening monetary policy in the near term. This statement swiftly reshaped market pricing: the implied probability of a July rate hike in the money market surged from less than 10% to approximately 50%, and the two-year Treasury yield touched 4.28%, its highest level in over a year. Simultaneously, escalating geopolitical tensions between the US and Iran saw Brent crude oil rise by nearly 10% in a single day, delivering a dual shock to inflation expectations.

On the earnings front, Goldman Sachs expects the year-over-year earnings growth for the S&P 500 in the second quarter to reach 22%, with AI infrastructure-related stocks projected to contribute about 50% of the index's total earnings growth. However, Goldman Sachs also warns that if the Federal Reserve initiates a rate hike cycle, the combination of compressed growth expectations, rising capital costs, and the historical vulnerability of the high-valuation market will pose a triple threat to US stocks.

CPI Forecast: Energy Weighs on Headline, Core Inflation Remains the Core Issue

The market generally expects the month-over-month headline CPI for June to be approximately -0.2%, with the year-over-year rate slowing from 4.2% in May to 3.8%. This would be the first monthly negative reading since the outbreak of the pandemic in 2020, primarily driven by falling gasoline prices — regular gasoline prices have dropped about 15% cumulatively from mid-May to the end of June.

Goldman Sachs forecasts a month-over-month headline CPI of -0.11% and a core CPI of 0.17%, below the consensus market expectation of 0.2%. Goldman Sachs economists point out that the scope for inflation improvement in the coming months comes from several areas: airline fares will decline as jet fuel prices fall; hotel prices, measured at booking, will recede from elevated World Cup levels; and rent inflation will continue to moderate.

However, the pace of improvement in core PCE inflation is expected to be slower than that of core CPI. Goldman Sachs expects core PCE to rise by an average of about 0.23% month-over-month over the next three months, partly due to the continued increase in imputed prices for financial services driven by the stock market rally, and rising prices for software and related products — a category that has 30 times the weight in core PCE compared to core CPI.

The situation is more complex regarding PPI data. The energy shock triggered by the war in Iran is still propagating through the supply chain. The 12-month year-over-year growth rate for core PPI is expected to accelerate from 4.9% to 5.2%.

Warsh's Congressional Debut: Reduced Forward Guidance Adds to Policy Opacity

Warsh will testify before the House and Senate on Tuesday and Wednesday, respectively, marking his first public testimony on monetary policy since assuming the role of Federal Reserve Chair in May.

Unlike the Powell era, Warsh has previously stated his intention to reduce forward guidance on the interest rate outlook, a stance that makes it difficult for the market to anchor policy expectations. Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, stated bluntly, "The chance of a July rate hike is higher than not," adding that bringing inflation back down to 2% "will require some luck."

Lyngen noted that even if the CPI data is soft, the market might still maintain some pricing for a July rate hike, and the possibility of the Federal Reserve surprising the market with a hike when it is not fully priced in cannot be ruled out.

Andrew Sacher, Chief US Economist at Bloomberg, offers a relatively more moderate assessment. He believes that to significantly increase the probability of a rate hike, both a "hotter-than-expected CPI" and "clearly hawkish remarks from Warsh" would be needed simultaneously. The probability of both occurring is low — the current 24% implied rate hike probability in the market itself reflects the mainstream expectation's cautious stance on near-term tightening.

Five Major Banks' Earnings Kick Off: High Profit Growth Meets Policy Uncertainty

The opening lineup for this earnings season is unprecedentedly dense. JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will release their results before the market opens on Tuesday. Later this week, earnings from ASML and TSMC will directly test the health of global AI chip demand.

According to Goldman Sachs' trading desk estimates, market consensus expects S&P 500 year-over-year earnings growth for the second quarter to be around 22%, the highest level since 2021. However, earnings have surpassed consensus expectations for 11 consecutive quarters — actual growth in the first quarter reached 27%, exceeding expectations by about 15 percentage points, with the surplus mainly coming from AI-related sectors.

At the banking level, one of the key focus points for JPMorgan Chase is the potential impact of Marianne Lake's departure on the management premium. For Bank of America, the visibility of expense guidance and NII (Net Interest Income) is seen as the core variable influencing its stock price on the day. Citigroup benefits from a positive boost to Services NII from ECB rate hikes and, with relatively low capital market expectations, may have significant upside. Goldman Sachs is widely viewed as a core beneficiary of the AI capital market cycle, with its equity trading division drawing significant attention. For Wells Fargo, the achievability of its 2026 NII target remains at risk due to insufficient deposit growth in the second half of the year.

Goldman Sachs' market analysis warns that this earnings season may lack the additional catalytic effect from the significant upward revision in AI capital expenditure expectations seen last quarter. The market's reliance on earnings to continue driving the index higher faces greater implementation difficulty against a backdrop of a tightening macro policy environment.

Waller Sets Rate Hike Trigger, Policy Balance Tips Clearly

Waller's speech on Monday at the New York Association for Business Economics was interpreted by the market as the clearest warning of a rate hike to date.

He stated that the core Personal Consumption Expenditures (PCE) price index had already risen 3.4% year-over-year as of May and has been trending higher since January, showing an upward trajectory even before the outbreak of the US-Iran conflict. The factors driving inflation include tariffs, energy prices, and large-scale construction of AI infrastructure. "By any measure, inflation is moving up this year," he said. "I am currently concerned about the elevated path of core inflation."

Waller also cited the policy missteps of the 2021-2022 inflation surge as a cautionary tale, warning that the FOMC was widely criticized for its delayed rate hikes at that time and such errors cannot be repeated. He made it clear that if he sees several consecutive months of cooling data, he would support maintaining the current stance, but the prerequisite is quite stringent.

These remarks align with the minutes from last month's FOMC meeting, which showed that half of the 18 officials already expect at least one 25-basis-point rate hike at some point this year. The rate hike option is moving from a fringe issue towards the center of policy discussions. According to analysis from the team of Goldman Sachs economist Jan Hatzius, Waller's latest comments, together with the June meeting minutes, confirm that the Committee's openness to restarting rate hikes is significantly increasing.

The Triple Pressure of Rate Hike Risk: Growth, Capital Costs, and Historical Precedent

Goldman Sachs, in its latest weekly US equity strategy report, explicitly states that if the Federal Reserve restarts its rate hike cycle, US stocks will face triple pressure in the near term.

First, tightening policy will directly weigh on growth expectations. Although economic growth is more important for the stock market than the level of interest rates, all else being equal, monetary tightening will drag on the market's assessment of the growth outlook.

Second, the capital intensity of this economic cycle has increased significantly. AI infrastructure-related stocks currently account for 42% of the total market capitalization of the S&P 500 and are expected to contribute approximately 50% of the index's total earnings growth in 2026. Goldman Sachs data shows that capital expenditure for hyperscale cloud companies is expected to equal 100% of their operating cash flow this year. Their net debt reached $239 billion in the first quarter of 2026, a year-over-year surge of about 190%. Meanwhile, total US equity financing volume in the second quarter reached a record $252 billion, surpassing the previous high from the first quarter of 2021. Any increase in capital costs will directly impact the most crucial growth engine of this cycle.

Third, historical data indicates that Fed rate hikes are an important precursor to the peak of high-valuation, high-concentration bull markets. Rate hike cycles in 1929, 1972, 1987, and 1999 all preceded bull market peaks, and the market in 2022 peaked early in anticipation of rate increases. Goldman Sachs rates strategists estimate that if interest rate volatility rises to levels seen during the 2022-2023 rate hike cycle, it would correspond to a contraction of about 6% in the S&P 500's P/E ratio, representing roughly one turn of valuation.

Goldman Sachs currently sets its year-end S&P 500 target at 8600 points and its 12-month target at 8300 points, implying potential upside of about 14% and 10%, respectively, from the current level of 7544 points. However, strategists emphasize that achieving these targets is contingent on no significant tightening of the macro policy environment — a premise that will face its most direct test over the next two days.