Earnings Season, Walsh, and U.S. Inflation—Where Are the Federal Reserve and Markets Headed? Next Week Brings the First Clues!

Newly appointed Federal Reserve Chair Walsh is set to make his first appearance at a congressional hearing, coinciding with the intensive release of US June inflation data. The intersection of these events will provide a concentrated test for market bets on a possible July rate hike.

On Tuesday, Walsh's hearing will be held by the House Financial Services Committee, with the US June CPI data set to be released earlier that day. On Wednesday, after the release of the US PPI data, Walsh will testify before the Senate as well.

Bloomberg Economist surveys show that the implied probability of a July rate hike is currently only 24%. For this number to rise significantly, it would require both a "much hotter-than-expected CPI" and a "clearly hawkish statement from Walsh" to occur at the same time.

Bloomberg Chief US Economist Andrew Sacher believes the likelihood of both occurring simultaneously is not high.

Meanwhile, Goldman Sachs points out that the current US stock market stands at a delicate crossroads. The uncertainty of the Federal Reserve's policy path has become the most critical short-term risk variable facing equities. With the start of Q2 earnings season next week coinciding with the June CPI data, market volatility may rise significantly.

Since becoming Fed Chair, there has been concern about the transparency of the central bank’s policy communication.

Previously, Wall Street had already expressed worries about fewer Fed officials making public comments, which could trigger market volatility. Next week’s two-day hearings will mark Walsh’s first public remarks as Chair, and the market will closely interpret his wording for any indications about the July rate direction.

Bloomberg economists expect that, after notable price increases from March to May, inflation data in June will ease. Recent declines in gasoline prices may pull down CPI, with the index potentially posting its first monthly contraction since the pandemic began in 2020.

Goldman Sachs economists hold a similar view, forecasting a headline CPI print of -0.11%, mainly reflecting recent decreases in energy prices. Meanwhile, core CPI for June is expected to rise 0.17% month-on-month, below the market consensus of 0.2%.

However, the picture for PPI is more complex. The energy shock triggered by the Iran war continues to resonate through the supply chain, with core PPI (excluding food and energy) year-on-year growth expected to accelerate from 4.9% to 5.2%.

Bloomberg’s Andrew Sacher summarizes:

The market’s implied probability of a July rate hike is 24%, indicating market disbelief that the Fed will act at that time. For a notable change in expectation, CPI would need to significantly overshoot, and Walsh would have to present a clearly hawkish stance on Tuesday — we believe the likelihood of both happening is low.

Goldman Sachs expects Q2 earnings season to once again demonstrate robust profit growth.

On July 14, next Tuesday, the earnings season kicks off with reports from the five major US banks released on the same day, and conference call schedules are denser than usual.

Bank of America and JPMorgan Chase are expected to release results first in the morning, followed by Wells Fargo, and then Goldman Sachs Group and Citigroup. Next week, earnings from ASML and TSMC will directly test the global demand for AI chips.

Goldman forecasts S&P 500 EPS to reach $340 in 2026, up 24% year-on-year, and to further rise to $385 in 2027, up 13% year-on-year.

The current S&P 500 P/E is 21x, with Goldman’s year-end target at 8,600 points and a 12-month target at 8,300 points, implying about 14% and 10% upside from the current 7,544 points, respectively.

However, Goldman cautions, this earnings season may lack the additional catalytic effect of a significant upward revision to AI capital expenditure expectations seen last quarter. Whether profits can continue to lead the market remains dependent on the macro policy environment.

Goldman makes it clear in its latest US Equity Weekly Strategy Report that if the Fed starts a rate hike cycle, US equities will face significant short-term resistance. Goldman offers three reasons.

First, tightening policy itself suppresses growth expectations. While economic growth is more important for equities than interest rates, ceteris paribus, Fed tightening will weigh on market growth expectations.

Second, capital intensity in the current economic cycle has risen notably, making equities much more sensitive to changes in capital costs.

According to Goldman, stocks related to AI infrastructure now account for 42% of the S&P 500's total market cap, and are expected to contribute 38% of S&P 500 earnings and 50% of earnings growth in 2026. Capital expenditures by hyperscale cloud companies this year are expected to reach 100% of operating cash flow, with both debt and equity financing needs surging, and net debt reaching $239 billion in Q1 2026, a roughly 190% year-on-year increase.

Meanwhile, in Q2 2024, total US equity financing hit a record high, with IPOs, follow-on offerings, convertibles, and SPACs reaching $252 billion, exceeding the $234 billion high from Q1 2021. This means any increase in capital costs will directly impact the most important growth engine of the current cycle.

Third, Fed tightening has historically been an important precursor to the peak of high-valuation, highly concentrated bull markets. The Fed’s rate hike cycles in 1929, 1972, 1987, and 1999 all preceded the peak of the bull market, while in 2022, the market peaked in anticipation of rate hikes.

Beyond Walsh’s hearing, several Fed officials are scheduled for public appearances next week. The schedule includes:

• Monday: Federal Reserve Governor Christopher Waller delivers a speech;
• Wednesday: New York Fed President John Williams and Fed Governor Lisa Cook speak;
• Thursday: Fed Vice Chair Philip Jefferson, Dallas Fed President Lorie Logan, and Kansas City Fed President Jeff Schmid speak in succession.

On the US economic data front, retail sales data will be released Thursday, and Friday will see the release of industrial production, housing starts, and the consumer confidence index, together providing a comprehensive scan of the US economy’s resilience.

Goldman rate strategists believe that as Chair Walsh establishes a new communication framework, rate volatility before and after upcoming FOMC meetings is at risk of increasing.

Regardless of whether the Fed hikes rates, uncertainty in the future rate path itself will exert downward pressure on equities. Historical data shows that the market tends to perform poorly whenever rates move rapidly and sharply, regardless of direction.

According to Goldman’s estimates, if rate volatility returns to levels seen during the 2022–2023 rate hike cycle, the S&P 500 P/E would drop by about 6%, or roughly 1x.