The sudden surge in the Fed's interest rate hike expectations, the official start of the bank earnings season, and the new chairman's first appearance in Congress—all three variables overlapping in the same time window made this Tuesday the most decisive day in the recent market.
This Tuesday, the US June CPI data will be released first at 8:30 am Washington time, followed by Fed Chair Kevin Powell's first appearance at the House Financial Services Committee hearing in his new role as chairman. On the same day, JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will all concentrate on disclosing their second-quarter earnings, kicking off this earnings season. Ian Lyngen, head of US rate strategy at BMO Capital Markets, said, "The combination of CPI data and Powell's testimony will significantly alter the rate hike probability in some direction."
Fed Governor Christopher Waller clearly outlined the trigger conditions for a rate hike on Monday, stating that if this week's core inflation data is "again overheated," the FOMC will need to consider tightening monetary policy in the near future. This statement quickly reshaped market pricing: the implied probability of a rate hike in July in the money markets surged from less than 10% to around 50%, the two-year US Treasury yield hit 4.28%, the highest level in over a year. At the same time, the US-Iran geopolitical tensions escalated again, with Brent crude oil seeing a nearly 10% single-day surge, causing a double impact on inflation expectations.
On the earnings front, Goldman Sachs expects a 22% year-on-year growth rate for S&P 500 earnings in the second quarter, with AI infrastructure-related stocks expected to contribute approximately 50% of the index's earnings growth. However, Goldman also cautioned that if the Fed initiates a rate hike cycle, the growth outlook will be pressured, capital costs will rise, and the historical fragility of the overvalued market will pose a triple resistance to US stocks.
CPI Forecast: Energy Drags Down Overall, Core Inflation Remains the Core Contradiction
The market generally expects that the overall month-over-month CPI for June will be around -0.2%, slowing from 4.2% in May to 3.8% year-on-year. This will be the first monthly decline since the outbreak of the pandemic in 2020, primarily driven by a drop in gasoline prices—regular gasoline prices fell by about 15% from mid-May to the end of June.
Goldman Sachs predicts an overall CPI MoM of -0.11% and a core CPI MoM of 0.17%, lower than the market's general expectation of 0.2%. Goldman Sachs economists point out that the future inflation improvement will come from several aspects: airfare prices will decline along with the drop in jet fuel prices; hotel prices—measured at booking time—will fall from the peak during the World Cup period; and rental inflation continues to slow down.
However, the pace of improvement in core PCE inflation is expected to be slower than core CPI. Goldman Sachs expects the average monthly increase in core PCE over the next three months to be around 0.23%, partly due to the continued upward trend in implicit prices of financial services brought about by the stock market rise, and the rise in software and peripherals prices—this category's weight in core PCE is 30 times that in core CPI.
On the PPI data front, the situation is more complex. The energy shock triggered by the Iran war is still continuously transmitting along the supply chain, and the core PPI's 12-month YoY growth rate is expected to accelerate from 4.9% to 5.2%.
Powell's Congressional Debut: Forward Guidance Reduction Intensifies Policy Opacity
Powell will testify before the House and Senate on Tuesday and Wednesday, marking his first public appearance on monetary policy since assuming the Fed chairmanship in May.
Unlike the Powell era, Powell has previously made it clear that he will reduce the forward-looking guidance on interest rate prospects, a stance that has made it difficult for the market to anchor policy expectations. Columbia Threadneedle portfolio manager Ed Al-Hussainy bluntly stated, "The likelihood of a July rate hike is higher than no hike," while also noting that bringing the inflation rate back to 2% will "require some luck."
Lyngen said that even if CPI data is soft, the market may still maintain some pricing for a rate hike in July, and the possibility of an unexpected rate hike by the Fed when the market is not fully anticipating it cannot be ruled out.
Bloomberg's Chief U.S. Economist Andrew Sacher's assessment is relatively moderate. He believes that to significantly increase the probability of a rate hike, there needs to be both "unexpectedly hot CPI" and a "clearly hawkish statement from Powell," and the probability of both occurring simultaneously is not high— the current market-implied 24% probability of a rate hike already reflects the mainstream expectation of a cautious stance on near-term hikes.
Big Banks' Earnings Season Kickoff: High Earnings Growth Faces Off Against Policy Uncertainty
This round of earnings season has an unprecedentedly dense lineup. JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will all report earnings before the market opens on Tuesday, followed by ASML and TSMC whose earnings slightly later in the week will directly gauge global AI chip demand sentiment.
According to Goldman Sachs Trading Desk's calculations, the market consensus expects a second-quarter S&P 500 earnings year-over-year growth rate of around 22%, the highest level since 2021, with the past 11 quarters consistently surpassing consensus expectations—where the first-quarter actual growth rate reached 27%, exceeding expectations by about 15 percentage points, with the excess mainly coming from AI-related sectors.
On the banking front, JPMorgan's key focus is on the potential impact of Marianne Lake's departure on the management premium; Bank of America's expense outlay and NII guidance visibility are seen as core variables influencing the day's stock price swings; Citigroup is benefiting from the ECB rate hike's positive impact on Services NII, and with relatively low capital market expectations, there may be significant upside potential; Goldman Sachs is widely seen as a core beneficiary of the AI capital market cycle, with the stock trading division under close scrutiny; Wells Fargo's ability to achieve its 2026 NII target still faces the risk of 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 brought about by the significant upward revision of AI capital expenditure expectations seen in the previous quarter. The market's reliance on earnings to continue leading the index higher faces greater challenges in a context of tightening macro policy environment.
Waller Sets Interest Rate Trigger Line, Policy Scale Clearly Tipped
Waller's speech on Monday at the New York Association for Business Economics was interpreted by the market as the most explicit interest rate hike warning to date.
He stated that the core personal consumption expenditure (PCE) index had risen by 3.4% year-on-year as of May and had been on an upward trend since January, pre-dating the US-Iran conflict escalation. Factors driving inflation include tariffs, energy prices, and the large-scale construction of AI infrastructure. "Inflation is on the rise this year no matter how you measure it," he said. "I am currently concerned about the trajectory of core inflation."
Waller also referenced the policy mistakes leading to runaway inflation from 2021 to 2022 as a cautionary tale, warning that the FOMC was widely criticized that year for delaying rate hikes, and such errors cannot be repeated. He explicitly stated that if he sees several months of cooling-off data, he would support staying put, but the conditions are stringent.
His statements align with last month's FOMC meeting minutes, which showed that half of the 18 officials already expected at least a 25-basis-point rate hike at some point this year, shifting the rate hike option from a fringe issue to the center of policy discussions. According to Goldman Sachs' economist Jan Hatzius and team analysis, Waller's latest remarks, along with the June meeting minutes, confirm a significant increase in the committee's openness to resuming rate hikes.
The Triple Pressure of Rate Hike Risk: Growth, Cost of Capital, and Historical Precedent
Goldman Sachs clearly pointed out in its latest US Equities Weekly Strategy report that if the Fed resumes rate hikes, US stocks will face a triple pressure in the short term.
First, the tightening policy will directly suppress growth expectations. Although economic growth is more important to the stock market than the level of interest rates, all else being equal, monetary tightening will weigh on the market's assessment of growth prospects.
Second, the capital intensity of this economic cycle has significantly increased. Stocks related to AI infrastructure currently account for 42% of the total market value of the S&P 500, and are expected to contribute approximately 50% of the full index earnings growth in 2026. Goldman Sachs data shows that the capital expenditure of mega-scale cloud computing companies this year is expected to be equivalent to 100% of operating cash flow, with net debt reaching $239 billion in the first quarter of 2026, a year-on-year surge of about 190%. Meanwhile, US equity fundraising in the second quarter reached $252 billion, setting a new record, surpassing the previous high in the first quarter of 2021. Any increase in the cost of capital will directly impact the most important growth engine of this cycle.
Third, historical data indicates that Fed rate hikes are a key precursor to the peak of high-valuation, highly concentrated bull markets. Rate hike cycles in 1929, 1972, 1987, and 1999 all preceded the peak of the bull market, and in 2022, the market topped out ahead of rate expectations. Goldman Sachs interest rate strategists estimate that if interest rate volatility reaches the levels seen during the 2022-2023 rate hike cycle, it would correspond to a contraction of approximately 6% in the S&P 500 P/E ratio, or about a 1x valuation.
Goldman Sachs' current year-end target for the S&P 500 is 8600 points, with a 12-month target of 8300 points, representing potential upside of approximately 14% and 10%, respectively, from the current 7544 points. However, the strategists emphasize that the realization of these targets is contingent on no substantial tightening in the macro policy environment—a condition that will face the most immediate test in the next two days.
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