New Federal Reserve Chair Wash's inaugural congressional testimony, coinciding with a wave of June U.S. inflation data releases, will provide a concentrated test for market bets on the outlook for a July interest rate hike.
On Tuesday, Wash's testimony before the House Financial Services Committee will be preceded by the release of the U.S. CPI data for June. On Wednesday, shortly after the U.S. PPI figures are published, Wash will testify again before the Senate.
A Bloomberg economist survey indicates the market's current implied probability for a July hike is only 24%. To push this number significantly higher would require both a "hotter-than-expected CPI print" and "markedly hawkish rhetoric from Wash."
Bloomberg's Chief U.S. Economist, Andrew Sacher, believes the likelihood of both occurring is relatively low.
Concurrently, Goldman Sachs notes that the U.S. stock market stands at a delicate crossroads. Uncertainty surrounding the Federal Reserve's policy path has become the most critical risk variable for equities in the near term. The combination of the Q2 earnings season kick-off and June CPI data next week could lead to a notable increase in market volatility.
The Debut of Wash's Testimony: Inflation Data and Monetary Policy Signals Share the Stage
Since Wash assumed the role of Fed Chair, there have been concerns regarding the transparency of the central bank's policy communication.
Wall Street had previously expressed worries that a reduction in public remarks from Fed officials could heighten market volatility. The two days of hearings next week will mark Wash's first public comments as Chair, and markets will scrutinize his language for any signals regarding the July rate decision.
Bloomberg economists anticipate some moderation in the June inflation figures following significant price increases from March to May. Recent declines in gasoline prices may weigh on the CPI, with the index potentially recording its first monthly decline since the onset of the COVID-19 pandemic in 2020.
Goldman Sachs economists share this view, forecasting a headline CPI of -0.11%, primarily reflecting recent energy price drops. They expect the core CPI to rise 0.17% month-over-month in June, slightly below the consensus estimate of 0.2%.
However, the picture from the PPI data is more complex. The energy shock stemming from the conflict in Iran continues to ripple through supply chains. The year-over-year increase in the core PPI (excluding food and energy) is projected to accelerate from 4.9% to 5.2%.
Bloomberg's Andrew Sacher concludes: The current market-implied probability of a July hike at 24% suggests markets do not truly believe the Fed will act. To materially shift this expectation, it would require a significantly hotter-than-expected CPI print and clearly hawkish remarks from Wash on Tuesday—both scenarios, in our view, have a low probability of occurring simultaneously.
Solid Q2 Earnings Growth, But Fed Rate Hikes Could Pose a Triple Threat to U.S. Stocks
Goldman Sachs expects the second-quarter earnings season to deliver another round of robust profit growth.
The season unofficially begins on Tuesday, July 14th, with major U.S. banks reporting, featuring an unusually dense schedule of conference calls.
Bank of America Corp and JPMorgan Chase & Co are expected to report first in the morning, followed by Wells Fargo & Co. Later in the day, Goldman Sachs Group Inc and Citigroup Inc will release results. Earnings from ASML Holding NV and Taiwan Semiconductor Manufacturing Co Ltd will also directly test the strength of global demand for AI chips.
Goldman Sachs forecasts project S&P 500 EPS of $340 in 2026, representing 24% year-over-year growth, and a further rise to $385 in 2027, a 13% increase.
With the S&P 500 currently trading at a P/E ratio of 21x, Goldman's year-end target is 8,600 points, with a 12-month target of 8,300 points, implying upside potential of approximately 14% and 10%, respectively, from the current level around 7,544.
However, Goldman cautions that this earnings season may lack the additional catalyst seen last quarter from significant upward revisions to AI capital expenditure expectations. Whether profits can continue to lead the market will depend on the broader macro-policy environment.
In its latest weekly U.S. equity strategy report, Goldman Sachs explicitly stated that if the Fed initiates a rate-hiking cycle, U.S. stocks would face significant headwinds in the near term, citing three key reasons.
First, tightening policy inherently dampens growth expectations. While economic growth is more important for stocks than the level of interest rates, Fed tightening, all else equal, would weigh on market assessments of the growth outlook.
Second, the capital intensity of the current economic cycle has risen significantly, making the equity market more sensitive to changes in the cost of capital.
Goldman data shows that AI infrastructure-related stocks currently account for 42% of the S&P 500's total market capitalization, are expected to contribute 38% of S&P 500 earnings in 2026, and 50% of earnings growth. Capital expenditures by hyperscale cloud companies are projected to reach 100% of their operating cash flow this year, with both debt and equity financing needs climbing. Their net debt stood at $239 billion in Q1 2026, a surge of roughly 190% year-over-year.
Simultaneously, total U.S. equity issuance in Q2 this year hit a record high of $252 billion, combining IPOs, secondary offerings, convertible bonds, and SPACs, surpassing the previous peak of $234 billion in Q1 2021. This means any increase in the cost of capital will directly impact the most significant growth engine of this cycle.
Third, Fed tightening has historically been an important precursor to peaks in high-valuation, high-concentration bull markets. Fed rate-hike cycles preceded market peaks in 1929, 1972, 1987, and 1999, while 2022 saw the market peak in advance as it reacted to shifting rate expectations.
Multiple Fed Officials Set to Speak, Potentially Ending the 'Blackout Period'
Beyond Chair Wash's testimony, several other Federal Reserve officials are scheduled to speak next week. The schedule includes:
Monday: Speech by Fed Governor Christopher Waller.
Wednesday: Speeches by New York Fed President John Williams and Fed Governor Lisa Cook.
Thursday: Speeches by Fed Vice Chair Philip Jefferson, Dallas Fed President Lorie Logan, and Kansas City Fed President Jeff Schmid.
On the domestic U.S. economic data front, retail sales figures will be released on Thursday, while industrial production, housing starts, and consumer confidence data are due on Friday, collectively providing a comprehensive scan of U.S. economic resilience.
Goldman Sachs rate strategists believe that as Chair Wash establishes a new communication framework, there is upside risk to interest rate volatility around future FOMC meetings.
Regardless of whether the Fed ultimately hikes rates, uncertainty about the interest rate path itself will also weigh on equities. Historical data shows that stocks typically underperform during periods of rapid, large moves in interest rates, regardless of direction.
According to Goldman calculations, if interest rate volatility rises to levels seen during the 2022-2023 hiking cycle, it could correspond to a roughly 6% decline, or about 1 multiple, in the S&P 500's P/E ratio.
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