Expectations for a Federal Reserve rate hike have surged dramatically, the bank earnings season is officially opening, and the new Chair is making his first Congressional appearance—three major variables converging in the same time window, making this Tuesday the most decisive single 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 Wash's first appearance before the House Financial Services Committee in his new role. The day also features the concentrated release of second-quarter earnings from five major banks—JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS), and Citigroup (C)—kicking off this earnings season. Ian Lyngen, head of US rates strategy at BMO Capital Markets, stated, "The combination of the CPI data and Wash's testimony will certainly shift rate hike probabilities in one direction or another."
Federal Reserve Governor Christopher Waller on Monday clearly outlined the trigger conditions for a rate hike, stating that if this week's core inflation data is "hotter again," the FOMC would 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 money markets surged from less than 10% to about 50%, with the two-year Treasury yield hitting 4.28%, its highest level in over a year. Simultaneously, renewed geopolitical tensions between the US and Iran sent Brent crude oil up nearly 10% at its peak for the day, delivering a dual shock to inflation expectations.
On the earnings front, Goldman Sachs expects S&P 500 earnings per share growth to reach 22% year-over-year in Q2, with AI infrastructure-related stocks projected to contribute about 50% of the index's total earnings growth. However, Goldman also warns that if the Fed initiates a rate hike cycle, pressure on growth expectations, rising capital costs, and the historical vulnerability of high-valuation markets would pose a triple threat to US stocks.
Inflation Forecast: Energy Weighs on Headline, Core Remains Key
The market widely expects the June CPI headline figure to show a month-over-month decline of approximately 0.2%, with the year-over-year rate slowing from 4.2% in May to 3.8%. This would mark the first monthly negative reading since the pandemic outbreak in 2020, primarily driven by falling gasoline prices—regular gasoline prices dropped about 15% from mid-May to the end of June.
Goldman Sachs forecasts a headline CPI month-over-month change of -0.11% and a core CPI month-over-month change of 0.17%, below the market consensus of 0.2%. Goldman economists note that room for inflation improvement in the coming months will come from several areas: airfares will decline as jet fuel prices fall; hotel prices—measured at booking—will retreat from high levels during the World Cup period; and rental inflation will continue to slow.
However, the pace of improvement in core PCE inflation is expected to be slower than for core CPI. Goldman expects the average monthly increase in core PCE over the next three months to be about 0.23%, partly due to continued increases in implicit prices for financial services driven by rising stock markets, and price increases for software and related products—a category with a weight in core PCE that is 30 times its weight in core CPI.
The situation is more complex regarding PPI data. The energy shock triggered by the war in Iran continues to propagate along the supply chain, with the 12-month year-over-year growth rate for core PPI expected to accelerate from 4.9% to 5.2%.
Wash's Congressional Debut: Reduced Forward Guidance Adds Policy Opacity
Wash will testify before the House and Senate on Tuesday and Wednesday, respectively, marking his first public testimony on monetary policy since becoming Fed Chair in May.
Unlike the Powell era, Wash has previously stated he intends to reduce forward guidance on the interest rate outlook, a stance that makes it difficult for markets to anchor policy expectations. Columbia Threadneedle portfolio manager Ed Al-Hussainy stated bluntly, "The probability of a July rate hike is higher than no hike," while also noting that to bring inflation back to 2%, "we're going to need some luck."
Lyngen noted that even if the CPI data is soft, the market may still maintain some degree of pricing for a July hike, and the possibility of the Fed surprising the market with a hike when expectations are not fully priced in cannot be ruled out.
The judgment from Bloomberg's chief US economist, Andrew Sacher, is relatively more moderate. He believes that to significantly increase the probability of a hike, both "a hotter-than-expected CPI" and "a clearly hawkish tone from Wash" would need to occur simultaneously—the probability of both happening is not high. The current market-implied 24% probability of a hike itself reflects the mainstream expectation retaining a cautious stance on a near-term hike.
Major Bank Earnings Kick Off: High Profit Growth Meets Policy Uncertainty
This earnings season opens with an unprecedentedly dense lineup. JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will report earnings before the market opens on Tuesday, followed later in the week by results from ASML and TSMC, which will directly test the strength of global AI chip demand.
According to Goldman Sachs' trading desk calculations, the market consensus expects S&P 500 earnings per share growth of about 22% year-over-year for Q2, the highest level since 2021. However, actual results have beaten consensus expectations for the past 11 consecutive quarters—with Q1 actual growth reaching 27%, about 15 percentage points above expectations, with the outperformance primarily coming from AI-related sectors.
For the banking sector, one focus for JPMorgan Chase is the potential impact of Marianne Lake's departure on the management premium; the visibility of Bank of America's expense and NII guidance is seen as a core variable influencing its stock price that day; Citigroup benefits from the positive pull of ECB rate hikes on Services NII, and with relatively low capital markets expectations, its upside potential may be greater; Goldman Sachs is widely seen as a core beneficiary of the AI capital markets cycle, with its equities trading division in focus; risks remain for Wells Fargo regarding the achievability of its 2026 NII target, including potential insufficient deposit growth in the second half of the year.
Goldman's market analysis warns that this earnings season may lack the additional catalyst from significant upward revisions to AI capital expenditure expectations seen last quarter. The market's reliance on earnings to continue leading the index higher faces greater difficulty in a macro policy environment trending towards tightening.
Waller Draws the Line for Hikes, Policy Scales Clearly Tilted
Waller's speech Monday at the New York Association for Business Economics was interpreted by the market as the clearest warning yet of a potential rate hike.
He stated that the core Personal Consumption Expenditures (PCE) index had reached a year-over-year increase of 3.4% as of May and had been rising since January, showing an upward trend even before the US-Iran conflict erupted. Factors driving inflation include tariffs, energy prices, and the large-scale construction of AI infrastructure. "By any measure, inflation is up this year," he said, "I am currently concerned about the trend of high core inflation."
Waller also cited the policy mistake of letting inflation run out of control in 2021-2022 as a cautionary tale, warning that the FOMC was widely criticized for delaying rate hikes then, and such mistakes cannot be repeated. He clearly stated that if he could see several months of cooling data, he would support staying on hold, but the prerequisite is quite stringent.
These remarks align with the direction of last month's FOMC meeting minutes—which showed that half of the 18 officials now expect at least one 25-basis-point rate hike at some point this year, moving the rate hike option from the periphery towards the center of policy discussions. According to analysis by Goldman Sachs economist Jan Hatzius' team, Waller's latest remarks, together with the June meeting minutes, confirm that the Committee's openness to restarting rate hikes is rising significantly.
Triple Pressures from Rate Hike Risks: Growth, Capital Costs, and Historical Precedents
In its latest US weekly equity strategy report, Goldman Sachs clearly stated that if the Fed restarts rate hikes, US stocks would face three pressures in the short term.
First, tightening policy would directly pressure growth expectations. While economic growth is more important than interest rate levels for the stock market, all else being equal, monetary tightening would weigh on 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 S&P 500's total market capitalization and are projected to contribute about 50% of the index's earnings growth in 2026. Goldman data shows that capital expenditure for hyperscale cloud computing companies this year is expected to be equivalent to 100% of their operating cash flow, with their net debt reaching $239 billion in Q1 2026, a surge of about 190% year-over-year. Simultaneously, total US equity issuance in Q2 reached $252 billion, a historical record surpassing the previous high from Q1 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 significant precursor to peaks in high-valuation, highly concentrated bull markets. Rate hike cycles in 1929, 1972, 1987, and 1999 all preceded market peaks, while the market peaked ahead of rate expectations in 2022. Goldman rate strategists calculate that if interest rate volatility rises to levels seen during the 2022-2023 hiking cycle, it would correspond to a contraction in the S&P 500 price-to-earnings ratio of about 6%, or roughly 1 multiple of valuation.
Goldman's current year-end target for the S&P 500 is 8600 points, with a 12-month target of 8300 points, representing potential upside of about 14% and 10%, respectively, from the current level of 7544 points. However, strategists emphasize that achieving these targets is predicated on the macro policy environment not tightening substantially—a premise that will face its most direct test over the next two days.
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