Earnings season, Walsh and U.S. inflation—Where are the Fed and markets headed? Next week, we'll get the "first clues"!

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The new Federal Reserve Chairman Walsh is about to attend his first Congressional hearing, coinciding with the intensive release of U.S. inflation data for June. The intersection of these events will provide a focused test of the market's bets on a rate hike in July.

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

According to a Bloomberg economist survey, the market-implied probability of a July rate hike is currently just 24%. To push this figure significantly higher, both "a much hotter than expected CPI" and "clear hawkish statements from Walsh" are needed simultaneously.

Bloomberg Chief U.S. Economist Andrew Sacher believes the chance of both occurring at the same time is not high.

Meanwhile, Goldman Sachs points out that the current U.S. stock market is at a delicate crossroads. The uncertainty of the Fed's policy trajectory has become the key risk variable facing equities in the short term. With the Q2 earnings season kicking off next week alongside June's CPI data, market volatility could rise significantly.

Walsh’s Congressional Debut: Inflation Data and Monetary Policy Signals Take the Stage

Since Walsh took office as Fed Chair, there have been concerns about the transparency of the central bank’s policy communication.

Previously, Wall Street had expressed worries about the reduction in public remarks by Fed officials, which could cause market volatility. Next week's two-day hearings will be Walsh's first public statements as Chair, and the market will closely analyze his wording for any signals on the July interest rate direction.

Bloomberg economists expect that after significant price increases from March to May, June's inflation data will ease. A recent drop in gasoline prices could pull the CPI lower, and the index may even post its first month-on-month decline since the start of the Covid-19 pandemic in 2020.

Goldman Sachs economists share the same view, projecting overall CPI at -0.11%, mainly reflecting the recent fall in energy prices. The month-on-month core CPI increase in June is expected at 0.17%, also below the market consensus of 0.2%.

However, the PPI data presents a more complicated picture. The energy shock triggered by the Iran war is still being transmitted along the supply chain, and the 12-month year-on-year growth rate of core PPI (excluding food and energy) is expected to accelerate from 4.9% to 5.2%.

Bloomberg’s Andrew Sacher summarizes:

The market’s current implied probability of a July rate hike is 24%. This level suggests the market does not really believe the Fed will act then. To significantly change this expectation, there must be a much higher than expected CPI, and Walsh must show a clearly hawkish stance on Tuesday—both of which, in our view, are unlikely to occur together.

Strong Growth in Q2 Earnings, But Fed Hikes Pose Triple Pressure on U.S. Stocks

Goldman Sachs expects the Q2 earnings season to show another round of strong profit growth.

On Tuesday, July 14, earnings from the five major U.S. banks will be released simultaneously, marking the start of the U.S. earnings season, with a denser than usual conference call schedule.

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

Goldman Sachs forecasts S&P 500 EPS at $340 in 2026, up 24% year over year; and $385 in 2027, up another 13%.

The current S&P 500 P/E ratio is 21x. Goldman’s year-end target is 8,600, with a 12-month target of 8,300—about 14% and 10% above the current level of 7,544, respectively.

However, Goldman notes that this earnings season may lack the extra boost from last quarter’s sharp upward revision to AI capex expectations; whether earnings can continue to lead the market still depends on the macro policy environment.

In its latest U.S. equity weekly strategy report, Goldman Sachs makes it clear that if the Fed starts a rate hike cycle, U.S. stocks will face significant resistance in the short term. Goldman gives three reasons.

First, tighter policy itself suppresses growth expectations. Although economic growth matters more than interest rates for the stock market, Fed tightening, all else unchanged, will drag on market views of growth prospects.

Second, capital intensity in the current economic cycle has risen significantly, making the stock market more sensitive to changes in the cost of capital.

Goldman data shows that stocks associated with AI infrastructure now account for 42% of S&P 500 total market cap, and are expected to contribute 38% of 2026 S&P 500 earnings and 50% of earnings growth. This year, capex for hyperscale cloud companies is expected to equal their operating cash flow, with both debt and equity financing needs rising; net debt in Q1 2026 could reach $239 billion, surging around 190% YoY.

Meanwhile, total U.S. equity financing in Q2 this year reached a record high, with IPOs, follow-ons, convertibles and SPACs totaling $252 billion—exceeding the previous record of $234 billion in Q1 2021. This means that any increase in the cost of capital will directly impact the most important growth driver of this cycle.

Third, Fed tightening has historically been a key precursor to peaks in overvalued, concentrated bull markets. In 1929, 1972, 1987, and 1999, Fed hike cycles all preceded market peaks; in 2022, the market topped in advance as rate expectations surged.

Multiple Fed Officials to Speak: The "Silent Period" May End

In addition to Walsh's hearing, several Fed officials are scheduled for public appearances next week. The schedule includes:

Monday: Fed Governor Christopher Waller speaks;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 U.S. domestic data front, Thursday will bring retail sales, and Friday will see the release of industrial production, housing starts, and consumer sentiment indices—together providing a full scan of U.S. economic resilience.

Goldman interest rate strategists believe that, as Chair Walsh establishes a new communication framework, there is upside risk to interest rate volatility around future FOMC meetings.

No matter if the Fed hikes or not, uncertainty about the rate path itself will also pressure the stock market. Historical data shows that stock markets tend to underperform when rates move sharply, whether up or down.

According to Goldman’s estimates, if interest rate volatility rises to levels seen during the 2022–2023 hiking cycle, the S&P 500’s P/E multiple could fall by about 6% or roughly one point.

Risk Warning and DisclaimerThe market involves risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account individual users’ investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their circumstances. If you invest accordingly, you do so at your own risk. ```