Tonight, three major tests for global markets: US CPI, Walsh hearing, and earnings season.

Fed rate hike expectations suddenly surged, bank earnings season officially kicks off, and the new chairman makes his first appearance before Congress—three variables overlapping in the same time window make this Tuesday the most significant single day in recent market history.

This Tuesday, the U.S. June CPI data will first be released at 8:30 a.m. Washington time, followed by Fed Chairman Kevin Walsh’s first testimony as chairman before the House Financial Services Committee. On the same day, JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will simultaneously release their Q2 earnings reports, marking the start of this earnings season. Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets, noted, "The combination of CPI data and Walsh’s testimony will significantly change rate hike probabilities in one direction."

Fed Board Member Christopher Waller on Monday clearly defined the trigger conditions for a rate hike, stating that if this week’s core inflation data is "again hot," the FOMC will need to consider tightening monetary policy soon. This statement quickly reshaped market pricing: the implied probability of a July rate hike in the money markets jumped from less than 10% to around 50%; the two-year U.S. Treasury yield hit 4.28%, the highest in more than a year. Meanwhile, tensions between the U.S. and Iran escalated again, with Brent crude posting a single-day gain of nearly 10%, giving inflation expectations a double jolt.

On the earnings front, Goldman Sachs expects S&P 500 earnings growth in Q2 on a year-over-year basis to hit 22%, with AI infrastructure-related stocks expected to contribute about 50% of the total index's earnings growth. However, Goldman also warns that if the Fed starts a rate hike cycle, growth expectations will be pressured, capital costs will rise, and the historical vulnerability of high-valuation markets will pose triple headwinds for U.S. equities.

CPI Forecast: Energy Drags Headline, Core Inflation Still at the Center

The market generally expects June CPI month-on-month to be about -0.2%, and year-on-year to slow from May’s 4.2% to 3.8%. This will mark the first monthly negative growth since the outbreak of the pandemic in 2020, mainly driven by falling gasoline prices—regular gasoline prices have dropped about 15% from mid-May to the end of June.

Goldman Sachs forecasts headline CPI month-on-month at -0.11% and core CPI at 0.17%, lower than the market consensus of 0.2%. Goldman economists point out several areas for inflation improvement in the coming months: airline ticket prices will decline with the drop in jet fuel prices; hotel prices—measured at booking—will fall from World Cup highs; and rent inflation will continue to ease.

However, improvement in core PCE inflation is expected to be slower than core CPI. Goldman expects monthly average gains in core PCE over the next three months to be about 0.23%, partly due to implied financial services prices rising with the stock market, and increases in software and peripheral product prices—this category has 30 times the weight in core PCE compared to core CPI.

PPI data is more complicated. The energy shock caused by the Iran war is still being transmitted along the supply chain; the 12-month year-on-year growth rate of core PPI is expected to accelerate from 4.9% to 5.2%.

Walsh’s Congressional Debut: Reduction in Forward Guidance Increases Policy Uncertainty

Walsh will testify before the House and Senate on Tuesday and Wednesday respectively, marking his first public testimony on monetary policy since becoming Fed Chairman in May.

Unlike the Powell era, Walsh previously stated he will reduce forward guidance on interest rate outlook, making it difficult for the market to anchor policy expectations. Columbia Threadneedle Portfolio Manager Ed Al-Hussainy says, "The probability of a July rate hike is higher than no hike," and notes, to bring inflation back to 2%, "we will need some luck."

Lyngen argues that even if CPI is soft, the market may still price in a certain chance of a July hike, and an unexpected hike by the Fed could also occur if the market isn’t sufficiently prepared.

Bloomberg Chief U.S. Economist Andrew Sacher’s view is more moderate. He believes that for the rate hike probability to rise significantly, both a "hotter-than-expected CPI" and "a clear hawkish statement from Walsh" are needed, but the probability of both occurring together is low—the 24% rate hike probability implied by current markets already reflects mainstream expectations’ reservations toward a near-term hike.

Big Bank Earnings Season Opens: High Growth and Policy Uncertainty Clash

This earnings season launches with unprecedented density. JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup will release results before Tuesday’s market open, followed by ASML and TSMC later this week, testing global AI chip demand directly.

Goldman’s trading desk estimates that market consensus expects S&P 500 Q2 earnings growth year-over-year at about 22%, the highest since 2021, but consensus has been exceeded for 11 consecutive quarters—actual growth in Q1 was 27%, beating expectations by 15 percentage points, with most of the excess due to AI-related sectors.

In banking, JPMorgan’s focus includes the impact of Marianne Lake’s departure on management premium; Bank of America’s expense and NII guidance are viewed as the key factors for daily stock performance; Citi benefits from ECB hikes’ positive pull on Service NII, and with relatively low capital market expectations, upside potential may be large; Goldman is broadly seen as a key beneficiary of the AI capital markets cycle, with its equities trading division under scrutiny; Wells Fargo’s 2026 NII target may not materialize, with risk of insufficient deposit growth in the second half.

Goldman’s market analysis cautions that this earnings season may lack the extra catalyst effect from sharply upgraded AI capital spending expectations seen last quarter, and reliance on earnings to drive further market gains faces greater challenges as the macro policy environment becomes tighter.

Waller Sets Rate Hike Trigger, Policy Balance Clearly Shifts

Waller’s speech at the New York Association for Business Economics on Monday was interpreted as the clearest rate hike warning yet by the market.

He noted that core Personal Consumption Expenditures (PCE) index’s year-over-year gain as of May has reached 3.4%, and has continued to rise since January, trending upward even before the U.S.-Iran conflict erupted. Factors driving inflation include tariffs, energy prices, and large-scale AI infrastructure construction. "No matter how you measure it, inflation is rising this year," he said, "I am currently worried about the persistently high trend in core inflation."

Waller also cited the policy mistake of letting inflation run out of control in 2021–2022 as a lesson, warning that FOMC was widely criticized for not hiking sooner, and such errors must not be repeated. He clarified that if a few consecutive months of cooling data are seen, he would support holding the line, but the threshold is strict.

This position is consistent with last month’s FOMC minutes—the minutes show that half of the 18 officials expect at least one 25-basis-point hike at some point this year, and the option to raise rates is moving from the margins to the center of policy discussion. Goldman economists led by Jan Hatzius note that Waller’s latest stance, together with the June minutes, confirm that the committee’s openness to restarting hikes is rising significantly.

Triple Pressure of Rate Hike Risk: Growth, Capital Cost, and Historical Precedent

Goldman’s latest U.S. equities weekly strategy report points out clearly that if the Fed restarts rate hikes, U.S. equities will face three pressures in the short term.

First, tightening policy directly suppresses growth expectations. Although economic growth is more important to stocks than interest rates, all else being equal, monetary tightening drags down growth outlook.

Second, this economic cycle is notably capital-intensive. AI infrastructure-related stocks currently account for 42% of S&P 500’s total market cap, expected to contribute about 50% of index earnings growth in 2026. Goldman’s data shows that hyperscale cloud companies’ capital expenditures this year are projected to equal their operating cash flow, with net debt reaching $239 billion in Q1 2026, a surge of about 190% year-on-year. Meanwhile, total U.S. equity financing in Q2 reached $252 billion, a historical record surpassing the previous peak in Q1 2021. Any rise in capital cost will directly hit this cycle’s key growth engine.

Third, historical data shows Fed rate hikes are important precursors to peaks in high-valuation, concentrated bull markets. In 1929, 1972, 1987, and 1999, rate hike cycles preceded bull market peaks; in 2022, the market peaked ahead of rate hike expectations. Goldman rates strategists estimate that if rate volatility rises to levels seen in the 2022–2023 hike cycle, S&P 500’s P/E will contract by about 6%, or about 1 valuation point.

Goldman currently sets S&P 500 year-end target at 8600 points, 12-month target at 8300, offering about 14% and 10% upside potential compared with the current 7544 points. But strategists emphasize that achieving these targets depends on macro policy not tightening substantially—and this premise will face its most direct test in the next two days.

Risk Warning and DisclaimerThe market is risky, investing requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investment is at your own risk.