Inflation data, Powell’s speech and big bank earnings reports: What to know

Investors will get a look at inflation data and second-quarter earnings reports after a holiday-shortened week in which stocks closed near record highs.

Amid the slowdown in job growth, investors will be closely watching the release of the June Consumer Price Index (CPI) on Thursday as indications grow that the Federal Reserve could cut interest rates in September. Federal Reserve Chairman Jerome Powell’s semiannual testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will also be a key focus for investors.

On the corporate side, some of the largest U.S. financial institutions, including JPMorgan (JPM), Wells Fargo (WFC), and Citi (C), will kick off the second-quarter earnings season on Friday morning. PepsiCo (PEP) and Delta Air Lines (DAL) will also be in focus early in the week.

Last week, the S&P 500 (^GSPC) rose nearly 2%, while the Nasdaq Composite (^IXIC) rose more than 3%. Both ended the week at record highs. The Dow Jones Industrial Average (^DJI), which has been a noticeable laggard all year, gained a more modest 0.5%.

More and more arguments for interest rate cuts in September

Friday’s June jobs report showed the U.S. economy added more jobs than expected last month. But economists found few signs of a labor market slowdown in the report’s details.

The unemployment rate rose to 4.1%, the highest level since November 2021. Meanwhile, job growth data for April and May was revised down by 111,000, showing that the solid growth in the labor market over the past few months was not as solid as initially thought.

Many economists believe the release will lead to the Federal Reserve cutting interest rates in September.

“The June employment report showed more signs of a cooling labor market, with job growth, including revisions, coming in weaker than expected, the unemployment rate rising and earnings growth slowing,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, wrote in a note to clients.

“Federal Reserve officials are increasingly focused on downside risks in the labor market, and the June data support our forecast that the Fed will cut interest rates in September and at each meeting thereafter.”

Renaissance Macro’s head of economics, Neil Dutta, wrote in a note to clients on Friday that the report should “reinforce expectations for a rate cut in September.”

“Economic conditions are cooling, which leaves the Fed with other options,” Dutta added. “Powell should use July to set a September cut.”

The story continues

According to CME’s FedWatch tool, investors on Friday priced in the probability of the Fed cutting interest rates before its September meeting at about 75%, up from 64% a week earlier.

With Powell set to deliver his semi-annual testimony on Capitol Hill this week, investors will be closely watching any suggestions of policy changes ahead of the July 30-31 meeting.

Read more: What the Fed’s interest rate decision means for bank accounts, deposits, loans and credit cards

Price check

While the slowdown in the labor market provides additional support for the Federal Reserve to cut interest rates, inflation remains a key factor.

In May, inflation readings showed prices rose at their slowest pace in 2024. Powell noted last week that the readings “suggest we are returning to a disinflationary path.”

The first test of whether this path will continue will be released on Thursday morning with the CPI report for June.

Wall Street economists expect core inflation to have risen just 3.1% annually in June, a slowdown from the 3.3% gain seen in May. The May data was the slowest year-over-year inflation reading since July 2022. Prices are expected to rise 0.1% monthly, a slight increase from May’s flat reading.

On a “core” basis that excludes food and energy, the CPI is expected to rise 3.4% from a year ago in June, unchanged from May. Month-on-month increases in core prices are expected to be 0.2%.

“We expect the June CPI report to be another confidence-builder after an undoubtedly strong report in May,” Bank of America US economist Stephen Juneau wrote in a research note ahead of the release.

Read more: Is the inflation fever ending? The price hikes on everyday items are finally subsiding.

Big banks prepare the ground

Earnings season is upon us again, and financials (XLF) will be in the spotlight over the next few weeks; 40% of S&P 500 companies reporting this time will come from this sector, according to FactSet.

The sector is not expected to lead in earnings growth this quarter, as analysts are forecasting year-over-year earnings growth of 4.3% in Q2. This places the financials sector seventh out of eleven sectors in the S&P 500 in terms of earnings growth.

As Yahoo Finance’s David Hollerith recently reported, regional banks remain a key pain point for the industry. Regional banks are expected to see a 26% decline in year-over-year profit growth.

‘High Bar’ for Q2 Earnings

After emerging from an earnings recession in 2023, companies finally face a new challenge this reporting season: a high bar.

The consensus forecast is for S&P 500 earnings to rise 8.8% from a year earlier in the second quarter, according to FactSet. That would mark the index’s highest year-over-year earnings growth since the first quarter of 2022.

“We expect the magnitude of the earnings per share overshoot to moderate as consensus forecasts raise the bar higher than in prior quarters,” David Kostin, chief U.S. equities strategist at Goldman Sachs, wrote in a note to clients ahead of earnings season.

With markets expected to trade near record highs heading into the reporting period, Kostin and other strategists are cautious about what returns investors can expect if results beat Wall Street expectations.

Kostin noted that in the last quarter, stocks that beat expectations were up 3 basis points versus the S&P 500 on the next trading day, well below the historical average of 100 basis points.

Given that investor sentiment remains buoyant amid this round of earnings, Kostin argued that “the reward for beating results should be less than average this quarter, though not as extreme as the first-quarter season.”

Scott Chronert, Citi US equity strategist, echoed this sentiment, warning that given “high growth expectations,” the prospects for big gains in stocks this quarter are limited.

“Markets will likely need to see a hike coupled with solid earnings to sustain recent gains or push them higher,” Chronert wrote in a weekly research note on Friday. “We are concerned that while fundamentals are positive and consensus estimates are reachable, valuations suggest the buy side will demand more.”

Overall, Wall Street is downplaying expectations about how higher second-quarter earnings reports will impact the stock market.

Research by Binky Chadha, chief equity strategist at Deutsche Bank, shows that the S&P 500 rises 80% of the time during earnings season, with an average return of 2%.

“On the other hand,” Chadha noted, “the market is heading into earnings season, as well as over-investment in equities, which suggests moderate growth.”

Weekly calendar

Monday

Economic data:New York Federal Reserve 1-Year Inflation Expectations, June (3.17% previously)

Profits: No significant earnings information was published.

Tuesday

Economic data:NFIB Small Business Optimism, June (expect 89.9, previously 90.5); Federal Reserve Chairman Powell testifies before the Senate Banking Committee.

Profits:Helen of Troy (HELE)

Wednesday

Economic data: MBA Mortgage Applications, July 5 (-2.6% earlier), Wholesale Inventories, Month-on-Month, May, Final (0.6% earlier); Fed Chairman Powell Testifies Before House Financial Services Committee

Profits:Manchester United (MANU), WD-40 (WDFC), PriceSmart (PSMT)

Thursday

Economic data: Consumer Price Index, month-on-month, June (expected +0.1%, previously +0%); CPI excluding food and energy, month-on-month, June (expected +0.2%, previously +0.2%); Consumer Price Index, year-on-year, June (expected +3.1%, previously +3.3%); CPI excluding food and energy, year-on-year, June (expected +3.4%, previously +3.4%); Real average hourly earnings, year-on-year, June (+0.7% previously); Real average weekly earnings, year-on-year, June (+0.5% previously); First claims for jobless benefits, week ending July 6 (238,000 previously);

Profits:Brands Conagra (CAG), Delta Airlines (DAL), PepsiCo (PEP), Progressive (PGR)

Friday

Economic data: Producer Price Index, month-on-month, June (expected +0.1%, previously -0.2%); PPI, year-on-year, June (previous +2.2%); Core PPI, month-on-month, June (expected +0.1%, previously 0%); Core PPI, year-on-year, June (previous +2.3%); University of Michigan Consumer Sentiment, preliminary July (expected 67, previously 68.2)

Profits:BNY Mellon (BK), JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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