A series of major events in the US stock market: inflation data and the start of earnings season, the market awaits signals of a Fed rate cut

Zhitong Finance APP noticed that inflation data and the release of second-quarter financial reports will bring good news to investors. The stock market closed near record highs last week due to the shortened holiday.

With slowing job growth, investors will closely watch the release of the Consumer Price Index (CPI) for June on Thursday, as the possibility of a rate cut by the Federal Reserve in September is increasing. Federal Reserve Chairman Powell's semi-annual testimony before the Senate Banking Committee and the House Financial Services Committee on Tuesday will also be a focus for investors.

On the corporate side, some of the largest financial institutions in the United States, including JPMorgan Chase (JPM.US), Wells Fargo (WFC.US), and Citigroup (C.US), will begin releasing second-quarter financial reports on Friday morning. The performance of PepsiCo (PEP.US) and Delta Air Lines (DAL.US) will also be announced earlier this week.

Last week, the S&P 500 Index rose nearly 2%, and the Nasdaq Composite Index rose over 3%. Both indices hit historic highs this week. The Dow Jones Industrial Average, which has significantly underperformed this year, has only risen by 0.5%.

More reasons to support a rate cut in September

The June jobs report released last Friday showed that the U.S. economy added more jobs last month than expected. However, economists found several signs of a slowdown in the labor market in the details of the report.

The unemployment rate rose to 4.1%, the highest level since November 2021. At the same time, job growth in April and May was revised down by 111,000, indicating that the strong growth in the labor market in the past few months was not as robust as initially thought.

Several economists believe this will lead to a rate cut by the Federal Reserve in September.

Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, said, "The June jobs report shows more signs of cooling in the labor market, including lower-than-expected revised job growth, rising unemployment, and slowing income growth."

"Federal Reserve officials are increasingly concerned about downside risks in the labor market, and the June data support our forecast that the Fed will cut rates in September and at every subsequent meeting."

Neil Dutta, Head of Economics at Renaissance Macro, said the report should "firm up expectations for a rate cut in September." "Economic conditions are cooling, which changes the Fed's calculus," Dutta added. "Powell should use July to prepare for a rate cut in September."

According to the Federal Reserve Watch Tool from the Chicago Mercantile Exchange, as of last Friday, investors estimated a 75% likelihood of a rate cut by the Federal Reserve before the September meeting, up from 64% in the previous week Jerome Powell will deliver semi-annual testimony to Congress this week, and investors will closely watch the Federal Reserve's policy direction ahead of the July 30-31 meeting.

The U.S. unemployment rate rose to 4.1%.

Inflation Eases

While the slowdown in the labor market has increased the reasons for the Fed to cut interest rates, inflation remains a key factor.

In May this year, inflation data showed that the price increase was at its lowest level since 2024. Powell stated last week that these data "suggest that we are returning to the path of disinflation."

The CPI report for June will be released on Thursday morning, which will be the first test of whether this trend will continue.

Wall Street economists expect the overall inflation rate for June to increase by an annualized rate of only 3.1%, lower than the 3.3% increase in May. May's data was the slowest year-on-year inflation data since July 2022. Prices rose by 0.1% month-on-month, slightly higher than the flat rate in May.

On a basis of "core inflation" excluding food and energy prices, it is expected that the CPI for June will rise by 3.4% compared to the same period last year, the same as in May. The monthly core price increase is expected to be 0.2%.

Stephen Juneau, an economist at Bank of America, wrote in a research report: "We expect that, following the undeniable good report in May, the CPI report for June will be another confidence builder."

Major banks will successively release earnings reports this week

Earnings season is here again, and financial stocks will be closely watched in the coming weeks; according to FactSet data, 40% of S&P 500 index component companies will report earnings during this period.

The industry is not expected to be a leader in profit growth this quarter, with analysts expecting second-quarter earnings to increase by 4.3% year-on-year. This ranks the financial sector seventh among the 11 sectors in the S&P 500 index.

Regional banks remain a major concern in the banking industry. It is expected that the earnings growth of regional banks will decrease by 26% year-on-year.

Second-quarter earnings face a "high threshold"

After emerging from the profit decline in 2023, companies are finally facing a new challenge in this earnings season: a high threshold that needs to be overcome According to FactSet data, the market generally predicts that the earnings of companies in the S&P 500 Index components will increase by 8.8% year-on-year in the second quarter. This will be the highest year-on-year profit growth for the index since the first quarter of 2022.

David Kostin, Chief U.S. Stock Strategist at Goldman Sachs, said, "We expect the magnitude of earnings beats to narrow as the market's consensus is higher than in previous quarters."

As trading in the market approaches record highs before the earnings season, Kostin and other strategists are cautious about how much upside investors can expect if companies outperform Wall Street expectations.

Kostin pointed out that in the previous quarter, stocks of companies that beat expectations traded 3 basis points higher than the S&P 500 Index on the second day, far below the historical average of 100 basis points.

Given that investor sentiment remains elevated ahead of this earnings season, Kostin believes that the returns on performance this quarter should be below average but not as extreme as in the first quarter.

Scott Chronert, U.S. Stock Strategist at Citigroup, also issued a similar warning, cautioning that due to "overly high implied growth expectations," the prospects for a significant market rally this quarter are limited.

"The market may need to see positive news on wage increases and strong execution to sustain recent gains or push higher from current levels," "The concern is that despite positive fundamental trends and consensus, valuations suggest that buyers will demand more."

Overall, this has led to a change in Wall Street's expectations for how much of a boost second-quarter earnings reports can bring to the stock market.

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

"On the other hand," Chadha pointed out, "as the market enters earnings season with heavy stock positions, a moderate rebound is expected."