Weekly Comment

The second-quarter earnings season closed with results better than expected. 81% of S&P 500 companies beat estimates, with aggregate annual earnings growth of 12%. Nvidia stood out with a +45% increase in earnings, while Technology, Financials, and Industrials led the way, driven by artificial intelligence and energy demand. 

Key data from the quarter:

• 81% of companies beat expectations
• +12% annual earnings growth
• Nvidia: +45% earnings growth 
• Consumer Staples, Energy, and Materials faced headwinds from tariffs and FX

Consumers remain resilient, though spending is becoming more selective. With elevated valuations, the market is now watching whether corporate earnings can sustain current prices in an increasingly uncertain global environment. 

Source: Raymond James –  FacSet.

The U.S. inflation report for July showed mixed signals. Headline CPI held steady at 2.7% year-over-year, while core inflation rose to 3.1%, up from 2.9% the previous month. This shift reinforces market focus on the upcoming Jackson Hole symposium and the Fed’s September decision. 

Other relevant highlights: 

• Food: unchanged in July after a 0.3% increase in June. 

• Energy: mixed performance – gasoline (-2.2%) and natural gas (-0.9%) fell, while heating fuel rose (+1.8%). 

• Shelter: rose 0.2% MoM, unchanged from June. 

The Fed continues to monitor the impact of tariffs and their potential inflationary effects. Although two committee members supported immediate rate cuts, the overall tone remains cautious, with emphasis on balancing inflation and employment mandates. 

Source: Morningstar

Investors often focus on corporate earnings reports, inflation, or central bank decisions, but there is another factor that also influences markets: seasonality. 

Historically, August has been one of the weakest months for financial performance. Since 1950, the S&P 500 has averaged near-zero or negative returns. In pre-election years or after a strong summer, the pattern often repeats. For the Nasdaq, August has been the second-worst month since 1971. 

• Lower liquidity: With institutional traders away, market depth decreases. 
• Few macro catalysts: August falls between key data and inflation periods. 
• Psychological reset: Portfolios are reassessed after summer optimism. 

Market implications:

Volatility is not always negative, but it is rarely the result of chance. Therefore, in August as in any other period, patience and a long-term positioning matter more than very short-term performance. 

July Fed Monetary Policy Statement 

As markets anticipated, the Federal Reserve left its benchmark interest rate unchanged, maintaining the target range at 4.25%–4.50%. Unlike the more optimistic tone in June, this time the Fed acknowledged a slowdown in economic activity during the first half of the year. 

While the labor market remains strong and unemployment stays low, inflation is still somewhat elevated. As a result, the Committee reaffirmed its commitment to its dual mandate: maximum employment and price stability. 

A key highlight was the lack of unanimous support. Two members—Bowman and Waller—voted in favor of a 25-basis-point rate cut. This marks the first time since 1993 that multiple Fed governors have dissented on a rate decision. 

Market Implications: 

Focus now shifts to the annual Jackson Hole symposium in August, where the Fed Chair traditionally provides guidance on the direction of monetary policy. Markets are still pricing in a potential rate cut in September, which would lower the target range to 4.00%–4.25%. 

Federal Funds Rate Expectations

Source: JP Morgan

Despite recent criticisms from former President Donald Trump toward the Federal Reserve (Fed), the possibility of an early removal of Fed Chair Jerome Powell seems limited. The Federal Reserve Act of 1913 does not grant the Executive Branch the authority to dismiss its officials due to disagreements over monetary policy. In addition, a recent Supreme Court decision further reinforced the central bank’s independence, making intervention even more difficult. Although the law allows for removal “for cause,” this clause has never been tested, leaving the legal grounds for dismissal uncertain.

Against this backdrop, three scenarios emerge regarding the Fed’s future under new leadership:

The Fed would maintain a technical approach, free from political pressure.

• More predictable policy
• Lower inflation
• Greater long-term stability
• In the short term: a flatter yield curve and wider credit spreads

A more flexible stance could lead to more expansive policies.

• Boost to short-term growth and inflation
• Result: steeper yield curve and higher inflation expectations

The Fed could succumb to pressure to keep rates low despite high inflation.

• Loss of credibility
• High volatility and potential abrupt adjustments, as in the Volcker era (1979)

However, early dismissal could trigger:

• Temporary volatility spikes
• Weaker U.S. dollar
• Stock market declines
• Distortion of the yield curve

Since the 1970s, the Fed has remained committed to controlling inflation as a core institutional priority.

Source: Capital Group

June Inflation: Mixed Signals and Tariff Watch 

The June inflation report in the U.S. showed a modest monthly uptick, while underlying price pressures remain contained. The Consumer Price Index (CPI) rose 0.3% in line with expectations, while the annual rate increased to 2.7%, just above the 2.6% forecast. Core inflation rose 0.2% month-over-month and 2.9% year-over-year, showing no major surprises. 

Where are the biggest shifts? 

• Food and durable goods saw a 0.3% increase, driven by higher prices for coffee, beverages, and household items. In contrast, prices for new and used cars continued to decline, helping ease core inflation. 

• Services and energy were mixed. Gasoline prices rose 1.0% after four months of declines, and the housing index climbed 0.3%. Meanwhile, hotel and air travel costs edged down slightly, pointing to still-moderate demand. 

Despite the overall uptick, the market remains cautious. Attention is now on the potential impact of new tariffs set to take effect in August, particularly affecting electronics, apparel, and automobiles. 

Market implications: 

Markets are not expecting rate cuts before September, as they assess the effects of new tariffs amid ongoing political pressure for a more accommodative monetary policy. 

Annual headline inflation rose from 2.4% in May to 2.7% in June, while core inflation edged up from 2.8% to 2.9%. 

Congress has approved President Trump’s fiscal package, officially named the “One Big Beautiful Bill Act” (OBBBA). The proposal includes bold tax adjustments that could significantly impact both economic growth and the country’s fiscal stability. 

Here are the main highlights: 

Taxes and Deductions 

• The 2017 tax cuts are made permanent. 
• New deductions of up to $25,000 for income from tips and overtime will apply through 2028. 
• A temporary increase in the SALT deduction cap to $40,000 is introduced for households earning under $500,000. 

Cuts to Social Programs 

• Funding for Medicaid and SNAP is reduced, and new work requirements are introduced. 
• In total, food assistance programs are projected to be cut by $186 billion. 

Other Measures 

• Defense and border security spending increases (around $150 billion each). 
• Tax incentives for green energy are eliminated. 
  According to the CBO, the package could add $2.8 trillion to the deficit over the next decade. Public debt would rise from 98% to 125% of GDP. This could prompt credit rating agencies to reassess the U.S. sovereign rating. 

Market Implications:

The approval of this fiscal package may push Treasury yields higher as concerns grow over the deficit and rising debt issuance. If inflation picks up, the Fed may delay rate cuts—posing challenges for both bonds and equities. 

Public Debt-to-GDP Trend (%) 

Source: JP Morgan 

After the S&P 500 hit new highs, the focus is now on Q2 earnings season. Here are the key takeaways: 

• Earnings kickoff: Big banks like Citigroup, JPMorgan, and Wells Fargo will kick things off on July 15. By early August, over 70% of the index will have reported. 

• Earnings slowdown: S&P 500 EPS growth is expected to come in at +4% year-over-year—much lower than the 12% seen in Q1. Revenue growth is also set to slow to +4%, and margins are under pressure, falling from 12.1% to 11.6% quarter-over-quarter. 

• Sector impact: Earnings in Energy are expected to drop by 28%, with Materials and Consumer Discretionary down 7%. On the flip side, Tech and Communication Services are leading the pack with gains of 18% and 28%, respectively. 

• Tariff effect: New tariffs, which rose from 3% to 13%, are starting to make an impact. While companies haven’t fully passed the added cost to consumers yet, margin pressure is becoming more visible in the most exposed sectors. 

• Full-year outlook: Analysts have trimmed their 2025 earnings forecasts for the S&P 500 by 2%, now expecting +7% growth for the year. A stronger recovery is projected for 2026, with growth around +14%. 

Market takeaway: 

Earnings growth is cooling and margins are feeling the squeeze. Still, lower expectations could leave room for upside surprises. 

Source: Goldman Sachs 

Geopolitical Tensions on the Rise: What’s the Impact on Oil Markets? 

A ceasefire was recently reached between Israel and Iran, yet tensions flared again after the U.S. launched airstrikes on Iranian nuclear sites. In response, Iran threatened to close the Strait of Hormuz—a key passage for global oil shipments. 

Here are three key points to help put the situation into perspective: 

• Limited Immediate Impact: Iran accounts for only 3% of global crude supply and exports just half of that. Shutting down Hormuz would hurt its own economy. 

• Strategic Reserves Are Ready: OECD countries hold 1.2 billion barrels in reserves—enough to cover up to 60 days of exports through Hormuz. 

• Oversupply Ahead: Global demand is expected to grow by less than 1% this year, while supply could grow more than three times as fast, driven by Brazil, Norway, and adjustments in OPEC+ output. 

Market Implications 

S&P 500 companies have very limited direct exposure to Iran and Israel. In the short term, market sentiment may drive volatility. But from a broader perspective, oil market fundamentals remain relatively balanced. 

Over the past 30 years, markets have shown resilience. Following similar geopolitical events, the S&P 500 has delivered an average return of nearly 8% over the next 12 months. 

Source: Raymond James 

Fed sticks with rate cut outlook, but lowers growth forecast. 

As expected, the Federal Reserve kept its interest rate unchanged at 4.25%-4.50%. While uncertainty has eased somewhat, the Fed emphasized that lingering risks still call for a cautious approach. 

The latest dot plot shows that expectations for two rate cuts in 2025 remain. However, seven members of the Committee now anticipate no rate cuts in 2025. The Fed also revised its GDP growth forecast downward to 1.4% (from 1.7% in March) and raised its core inflation projection to 3.1%. 

Updated projections point to a softer labor market, with unemployment expected to reach 4.5%. No changes were announced to the Fed’s balance sheet reduction plans. 

Market Takeaway: 

The statement confirms a cautious stance in response to slower growth, tariff pressures, and lingering inflation risks. While rate cuts are still in the forecast, the Fed acknowledges that balancing growth and inflation will be more challenging. 

Fed Indicators Update (June vs. March) 

Source: Federal Reserve