June headline inflation came in right at expectations, but there’s still some growing concern on a trend basis. The annualized CPI rate is now at 2.7%, up from 2.3% just two months earlier. We’re likely beginning to see some of the trickle-down effects of the Trump tariffs. I don’t think we’re necessarily on the cusp of another big inflation spike here, but I do think the markets are largely dismissing the possibility that inflation could start getting a little unruly. With the economy still growing, earnings season off to a decent start and unemployment still pretty low, there’s not really much of a case for needing to cut rates here unless you think that policy needs to be normalized a bit. With inflation trending higher, however, there’s really even less of a case for rate cuts. The futures market is still expecting two rate cuts by year-end and four by June 2026. Investors seem to believe that numerous cuts are still on the way, but I think there’s a real chance that the market is going to get disappointed.
With regards to earnings season, the bar for success is pretty low right now (FactSet is only expecting roughly 5% earnings growth from the S&P 500) and that could pave the way for an earnings-related rally. Early results are fairly positive and it feels likely that we’re going to see another good beat rate. Even as geopolitics add a layer of uncertainty and inflation is now looking like it could become problematic again, corporate earnings are the one thing that have consistently pushed stock prices higher. I don’t think there’s much question that valuations have gotten stretched again, but without a meaningful contraction in earnings, there’s unlikely to be sustained downward pressure on stock prices here.
