US WEEKLY KICKSTART What the Fed policy outlook means for equities

Research evidence excerpt

US WEEKLY KICKSTART What the Fed policy outlook means for equities

Goldman Sachs US Weekly Kickstart

Fed policy and implications for equities

Macro and micro will share the equity stage next week as the Q2 earnings season

begins alongside an important CPI release. On Tuesday morning, earnings reports

from some of the largest banks will compete for the spotlight with the last consumer

price inflation print before the next FOMC meeting on July 28-29. We expect another

quarter of strong earnings results, but without the magnitude of upward revisions to AI

capex spending that characterized the Q1 earnings season.

Most investors share our economists’ view that the Fed will leave the funds rate

unchanged at the July meeting. Our economists expect a 0.17% month/month

increase in June core CPI, vs. +0.2% for consensus. Their forecast for a -0.11% reading

for headline CPI reflects the recent decline in energy prices and helps explain why the

market is pricing just a 35% probability of a hike later this month.

However, the distribution of investor views surrounding the path of monetary

policy in coming months is wide. Our economists’ baseline forecast is that the FOMC

will leave the policy rate unchanged this year but they assign a 25% probability to a

scenario where the Fed hikes. Market pricing is more hawkish, reflecting a base case of

nearly 50 bp of hikes through mid-2027, with uncertainty around that outlook. Option

pricing signals greater than a 50% likelihood of hikes, but also substantial probabilities

to scenarios where the Fed cuts or remains on hold. Our conversations with clients

reflect a similarly wide range of expectations. Investors also express an unusually wide

distribution of views regarding the implications of any given Fed policy path for equities.