Next Tuesday will bring the start of the Q2 earnings reporting season and a CPI release with key implications for the trajectory of Fed policy. Earnings growth should determine the overall direction of equity market travel, but we would expect stocks to struggle in the short term if the Fed were to hike. Three reasons: First, while growth is more important than rates for equities, Fed tightening would weigh on the market outlook for growth. Second, the AI boom has made the current cycle particularly capital-intensive, increasing the likely sensitivity to changes in the cost of capital. Third, Fed tightening is one of the conditions that has marked the peaks of past high-valuation, high-concentration bull markets. We expect S&P to peak around 7700 levels in our base case scenario and 7900 levels in bull case scenario. The bear case might see 7200 if earnings disappoint or Fed hike probabilities increase further. Event risks such as middle east conflict might further act as headwinds for US equities as higher gasoline prices reduce consumer discretionary spending power.
