Two the Point — Earnings Climb as the Fed Divide Grows

As markets digest early earnings results and diverging signals from the Federal Reserve, investors are weighing the path ahead for interest rates and risk assets. While the odds of a July cut remain low, internal divisions at the Fed and signs of easing financial conditions are drawing renewed attention.

Key Insights:

• Fed Governor Waller made his strongest case yet for a rate cut, citing declining inflation and restrictive real rates.
• Some investors are turning their focus to the “shadow” Fed funds rate, a way to gauge the true stance of monetary policy by factoring in financial conditions like credit spreads, equity valuations, and money supply. By that measure, policy may already be looser than the headline rate suggests.
• Earnings season is underway: S&P 500 Q2 EPS growth is tracking above 5%, with Financials leading and the “Magnificent Seven” expected to post 14.1% growth.
• Housing remains soft, but regional manufacturing surveys (Philadelphia, New York, Richmond) continue to show improvement.
• Inflation trends remain favorable, with June CPI up 2.7% YoY and core PCE expected to remain contained in June.
• Despite policy uncertainty, resilient earnings and cooling inflation offer a supportive backdrop for risk assets.