CPI joins hands with bank stocks, performance to come this week! The financial reporting season has begun, can the US stocks affected by tariffs maintain their upward trend?

U.S. stock market has returned to near historic highs. In the coming week, a busier economic and earnings calendar will provide investors with more information to focus on. First, the CPI data to be released on Tuesday will set the tone for this week's economic agenda. CPI will be an important data indicator for investors and policy makers to consider, and the next interest rate decision from the Federal Reserve is less than two weeks away. The latest earnings season for U.S. stocks will also kick off this week. Earnings season is here, with bank stocks leading the way In terms of earnings, the latest earnings season for U.S. stocks will kick off this week. As usual, all major U.S. banks will report their earnings first this week. Investor enthusiasm for Wall Street IPOs and mergers and acquisitions is once again high, with Wells Fargo & Company (WFC.US) possibly becoming a focus of attention as it escapes stricter regulatory constraints that have lasted for a decade. Regarding the latest earnings for Wall Street banks, Morgan Stanley points out that capital markets have become more active again, with expectations that stock trading will be very active and investment banking revenue will exceed management's expectations; secondly, due to a decrease in capital requirements after recent stress tests, Morgan Stanley expects management to start announcing stock buyback plans and related management cushion measures. Meanwhile, Netflix (NFLX.US) earnings will kick off the earnings season for large U.S. tech companies, and ASML Holding NV ADR (ASML.US) and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) will also announce important developments in the artificial intelligence chip trend. Other well-known companies reflecting consumer conditions, such as PepsiCo, Inc. (PEP.US), Johnson & Johnson (JNJ.US), United Airlines (UAL.US), and American Express Company (AXP.US), will also release their quarterly earnings. Data released by FactSet on July 3 showed that analysts expect earnings per share for the S&P 500 index to increase by 5% entering the second quarter earnings season. If this forecast holds true, it will be the slowest profit growth rate since the fourth quarter of 2023. During the second quarter, uncertainty related to tariffs reached a peak - President Trump's shocking "Liberation Day" declaration was made on the second day of the quarter (April 2). However, recent market rallies indicate that the impact of the performance data that companies will announce in the coming weeks, reflecting past conditions, has been fully reflected. In the third quarter, analysts expect earnings to grow by 7.3% compared to last year. According to FactSet data, full-year profit growth is expected to reach 9%. Analysts predict that by 2026, earnings should increase by 13.9%. Therefore, earnings data for the second quarter seem to reflect a brief period of panic, acceptance, and subsequent resignation in the U.S. business community surrounding Trump's tariff goals. This whole process lasted about five weeks from April to May. This week, Trump once again announced a series of tariff measures, surprising some of America's trading partners. However, investors overall did not seem too worried about this. Later on Thursday, the United States implemented new tariff measures on Canada, and Trump decided to raise tariffs on all U.S. imports, a move reminiscent of the headline news that shocked the market earlier this year. However, this time, this impact almost did not disrupt market momentum. As Trump himself said in an interview last week, "I think these tariff measures have been widely welcomed. The stock market hit a new high on Thursday." Inflation Expectations As investors and Trump anxiously await the Federal Reserve to start cutting rates, the inflation data released on Tuesday is unlikely to strengthen the urgency for the central bank to act faster. Wall Street economists expect the inflation rate to further deviate from the Fed's target level. The "core" consumer price index (excluding food and gasoline, and closely watched by the Fed) is expected to increase by 2.9% year-on-year in June. Monthly, both the "core" and total inflation rates are expected to increase by 0.3%. Economists at Oxford Economic Research Institute wrote in a report to clients on Friday, "Inflation data in line with our expectations will keep the Fed cautious as it assesses the impact of tariffs on inflation. And the impact of these effects is just beginning to show." The institute also pointed out that the easing inflation effect brought about by the recent decline in oil prices after the implementation of spring tariffs is gradually disappearing. In the view of the institute, all these factors may lead the Fed to remain cautious at least during the summer. As of Friday, data from the Chicago Mercantile Exchange Group indicated that traders believe there is only a 4.7% probability of a rate cut by the Federal Reserve later this month. A month ago, this probability was close to 20%. However, Trump has been firm in calling for rate cuts, and this week he told reporters that he believes Fed Chairman Powell should resign immediately. For Trump and the Fed, the challenge is that tariff policies will only make the interest rate situation more complex. Economist Aditya Bhave of Bank of America Corp wrote in a report to clients on Friday, "The tariff measures announced last week will raise the effective tax rate by about 2 percentage points. Based on the composition of imports over the past 12 months, the effective tax rate will rise to nearly 14%. In other words, there is a risk of upward revision to our basic forecast, with the effective tariff tax rate likely to stabilize at around 10%." Although Bhave points out that there is still room for downsizing tariff rates, the uncertainty of this policy makes it harder for the Fed to cut rates. Bhave added, "Powell has emphasized that the Fed wants a clearer understanding of the impact of policy changes before taking the next steps. However, if there is a risk of further significant adjustments to the tariff system, then such clarity may be difficult to achieve." Adjusting stock market target levels The volatility in the stock market this year has led to considerable fluctuations in Wall Street's forecasts for the full-year performance of the stock market - although they are not completely consistent. Last week is the latest example. Strategists from Goldman Sachs Group, Inc. and Bank of America Corp raised their target prices for the S&P 500 index in a report. Goldman Sachs Group, Inc. raised its year-end target for the index to 6600 points, while Bank of America Corp predicts the index will end the year at 6300 points. Before this, these two institutions had forecast the index to stabilize at 6100 points and 5600 points, respectively. The S&P 500 index closed at 6259 points on Friday. In a report to clients on Tuesday, Bank of America Corp's U.S. stock strategy head Savitha Subramanian pointed out that the "U.S. corporate advantage thesis" is a key factor driving the upward revision of stock prospects. Essentially, the companies covered by the S&P 500 index now have a more stable earnings situation and are more resilient to the uncertainties brought about by tariffs, and overall have lower sensitivity to the economic cycle. All of this further demonstrates that earnings growth will continue to be strong. In the second quarter, earnings for the Communication Services (XLC) sector and the Technology (XLK) sector are expected to increase by 29.5% and 16.6%, respectively. These sectors contain five of the "Big Seven" - Amazon.com, Inc. (AMZN.US) and Tesla, Inc. (TSLA.US) belong to the Consumer Discretionary (XLY) sector - and are at the core of AI trading. Only the Utilities (XLU) sector (another sector that performs well in AI, as power demand has increased significantly with the construction of data centers) is expected to have an earnings growth rate that is not lower than the overall index; both the Utilities sector and the entire S&P 500 index are expected to have an earnings growth rate of 5% in the second quarter. In the long run, the most important factor influencing stock prices is the growth of earnings. David Kostin, U.S. stock strategy chief at Goldman Sachs Group, Inc., expressed a similar view, writing, "Companies expect the digestion process of tariffs to be gradual, and large companies seem to have some inventory buffers before the tariff tax rate is raised." The bank added that companies in the S&P 500 index components seem to have sufficient inventory buffers at the beginning of the second quarter, and comments from earnings conference calls "indicate that S&P 500 index components companies plan to mitigate the impact of tariffs by cutting costs, adjusting supplier relationships, and adjusting prices." This is undoubtedly because companies have prepared themselves to deal with Trump's reintroduction of tariff-based fiscal policy. However, what really plays a role is the composition of the S&P 500 index itself - which is now primarily dominated by a few tech giants - ultimately largely mitigating the impact of tariffs for investors.