Earnings soar and inflation bites, but the most important market mover this week was all about the Fed.

Strong Earnings Bolster Equities

Solid corporate earnings reports propelled the S&P 500 and Nasdaq 100 to new records. Major banks like JP Morgan and Citigroup exceeded forecasts, contributing to overall market strength. Even small-caps saw gains, reflecting broader market optimism. The most important stock announcement of the week, though, was Nvidia's permission to sell AI chips in China - it sent its stock soaring, becoming the first ever company to reach a market cap of $4 trillion.

Inflationary Pressures Persist

But inflation is heating up. CPI saw its biggest monthly jump in five months in June, rising 0.3%. On a year-over-year basis, prices climbed 2.7%, up from May's 2.4%. Core CPI, excluding volatile food and energy, also ticked up to 2.9% year-over-year. There have been accelerated price increases in household goods, recreational items, and footwear since April. However, these were somewhat offset by lower car prices. PPI also came in, with headline PPI inflation at 2.3%, slightly below forecasts, suggesting that not all tariff increases have fully manifested in producer prices just yet.

Robust Consumer Spending Amidst Fed Tensions

Retail sales rebounded sharply, up a better-than-expected 0.6% in June, after a 0.9% decline in May. This signals robust consumer spending, a crucial driver for the economy, as consumption contributes about 70% to US GDP. Sales of motor vehicles and parts, clothing, and food services all showed strength. Yet, whispers of presidential discontent with the Fed and its chairman continue to inject volatility. While Trump initially floated the idea of firing Fed Chair Jerome Powell, he quickly walked back the comment, suggesting it was more political posturing than a concrete plan.

Markets Climbing the Wall of Worry

We've seen markets climb a significant "wall of worry," with the S&P 500 now up over 26% since the April 8 lows. Positive economic data, including in-line inflation readings and strong retail sales, have underpinned this resilience, allowing equity markets to continue grinding higher. Despite average tariff rates moving substantially higher since the beginning of the year (from about 2.4% to roughly 20.6%, the highest since 1910 according to the Yale Budget Lab) inflation has remained contained thus far, and economic growth has held firm. This notable adaptability suggests higher tariff rates have begun to be absorbed across various constituents, from exporters to corporations.

Tariffs Remain an Overhang, But Year-End Outlook Is Favorable

However, tariffs remain a significant overhang. We expect caution and bouts of volatility as investors digest a new set of tariff updates ahead of the August 1 deadline and potential sector tariffs. This may lead to higher prices if corporations and export partners become less willing to absorb costs, potentially cooling consumption in the second half. Nonetheless, we anticipate a more favorable backdrop towards year-end as the Fed considers cutting rates, a new tax bill kicks in, and we gain more clarity on trade and tariffs. We see a potential re-acceleration of corporate earnings in 2026, with double-digit growth likely, as the lowered bar for Q2 earnings is likely to be exceeded.

The Enduring Independence of the Fed

The biggest concern that emerged this week revolved around the Fed's independence. Congress even launched an investigation into the Fed HQ renovation, theoretically to be used as grounds for removal "for cause”. While the President can nominate Board members, their staggered 14-year terms are designed to prevent any single administration from quickly stacking the board.

Any attempt to remove a sitting Fed Chair would be unprecedented and would severely impact investor confidence and global markets. History shows that economies tend to perform better when central banks are free to make decisions without political pressure.

Market Reaction to Fed Uncertainty

We believe the Fed's independence will endure, despite the heated political climate. Undermining its credibility, especially at a time when inflation remains uncertain, poses an even greater threat to the economy. Therefore, we ultimately do not expect the President to follow through with his threats to oust the current Fed Chair before his term ends, as the risks clearly outweigh any perceived benefits. 

The market's knee-jerk reaction to talk of a Fed Chair removal provided a glimpse of the potential fallout: a short-term spike in volatility, a weaker US dollar, lower equities, and a twist in the yield curve with lower short-term yields (on expectations for rate cuts) and higher long-term yields (due to higher inflation expectations). This signals how seriously investors view the threat to central bank autonomy. 

Future Outlook

Volatility is here to stay in the near term, especially as markets digest tariff headlines and head into the seasonally choppy August and September. However, we believe investors can still feel comfortable that the worst-case scenario - high tariff rates, no positive trade outcomes, and runaway inflation - is unlikely. 

We see opportunities for investors to use pullbacks and volatility to position for a more stable backdrop and re-accelerated growth in the year ahead. We favor US large-cap and mid-cap stocks and recommend sectors across growth and value, including consumer discretionary, financials, and health care.

Have a good week ahead!