Report by Renta 4
European markets opened lower (Eurostoxx 50 futures down 0.9%, S&P 500 down 0.6%, Nasdaq 100 down 1.3%) and there were sharp falls in Asia (Nikkei down 2%, South Korea’s Kospi down 8%).
On the geopolitical front, another weekend of escalation in the Middle East, with fresh Iranian attacks on merchant ships, to which the United States has responded with its fourth round of strikes in a week against Iranian targets – which in turn have led to Iranian attacks on US bases in Kuwait, Bahrain, Jordan and Qatar, and to declare the Strait of Hormuz closed “until further notice”. For its part, the US denies this, stating that the southern corridor remains open. In practice, these tensions mean that traffic through the Strait is virtually non-existent (except for vessels passing through with their transponders switched off).
Against this backdrop, Brent crude is up 3% to $78/bbl, putting upward pressure on yields: the 2-year US Treasury yield has risen to 4.24% (its highest since February 2025) and the 10-year T-bond yield stands at 4.59%. The dollar is strengthening and gold is falling in a market that is already almost fully pricing in (at 90%) a Fed rate rise in September (compared with a 65% probability a week ago), as well as a second rise in Q1 2027.
With investors focusing on inflation due to its implications for the monetary policy of the major central banks, attention this week will centre on the release of the US CPI for June (Tuesday). The consensus forecast projects a moderation in the headline rate to 3.8% (down from 4.2% in May, and marking the first negative monthly reading since the start of the pandemic in 2020) and the core rate remaining at 2.9%. Although this would mark the first monthly fall in the headline CPI since the start of the pandemic in 2020 – due to petrol prices falling from their war-induced highs – it is likely that, given the current context of escalating tensions in the Middle East, investors will view the data with some caution. On Tuesday, Warsh will give his first half-yearly testimony before the House of Representatives’ Financial Services Committee (and before the Senate on Wednesday), which will serve as an update on his view regarding the rate rises currently priced in by the market (up 25 basis points for the remainder of 2026, with the possibility of a further 25 basis points in Q1 2027) and what the Fed’s monetary policy trends might be once the deliberations of the five working groups set up to reform the institution conclude at the end of the year.
Also of significance will be the June economic data from China (Wednesday), where we are likely to continue seeing a divergence between consumption (a fall in retail sales) and manufacturing (rising industrial production), whilst the property sector will continue to act as a clear drag on the Asian giant’s economy and the external sector (Tuesday) will remain in good shape.
Against a complex geopolitical and macroeconomic backdrop, stock markets will need to justify their valuation multiples based strictly on second-quarter (2Q26) corporate earnings. This week will mark the real starting point in the United States with the results from the major investment banks. On Tuesday, giants such as JPMorgan, Bank of America, Wells Fargo, Goldman Sachs and Citi will report, followed on Wednesday by Morgan Stanley.
These institutions’ trading revenues are expected to remain at levels close to the all-time highs recorded in the first quarter, driven by the high volatility caused by the war with Iran and speculation in the artificial intelligence sector. This will also be bolstered by buoyant investment banking activity, spurred by major IPOs, and the volume of corporate transactions. Furthermore, the banking sector will benefit from solid credit growth and the expansion of its net interest margins thanks to persistently high interest rates. However, the business guidance provided by executives will be decisive: if corporate lending begins to show signs of weakness or if companies scale back investment plans in the face of rising borrowing costs, the optimism driving the sector rotation towards banking could be reversed.
For the S&P 500 as a whole, EPS growth of 23.6% year-on-year is expected for Q2 2026, which would mark the second consecutive quarter of year-on-year growth above 20% for the index. However, this EPS growth could exceed 29% if we take into account the average beat that S&P 500 companies have delivered against estimates: an average of 7.4% over the last 10 years and 9.2% over the last four quarters. With 4 per cent of S&P 500 companies having reported results as of 10 July, 89 per cent have posted higher-than-expected EPS, averaging 14.5 per cent, and 76 per cent have reported higher-than-expected revenue. This week, 31 companies are scheduled to report, 17 of which are in the financial sector, where growth of 6.6% year-on-year is expected – which would mark the fastest growth rate for the eighth consecutive quarter amongst the eleven sectors of the S&P 500.
We believe the market continues to show a degree of optimism, anticipating a ‘soft landing’ and an imminent pause in interest rate rises. However, the combination of a geopolitical stalemate in the Strait of Hormuz, the stagnation of global disinflation according to the IMF, the massive capital expenditure on AI and, above all, the arrival of an independent Kevin Warsh at the Fed suggests that the risk of ‘higher rates for longer’ may be underestimated. Volatility is not a temporary phenomenon this week; it is the new normal for the rest of 2026.
