Investing.com — Goldman Sachs warned that a hotter-than-expected U.S. inflation reading this week could weigh on equities by increasing the likelihood of Federal Reserve rate hikes, overshadowing what it expects to be another quarter of solid corporate earnings.
The investment bank expects June core inflation to rise 0.17% month-on-month, below consensus, with headline inflation declining 0.11% as lower energy prices offset price pressures. While Goldman forecasts the Fed will keep rates unchanged this year, markets are pricing in nearly 50 basis points of tightening through mid-2027, creating a key risk for equities ahead of next week’s CPI release and the July 28-29 policy meeting.
The bank said earnings growth should continue to underpin equities over the medium term but argued that additional Fed tightening would weigh on stocks by dampening growth expectations, increasing financing costs in an AI-driven, capital-intensive investment cycle, and echoing conditions seen at previous market peaks.
Goldman noted that the S&P 500 has historically struggled at the start of Fed hiking cycles, posting an average 2% decline over the first three months after an initial rate increase. However, longer-term performance has generally been positive, with the index averaging a 9% gain over the following 12 months, except during the 2022 tightening cycle.
The report added that current market pricing also leaves room for a relief rally if incoming inflation data prompt a more dovish policy outlook. Options markets imply the S&P 500 could move about 0.8% following Tuesday’s CPI release and roughly 1.1% through the end of the week.
Within the market, Goldman expects companies with weak balance sheets and high floating-rate debt to remain particularly sensitive to shifts in interest-rate expectations, while the technology sector has historically outperformed and financial stocks underperformed during the early stages of Fed tightening cycles.