Inflation Data and Bank Earnings Kick Off a Crucial Test for Markets

Skip the usual brew and order a tea or a Turkish coffee this morning because it’s Tasseography Tuesday. For hundreds of years, people have looked to coffee grounds and tea leaves for fortune-telling and divination and today is the financial equivalent, when analysts will be poring over data and balance sheets like the dried remnants of an empty cup.

The Labor Department is scheduled to release June consumer price index (CPI) data at 8:30 a.m. this morning, a crucial indicator that will have major implications on the future of interest rates. Meanwhile, Wall Street titans JPMorgan, Citigroup and Wells Fargo will kick off a run of crucial earnings today, with lending peers Goldman Sachs, Morgan Stanley and Bank of America, pharma leaders Johnson & Johnson and Novartis, food and beverage giant PepsiCo, and streaming standout Netflix to follow later in the week.

They Might Be Undervalued Giants

Heading into this morning, Bloomberg data shows economists expect headline CPI to have increased 2.6% year-over-year last month, a jump from the 2.4% reading in May. On a month-to-month basis, prices are forecast to have risen 0.3% in June, coming in hotter than the 0.1% a month earlier. If the reading is anything like that, it will be headed in the wrong direction away from the Federal Reserve’s 2% inflation target that officials have eyed for rate cuts, something markets have been waiting on to stimulate M&A. Without the target in sight, markets are pricing for a mere 4.7% chance of a rate cut this month, per the CME FedWatch.

At least the cascade of banking earnings looks a little brighter if recent share performance is any indication. The KBW Bank Index is up 37.9% since its tariff mayhem-induced April low, vaulting the S&P 500’s 25% recovery since its own low. The big US banks already bested first-quarter earnings expectations, and many observers expect their trading desk revenues will have been boosted by record-setting trading days after President Donald Trump’s “Liberation Day” tariff announcement. In the near term, they’re also likely to gain from long-awaited deregulation efforts by the Trump administration — Bloomberg Intelligence analysts flagged that financials, which have a 13.7% weighting in the S&P 500, are forecast to make up 18.6% of the index’s earnings, suggesting the sector may still be undervalued. As for the rest of the market, it’s likely to more closely reflect the volatile second quarter:

• Entering this month, FactSet analysts said analysts expect to see 5% year-over-year earnings growth for the S&P 500 during the second quarter earnings season — that would amount to the slowest growth since the final quarter of 2023. Things are, at least, expected to get better from there: 7.3% in the third quarter, 9% for the full year, and 13.9% in 2026.
• In essence, this means analysts expect second-quarter results will mirror the alternating bearish tumult and bullish triumph of the last three months, with “yippie” selling and a market freakout in April giving way to May and June’s march to recovery and beyond. 

Foolish Prediction: The market may have recovered from the selloff prompted by the tariff announcement, but it’s not without potential losses. Analysts surveyed by LSEG IBES expect a more optimistic 5.8% rise in S&P 500 earnings in the second quarter, but that’s a massive downgrade from the 10.2% forecast on April 1. That’s why we’re examining coffee grounds this week. So you don’t have to.