Stronger Wholesale Prices, Rate Cut Expectations, and Robust Earnings Shape Market Outlook

Matthew Rubin Chief Investment Officer

 

1. July’s Producer Price Index rose sharply, hinting at potential upward pressure on consumer prices in the months ahead.
2. Despite higher producer price inflation, a September rate cut remains likely.
3. Most S&P 500 Index companies beat earnings estimates last quarter, pushing growth forecasts sharply higher.

 

1. PPI Inflation Sees Largest Monthly Gain Since 2022

Last week’s data showed that the U.S. Producer Price Index (PPI) surged 0.9% in July, reaching a year-over-year pace of 3.3%.¹ This is the largest monthly gain since June of 2022, and far higher than the 0.2% monthly forecast and June’s flat PPI reading.¹ PPI measures the prices companies pay at the wholesale level and is often viewed as a leading indicator of shifts in consumer prices.

July’s PPI data showed services inflation climbing 1.1%, fueled by stronger trade services, while goods inflation rose 0.7%, driven largely by higher food costs.¹ The sharp rise may reflect early effects of recent tariffs. It is not yet clear whether businesses will absorb these costs through lower margins or pass them on to consumers.

While one month of higher inflation does not establish a trend, the magnitude of July’s jump suggests we may have reached a turning point on inflation. The next key reading to watch will be July’s personal consumption expenditure (PCE) inflation, the Federal Reserve’s (Fed’s) preferred gauge, expected to be published on August 29th.

The strongest earnings growth came from the communications and technology sectors. In contrast, energy and consumer discretionary companies reported average declines. Forecasts for S&P 500 earnings growth suggest a slower pace ahead, with projected full-year growth of 10.0%. This outlook is supported in part by a solid 12.8% increase in the first quarter of 2025.¹ Although tariffs are likely to weigh on corporate profit margins in the months ahead, if overall earnings trends remain robust, it could be enough to support stock prices over time.

2. Markets Maintain High Odds for September Fed Rate Cut

Last week’s stronger-than-expected PPI inflation report did little to alter expectations for a September interest-rate cut. According to CME FedWatch, markets continued to price in a roughly 92% probability of a cut next month. However, expectations for additional cuts in October and December eased slightly following the report.

Current projections suggest the Fed may lower rates one to two times this year, with a similar pace anticipated in 2026, potentially bringing the federal funds rate to approximately 3.5%. While inflation uncertainty remains, recent signs of labor market softening may shift the Fed’s focus toward avoiding a deeper or more prolonged employment slowdown.

The central bank’s annual Jackson Hole conference, scheduled for August 21st–23rd, is expected to be an important forum for signaling any potential changes in interest rate policy.

3. Earnings Season Winds Down with Stronger-Than-Expected Results

With 91% of S&P 500 companies having reported results as of last week, the second-quarter earnings season is winding down. The numbers exceeded expectations, as 82% of companies beat analyst estimates, delivering an average earnings upside surprise of 8.5%.¹ This lifted projected earnings growth for the quarter to 10.3% from 3.8% at the end of the quarter, suggesting that earlier downgrades may have been overly pessimistic.¹

The strongest gains came from the communications and technology sectors, which each posted year-over-year growth of more than 20%.¹ Only one of 11 sectors — energy — reported a decline, and it accounts for less than 3% of the S&P 500’s market capitalization.¹

Looking ahead, earnings growth is expected to slow in the coming quarters, but still total 10.3% for 2025, supported by a strong 12.8% rise in the first quarter. With U.S. equity markets near record highs, earnings growth will remain a key driver of potential gains over the rest of the year.¹

For the period ending 8/15/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ FactSet

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Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index.
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 200^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_22