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Thought of the day

Markets started the last week of July on an encouraging note, as the US and Iran halted strikes against each other over the weekend, while talks between Iranian and Omani officials indicated a fresh attempt to revive shipping through the Strait of Hormuz. Brent crude oil was trading at USD 90.5/bbl at the time of writing, over 10% below last week's high, and S&P 500 futures were pointing to a higher open.

The positive sentiment may soon be put to the test, as investors brace for earnings results from major US hyperscalers and the Federal Reserve’s policy meeting this week. The Bank of England and the Bank of Japan will also make interest rate decisions.

But while volatility may pick up in the coming days, steady Fed policy and robust corporate earnings growth should keep markets supported, in our view.

The Fed is likely to keep rates unchanged this week, in our view. Current fed funds futures indicate an over-30% chance of a rate hike on Wednesday when the US central bank concludes its two-day policy meeting. But we believe the Fed will keep the target range unchanged at 3.50-3.75% despite Chair Kevin Warsh’s recent hawkish comments. The latest data showed that price pressures have moderated, and we think the recent spike in oil prices and the Trump administration’s new tariffs should have a limited impact on inflation. The June employment report also suggested that labor demand is not running at a pace that would fuel concerns about overheating. If the Fed does not embark on an aggressive tightening cycle, it should keep equities supported.

US companies continue to report strong earnings. US hyperscalers’ capex commitments and cloud revenue growth will be closely watched, and limited visibility on AI spending beyond 2027 may continue to weigh on sentiment. But we think the earnings strength that will underpin market performance in the coming months is much broader than the tech sector. Last week, company results showed that consumer spending remains on a solid footing, with American Express saying it sees no evidence of a general slowdown, Capital One reporting an improvement in its credit card delinquency rate, and travel companies indicating healthy demand trends. Separately, GE Vernova reported results that are consistent with continued strength in electrification demand. Without taking any single-stock views, we see an upside risk to our S&P 500 earnings per share estimate of 28% growth for the second quarter if companies continue to post solid earnings at this pace.

Energy flows through the Strait of Hormuz should recover over time. The situation in the Middle East is fluid, and the risk of further escalation remains high. President Trump has said the US is “locked and loaded” for major strikes on Iran, and Tehran has warned of an expanding war geographically if US strikes continue. But prolonged disruption of energy supplies would add pressure on US household budgets when affordability is a key concern, while reduced or minimal income from oil exports could impede the Iranian government’s ability to provide vital goods to its population. Our base case remains that mounting economic pressures on both sides should lead to mutual interest in re-establishing shipping through the Strait.

So, while investors should be prepared for possible equity volatility this week, we maintain our constructive view on the market over the next six to 12 months. Investors should broaden their stock exposure across sectors and regions for better diversification, and consider capital preservation strategies for more defensive positioning.