Market Outlook

Making Sense

Q&A | Inflation | Earnings Season | Market Resilience

Recorded: July 21, 2025

Amy: Hi, I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Monday, July 21st, 2025. I'm joined by our Chief Investment Officer Brent Ciliano and Director of Market and Economic Research Phil Neuhart to talk about some of the questions we are hearing most often from clients. If you'd like to submit a question for a future discussion, please visit FirstCitizens.com/MarketOutlook to submit your question.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

So Phil, we got fresh inflation data last week. The Fed is meeting next week. What are your takeaways from last week and going into next week?

Phil: Yeah, it was an interesting week on the data front. Earnings season started, and we had a lot of inflation data—both Consumer Price Index and Producer Price Index. Both of those indices came in below expectations, so disinflationary, which is great.

Brent: Good to see.

Phil: Great news for the market. There was some interesting detail particularly within the Consumer Price Index. Certain signs maybe of early tariff impact—think appliances, furniture, shoes, things that you'd expect that we import a lot of. We are seeing price increases. But it didn't impact the overall numbers. Why is that?

Consumers spend more on services than they do on goods. I think it is a reminder that yes, tariff impacts are—potentially we're starting to see them, and they're going to continue to feed through—but the overarching picture may not be quite as bad as we have feared because people spend more on services.

If there's services disinflation, things like owner's equivalent rent, the cost of owning a home, if that does not skyrocket, then you could see the overall inflation down and not look too bad. What does this all mean for the Fed? Well, core inflation according to CPI is still running at 2.9%. The Fed's target is 2%.

So you do have inflation above the Fed's target, and you have the unemployment rate still at very low levels. So the Fed's dual mandate of price stability—i.e. inflation and full employment, i.e. the unemployment rate—would indicate in our view the Fed's probably on hold.

But Brent, when you look at futures, they are still pricing almost roughly two cuts this year. From your perspective and our perspective, what do think? If two cuts is the over-under, where do you sit on that?

Brent: I think as we say quite often, I take the under on that one. The Fed will likely be more data dependent, and we'll have to see some more prints to solidify that trajectory on inflation.

So we think probably one cut this year is probably where we are. Fed fund futures are pricing in about October for that. So we'll have to wait and see.

Phil: What do you think, a question we often get, Brent, is the Fed's cutting, right? That's short-term rates, the front end of the yield curve, as we say. What do you think of—let's say the Fed does cut one time. What do you think the impact is on longer-term rates? Does the Fed really control things like the 10-year Treasury, 30-year. How do you think about that?

Brent: I mean, everyone wants mortgage rates to fall, right? So the Fed can control the short end of the curve in Fed fund futures, right? So think about the 2-year is roughly in line with where Fed fund futures will trade. So likely speaking, you're going to see more price action and movement on the shorter end of the curve. So think 3 years and in, less so than like sort of that 10-year, 7-year, 20-year, 30-year, which we believe will likely be more anchored and potentially stickier as the economy and participants focus more on the longer term. So think about the BBB and everything that got passed and so that fiscal prudence and whatnot. So we're likely to see more action on the short end than the longer end.

Amy: And Brent, we're just getting started into Q2 earnings season. We've already seen some surprises. What are your takeaways from what you've seen so far, and what are you looking for?

Brent: Yeah, with about 13% of the companies reporting, it will probably get to about 15 percent-ish by the end of this week. So far, so good. About 83% of companies are posting surprise earnings, so that's great to see. Still a lot more to go. Banks started off pretty good. We've got technology that's gearing up for this week.

So by and large, corporate earnings and profitability is likely to hit that lower bar that we were thinking about seeing—about 5% expected—and we're likely, we think, to be above that once we get through this earnings season.

Phil: Pretty achievable.

Brent: Pretty achievable number, and again this is far into the future, but when you think about what's happening with 2026 earnings and revenues, at the margin, that's starting to continue to creep up a little bit. We're about 14% for 2026 as far as expected earnings-per-share growth and about six-ish percent on the revenue side, which I think is important to see. The revenue side of the equation will likely be important as we continue to move forward, not only this year but into next.

Phil: Yeah and a couple other things we'll be watching. One, margins.

Brent: Yes.

Phil: Margin expectations fell during the tariff concerns but have started to rebound. Do companies come through in the second quarter in terms of seeing margin improvement, particularly back half of the second quarter is more certainty. And speaking of the second quarter, management teams had a pretty interesting quarter, right? Liberation Day was April 2nd to start the quarter. And if you look at some of the results last week, there's indications that folks were getting back to business as we got to the second, the back half of the second quarter.

But we want to hear that management commentary. What are management teams saying relative to CapEx, relative to hiring, relative to doing business? Our sense is that folks are getting back to work compared to sort of the frozen business environment of April. But we want to hear that and something we'll certainly be watching beyond just the results.

Brent: Yeah, and margins to your point, have been very, very strong, and I think it's important to see not only margins but revenue proof because at the end of the day, one of the largest expenditures for corporations is people, right? So in order for the labor market to continue to do as well as it has been doing, given where we are in the cycle, we certainly want to see both balance of revenue and margins kind of come in there, and we're starting to see that, so it's good signs.

Amy: And one thing I know you've been hearing from clients, Phil, is just concern around the resiliency of the market and how long that's going to continue as all of these factors come into play.

Phil: Yeah, we hear that question a lot. The markets face so much this year, and here we are up on the year and near all-time highs.

Brent: What a year it's been already.

Phil: Yeah, and I think there's a few things to consider. One, I think that the market has started to look through a lot of noise and headline risk and really has turned to fundamentals. The fundamentals are pretty good, right? First quarter earnings grew 13%.

We're in the middle of our earnings season. Now we're probably going to see well in excess of the 5% estimate. And economic data, yes, there are some soft spots, but we just got retail sales last week, which beat to the upside.

We are seeing some real strength in fundamentals. So when we don't think the market is showing irrational exuberance, it's simply trading on fundamentals. That said, our 12-month-forward price target—6,400 on the S&P—that is up low single digits from where we're trading today. And as you look at the very near term, yes, the market's trading on fundamentals, but it's trading on fundamentals that are pretty good news, right?

We still have tariff deadlines pending. We are entering a period of lower volume as you look at late July into August, often a time in which interesting things can happen in the market. So it's not that we think the market moves in a straight line to our 12-month price target. In fact, we think volatility probably does exist at some point in the next couple months.

But we've been wrong so far this summer, and that could remain the case. But certainly the market's facing a lot, given the August first deadline, potential deadline, and just a lot of headline risk still persisting in a time of low volume.

Brent: Yeah, and you touched upon valuations. Certainly US equity markets are trading at higher valuations, but we have to remember contemplating and understanding valuations as it relates to prices is a longer-term thing, right? Markets don't trade day to day, week to week on valuations, right, that's a longer term. And as we've lived through in many periods, you can stay at high valuations for quite some time.

Longer term, right, we think expectations for long-term market returns will be more moderate versus what we've seen over the last decade. But by and large, we think we're very constructive on prices going forward. But as you said, Phil, a little bit of volatility is a time period where people take vacations and we kind of get all geared up before we get back to the fall. We're likely to see some volatility, but not just equities, but also on the fixed-income side. There's a lot that we'll have to sift through still on the tariff side.

Amy: That makes sense. And just for the record, I've never known either of you to be wrong about anything, so that is not a concern. Thank you both for answering questions as always. If you have any further questions, please submit them at FirstCitizens.com/MarketOutlook, and we will be back with you next month.

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Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

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