The three keys

As we’ve said many times, sustained stock-market moves usually reflect sustained moves in the outlook for corporate earnings, inflation, and interest rates. With all three of those key drivers in the news, now seems a good time for a quick review:

Earnings. With 90% of S&P 500 Index members having reported June-quarter results, the percentages of companies beating consensus revenue estimates and consensus earnings estimates have topped 80%, above five- and 10-year norms. The consensus calls for nearly 10% profit growth for full-year 2025, with eight of the index’s 11 sectors delivering at least 7% growth.

Inflation. Tariffs have not led to a surge in consumer prices, partly because U.S. companies stockpiled goods ahead of their imposition. Also, companies have absorbed much of the impact so far, with many worried that price increases will result in market-share losses. But even without much impact from tariffs, U.S. inflation excluding food and energy was 3.1% in the 12 months ended July — well above the Fed’s 2% target.

Interest rates. As expected, the Federal Reserve Board made no change to the federal funds rate after its July 30 meeting. In announcing the decision, the Fed said that growth moderated in the first half of the year, but that inflation remains somewhat elevated. However, weakness in the labor market seems to have boosted the market’s confidence in future cuts. Fed funds futures imply a 98% chance of a rate cut by the end of the year, with a 33% chance of at least 0.75% in cuts.

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