GS IR Kick Start Europe edges higher, US CPI, Q2 Earnings what have we learnt from the US earnings

• European markets edged higher (STOXX 600 +0.07), with investors digesting yday’s US CPI and Fed rate expectations, along with the geopolitical backdrop of US-Iran talks stalling.

• Yesterday: Europe closed marginally in the red (STOXX 600 -0.15%), pulling back from record highs with a tale of two tapes under the hood. Beats in renewables and semis did the heavy lifting yesterday while luxury and software were at the bottom of the table, followed by Healthcare which also dipped. The macro backdrop was ultimately benign. US July CPI came in broadly in line, with headline inflation at 3.4% YoY and core at 2.5%, the slowest core print since March 2021. This softer inflation backdrop kept September Fed hike expectations capped around 40% and gave rates bulls some room to breathe (see more on chart of the day). In the US, equities were higher with markets trading in tight ranges, as July CPI came largely in-line with expectations – S&P 500 +0.26%, Nasdaq +0.74%. 9 of 11 sectors closed in the green, with strength in Real Estate (+1.07%) and Info Tech (+1.06%), offset partially by losses in Consumer Discretionary (-1.40%), Materials (-1.19%), and Communication Services (- 0.94%).

• Q2 Earnings – What have we learned so far from the US earnings? ~80% of S&P’s market cap behind us, some notable highlights from our US trading desk: The median beat earned just +20bps vs the S&P (+95bps historically) vs a miss 118bps (vs 211bps). Earning growth has been unbelievably strong with Q2 EPS +45% YoY (vs 22% est.). AI ROI started to show up, and Capex estimates rose modestly this quarter but >$1trn expected in 2027. EPS produced two of the largest single day market cap increases & decreases this period - MSFT +$550bn on 7/30, AAPL $500bn on 7/31. Moreover, Beat rate remains one of the highest on record: 64% of companies are beating EPS by > 1 std of consensus estimates - well above the 49% avg. Nine of the eleven S&P 500 sectors delivered double-digit year-on-year EPS growth, while the median stock grew earnings by 14%, the strongest pace since the 2021 reopening period (link). Specifically on TMT beat & fade was the theme as TMT beats lagged S&P by -192bps. Overall it seems mkt did not reward in either direction - Median 1-day excess return vs. the S&P was +20bps for a beat (vs. +95bps historically) and -118bps for a miss (vs - 211bps historically).

• Interesting reads on AI – According to this article, White House officials are almost certain to revise the Trump administration’s AI guidelines and expand its oversight of AI models. And this other article on AI risks, argues that AI demand will collapse but that

the AI financing model only works if demand growth keeps accelerating; analogy is to 2008 housing, not 2000 dot-com – worth a read.

• Headlines: US inflation falls to 3.4% in July (FT), Trump Says US Will Keep Control of Hormuz as Iran Hardens Stance (BBG), Internal UK Forecasts Raise Risk of Growth Downgrade Due to War (BBG), Anthropic investors bet on $2tn valuation in record IPO (FT) US Budget Deficit Surged in July on Acceleration in Spending (BBG), Japan’s Government Is Said to Support Faster BOJ Rate Hike (BBG).

• Market pricing for a September hike fell ~20% post yesterday’s US CPI print. The latest US inflation figures, which came on the heels of a soft employment report, were in line with consensus expectations and the outlook for September's Fed meeting is now tilting more towards rates being kept on hold (GS Research). Before the CPI data, traders were split 50-50 on rates being kept unchanged or raised by 25 bps. Now, that's 60-40 in favor of no change. Market is now pricing just 38% chance of a September hike (RTS). Our US economists’ view is that the inflation problem is mostly a supply-side story; while markets remain focused on tariffs, oil price spikes, and implications of AI- capex, they believe these effects should fade over the coming months given relatively benign underlying inflation and that historically monetary policy has been more effective at taming demand-driven inflation. They believe that the cost of hiking rates in this environment (by putting excess downward pressure on demand) outweighs the benefit. Worth noting that…