Market Outlook

Making Sense

Q&A | Inflation and the Fed | Earnings Season Results | Financial Markets

Recorded: August 12, 2025

Amy: Hi, I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Tuesday, August 12th, 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're hearing most often from clients.

If you'd like to submit a question, please visit FirstCitizens.com/Wealth and visit our Market Outlook page 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 just got fresh inflation data. What are your takeaways from that report?

Phil: Yeah, interesting Consumer Price Index report this morning. The headlines—or the news headlines—is that's in line, right? We saw headline inflation come in at 0.2%, core inflation at 0.3%. But the details, I think we are seeing some inflationary pressure. That 0.3% core inflation, which excludes food and energy, that's up from 0.2%. And we now see 3.1% year-on-year inflation at the core, which excludes food and energy as I mentioned.

That 3.1% is the highest level since February of this year. So there is inflation in the system. Clearly, markets were expecting potentially something worse because we saw yields fall after the report and stocks rally—at least initially.

Now, in the details, what are we seeing? The question on everyone's mind is, "Well, are there tariff impacts?" And the answer is we're still seeing some, but there's some offsetting factors. So on the tariff front, furniture prices rose again this month. Footwear prices rose. Electronics rose. Coffee—something near and dear to our hearts—

Brent: I shuddered when I saw that one.

Phil: Coffee prices are now 14.5% year on year. These are probably tariff pass-throughs. Now, why was not everything up? Well, that's because we saw offsets. Gasoline prices down north of 2%.

Brent: Which is good to see.

Phil: Appliances, which rose in last month's report, fell. Apparel categories outside of footwear, we saw a lot of declines. So it's not that tariff impacts are everywhere. For example, new vehicle prices—flat. Even though used vehicle prices were up. So it's not that every category we're seeing tariffs, but clearly there is some impact.

Maybe the bigger story from this month's report was that services inflation, which really is viewed as separate from any tariff impact, running a little bit hotter than the month before. And that is why we saw an acceleration in that core number.

What does this mean all for the Fed, which is really what's on everyone's mind? Well, we saw—at least initially—fed funds futures pricing 95%, 96% chance of a Fed cut in September. That number was in the low 80s in terms of probability before this report. And now the Fed is pricing to it—or not the Fed—fed funds futures are pricing two-and-a-half cuts this year.

Brent: That’s up a little bit from two-and-a-quarter, roughly.

Phil: Yeah, up a little bit as well. So clearly this report is being viewed as dovish—in other words, Fed cutting. But Brent, there's a lot of data still to go before that September Fed meeting. What are your thoughts in terms of what we're watching as we move forward in terms of the Fed?

Brent: Yeah, so from the Fed perspective, right, so we still have another inflation print before the next meeting in September. But, again, I think market participants—again, we're also entering a period of time where you have a high degree of seasonality in August and September. So we believe that we're going to continue to see rates volatility, right? We saw a lot of that even this morning, right? Two-year, basically, yields came off a good bit, basically come back a little bit.

So we expect continued volatility across, I would say, the belly of the curve and shorter, which you'd think a lot of the impact of—as far as Fed expectations, what's priced into the market—would occur. But, again, a lot of data between now and September. But right now, it looks like September—at least from a market-pricing perspective—is in the bag for a 25-basis-point cut.

I still think we might take the under on total cuts this year. Two-and-a-half cuts is priced in as of this morning. We think we'd probably see a little bit less than that, but certainly time will tell.

Amy: So Brent, when we talked last month, we were just getting into earnings season, just seeing a few earnings come out. Now we're wrapping things up. What are your takeaways from this earnings season?

Brent: So we're about 90%—effectively all the way through second quarter earnings, with 90% reporting. The good news is that 81% of companies beat on earnings, but also 81% beat on revenues, which is really good to see.

Earnings, you can see some adjustments and things along those lines. Revenue is a hard number to either manipulate or to see significantly get adjusted. By and large, revenues are the true tale of what's going on in corporate America. So it was good to see significant beats there. For the quarter, 11.8% quarter-over-quarter—sorry, year-over-year—growth for the quarter.

Expectations at June 30 were for 4.9%. So we're now back to double digits. Full year, we're expecting 10.3% for fiscal 2025 as far as year-over-year earnings growth. 2026 has come down a little bit from 13.9% down to 13.3%, but corporate earnings and profitability continue to do exceptionally well. And you and I have talked about fundamentals driving equity markets, and certainly the fundamentals have come up to support what's going on in the equity markets.

Amy: And Phil, we're back to all-time highs in the markets. What are you hearing from clients on the road, and what are you saying to them?

Phil: Yeah, so really to Brent's point, fundamentals have supported the market. You have an earnings season that comes in with growth more than double what was expected. The market is going to reflect that. Not to mention expectations that the Fed is cutting, which finds its way into the stock market as well.

Our 12-month price target is 6,400. We will be adjusting that later this month to incorporate some of these fundamentals. But there's a reason we have a bull case and a bear case. Our bull case is 6,950 on the S&P 500. That's not a coincidence.

So we remain constructive over the medium term—think of a 12-month time frame. Why is that? Fundamentals are still in place. They aren't perfect. The recent labor market report, I think, a was a reminder of that. By the way, we do get more labor market data before the Fed meeting in September.

So it's not that all is well. We would not posit that, but there are still fundamentals in place. Medium term, we're constructive. Near term, we still think there could be some volatility. We did see that after the recent employment report. We saw a drawdown in the market, not to mention seasonality, which you mentioned. It's not odd to see market volatility in August when volumes are low, right? A lot of people are on vacation. And then September and October seasonally also can be interesting months in terms of market moves. But that's not how we invest, right?

Brent: Yes.

Phil: We invest for the long term, and we think clients should think about balance in their portfolios. Think about fixed income, where you are still getting yield, right?

Brent: Yes.

Phil: But stay invested in equities—just have the right buckets. Equities are a long-term asset class. If you need that money in the very near term, it may not belong in the stock market. But we remain constructive on trend.

Brent: Yeah. I mean, it's a great conversation to have, and it's a great situation for investors. To your point, Phil, you're now getting thoughtful yield. You've got, you know, US taxable bonds that are yield north of 4.5%. You have municipal bonds at a nominal yield of about 4%, so tax equivalent is above 6%. And you've got equities that are putting up—getting close to a double-digit return this year after the 19% drawdown that we saw in April.

So across the board for balanced portfolios, so far—given what could have happened with tariffs and geopolitical noise and tensions in the normal cyclicality of where we are in the economic cycle—it could have been a much worse outcome. And here we are with balance in portfolios and good yields and good returns in equity markets.

Again, bumpiness that we think might be coming down the path in the, like you said, normal seasonality, but we think that the fourth quarter should see, again, holding all things constant of reacceleration, hopefully getting closer to where we think the market should be.

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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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