A more hawkish tone from the U.S. Federal Reserve under chair Kevin Warsh has increased uncertainty around the path of interest rates, even as investors continue to assess the strength of economic growth, inflation trends and corporate earnings.
BNN Bloomberg spoke with JP Coviello, head of portfolio strategy at Citi Wealth, about the U.S. Fed’s evolving approach, inflation risks, market breadth and opportunities for investors during periods of volatility.
Key Takeaways
- The U.S. Fed’s hawkish messaging reflects concerns that inflation remains above target, even though inflation pressures are not broadening significantly.
- Inflation momentum and breadth will be key indicators to watch, as a further increase could raise the likelihood of a rate hike before year-end.
- Investors should be prepared for greater volatility as Kevin Warsh has signalled a reduced reliance on forward guidance compared with previous Fed leadership.
- Holding excessive cash during inflationary periods can erode real returns, making market pullbacks potential opportunities to add risk assets.
- Market breadth remains stronger than many headlines suggest, supported by improving earnings revisions, expanding capital spending and broad participation across sectors.
Read the full transcript below:
MATT: Well, the Federal Reserve, under new chair Kevin Warsh, delivered a stronger-than-expected pivot toward raising rates in the future. It sparked a selloff yesterday afternoon, but investors appeared to be in a more positive mood this morning, as U.S. stocks rebounded at the open and oil slid after the U.S. and Iran signed their interim pact to wind down the war in the Middle East. Let’s get some perspective from JP Coviello, head of portfolio strategy at Citi Wealth. JP, good morning. Thanks for being here.
JP: Good morning, Matt. Thanks so much for having me.
MATT: Let’s get into it. First, from what Kevin Warsh had to say, I think it’s very interesting to see the different takes we’re seeing right across the spectrum. Give me your sense of what you heard from the new Fed chair yesterday afternoon, and, in particular, the possibility of a rate hike later this year.
JP: Sure. Great question. Obviously, it’s a shift from what we’re used to. In many respects, it was a hawkish statement, hawkish dots, and Warsh reinforced this view in the press conference. One of the key things we picked out was him noting that financial conditions are not tight, in his view, outside of the housing market. Our view has always been that there’s an inflation problem, not a labour market problem. When we look under the hood of inflation, we don’t see inflation breadth worsening, but it is much higher than pre-COVID levels when inflation was at target. There’s a lot to unpack here, but I’d say those are our main takeaways with respect to yesterday.
MATT: Yeah, and what’s going to essentially move the Fed off that hold stance? We heard him say they were holding rates yesterday, and some of those indicators — was this more of a political statement? He was clearly hawkish, and inflation is not where he wants it to be. He was a little more adamant than many were expecting. What ultimately do you believe is going to move the Fed off that hold stance, and when could we get one or a couple of those factors that could lead them to move on rates?
JP: It’s a great question. We’re really focused on momentum here — the momentum of underlying inflation and that breadth, which I mentioned. Right now, 39 per cent of the underlying components of CPI are moving at a five per cent or higher one-month annualized rate. That compares with 25 per cent pre-pandemic. If we were to see that continue to move higher, that would, in our view, make it more likely that we see a rate hike before year-end. Markets are obviously pricing that already.
I think one of the added pieces that Warsh brings to the table is that he’s not going to give you forward guidance. So we’re going to see more volatility within rate markets as investors interpret what should be priced on a forward-looking basis. For us, it’s really about the breadth and momentum of the underlying inflation components moving into hiking territory.
MATT: Yeah, it’s going to be interesting, too, without that forward guidance and with this change, for investors and what we’re going to see from the markets over the next several months. I’m curious about your thoughts on holding cash during inflationary periods. Where do you stand on that?
JP: Thanks for bringing that up. We put out a client note just the other day noting that, in inflationary environments, when inflation is rising, owning cash may feel good, but your nominal return is being eroded by that higher inflation. Equities, depending upon your risk tolerance, are a good place to park your cash in a high-growth, high-inflation environment like we’re in now.
We are seeing cyclical performance year to date — energy, industrials, materials and technology as well. This is to be expected in what we would call an overheating environment: high growth and high inflation. In our view, we’ve been advising clients that, should we get pullbacks, whether that’s due to markets becoming over-positioned and needing to take some air out of the balloon, if you will, they should use those pullbacks to get some of that cash off the sidelines.
MATT: Yeah, and again, you talk about that and what we’re going to see here in the next little bit. We just had the SpaceX IPO, but there are other IPOs coming, from Anthropic and OpenAI. I’m curious about your thoughts on equities generally as we move through the rest of the year. We’ve now heard from Kevin Warsh. I think that was one of the big question marks for investors. Things are probably going to be a little quieter, but we also have the continued hope for an end to the conflict in the Middle East and questions about where oil prices will end up. Where do you stand in the short term for the rest of 2026?
JP: Sure, another great question. We are fundamental investors, and the fundamentals remain strong and, in many cases, are still improving. We’re seeing earnings revisions increase across technology, industrials, materials and banks. We’re seeing margin improvement across nearly all sectors year over year. Staples and health care have seen the smallest improvements. Energy was actually negative.
On a forward-looking basis, we remain constructive based on fundamentals. I think you’re seeing a broadening out in markets, contrary to that narrow-market narrative. With 43 per cent of constituents in the S&P 500 beating the index year to date, compared with a 30 per cent average over the past three years and roughly 40 per cent over the past 10 years, we’re actually seeing a broader market than headlines suggest.
We’re getting through these risk events, as you mentioned. The SpaceX IPO came and went. Kevin Warsh was introduced, and that was a big deal yesterday. As we get through these events, fundamentals remain very resilient and quite strong.
One little thing I’d like to note is memory remaining in the spotlight globally, with Apple CEO Tim Cook noting that the company may have to raise prices because of supply constraints. Whether that’s in Korea or the U.S., we still see that as a beneficiary.
MATT: Okay, interesting. You mentioned the broadening out. Are we done broadening yet? Have we reached the limit of it, or could we get to a point where 50 per cent of S&P 500 stocks are outperforming?
JP: I think 50 per cent is difficult. It’s been difficult historically over the past 10 years, and in a market-cap-weighted index, the leaders must lead. They are earning their spot as leaders based on performance.
I do think the broadening of performance will continue based on a couple of things. We have a global capital expenditure cycle that started with AI, and it’s extending across industries around the world. We’re seeing China spend more on data centres right now, so that’s benefiting parts of its market as well, especially on the connectivity side.
As the capital expenditure cycle continues, this is, in our view, a multi-year cycle. That’s fairly consensus at this point. There’s also the electrification theme — thinking about grid security. That’s another piece that, in our view, is likely to take multiple years to materialize.
So we do see a broader market, generally speaking, continuing to work, but we would put our money where the fundamentals are strongest.
MATT: JP Coviello, head of portfolio strategy at Citi Wealth. Appreciate your time today, JP. Thanks so much for this.
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This BNN Bloomberg summary and transcript of the June 18, 2026 interview with JP Coviello are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
