A reading on inflation and the start of second quarter earnings reports will greet investors after a holiday-shortened week that saw stocks close near record highs.

With job growth slowing, investors will be closely watching the release of June's Consumer Price Index (CPI) on Thursday as the case builds that the Federal Reserve could be set to cut interest rates in September. Semiannual testimony from Federal Reserve Chair Jerome Powell before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will also be a key focus for investors.

On the corporate side, Friday morning will see some of America's largest financial institutions, including JPMorgan (JPM), Wells Fargo (WFC), and Citi (C), kick off second quarter earnings season. Results from PepsiCo (PEP) and Delta Air Lines (DAL) will also be in focus earlier in the week.

Last week, the S&P 500 (^GSPC) rose nearly 2% while the Nasdaq Composite (^IXIC) rallied over 3%. Both finished the week at record highs. The Dow Jones Industrial Average (^DJI), which has been a notable laggard all year, gained a more modest 0.5%.

Case for a September rate cut builds

On Friday, the June jobs report showed the US economy added more jobs than expected last month. But economists found several signs of a slowing labor market in the details of the report.

The unemployment rate rose to 4.1%, its highest level since November 2021. Meanwhile, job gains for April and May were revised lower by 111,000, showing the labor market's robust gains over the past several months weren't as solid as initially thought.

Several economists believe this print will lead the Federal Reserve to cut interest rates in September.

"The June jobs report showed more signs of cooling in the labor market, with job growth including revisions weaker than expected, the unemployment rate rising and earnings growth slowing," Oxford Economics lead US economist Nancy Vanden Houten wrote in a note to clients.

"Federal Reserve officials have become increasingly focused on the downside risks to the labor market and the June data bolster our forecast for the Fed to cut rates in September and at every other meeting thereafter."

Renaissance Macro's head of economics Neil Dutta wrote in a note to clients on Friday that the report should "firm up expectations of a September rate cut."

"Economic conditions are cooling and that makes the trade-offs different for the Fed," Dutta added, "Powell should use July to set up a September cut."

As of Friday, investors were pricing in a roughly 75% the Fed cuts rates by its September meeting, up from a 64% chance seen the week prior, per the CME's FedWatch Tool.

With Powell set to give his semiannual testimony on Capitol Hill this week, investors will be closely listening for any hints at policy moves ahead of its July 30-31 meeting.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Price check

While the labor market's slowing has added to the case for Fed rate cuts, inflation remains a key factor.

In May, inflation readings showed prices increased at their slowest pace of 2024. Powell remarked last week that those readings "suggest that we are getting back on a disinflationary path."

The first test for whether that path will continue is set for release on Thursday morning with the June CPI report.

Wall Street economists expect headline inflation rose just 3.1% annually in June, a slowdown from the 3.3% rise seen in May. May's data was the slowest year-over-year inflation reading since July 2022. Prices are set to rise 0.1% on a month-over-month basis, a slight increase from the flat reading seen in May.

On a "core" basis, which strips out food and energy prices, CPI is forecast to rise 3.4% over last year in June, unchanged from May. Monthly core price increases are expected to clock in at 0.2%.

"We expect the June CPI report to be another confidence builder following the undeniably good May report," Bank of America US economist Stephen Juneau wrote in a research note previewing the release.

Read more: Inflation fever breaking? Price hikes on everyday expenses finally ease up.

Big banks set the stage

Earnings season is upon us again, and Financials (XLF) will be in particular focus over the next few weeks; 40% of the S&P 500 companies set to report over that period will be from the sector, according FactSet.

The sector isn't expected to be a leader in earnings growth this quarter, with analysts forecasting 4.3% year-over-year earnings growth in Q2. This places Financials seventh among the eleven sectors in the S&P 500 for earnings growth.

As Yahoo Finance's David Hollerith recently reported, regional banks remain a key concern for the industry. Regional banks are expected to report a 26% year-over-year decline in earnings growth.

A 'high bar' for Q2 earnings

After climbing out of an earnings recession in 2023, corporates are finally facing a new challenge this reporting season: a high bar to beat.

Consensus forecasts are for the S&P 500's earnings to grow 8.8% against the year prior in the second quarter, according to FactSet. This would mark the highest year-over-year earnings growth for the index since the first quarter of 2022.

"We expect the magnitude of EPS beats to diminish as consensus forecasts set a higher bar than in previous quarters," Goldman Sachs chief US equity strategist David Kostin wrote in a client note previewing earnings season.

With the market trading near record levels ahead of this reporting period, Kostin and other strategists are cautious about how much upside investors can expect if results top Wall Street expectations.

Kostin noted that last quarter, companies that beat expectations saw their shares outperform the S&P 500 by 3 basis points in the following day of trading, well below the historical average of 100 basis points.

Given that investor sentiment is still elevated entering this round of earnings, Kostin reasoned, "the reward for beats should be smaller than average this quarter, although not as extreme as during the 1Q season."

Citi US equity strategist Scott Chronert struck a similar tone, warning that given "lofty implied growth expectations," the prospect of large stock pops this quarter is limited.

"Markets likely need to see raises coupled with solid execution driven beats to sustain recent gains or push higher from here," Chronert wrote in a weekly research note on Friday. "The concern is while fundamental trends are positive and consensus estimates are attainable, valuations suggest the buy-side will demand more."

Broadly, this has Wall Street tampering expectations about how much higher second quarter earnings reports could send a stock market.

Research from Deutsche Bank chief equity strategist Binky Chadha showed that the S&P 500 rises 80% of the time during earnings season, with an average return of 2%.

"On the other hand," Chadha noted, "the market run up into earnings season and overweight equity positioning argue for a muted rally."

Weekly calendar

Monday

Economic data: New York Fed 1-year inflation expectations, June (3.17% prior)

Earnings: No notable earnings releases.

Tuesday

Economic data: NFIB Small Business Optimism, June (89.9 expected, 90.5 prior); Fed Chair Powell testifies before the Senate Banking Committee.

Earnings: Helen of Troy (HELE)

Wednesday

Economic data: MBA mortgage applications, July 5, (-2.6% prior), Wholesale inventories month-over-month, May final (0.6% prior); Fed Chair Powell testifies before the House Financial Services Committee

Earnings: Manchester United (MANU), WD-40 (WDFC), PriceSmart (PSMT)

Thursday

Economic data: Consumer Price Index, month-over-month, June (+0.1% expected, +0% previously); CPI excluding food and energy, month-over-month, June (+0.2% expected, +0.2% previously); Consumer Price Index, year-over-year, June (+3.1% expected, +3.3% previously); CPI excluding food and energy, year-over-year, June (+3.4% expected, +3.4% previously); Real Average Hourly Earnings, year-over-year, June (+0.7% previously); Real Average Weekly Earnings, year-over-year, June (+0.5% previously);Initial jobless claims, week ended July 6 (238,000 previously);

Earnings: Conagra Brands (CAG), Delta Air Lines (DAL), PepsiCo (PEP), Progressive (PGR)

Friday

Economic data: Producer Price Index, month-over-month, June (+0.1% expected, -0.2% previously); PPI, year-over-year, June (+2.2% previously); Core PPI, month-over-month, June (+0.1% expected, 0% previously); Core PPI, year-over-year, June (+2.3% previously); University of Michigan consumer sentiment, July preliminary (67 expected, 68.2 previously)

Earnings: BNY Mellon (BK), JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

Click here for in-depth analysis of the latest stock market news and events moving stock prices.

Read the latest financial and business news from Yahoo Finance