Equity markets pulled back on Tuesday but continue to trade within a narrow range. The move was driven by weaker-than-expected retail sales data and earnings guidance from Home Depot, which suggests further slowing of consumer demand. The news foreshadows what may be a weak reporting season for the retailers, and this week will bring reports from Target and Walmart and others in the industry. The takeaway is that the outlook for earnings in the 2nd half of the year will continue to slide, and the decline may accelerate.

Investors hoping for a summer rally may be disappointed. While the outlook for FOMC interest rate hikes has fallen to near-zero, the outlook for interest rates to stay high is firming. In this scenario, the outlook for S&P 500 earnings will also deteriorate due to declining demand and the deflationary conditions they will create.