After a tough start to 2024, the latest inflation data could provide further impetus to the current stock market rally.
“Falling inflation remains one of the key drivers supporting the equity bull market,” Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI, wrote in a client note.
Emanuel on Sunday raised his year-end price target for the S&P 500 (^GSPC) to 6,000 from 4,750. Emanuel cited a promising inflation outlook and the “early stages” of AI trading as reasons for raising his year-end target to the highest on Wall Street.
Last week, the S&P 500 and Nasdaq (^IXIC) both hit record highs for a fourth straight week as investors digested weaker-than-expected consumer and wholesale price inflation figures.
Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, has a high year-end price target for the S&P 500 at 5,600, but believes this week’s inflation data and its impact on eventual interest rate cuts “opens up the possibility of further upside” in his year-end outlook.
Golub’s confidence is growing as inflation is making its most progress toward the Fed’s 2% target since the beginning of the year, buoying expectations of rate cuts and pushing down Treasury yields, which have been a headwind for the stock market over the past year.
In May, the “core” Consumer Price Index (CPI), which excludes volatile food and energy items, rose 0.2% from the previous month, the lowest since June 2023. Meanwhile, the “core” Producer Price Index (PPI), which excludes volatile food and energy items, was unchanged in May from the previous month, below the 0.3% increase economists had expected.
Combining the various indicators, economists believe this points to a positive reading in the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) index, due to be released later this month.
Interest rate cut?
Bank of America U.S. economist Stephen Juneau said Thursday’s producer price index supported his view that “deflation is the most likely path forward,” noting that core PCE was rated an “A+” for May. Bank of America estimates that core PCE rose 0.16% in May from the previous month.
“The May CPI and PPI data support our view that the Fed will cut interest rates later this year,” Junod wrote. “We believe recent inflation data has significantly reduced the likelihood the Fed will be forced to raise rates, and labor market data also makes rapid rate cuts less likely.”
“An easing cycle could still potentially begin in September, especially if house price growth eases further in the coming months.”
The inflation data appears to have pleased investors, even though the Federal Reserve’s latest Summary of Economic Outlook showed the median forecast for interest rate cuts in 2024 had fallen to just one. Markets are now more certain about pricing in two rate cuts this year than they were going into this week.
Some put this down to the timing of the data: The CPI report was released just hours before the Fed’s, and Fed Chairman Jerome Powell said that while officials can change their forecasts after economic data is released, “most people don’t do that.”
Moreover, the Fed’s forecast was narrowly divided, with only one official favoring one rate cut instead of two. The narrow majority vote, and the second positive inflation reading this week after the Fed had already met, have Wall Street strategists thinking the Fed’s forecast may already be out of date.
“To be honest, [the inflation data] “Even if the cut had happened a week earlier, it might have been enough to keep the other two in favor of a second cut,” David Kelly, chief global strategist at JPMorgan Asset Management, said during a media roundtable on Thursday.
Kelly said recent data added to evidence that inflation was slowly declining toward the Fed’s 2 percent target, and that the “soft landing remains” unless the U.S. economy experiences an unexpected shock that reverses course, he said.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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