By Lewis Krauskopf
NEW YORK (Reuters) – Investors will focus in the coming week on whether inflation trends can support the record-breaking stock market rally boosted by Donald Trump’s victory in the U.S. presidential race.
The benchmark S&P 500 rose to an all-time high, hitting the 6,000 level for the first time on Friday as expectations of tax cuts and looser regulations under Trump helped fuel interest in stocks.
The reassuring economic outlook from the Federal Reserve, which delivered a widely expected 25 basis point interest rate cut on Thursday, also helped boost sentiment. However, the central bank’s ability to keep cutting rates will be tested by whether incoming data shows inflation continues to moderate.
The Nov. 13 consumer price index report should “confirm the idea that inflation continues to move in the right direction,” said Art Hogan, chief market strategist at B Riley Wealth.
Investors believe Trump’s proposals, especially higher tariffs, could push up consumer prices. Meanwhile, US data was stronger than expected, with a recent report showing the economy grew at a solid pace of 2.8% in the third quarter.
The CPI for October is expected to reach an annual pace of 2.6%, according to economists polled by Reuters. That would be a slight increase from the 2.4% pace in September, which was the smallest gain since 2021, but well below the four-decade high reached in 2022 and which prompted the Fed to cut rates increase.
More robust inflation could further change projections for the Fed’s rate-cutting trajectory after expectations shifted following Trump’s election victory. Fed funds futures show that investors now expect rates to fall to around 3.7% by the end of 2025 from the current range of 4.5%-4.75%, about 100 basis points above September estimates.
Expectations of financial easing have boosted stocks this year, along with solid corporate earnings and excitement about the business potential of artificial intelligence. Michael Reynolds, vice president of investment strategy at Glenmede, said the neutral level for the fed funds rate was about 3%, “and we ultimately expect the Fed to stay no further than neutral.” “Ultimately, we think they’re going down that superficial path because inflation is still a risk,” Reynolds said. ‘We have just completed a period in which inflation is well above average. Historically, that has happened in waves.” That risk is exacerbated by Trump’s economic agenda, which could undermine both inflation and growth during his presidency. “We’re a long way from knowing the details of tax policy or trade policy, but both are on the table and will undoubtedly factor into the Fed’s calculations as they look ahead from here,” said Jim Baird, chief investment officer at Plante. Moran Financial Advisors. Investors also continue to adapt to the new political landscape, following big moves this week in so-called ‘Trump trades’ in the stock market. The small-cap Russell 2000 rose 8% this week, with smaller, domestically focused companies expected to benefit from Trump’s plans to raise tariffs on imports. The S&P 500 banking index rose about 7%, with lenders poised to benefit from expected Republican efforts to ease regulations. Initial market reactions will be tested as Trump further develops his policy goals and begins appointing political appointees. “Markets have begun to digest Trump’s victory,” analysts at UBS Global Wealth Management said in a Thursday note. “As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings.”
(Reporting by Lewis Krauskopf; Editing by Richard Chang)
