After a rocky start to 2024, the latest inflation data could very well provide more fuel for the current stock market rally.
“Falling inflation remains one of the key drivers of the bull market in equities,” Julian Emanuel, who heads Evercore ISI’s equity, derivatives and quantitative strategy, wrote in a note to clients.
On Sunday, Emanuel raised his year-end price target for the S&P 500 (^GSPC) from 4,750 to 6,000. Emanuel cited the promising inflation path and “early innings” of AI trading in moving his year-end target to the highest on Wall Street.
The S&P 500 and Nasdaq (^IXIC) hit four straight record closes last week as investors digested softer-than-expected inflation numbers for both consumer and wholesale prices.
Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, who has one of the highest year-end targets for the S&P 500 right now at 5,600, believes this week’s inflation data, and what it could mean for any rate cuts, “ offering the potential for even greater upside” from its year-end outlook.
Golub’s confidence is rising as inflation shows the biggest progress toward the Fed’s 2% target since the start of the year. That fuels hopes for rate cuts – and lowers government bond yields, a known headwind for equities over the past year.
May’s Consumer Price Index (CPI) showed the ‘core’ CPI, which excludes volatile food and energy categories, rising 0.2% month-on-month, the lowest since June 2023. Meanwhile, the ‘core’ rose The producer price index (PPI), which excludes volatile food and energy categories, was unchanged in May from the previous month, below economists’ expectations for a 0.3% increase.
Combining the different measures, economists believe this points to a positive reading for the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month.
Rate reductions?
Bank of America economist Stephen Juneau wrote on Thursday that the PPI supports their position that “disinflation is the most likely path forward” and points to an “A+ report card” for May’s core PCE. BofA estimates that core PCE rose 0.16% month-over-month in May.
“The May CPI and PPI data support our view that the Fed will cut its policy rate later this year,” Juneau wrote. “We believe that recent inflation data significantly reduces the likelihood that the Fed will have to raise rates and view labor market data as indications that the likelihood of rapid rate cuts is also low.
“An easing cycle starting in September remains a possibility, especially if inflation were to decline further in the coming months.”
The inflation numbers appear to have cheered investors, given the Fed’s latest Summary of Economic Projections (SEP), which shows that the average forecast for rate cuts in 2024 has fallen to just one cut. Markets are now more firmly pricing in two rate cuts this year than they had entered last week.
Some attribute this to when the data was released. The CPI report came just hours before the Fed released it — and while Fed Chairman Jerome Powell noted that officials are allowed to change their forecasts after the release of economic data, “most people don’t.”
Moreover, the Fed’s call was close, with only one official favoring one cut instead of two. Between the narrow majority and the second positive inflation reading of the week, after the Fed already wrapped up its meeting, Wall Street strategists think the Fed’s forecast may already be outdated.
“Honestly, like [the inflation data] What happened a week earlier, I think that would have been just enough to keep two more people on the bandwagon of two rate cuts,” David Kelly, chief strategist at JPMorgan Asset Management, said during a media roundtable on Thursday.
Kelly said recent data has contributed to inflation slowly falling toward the Fed’s 2% target. And unless the U.S. economy is hit by an unexpected shock that will change course, “the soft landing will continue,” Kelly said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance
