The latest inflation data offers the potential for “greater upside” in the stock market rally

After a rocky start to 2024, the latest inflation data could mean more fuel for the current stock market rally.

“Lower inflation remains one of the key factors behind the stock market rally,” Julian Emanuel, who leads equity, derivatives and quantitative strategy at Evercore ISI, wrote in a note to clients.

On Sunday, Emanuel raised his year-end price target for the S&P 500 (^GSPC) to 6,000 from 4,750. Emanuel cited a promising inflation trajectory and the “early innings” of AI trading when he moved the year-end target to the highest level on Wall Street.

The S&P 500 and Nasdaq (^IXIC) posted four straight record closes last week as investors digested weaker-than-expected inflation readings for both consumer and wholesale prices.

Jonathan Golub, chief US equity strategist at investment bank UBS, who holds one of the highest end-of-year targets for the S&P 500 at 5,600, believes this week’s inflation data and what it could mean for eventual interest rate cuts “offers the potential for more… from inflation.” “Upward” to his expectations at the end of the year.

Golub’s confidence is growing as inflation shows its most significant progress toward the Fed’s 2% target since the start of the year. This is fueling hopes for lower interest rates — and driving down Treasury yields, which have been a notable headwind for stocks over the past year.

The May Consumer Price Index (CPI) showed the “core” CPI, which excludes volatile food and energy categories, rose 0.2% on the month, the lowest reading since June 2023. Meanwhile, the “core” Producer Price Index rose ( The 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 metrics, economists believe this indicates a positive reading on the Fed’s preferred measure of inflation within the Personal Consumption Expenditures (PCE) index later this month.

Interest rate cuts?

Bank of America economist Stephen Juneau wrote that Thursday’s Producer Price Index supports their view that “deflation is the most likely path forward” and points to an “A+” report for core personal consumption expenditures for May. Bank of America estimates core personal consumption expenditures rose 0.16% month-over-month in May.

“May CPI and PPI data are favorable to our view that the Fed will cut rates later this year,” Juneau wrote. “We see the recent inflation data as significantly underestimating the likelihood of the Fed raising interest rates and we view the labor market data as suggesting that the likelihood of rapid rate cuts is also low.

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“An easing cycle starting in September remains possible, especially if housing inflation declines further in the next two months.”

The inflation data appears to have cheered investors in the face of the Fed’s latest Summary of Economic Projections (SEP), which showed the average expectation for a rate cut has fallen to just one cut in 2024. Markets are now pricing in a tougher two rate cuts. . This year than they were entering the week.

Some attribute this to the timing of the data release. The CPI report came just hours before the Fed released its report — and while Fed Chair Jerome Powell noted that officials are allowed to change their forecasts after economic data is released, “most people don’t do that.”

Additionally, 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 has already concluded its meeting, Wall Street strategists believe the Fed’s forecast may actually be outdated.

“Honestly then [the inflation data] “What happened a week ago, I think that was probably enough to keep a couple more people on the bandwagon of two rate cuts,” David Kelly, JPMorgan’s chief global asset management strategist, said at a media roundtable on Thursday.

Kelly said the latest data added to the fact that inflation is slowly falling toward the Fed’s 2% target. Kelly said that unless the US economy experiences an unexpected shock to change its course, “the soft landing will continue.”

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

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