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Wall St Week Ahead – US Stock Market Rebound Faces Key Inflation Test

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A rally that took U.S. stocks off the brink of a bear market faces a significant test next the weekas consumer price data provides a glimpse of what more the Federal Reserve will need to do in its battle against the worst inflation in decades.

Despite a rock the weekthe S&P 500 .SPX is still up more than 5% from last month’s lows, which saw the benchmark extend its decline to almost 20% from its all-time high. The index was recently down about 14% from its January 3 high after losing 1% in the past. the week.

More upside could hinge on whether investors believe policymakers are making progress in the face of soaring prices. Signs that inflation remains strong could bolster the case for even more aggressive monetary tightening, potentially spooking a market already battered by fears that a hawkish Fed could deal a serious blow to US growth.

This market should remain constrained until we get a meaningful drop in inflation, said Mona Mahajan, senior investment strategist at Edward Jones, who currently favors large-cap stocks over small-caps, given the ability of large firms to absorb higher input costs and wages. Obviously, the following impression the week is going to be the key.

The consumer price index (CPI) for the 12 months ending April rose 8.3%, down from the annual rate of 8.5% recorded the previous month, which was the largest gain significant year-on-year in 40 years. Friday’s inflation report for May is one of the last key data ahead of the Fed’s June 14-15 meeting, when the central bank is expected to raise rates another 50 basis points.

If inflation “continues to be a problem, the Fed may not have the ability to let go later this year,” said Paul Nolte, portfolio manager at Kingsview Investment Management, adding, “The more interest rates are higher, the greater the struggle for the market.”

Nolte has generally reduced equity positions in the portfolios he manages, particularly in growth stocks, and increased cash levels, pointing to factors such as still high stock market valuations.

INVESTORS WEIGH THE DATA

The CPI report comes as investors gauge how the 75 basis points of monetary tightening already delivered by the Fed this year is affecting growth. Jobs data released on Friday showed U.S. employers hired more workers than expected in May and maintained a solid pace of wage increases, signs of strength that could keep the Fed on an aggressive tightening path monetary policy. Read the full story

Meanwhile, the gloomy opinions of several top business leaders, including JPMorgan Chase JPM.Women Jamie Dimon and Tesla TSLA.O Elon Musk, weighed on hopes that the central bank could calm inflation without hurting the economy. Musk said in an email to executives that he had very bad feelings about the economy and needed to cut about 10% of jobs at the electric car maker, Reuters reported on Friday. L1N2XQ0PIRead the full story

Investors’ views on inflation are critical in valuing stocks, as rising prices have generally prompted the Fed to raise interest rates, with rising bond yields in turn reducing the value of future earnings on stocks. businesses. Rising prices also increase costs for businesses and consumers.

The S&P 500 is trading at around 18.7 times its past 12-month earnings, a rich valuation relative to other inflationary periods that suggests to investors that the current level of price increases may not last, according to Jeff Buchbinder. equity strategist at LPL Financial.

LPL believes inflation will eventually come down this year and the companies have strong earnings momentum. The company’s year-end target on the S&P 500 is between 4,800 and 4,900, which, at the low end of the scale, was around 16% above the level of the indices on Friday after- midday.

Others were less optimistic. Morgan Stanley strategists earlier this the week called the latest rally a “bear market rally” and, citing negative trends in earnings and economic indicators, forecast the S&P 500 to fall to around 3,400 by mid-August.

There’s consensus that we’ve probably seen the lofty prints or inflation spikes in the rearview mirror,” said Art Hogan, chief market strategist at National Securities. to overturn the basket of apples for the markets.” – Reuters

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