Recent inflation data offers potential for ‘even bigger upside’ in stock market growth

After a rough start to 2024, recent inflation data could very well mean more fuel for the current stock market rally.

“Falling inflation continues to be one of the main factors behind the bull market in equities,” Julian Emanuel, who heads 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 the promising path of inflation and AI trade’s “early gains” as he moves his year-end target to the highest level on Wall Street.

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

UBS Investment Bank chief U.S. equity strategist Jonathan Golub, who has one of the S&P 500’s highest year-end targets on the Street at 5,600, believes this week’s inflation data and what it could mean for eventual cuts of interest rates “provide the potential for even greater. upside” in his year-end outlook.

Golub’s confidence is growing because inflation is showing its most significant progress toward the Fed’s 2% target since the start of the year. That’s fueling hopes of a rate cut — and sending Treasury yields, a headwind seen for stocks over the past year, lower.

May’s Consumer Price Index (CPI) showed the “core” CPI, which excludes volatile food and energy categories, rose 0.2% month-on-month, the lowest reading since June 2023. Meanwhile, the Index “Core” Producer Prices (PPI), which excludes volatile food and energy categories, was unchanged in May from a month earlier, below economists’ expectations for a 0.3% increase.

Combining the various metrics, economists believe this points to a positive reading of the Fed’s preferred inflation gauge within the Personal Consumption Expenditure (PCE) index later this month.

Lower rates?

Bank of America US economist Stephen Juneau wrote that Thursday’s PPI supports their view that “disinflation is the most likely path forward” and points to an “A+ report” for May’s core PCE. BofA estimates that core PCE rose 0.16% month-on-month in May.

“May’s CPI and PPI data are supportive of our view that the Fed will cut its policy rate later this year,” Juneau wrote. “We see recent inflation data as greatly reducing the likelihood that the Fed will need to raise rates, and we see labor market data indicating that the probability of a quick rate cut is also low.

The story continues

“An easing cycle starting in September remains a possibility, especially if housing inflation softens further in the next couple of months.”

The inflation data appears to have cheered investors ahead of the Fed’s latest Summary of Economic Projections (SEP), which showed the median forecast for a rate cut fell to just one cut in 2024. Markets are now pricing in more stable in two interest rate cuts this year than they had entered the week.

Some attribute this to when the data was released. The CPI report came just hours before the Fed was due to release — and while Fed Chairman Jerome Powell noted that officials are allowed to change their forecast after an economic data release, “most people don’t.”

Moreover, the Fed’s call was close, with only one more official favoring one rate cut instead of two. Between the narrow majority and the week’s second positive inflation reading coming after the Fed had already wrapped up its meeting, Wall Street strategists believe the Fed’s forecast may already be on hold.

“Honestly, if [the inflation data] happened a week ago, I think that might have been enough to keep two more people in the two-rate group,” JPMorgan Asset Management’s chief global strategy officer David Kelly said at a media roundtable on Thursday.

Kelly said the latest data added to the case that inflation is slowly falling toward the Fed’s 2% target. And unless the U.S. economy is hit by a sudden shock to reverse course, “the soft landing continues,” Kelly said.

Josh Schafer is a reporter for Yahoo Finance. Follow him to X @_joshschafer.

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