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A rally that lifts US stocks from the brink of a bear market faces a crucial test next week, when consumer price data provides insight into how much more the Federal Reserve is facing in its fight against the worst inflation in decades. will need to do.
Despite a rocky week, the S&P 500 is still up 5% from last month’s low, which dropped the benchmark index nearly 20% from its all-time high. The index was recently down nearly 14% from its January 3 record, after losing 1% in the previous week.
More bullishness may depend on whether investors believe policymakers are making progress against price hikes. Signs that inflation remains strong could strengthen the case for even more aggressive monetary tightening, potentially scaring a market already plagued by concerns that a hawkish Fed could deal a severe blow to US growth. could.
“This market is likely to remain limited until we see a meaningful move in inflation,” said Mona Mahajan, senior investment strategist at Edward Jones, which currently favors large-cap stocks over small-cap, large companies. Given the ability. to absorb higher input and wage costs. “Obviously, the print next week is going to be important.”
The consumer price index (CPI) for the 12 months through April rose 8.3%, down from the 8.5% annualized rate recorded in the previous month, the biggest year-on-year gain in 40 years.
Friday’s inflation report for May is one of the last key pieces of data ahead of the Fed’s June 14-15 meeting, at which the central bank is widely expected to raise rates by another 50 basis points.
“If inflation “remains a problem, the Fed may not have the option of going onshore later this year,” said Paul Nolte, portfolio manager at Kingsview Investment Management Market.
Nolte has broadly lightened positions in equities in its portfolio, particularly in growth stocks, and raised liquidity levels, which still point to factors such as higher stock valuations.
Investors Weighing Data
The CPI report comes as investors anticipate how 75 basis points of the monetary tightening already given by the Fed is affecting growth this year. Employment data released Friday showed US employers hiring more workers than expected in May and maintaining a strong pace of wage growth, signs of strength that should prompt the Fed to tighten an aggressive monetary policy. can be kept on the way.
Meanwhile, dismal views from several top business leaders, including JPMorgan Chase’s Jamie Dimon and Tesla’s Elon Musk, have dashed hopes that the central bank can calm inflation without hurting the economy. Musk said in an email to executives that he has a “super bad feeling” about the economy and needs to cut about 10% of jobs at the electric carmaker, Reuters reported on Friday.
Investors’ view of inflation is important in how they value equities, as higher prices typically prompt the Fed to raise interest rates, reducing the value of future corporate profits with higher bond yields. Is. Rising prices also increase costs for businesses and consumers.
According to Jeff Buchbinder, equity strategist at LPL Financial, the S&P 500 trades at around 18.7 times its previous 12-month earnings, a rich valuation compared to other inflationary periods that investors believe will be priced in. The current level of increase may not be maintained.
LPL believes that inflation will eventually ease this year and companies have solid earnings momentum. The firm’s year-end target on the S&P 500 is in the range of 4,800-4,900, which was up about 16% from the index’s level at the lows as of Friday afternoon.
Others have been less optimistic. Morgan Stanley Strategists earlier this week called the latest rally simply a “bear market rally,” and, citing negative trends for earnings and economic indicators, predicted the S&P 500 would drop to around 3,400 by mid-August.
“There is agreement that we have seen high print or extreme inflation numbers in the rear-view mirror,” said Art Hogan, chief market strategist at National Securities. “If that doesn’t turn out to be true…
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