Investors in U.S. stocks are now focusing on next week’s inflation data, which might determine the direction of a recent asset rise that has been shaky in the short term.
The S&P 500 has gained 16% so far this year on the strength of indications that the American economy is headed for a so-called “soft landing,” in which the Federal Reserve is able to reduce inflation without significantly harming growth.
The job market has remained solid, but not strong enough to raise concerns that the Fed will need to raise interest rates further to combat inflation, actions that shook markets last year, according to last week’s employment report.
Investors suggested that next week’s consumer price data could need to find a similar balance. A number that is too high would fuel concerns that the Fed will keep interest rates higher or raise them further in the upcoming months. After a tech-driven decline that saw the S&P 500 lose around 5% of its value from summer highs, it would offer investors less of an incentive to stay onto stocks.
“This inflation demon is far from being destroyed,” asserted Michael Purves, CEO of Tallbacken Capital Advisors. He predicted that indications of increasing inflation will have an adverse effect on the multiples of the megacap growth stocks that have propelled the advance. With stronger nominal GDP growth, “if we’re hitting a structural shift, that will come with some volatility and unintended consequences.”
Investors attempting to predict future Fed policies will also be keeping an eye on other data in the upcoming week, such as retail sales and a reading of the producer price index.
At its meeting on September 20, the U.S. central bank is anticipated to keep benchmark rates unchanged. Additionally, markets are now pricing in a nearly 44% possibility of a rate hike at the Fed’s meeting in November, up from a 28% chance one month ago.
According to Randy Frederick, managing director of trading and derivatives at the Schwab Centre for Financial Research, “if we get a high inflation print we will see those expectations pick right up” for September and November.
Despite the recent tumult in the stock market, investors and strategists are now mostly still confident in the market. However, some people are becoming more wary.
Among the causes for confidence are the relative superiority of the American economy over that of China and Europe, as well as indications that the so-called earnings slump among the S&P 500 corporations may be coming to an end.
Still, some market participants feel it will become more challenging to extract more gains from stocks due to worries about a slowdown in China’s economy and questions about the future of corporate margins in the United States.
This week, the S&P 500 Information Technology sector fell more than 2% as a result of reports that Beijing had ordered employees of the central government to stop using iPhones for work. Shares of Apple (AAPL.O) plummeted 6% for the week on worries that Huawei, a Chinese competitor, might hurt both the business and its suppliers.
According to Ed Clissold, Chief U.S. Strategist at Ned Davis Research, “We think we are still in a bull market that will hit new highs before the end of the year, but it will be a choppy road.”
According to Jonathan Golub, senior equity strategist at Credit Suisse Securities, the S&P 500 is down around 5% from its July highs, which has generally increased the attractiveness of stock prices given the low likelihood of an impending recession.
He highlighted that although the P/E for the index as a whole remained near 20, compared with 17 at the end of 2022, forward price to earnings multiples for 10 out of the S&P 500’s 11 sector groupings declined in August.
However, a significant portion of the bull thesis for equities depends on slower inflation ultimately forcing the Fed to cut interest rates.
According to David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, “the equity market would not take that well if we saw a further material rise in interest rates.”