Wall Street Pros See Stocks Ignoring ‘Transitory' Inflation Rise
The inflationary impact of President Donald Trump's sweeping global tariffs is projected to start appearing in the latest US consumer price index figures, which will be released before trading begins on Tuesday. Still, Wall Street firms including JPMorgan Chase & Co. and Morgan Stanley expect investors to shrug off those concerns and keep equity prices soaring by focusing on strong corporate earnings and interest-rate cuts.
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Macroeconomic data remains 'supportive of the bull case, with earnings likely to maintain their positive trend,' Andrew Tyler, head of global market intelligence at JPMorgan, wrote in a note to clients Monday, adding that the Federal Reserve is headed toward cutting interest rates. Any potential increase in inflation is likely to be transitory, according to Tyler, and with a peak that will probably be lower than expected.
In fact, his team placed the odds of further gains in the S&P 500 at 70% following Tuesday's CPI reading, predicting the gauge can advance as much as 2% if the data is either in-line or cooler than estimated.
The primary risk for a pullback is a seasonal, Tyler wrote, as the S&P 500 Index has fallen an average of 1.5% in September over the past 25 years — only to be followed by a 4% gain in the fourth quarter.
The core CPI, which removes volatile food and energy costs and is considered a reliable measure of underlying inflation, is projected to show a rise of 0.3% in July from June, according to the median estimate in a Bloomberg survey of economists. That would mark the biggest increase since the start of the year — it edged up 0.2% in June.
Yet, options traders are mostly unfazed heading into the report, pricing a move of about 0.74% in either direction for the S&P 500 Index, compared with a 12-month average implied move of nearly 1%, according to data from Citigroup Inc.'s trading desk.
The S&P 500 is trading near an all-time high ahead of Tuesday's data release after soaring 28% from April's lows and setting 10 new records in the month of July alone. The outsized moves are notable since investors have little idea how the Trump administration's trade plans will affect the economy.
But the market isn't necessarily reading bad news as bad news these days. For example, recent employment data showed a substantial slowdown in the job market, prompting Trump to fire the head of the Bureau of Labor Statistics and accuse her without evidence of political bias.
Wall Street shrugged it all off, focusing instead on how the figures supported an interest-rate cut by the Fed. And that seems to have been enough to keep stocks climbing, even though the numbers point to the possibility of stagflation, where prices increase but growth doesn't.
'Due to the soft July employment report, investors have greater confidence in Fed easing resuming next month,' said Michael O'Rourke, chief market strategist at JonesTrading LLC. 'That is taking precedence over the anticipated inflation uptick.'
Three Fed officials — Vice Chair Michelle Bowman, Governor Christopher Waller and Minneapolis Fed President Neel Kashkari — all voiced concerns about the US labor market last week and pointed to a potential rate reduction in September.
Morgan Stanley's chief US equity strategist Mike Wilson is also counting on a substantial rate-cutting cycle to set the stage for fresh stock market gains into next year, even if there are some blips in the near term.
'Ultimately, our house view is for tariff-induced inflation to subside later this year, paving the way for a significant rate cutting cycle,' Wilson told clients in his weekly commentary Monday. 'This is supportive of our constructive longer-term outlook for US stocks.'
--With assistance from Sagarika Jaisinghani.
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