Wall Street Week Ahead: Inflation data to test stocks as some investors brace for rally to pause
The benchmark S&P 500 was last up more than 7% on the year and within about 1% of its all-time closing high set in late July, as stocks largely rebounded from declines following a weak employment report earlier this month.
Strategists at firms including Deutsche Bank and Morgan Stanley have recently said the market could be poised for some level of pullback after a largely unabated climb over the past four months, which has pushed valuations to historically expensive levels as a seasonally treacherous period for stocks begins.
The monthly US consumer price index report, due on Tuesday, could cause volatility. Data showing higher-than-expected inflation could undermine the growing expectation for impending interest rate cuts.
'I do think the market is set up for a bit of a pullback,' said Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. 'There's a lot of concern bubbling underneath.'
The S&P 500 has soared well over 20% since its low for the year in April, as investor fears about a tariff-induced recession calmed after President Donald Trump's 'Liberation Day' announcement earlier that month had set off extreme asset volatility.
The index is trading at 22.4 times its earnings estimates for the next year, well above its long-term average P/E ratio of 15.8 after recently reaching its highest valuation in over four years, according to LSEG Datastream.
Investors are also wary of risks posed by the calendar. Over the past 35 years, August and September have ranked as the worst-performing months for the S&P 500, according to the Stock Trader's Almanac. The index has declined an average of 0.6% in August and 0.8% in September — the only months of negative average performance for the index during that time period.
'The combination of a softer payroll number with concerns of tariff-related inflation could be the recipe for ... a correction, especially in the seasonally weak third quarter,' Morgan Stanley equity strategist Michael Wilson said in a note this week. Still, Wilson said his 12-month outlook was bullish, adding 'we're buyers of pullbacks.'
The CPI for July is expected to have climbed 2.8% on an annual basis, according to a Reuters poll of economists. Investors will be watching to see if Trump's tariffs on imports are translating into higher prices after the June CPI report suggested levies were impacting the prices of some goods.
Market bets on Fed rate cuts rose following the recent weak jobs data as investors expect the central bank will ease monetary policy to help shore up the labor market. Fed funds futures indicate an over 90% chance the Fed will cut at its next meeting in September, with at least two cuts priced in for this year, LSEG data showed.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
7 hours ago
- Business Recorder
Trump says may allow lawsuit against Fed chair over renovations
WASHINGTON: President Donald Trump said Tuesday he might allow 'a major lawsuit against' the US central bank chief to proceed, as he complained again about renovations to the Federal Reserve headquarters and renewed pressure to lower interest rates. 'The damage he has done by always being Too Late is incalculable,' Trump wrote of Fed Chair Jerome Powell on his Truth Social platform. He added that he is thinking of allowing a lawsuit taking aim at Powell's oversight on the renovations in Washington, but did not offer more details. Trump has repeatedly lashed out at Powell this year over the Fed's decisions to keep interest rates steady since its last cut in December. Policymakers have been cautiously monitoring the effects of Trump's wide-ranging tariffs on the world's biggest economy, as they mulled the right time to lower rates further. Trump renews attacks on Fed chair after rates held again This is because it takes time for levies to filter through to consumer prices. The jury is still out on whether Trump's latest tariffs will have a one-off or longer-term impact on inflation, but the president has regularly pointed to benign data to urge for rate reductions to boost the economy. Shortly after government data was released Tuesday, showing that consumer inflation stayed unchanged at 2.7 percent in July, Trump wrote on social media that Powell 'must now lower the rate.' He also called the Fed's leadership 'complacent.' Trump has openly floated the idea of ousting Powell over cost overruns for the renovation. While the US leader says the price of the makeover was $3.1 billion, reiterating this figure in his social media post on Tuesday, Powell has been quick to correct Trump in the past. The cost has been put at $2.5 billion, but Trump's higher number includes work on another building that Powell maintains was completed previously. On Tuesday, Trump said Powell was doing a 'horrible' job in managing the Fed's revamp.
Business Recorder
8 hours ago
- Business Recorder
Toronto stocks jump as US inflation data keep rate-cut hopes alive
Canada's main stock index edged higher on Tuesday, as benign U.S. inflation data reinforced expectations for an interest-rate cut by the country's Federal Reserve in September. At 09:50 a.m. ET (1350 GMT), the Toronto Stock Exchange's S&P/TSX composite index was up 0.26% at 27,847.43 points and was trading near record levels. The communications sector led the advances on TSX by rising 1.24%, followed by a 0.8% rise in healthcare. A Labor Department report showed U.S. consumer prices rose 0.2% in July after a 0.3% gain in June. On a year-over-year basis, CPI advanced 2.7%, slightly below the 2.8% forecast from economists polled by Reuters. The data maintained the case for a Fed rate cut next month, according to traders' bets in futures markets. 'Inflation is on the rise, but it didn't increase as much as some people feared,' said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. 'In the short term, markets will likely embrace these numbers because they should allow the Fed to focus on labor-market weakness and keep a September rate cut on the table.' An additional boost came from seemingly subsiding trade tension between the world's top two economies. U.S. President Donald Trump extended a tariff truce with China to November 10, averting triple-digit duties on Chinese goods. Canada's materials index added 0.5%, thanks to rising copper prices due to the China tariff deadline extension. However, the trade tension between China and Canada showed no signs of easing. Beijing announced a preliminary anti-dumping duty on Canadian canola imports, a fresh escalation in a year-long trade dispute that began with Ottawa's imposition of tariffs on Chinese electric vehicle imports last August. In other stocks, Gildan Activewear fell more than 9% after the Financial Times reported that the apparel manufacturer is nearing an about $5 billion deal to acquire Hanesbrands, including debt.
Business Recorder
8 hours ago
- Business Recorder
Wall St edges higher after inflation rises moderately in July
Wall Street's main indexes inched higher on Tuesday after data showed inflation rose broadly in line with expectations in July, putting the Federal Reserve on track to lower interest rates next month. A Labor Department report showed that the Consumer Price Index (CPI) rose by an expected 0.2% on a monthly basis in July, while on an annual basis it was a touch lower than what economists were projecting, drawing calls from President Donald Trump to lower interest rates. However limiting the optimism, the data suggested that underlying inflation rose by 3.1% in the previous month as markets look for signs that tariffs and trade uncertainty were filtering into prices. Yields on shorter-dated Treasury bonds – a reflection of interest rate expectations - moved lower after the data and interest rate futures showed traders are giving an 88.8% chance that the Fed could lower interest rates by about 25 basis points in September. 'My bigger fear is that this is still early innings of this process and just as the Fed will be beginning to cut ratesin the autumn, that's when the inflation data will probably start to be registering some of these more direct tariff price increases and it's going to complicate the rate-cutting decision,' John Velis, a macro strategist at BNY said. The data also comes at a time when there are growing concerns over the quality of economic data, weeks after Trump fired the head of the Bureau of Labor Statistics following downward revisions to previous months' nonfarm payrolls counts. At 09:49 a.m. ET, the Dow Jones Industrial Average rose 163.16 points, or 0.37%, to 44,139.85, the S&P 500gained 20.65 points, or 0.32%, to 6,394.10 and the Nasdaq Composite gained 69.38 points, or 0.32%, to 21,454.78. Eight of the 11 S&P 500 sectors were in gains, with energy in the lead with a 0.8% rise. Further providing some relief, U.S. and China extended their tariff truce until November 10, staving off triple-digit duties on each other's goods. U.S. stocks have rallied in recent weeks and the tech-heavy Nasdaq touched a record high on Tuesday, boosted by better-than-expected earnings from technology majors, a détente between the U.S. and its top trade partners and on expectations of rate cuts. Reflecting the confidence, data from BofA Global Research showed that inflows into U.S. stocks last week were the largest in two years. Markets are monitoring developments around Trump's nominee E.J. Antoni to the Bureau of Labor Statistics commissioner post and potential candidates for the Fed's top job. Among single stocks, Intel rose 1.7% as Trump praised CEO Lip-Bu Tan following their meeting on Monday, days after seeking Tan's resignation. Palo Alto Networks gained 2% after brokerage Piper Sandler raised its rating on the cybersecurity stock to 'overweight' from 'neutral'. U.S.-listed shares of On Holding climbed 11.6% after the sportswear maker raised its annual sales forecast. Cardinal Health dropped 9% after the drug distributor said it will buy healthcare management firm Solaris for $1.9 billion. Advancing issues outnumbered decliners by a 2.44-to-1 ratio on the NYSE and by a 1.78-to-1 ratio on the Nasdaq. The S&P 500 posted 14 new 52-week highs and eight new lows, while the Nasdaq Composite recorded 43 new highs and 44 new lows.
