S&P 500’s Record Rally Cast Under Shadows of Inflation Concerns
Investors are focusing on the consumer price index (CPI) report set to be released on Tuesday, as they seek to determine whether recent inflation trends will support the stock market rally that has gained momentum following Donald Trump's victory in the presidential election. The S&P 500 reached a historic peak on Friday, surpassing the 6,000 mark for the first time, buoyed by expectations of tax cuts and eased regulations under the new administration.
The Federal Reserve's optimistic economic outlook and its decision last Thursday to reduce interest rates by 25 basis points also contributed to the positive market sentiment. However, future interest rate cuts from the central bank will depend on whether incoming data indicates a slowdown in inflation.
The chief market strategist at B Riley Wealth stated that the CPI report needs to confirm the direction of inflation. Investors are concerned that Trump's proposed policies, particularly increased tariffs, could lead to a rise in consumer prices. Despite these concerns, recent U.S. economic data has surprisingly shown strong results, with a report indicating a growth rate of 2.8% in the third quarter.
Economists predict that the annual CPI increase for October will be 2.6%. While this represents a slight uptick from September's lowest level since 2021 of 2.4%, it remains below the peaks that prompted the Fed's rate hikes in 2022. The expectation of softer inflation has shifted expectations for the Fed's interest rate trajectory, with Fed funds futures now anticipating rates will drop to around 3.7% by the end of 2025, down from the current range of 4.5%-4.75%.
Expectations for financial easing, coupled with strong corporate earnings and excitement around artificial intelligence, have boosted stock market gains this year. The vice president of investment strategy at Glenmede believes that inflation remains a concern, and he anticipates that the Fed will halt interest rate cuts before reaching a neutral level of 3%.
The chief investment officer at Plante Moran Financial Advisors noted that while the specifics of Trump's tax and trade policies are still unclear, they will impact future Fed decisions. The market has seen significant changes in "Trump trades" this week; as investors anticipate benefits from Trump's tariff and deregulation plans, the Russell 2000 index rose by 8%, while the S&P 500 banking index increased by nearly 7%.
As Trump's policy details become clearer and he begins to appoint political figures, analysts at UBS Global Wealth Management are advising investors to be prepared for increased market volatility.