The latest inflation data offers the potential for ‘even bigger upside’ in the stock market rally

After a rocky start to 2024, the latest inflation data could very well provide more fuel for the current stock market rally.

“Falling inflation remains one of the key drivers of the bull market in equities,” Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI, wrote in a note to clients.

On Sunday, Emanuel raised his year-end price target for the S&P 500 (^GSPC) from 4,750 to 6,000. Emanuel cited the promising inflation path and “early innings” of AI trading to push his year-end target to the highest on Wall Street.

The S&P 500 and Nasdaq (^IXIC) hit four straight record closes last week as investors digested softer-than-expected inflation numbers for both consumer and wholesale prices.

Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, which currently has one of the highest end targets for the S&P 500 at 5,600, believes this week’s inflation data, and what it could mean for any rate cuts, “highlights the potential for even greater upside potential” from the year-end outlook.

Golub’s confidence is rising as inflation shows the biggest progress toward the Fed’s 2% target since the start of the year. That fuels hopes for rate cuts – and lowers government bond yields, a known headwind for equities over the past year.

May’s consumer price index (CPI) showed the ‘core’ CPI, which excludes volatile food and energy categories, rising 0.2% month-on-month, the lowest since June 2023. Meanwhile, the ‘core’ rose. ), which excludes volatile food and energy categories, was unchanged in May from the previous month, below economists’ expectations for a 0.3% increase.

Combining the different measures, economists believe this points to a positive outcome for the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month.

Bank of America economist Stephen Juneau wrote Thursday that the PPI supports their position that “disinflation is the most likely path forward” and points to an “A+ report card” for May’s core PCE. BofA estimates that core PCE rose 0.16% month-over-month in May.

“The May CPI and PPI data support our view that the Fed will cut its policy rate later this year,” Juneau wrote. “We believe that recent inflation data significantly reduces the likelihood that the Fed will have to raise rates and view labor market data as indicating that the likelihood of rapid rate cuts is also low.

“An easing cycle starting in September remains a possibility, especially if inflation were to decline further in the coming months.”

The inflation numbers appear to have cheered investors, given the Fed’s latest Summary of Economic Projections (SEP), which shows that the average forecast for rate cuts in 2024 has fallen to just one cut. Markets are now more firmly pricing in two rate cuts this year than last week.

Some attribute this to when the data was released. The CPI report came just hours before the Fed released it — and while Fed Chairman Jerome Powell noted that officials are allowed to change their forecasts after the release of economic data, “most people don’t.”

Moreover, the Fed’s call was close, with only one official in favor of one cut instead of two. Between the narrow majority and the second positive inflation reading of the week, after the Fed already wrapped up its meeting, Wall Street strategists think the Fed’s forecast may already be outdated.

“Frankly, given (the inflation data) what happened a week earlier, I think that would have been just enough to keep two more people on the bandwagon of two rate cuts,” said David Kelly, chief strategist at JPMorgan Asset Management, during a Roundtable discussion for the media on Thursday.

Kelly said recent data has helped push inflation slowly toward the Fed’s 2% target. And unless the U.S. economy is hit by an unexpected shock that will change course, “the soft landing will continue,” Kelly said.

FILE – Jerome Powell, Chairman of the Federal Reserve Board of Governors, speaks during a press conference at the Federal Reserve in Washington, May 1, 2024. On Wednesday, June 12, 2024, the Federal Reserve will conclude its final meeting by issuing a policy statement , in which it updates its economic policy.  and interest rate projections and holding a press conference with Powell.  (AP Photo/Susan Walsh, File)

Does he reserve the right to change his mind about interest rate cuts? Federal Reserve Board of Governors Chairman Jerome Powell (AP Photo/Susan Walsh) (ASSOCIATED PRESS)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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