The Federal Reserve refuses to concede victory in its battle against inflation—but the stock market has other reasons to feel good about the future.
The market has found a lot to like during the week.
announced that new iPhones will contain artificial-intelligence capabilities, spurring hopes that consumers will pay the price to upgrade to the iPhone 16 when it arrives, sending that stock up 8.7% for the week and helping the
exchange-traded fund to a 5.6% gain.
The inflation data, too, provided reason for optimism. The consumer price index rose 3.3% year over year in May, below the 3.4% forecast and down from April’s 3.4%. The reading, which arrived on Wednesday morning, caused the S&P 500 to jump 0.9% out of the gate, gains it held on to at the close, even though some wondered at the extent of that strength.
“It does seem a little perverse that you get a 3.3 instead of a 3.4 and the market is worth a trillion dollars more,” says Adam Parker, founder of Trivariate Research, referring to the S&P 500.
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The Fed also seemed unmoved by the inflation data. At its meeting on Wednesday—its statement came at 2 p.m., some 5½ hours after the CPI’s release—it emphasized that inflation still isn’t close enough to its 2% target to cut rates. Its “dot plot” showed one rate cut later this year, down from three at the previous meeting.
Investors, though, remain confident that the Fed will cut eventually, allowing the economy to continue to grow. They know that the Fed is done hiking rates and it’s just a matter of time before it starts cutting them. “I’m not sure I really care about whether it’s a July or September cut,” says Citigroup strategist Scott Chronert. “What I care about is that a cut is coming and that the Fed has to be less restrictive.”
It’s also necessary for the stock market to support what is still a lofty valuation. The S&P 500 trades at 21 times expected earnings for the coming year, at the high end of the range since the Fed began lifting rates in early 2022. But that’s no reason to bail on stocks. “Expensive markets can stay expensive for extended periods,” writes Evercore ISI strategist Julian Emanuel. In 1998 and 2020, the index traded at over 20 times earnings and went on to gain for hundreds of days before finally peaking out and experiencing major declines, his data show.
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Even recent weakness in certain areas of the market—namely consumer, manufacturing, and bank stocks—isn’t worrisome enough to walk away, says Leuthold Group Chief Investment Officer Doug Ramsey, who notes that most sector indexes are seeing enough buying support to keep him optimistic on the market. “The case for holding stocks remains a ‘lopsided’ one,” he writes.
With or without the Fed.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
