By Lewis Krauskopf
NEW YORK (Reuters) -A fresh look at inflation trends will test the U.S. stock market’s rally in the coming week, with some investors saying equities are primed for a potential pullback after rocketing to records.
The benchmark S&P 500 ended on Friday up more than 8% on the year and on the cusp of all-time high levels, while the tech-heavy Nasdaq Composite was at a record, as stocks 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 U.S. 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 surged 28% 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 over 22 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.
finance.yahoo.com
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