The stock market experienced a mixed session on Wednesday as investors digested the latest Consumer Price Index (CPI) data, according to the Sevens Report.
The S&P 500 ended the day with a slight increase, closing up 0.38%. Initially, there was optimism as July’s headline CPI came in slightly below expectations, marking the first instance of inflation dipping below 3% since early 2021. However, the core CPI remained steady at 3.2%, which is still over 1% higher than the Federal Reserve’s 2% target, leading to a more cautious approach from investors.
The S&P 500 began the session on a high note, buoyed by the positive headline CPI figures. Yet, the in-line core CPI data dampened the excitement, especially among investors who were hoping for a clearer sign of disinflation. This led to a period of sideways trading before dip buyers pushed the S&P 500 to new weekly highs. Despite these gains, the lack of a strong bullish trigger caused the market to retreat slightly in the afternoon, closing just above 5,450.
Sector Performance and Market Trends
Sector performance was varied, with the Dow Jones Industrial Average leading with a 0.61% gain, while the Nasdaq remained unchanged, and the Russell 2000 dropped by 0.52%. The financial sector outperformed, driven by robust earnings from insurance companies like Progressive, which surged by 5%.
Conversely, sectors such as communications and consumer discretionary underperformed, affected by concerns over potential regulatory actions against Alphabet (NASDAQ: GOOGL) and forthcoming retail earnings reports.
Why Lower Inflation Isn’t Boosting Stocks
According to the Sevens Report, while declining inflation traditionally supports stock market growth, it has now become an anticipated outcome. This shift reflects a significant change in market behavior over the last 18 months, during which falling inflation consistently provided a tailwind for equities.
Strategists note that with inflation now at more normal levels, the likelihood of it surprising the market on the downside has decreased. Consequently, market attention has shifted to other factors like economic growth and Federal Reserve policies. With inflation expectations already factored in, only significant deviations in data—whether much weaker inflation or stronger growth—are likely to influence market movements.
Future Market Catalysts
Looking ahead, strategists highlight that the next potential market movers will be economic growth data and the Federal Reserve’s policy direction. Key economic indicators, such as retail sales and manufacturing indexes, along with Federal Reserve Chair Jerome Powell’s upcoming speech at the Jackson Hole symposium, will be closely monitored.
Should growth data come in strong and Powell suggests the possibility of more significant rate cuts, it could spark a renewed rally in the stock market. However, if growth disappoints or Powell takes a more neutral stance, the recent market upswing could reverse quickly. This situation underscores the market’s current delicate balance, where the margin for error is narrow, and the risk of volatility remains high.
