New York, Sept. 9 (BNA): U.S. stock investors are turning their focus to next week’s inflation data, which could determine the near-term path of an equity rally that has wobbled in recent weeks.
Signs the U.S. economy is on track for a so-called soft landing, where the Federal Reserve is able to bring down inflation without badly damaging growth, have helped power the S&P 500’s 16% year-to-date gain, Reuters reported.
Last week’s employment data played into that narrative, showing the job market remained robust, though not strong enough to spark worries that the Fed would need to hike interest rates more to fight inflation, moves that rocked markets last year.
Consumer price data next week may need to strike a similar balance, investors said. Too high a number could fan fears of the Fed leaving interest rates higher for longer or hiking them more in coming months. That would give investors less reason to hold onto stocks after a tech-led drop in which the S&P 500 lost about 5% from summer highs.
Investors trying to assess future Fed policy will watch other data in the coming week too, including a reading of the producer price index and retail sales.
The U.S. central bank is widely expected to hold benchmark rates steady at its Sept. 20 meeting. Markets are also pricing in a nearly 44% chance of a rate hike at the Fed’s Nov. meeting, up from 28% a month ago.
Strategists and investors currently have largely held faith in the market despite stocks’ recent wobble. Some, though, are growing more cautious.
Reasons for optimism include the relative outperformance of the U.S. economy compared to Europe and China and signs the so-called profit recession among S&P 500 companies may be over.
Still, worries over an economic slowdown in China and concerns that U.S. corporate margins will shrink have led some market participants to believe squeezing more gains out of stocks will grow more difficult.
The S&P 500 Information Technology sector lost more than 2% this week following news that Beijing had ordered central government employees to stop using iPhones for work. Apple shares fell 6% for the week on fears the company and its suppliers could take a hit from rising competition from China’s Huawei.
The S&P 500 is down about 5% from its July highs, which has made stock valuations broadly more attractive given the low possibility of an imminent recession, said Jonathan Golub, senior equity strategist at Credit Suisse Securities.
Forward price-to-earnings multiples for 10 out of the 11 sector groups of the S&P 500 fell in August, he noted, though the P/E for the index as a whole remains near 20, compared with 17 at the end of 2022.
Still, much of the bull case for stocks hinges on softer inflation eventually pushing the Fed to lower interest rates.
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