Inflation trap? Stocks Are Nearing a Record Run, but the Most Crucial CPI Reading of 2024 is Just Around the Corner

U.S. equities could face hurdles as they navigate their way back to record levels, with this week's consumer price readings potentially holding significant implications for the year.

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Inflation over the past quarter has deviated from the Federal Reserve's target of a 2% annual rate, primarily driven by increases in energy and housing costs, pushing the consumer-price index (CPI) for March to a yearly rate of 3.5%.

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Matthew Bartolini, head of SPDR research at State Street Global Advisors, emphasized the market-moving potential of each data release in the context of the Fed's data-dependent stance. Fed Chair Jerome Powell's recent remarks suggested a likelihood of rate cuts rather than hikes, despite stagnant progress on inflation.

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Following a 1.9% increase last week, bringing the S&P 500 index close to its record high, stocks were indecisive on Monday. The benchmark 10-year Treasury yield remained relatively unchanged at 4.503% by the end of the week, albeit down from its late April peak of 4.706%.

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Bartolini highlighted the upcoming inflation report as a pivotal event for policymakers and investors alike, akin to a "mini Super Bowl" for those monitoring policy shifts.

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Consumer Sentiment:Consumer sentiment regarding inflation has grown more pessimistic, as evidenced by the University of Michigan index released on Friday. One-year inflation expectations climbed to 3.5% from 3.2% in April, potentially providing companies with justification to raise prices.

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Conversely, major food and beverage companies have observed heightened consumer stress levels, with McDonald's noting increased demand for value across income levels, Starbucks observing more discerning spending habits among customers, and Mondelez highlighting heightened price sensitivity.

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Earnings Outlook:With most S&P 500 companies having reported their first-quarter results, there's been a 5.4% blended yearly earnings growth rate as of Friday, the highest since the second quarter of 2022, according to John Butters, senior earnings analyst at FactSet Research Systems.

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Upcoming Events:Key events on the horizon include Home Depot's earnings on Tuesday, followed by the CPI release for April and retail sales data on Wednesday, and Walmart's earnings on Thursday.

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Investment Strategies:In anticipation of sustained inflation, investors may consider diversifying their portfolios to mitigate risks. Bartolini suggests incorporating U.S. Treasury inflation-protected securities (TIPS) alongside growth stocks and bonds. Additionally, he recommends exploring sectors such as home builders, short-dated credit, gold, natural resource-focused stocks, and bank loans.

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Anthony Saglimbene, chief market strategist at Ameriprise Financial, underscores the importance of monitoring inflation levels for potential market movements, especially for stocks nearing record levels.

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The Dow Jones Industrial Average ended Friday merely 0.7% away from its late March record close, while the Nasdaq Composite Index closed 0.6% shy of its mid-April record finish.

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