Equities are making a long-awaited comeback as economic data points toward decelerating inflation rates. After a record rally in July, benchmark indexes have maintained their bullish streak well into August as well, as stocks ended the fourth consecutive week in the green on August 12.
In fact, the S&P 500 index ended last week with 3.26% gains, marking the longest weekly winning streak since November last year. Many technical analysts are predicting that the S&P 500 stocks have already bottomed and are poised to gain momentum hereon.
Improving economic data
While July was the month for “better-than-expected earnings,” analysts and economists expect August to be the season for “better-than-expected macroeconomic data.”
With a nearly 20% decline in gasoline prices last month, the U.S. Consumer Price Index (CPI) remained unchanged in July after a 1.3% rise in June. On a year-over-year basis, CPI increased 8.5% in July, a sharp decline from the 9.1% year-over-year rise in June. This is lower than the Dow Jones consensus estimate of an 8.7% rise in CPI last month.
Regarding this, John Augustine, chief investment officer at Huntington National Bank, said, “This morning's inflation report was a stress reliever and now we're getting buying in stocks, bonds, and commodities. We haven't had an inflation release that was lower than expected in quite some time.”
Following the signs of cooling inflation, the Federal Reserve is expected to ease its aggressive hawkish stance. While interest rates are expected to rise in September, the rate hike is expected to be in the 25-50 basis points range. However, many contrarian analysts expect the Fed to stick to its aggressive stance, given the red-hot labor market.
Consumer sentiment is also improving lately. The University of Michigan consumer index preliminary August data stood at 55.1. This compares with the Dow Jones estimate of 52.5.
Mixed GDP Expectations
Economists expect the U.S. GSP to rise at a 1.4% annualized rate in the fiscal third quarter, following two consecutive quarters of negative GDP growth. However, the recent third quarter estimate has been downgraded from the initial forecast of 2.5%. In fiscal 2022, the Philadelphia Federal Reserve forecast indicates a 1.6% GDP growth, down from the prior forecast of 2.5%.
Also, the U.S. GDP is expected to expand at a 1.3% rate in fiscal 2023. This is a full percentage point down from the prior GDP forecast.
After the optimistic inflation data was released last week, investors and analysts are awaiting the housing data release scheduled for next week. According to Dow Jones economists, home sales are expected to decline more than 6%, driven by the rising mortgage prices. A cooling housing market could signal declining consumer spending, further substantiating the inflation slowdown expectation.
The bottom line
Markets are also keenly waiting for the earnings data for industry-leading retail stocks such as Walmart (NYSE: WMT) and Target (NYSE: TGT). This comes as Walmart’s latest downgrade on quarterly and full-year profit outlook concerned investors. However, Morgan Stanley (NYSE: MS) recently stated that concerns surrounding Walmart’s recent earnings downgrade might be overblown.