The stock market posted a mix of gains and losses during Wednesday's session as investors pored over the latest consumer price index (CPI) data, according to Sevens Report.
The bullish index ended with a modest gain of 0.38%. The day started on an optimistic note as the headline CPI figure for July came in slightly below expectations, marking the first time inflation fell below 3% since early 2021. However, the core CPI remained in line with estimates at 3.2%, more than 1% above the Federal Reserve's 2% target, leading to a more cautious market sentiment.
The S&P 500 opened the session with a strong rally, driven by positive headline CPI figures. However, the core CPI figure, which remained in line with that of the index, tempered enthusiasm, particularly among investors hoping for a clearer sign of disinflation. This cautious tone led to a brief period of flat trading, but as the day progressed, dip buyers came into action, pushing the S&P 500 to fresh weekly highs. Despite these gains, the absence of a strong bullish catalyst saw the market retreat slightly in the afternoon before settling just above the 5,450 mark.
Sector performance and commercial dynamics
Market sector performance was mixed, with the S&P 500 index leading the way with a gain of 0.61%, while the Nasdaq was flat and the S&P 500 fell 0.52%. The financial sector was the standout, boosted by strong results from insurance companies, in particular Progressive, which experienced a 5% gain.
Sectors such as communications and consumer discretionary, however, lagged, weighed down by concerns over potential regulatory action against Alphabet (NASDAQ:) and upcoming retail earnings reports.
Why falling inflation is no longer boosting stocks
According to Sevens' report, falling inflation, while historically positive for stocks, has now become an expected outcome. This shift marks a significant change in market behavior over the past 18 months, when falling inflation consistently provided a boost to stocks.
Strategists explain that now that inflation is at relatively normal levels, the chance of it surprising markets to the downside has diminished. As a result, market attention has shifted to other factors, such as economic growth and Federal Reserve policy. Since inflation expectations are already priced in, only data that deviates significantly from expectations (either much weaker inflation or stronger growth) will move the market.
Potential catalysts for future market movements
Looking ahead, strategists note that the next potential market catalysts will be data on economic growth and the Federal Reserve's policy stance. Key economic reports such as retail sales and manufacturing indices will be closely watched, along with Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole symposium.
If growth data is strong and Powell leaves the door open to more significant rate cuts, a stock market rally could be reignited. However, strategists warn that if growth disappoints or Powell strikes a more neutral tone, the recent market rally could quickly reverse. This underscores the delicate balance the market is currently in, where the margin for error is slim and the potential for volatility is high.
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