The rise in the S&P 500 at the start of August represents a welcome respite from the recent market volatility, but analysts at Wolfe Research believe there is uncertainty about whether stocks can maintain this upward momentum in the coming days.
In a note to their clients, analysts, including Chris Sinek and Adam Kalingasan, pointed out that the benchmark index has achieved returns of about 3.6% since the beginning of this month, which has allowed it to set new record highs and break out of a narrow trading range that lasted for two months.
The index's rise was largely based on strong corporate results during the last quarter; some 436 companies listed on the S&P index released their latest financial results, and 85.1% of them exceeded analysts' expectations, according to LSEG data reported by Reuters.
These strong returns have helped alleviate some concerns about the sustainability of the AI boom and the potential impact of an energy shock from a war with Iran. However, results from prominent companies this week, such as networking equipment maker Cisco Systems and chip-manufacturing equipment manufacturer Applied, may provide further clues about the scale of spending on AI infrastructure.
Wolfe analysts stressed that most importantly, the anticipated consumer price data due on Wednesday could shed light on the trajectory of inflation in the United States and the direction of monetary policy for the Federal Reserve.
The analysts wrote: The key question is whether stocks can continue their gradual rise given the waning support from the earnings season and the renewed focus on macroeconomic data.
The U.S. Labor Department's Consumer Price Index is expected to decline slightly to 3.4% from 3.5% year-on-year through the end of July. The headline index includes fuel costs, which have risen sharply since the outbreak of the conflict with Iran in late February.
The core inflation rate, which excludes energy and food costs, is expected to decline to 2.5% from 2.6%.
At these levels, inflation will remain well above the Federal Reserve's 2% target. While the central bank could resort to raising interest rates to curb rising prices, this could have a negative impact on the broader economy, particularly the labor market, which is showing signs of fragility.
Data released last week showed that the US economy unexpectedly lost jobs in July, weakening expectations that the Federal Reserve will raise interest rates at its next meeting in September.
Wolfe analysts said: Expectations for the Federal Reserve to raise interest rates at its September meeting have declined, but we see an upward surprise in inflation data as the biggest near-term threat.
Citing strong manufacturing data for July, analysts added that the US economy appears to be entering a phase they call delayed acceleration. At this stage, a combination of massive spending on artificial intelligence and a decline in wholesale inventories relative to sales is expected to drive inventory building in the economy.
From this perspective, analysts have shown a preference for technology stocks, particularly semiconductor stocks, as well as the energy, financial services, healthcare and industrial sectors.
