Wall Street Rallies on More Evidence of Peak Inflation; S&P 500 Recovers 50% of 2022 Drop

S&P 500 Recovers 50% of Drop from 2022, on Track for Fourth Consecutive Weekly Gain

As two additional data points on Friday contributed to the mounting body of evidence indicating inflationary pressures in the US had peaked, US stocks rose. With US import prices down for the first time this year in July and a consumer mood poll showing a decline in one-year consumer inflation forecasts to a new six-month low of 5.0%, the S&P 500 rose 1.6% to hit its highest level since May 4 in the 4,270s.

These two data points follow the release on Wednesday and Thursday of the July CPI and PPI statistics, which revealed a softening of pricing pressures. The S&P 500 was last expected to score a 3.0% weekly gain, which would be its greatest run since a five-week surge back in November 2021 and represent a fourth consecutive week in the green.

Importantly, the index was able to bounce back on Friday to the north of the critical 4,230 level, recouping slightly over 50% of its peak to trough losses from earlier in the year. For comparison, the index fell as low as the 3,630s in early June after reaching a high over 4,800 in January.

The Nasdaq 100 index was last expected to record a 2.0% rise, which would have given the index a week-to-week gain of around 2.5%. In contrast, the Dow last gained 1.2% on Friday and 2.8% for the week. The large tech/growth stock-rich Information Technology, Communications Services, and Consumer Discretionary sectors led the way with gains of 1.9% to 2.0%, while all eleven S&P 500 GICS sectors had gains.

Strong earnings and Soft-Landing Optimism Support Equity Market Sentiment

The ISM and employment figures last week, which challenged the notion that the US economy is in recession in Q3, have been followed by recent data that suggest a lessening of pricing pressures in the US. As a consequence, this week saw a rise in confidence that the economy may yet pull off a so-called "soft landing," or a situation that would be just right for equities and see inflation decline while GDP remained positive or robust.

The US equity markets have been protected from hawkish commentary from Fed policymakers this week, who have been keen to emphasize that the fight against inflation is still far from won and that more rate hikes remain necessary, by this optimism as well as a much stronger than expected Q2 earnings season, which is now coming to a close. 78% of the 91% of S&P 500 firms who have reported profits so far this earnings season, according to Reuters using Refinitiv data, have outperformed analyst expectations.

Equity analysts currently anticipate S&P 500 company profits to have climbed at a YoY rate of 9.7% in Q2, as opposed to forecasts of a 5.6% earnings growth pace before the beginning of the earnings season a few weeks ago, according to Refinitiv data. Remember that a few weeks earlier, several macro experts even referred to forecasts for a Q2 profits growth rate of 5.6% YoY as being excessively optimistic.

Since equities values were significantly lower a few weeks ago and the markets were plainly much too pessimistic about the US economy and the outlook for profits growth, there has definitely been a significant narrative change. According to a statement from Bank of America published on Friday, stocks witnessed inflows of $7.1 billion in the week ending on Wednesday, the highest weekly inflow since last December, signaling an accelerating change in attitude even before the most recent round of negative inflation shocks.

Next week's earnings season will come to an end with results from major US retailers like Home Depot, Lowe's, Walmart, and Target. These results, along with next Wednesday's release of the US Retail Sales report for July, will provide additional information about the state of the US consumer and economy.