Wall Street kicked off the week on a cautious note as traders awaited key CPI inflation data that will help shape the outlook for Federal Reserve policy and global financial markets.

U.S. stocks, bonds and the dollar all saw small moves in the days leading up to the CPI release, which is expected to be mild but still too high to support expectations of a rate cut. On Monday, a New York Fed survey showed expectations for inflation rising.

Some prominent traders warned that investors should prepare for a possible disruption to the calm in the U.S. stock market. Andrew Tyler of JPMorgan Chase said the options market is betting that the S&P 500 will move 1% in either direction after Wednesday's CPI report. Tyler said:

"The key risk is that the CPI data is hotter than expected. But the upcoming macro data will bring double-tail risks: first, stronger-than-expected growth will exacerbate inflation concerns, and second, weak growth will exacerbate recession or 'stagflation' concerns."

JPMorgan Chase predicts the probability of different readings for April CPI and the reaction of the S&P 500

Goldman Sachs Group Inc.'s Scott Rubner said there are upside risks to U.S. stocks and bonds this week as traders continue to build long positions. Commodity Trading Advisors (CTAs) saw significant demand for equities and fixed income, with a so-called "green sweep" occurring in most of Goldman's models. This means that even if the market falls, investors will continue to pour in.

Chris Larkin of Morgan Stanley E*Trade pointed out that just as the S&P 500 rebounded for three consecutive weeks and knocked on the door of record highs, important inflation data is about to be released. "Whether the rally can continue may depend on whether investors remain positive about rate cuts after the release of this week's data."

“If CPI falls short of expectations, the risk of a squeeze on rate-sensitive laggards will outweigh the downside risk from a higher-than-expected CPI,” said Ohsung Kwon of Bank of America. “After the Fed ruled out further rate hikes, we think the stock market may be able to tolerate higher inflation. If the data is released in line with expectations, it should also be a net positive, removing the inflation concern at least in the short term.”

Barry Bannister of Stifel Nicolaus & Co. believes that stagnant inflation is likely to trigger a decline in U.S. stocks in the coming months. He noted that the S&P 500 could fall about 10% in the second or third quarter to around 4,750.

HSBC strategists led by Duncan Toms believe that this week's US CPI inflation report "is merely in line with expectations, which will be enough for risk assets to rise further."

Matt Maley of Miller Tabak + Co. believes the U.S. stock market’s “setup” puts it at a critical juncture. In fact, the sharp drop in U.S. stocks in April, followed by a beautiful rebound, makes the stock market very vulnerable to a “double top” - one of the most bearish signals in technical analysis.

Will the S&P 500 form a "double top"?

“If this week’s inflation data shows a sharp reversal, that would be a very negative development,” Maley said. “However, if this week’s data can lead to an additional rebound that pushes the major indexes meaningfully above their 2024 highs, that would be very bullish.”

Jason Pride and Michael Reynolds of Glenmede said if recent events prove to be a blip in the disinflation process, one or two rate cuts starting in the fall might be justified, but they said that timetable could be revised further if inflation remains elevated.

Marko Kolanovic of JPMorgan Chase believes it is difficult to justify buying stocks right now due to rising interest rates, weak growth and meager potential returns. He noted: "We don't see enough returns to justify taking equity risk right now. The macro outlook is uncertain and we are entering a seasonally tricky time of year for equity markets, with the combination of the potential for high inflation, margin pressures and elevated positioning making it very challenging."

Goldman Sachs believes that the high valuation of the U.S. stock market shows that investors have already priced in a lot of enthusiasm for the stock market, but this does not mean that they should start selling. Ben Snider, senior strategist of Goldman Sachs' U.S. portfolio strategy team, said in an interview that the S&P 500 index is already above Goldman Sachs' year-end target of 5,200 points, but the fundamental background of stock prices is still "very good." Snider said he is optimistic about the future stock market because of strong earnings of U.S. companies and confidence in the anti-inflation path.

Ahead of Wednesday's CPI, economists will analyze producer price data on Tuesday to gauge the impact of various data that go into the Fed's preferred inflation gauge, the personal consumption expenditures price index (PCE). Fed Chairman Jerome Powell is also scheduled to speak on Tuesday. Retail sales data will also be released this week. With nearly 90% of S&P 500 companies reporting for the quarter, upbeat first-quarter results have pushed Wall Street to raise profit expectations for the three months ending in June, according to Bloomberg Intelligence.

Investors who are worried that the S&P 500 is losing steam after a double-digit run since October should look to history for reasons to hold on to U.S. stocks.

Missing the index’s best 10 days in each decade since the 1930s would have yielded a return of just 66%, according to Bank of America, which pales in comparison to the roughly 23,000% gain that would have been generated by staying invested on those days. What’s more, those best days came right after the worst days for stocks, when selling might have been most tempting, the analysis shows.

Ten-year returns of the S&P 500, including and excluding the 10 best and 10 worst trading days

Article forwarded from: Jinshi Data