The stock market posted a mix of gains and losses during Wednesday’s session as investors navigated the latest consumer price index (CPI), Sevens Report showed.
The shares eventually traded higher, closing with a modest gain of 0.38%. The day started with optimism as July’s CPI figure came in slightly below expectations, marking the first time inflation has fallen below 3% since the start of 2021. However, the core CPI remained in line with estimates at 3.2%, more than 1% above 3.2%. The Federal Reserve’s 2% target, leading to more cautious market sentiment.
The S&P 500 opened the session with a strong rally, driven by positive CPI data. However, the in-line core CPI figure dampened enthusiasm, especially among investors who had hoped for a clearer signal of disinflation. This cautious tone led to a brief period of flat trading, but as the day progressed, dip buyers stepped in, pushing the S&P 500 to new weekly highs. Despite these gains, the absence of a strong bullish catalyst caused the market to pull back slightly in the afternoon before settling just above 5,450.
Sector performance and trading dynamics
The market’s sector performance was mixed, with the leader gaining 0.61%, while the Nasdaq was flat and fell 0.52%. Financial services was the sector that stood out the most, thanks to strong gains from insurance companies, especially Progressive, which rallied 5%.
However, sectors such as communications and consumer discretionary lagged, pressured by concerns about possible regulatory action against Alphabet (NASDAQ:) and upcoming retail earnings reports.
Why falling inflation no longer stimulates stocks
According to the Sevens Report, the decline in inflation, while historically positive for equities, has now become an expected outcome. This shift marks a significant change in market behavior over the past eighteen months, when falling inflation has consistently been a tailwind for equities.
The strategists explain that with inflation at relatively normal levels, the potential to surprise markets to the downside has diminished. As a result, the market’s focus has shifted to other factors, such as economic growth and Federal Reserve policy. With inflation expectations already priced in, only data that deviates significantly from expectations (much weaker inflation or stronger growth) will move the market.
Potential catalysts for future market movements
Looking ahead, strategists emphasize that the next potential market catalysts will be economic growth data and the Federal Reserve’s policy stance. Major economic reports, such as retail sales and manufacturing indices, will be closely watched along with Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium.
If growth rates are strong and Powell leaves the door open for even bigger rate cuts, it could spark another stock market rally. However, strategists warn that if growth disappoints or Powell takes a more neutral tone, the market’s recent rally could quickly reverse. This underlines the delicate balance the market currently finds itself in, where the margin for error is small and the potential for volatility is high.
