Stocks Kick Off Key Inflation Week Under Pressure: Markets Wrap

Wall Street traders found little encouragement to keep pushing the stocks higher at the start of a week that will bring the last key inflation figures before the Federal Reserve decision.

Equities retreated on Monday, with investors awaiting more clues on whether the recent uptick in consumer prices was just a blip or a sign that the disinflationary trend has hit a wall. After closing at record highs 16 times this year, the S&P 500 is showing signs of overheating, spurring warnings for a near-term consolidation in the absence of fresh catalysts.

“It would be natural to expect some fly in the ointment, some monkey in the wrench, to bring investor expectations back to Earth,” said Jason De Sena Trennert at Strategas. “Stock prices, credit spreads, and the price of gold and Bitcoin suggest that monetary conditions are far from restrictive.”

The S&P 500 hovered near 5,100, with Boeing Co. leading losses in industrial shares. Nvidia Corp. erased its decline while Tesla Inc. gained 2.5%. The Cboe Volatility Index — the VIX — climbed toward its highest since November. Treasury two-year yields topped 4.5%. Bitcoin hit $72,000.

Despite the recent loss of traction, the S&P 500 climbed in 16 of the past 19 weeks on the back of improving earnings outlooks and a resilient US economy. But some of those gains could be undone if the Tuesday’s consumer price index reading continues to show inflation remaining stubbornly sticky.

While the S&P 500 has fallen on just four CPI reporting days in the past 12 months, volatility is picking up in those sessions this year. Over the past six months, the equity gauge has moved about 0.8% in either direction on the day CPI has been released, according to data compiled by Bloomberg. That’s the most since April and up from less than 0.5% in September.

Inflation in the US probably abated only gradually last month and retail sales rebounded, illustrating why the Fed is in no rush to lower interest rates. Speaking to US lawmakers last week, Fed Chair Jerome Powell said that while it would likely be appropriate to cut rates “at some point this year,” he and his colleagues aren’t ready yet.

“Expect more volatility around those releases as investors continue to determine the direction of interest rates,” said Paul Nolte at Murphy & Sylvest Wealth Management.

Meantime, the ranks of Wall Street strategists playing down concerns around a bubble in US technology megacap stocks are growing.

The team at JPMorgan Chase & Co. was the latest to flag that valuations of the seven tech giants that have powered the record-breaking rally on Wall Street are currently lower relative to the rest of the S&P 500 than the average of the past five years.

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“There is a concern over the very strong outperformance of the Magnificent 7, but we note that the group is currently trading less stretched than a few years ago, given earnings delivery,” strategist Mislav Matejka wrote in a note. “This is not to say that the group is immune to profit disappointments ahead, but in the case of general earnings disappointment, these stocks could still hold out better than traditional cyclicals” reliant on strength in the economy, he said.

Robust profits from some of the tech behemoths have also brought down sky-high valuations. They remain relatively stretched, but they’re still well below prior peaks.

The “Magnificent Seven” stocks, for example, trade near their average price-to-earnings ratio since 2015, data compiled by Bloomberg show. The group comprises Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc.

Corporate Highlights:

US Transportation Secretary Pete Buttigieg said the Federal Aviation Administration will rigorously assess Boeing Co. after the blowout of a fuselage section on an Alaska Airlines flight in January.
Delta Air Lines Inc. expects deliveries of its Boeing Co. 737 Max 10 aircraft could be pushed out to as late as 2027 as the troubled planemaker undergoes federal safety and criminal reviews.
MicroStrategy Inc. bought another 12,000 Bitcoin for $821.7 million, the second-largest purchase by the enterprise-software maker since it began acquiring the cryptocurrency almost four years ago.
Reddit Inc. disclosed further details of what is set to be one of the year’s biggest initial public offerings, with the company and some existing shareholders seeking to raise as much as $748 million.
US natural gas producer EQT Corp. agreed to buy back former unit Equitrans Midstream Corp. for about $5.5 billion in stock, the latest in a flurry of deals in the oil and gas pipeline industry.

Key events this week:

Japan PPI, Tuesday
UK Financial Policy Committee quarterly meeting, attended by Bank of England Governor Andrew Bailey, Tuesday
EU finance ministers meet in Brussels, Tuesday
ECB Governing Council Member Robert Holzmann, Tuesday
US CPI, Tuesday
Eurozone industrial production, Wednesday
ECB Governing Council member Yannis Stournaras speaks, Wednesday
Volkswagen, Adidas earnings, Wednesday
US PPI, retail sales, initial jobless claims, business inventories, Thursday
China property prices, Friday
Japan’s largest union federation announces results of annual wage negotiations, just ahead of Bank of Japan policy meeting, Friday
Bank of England issues inflation survey, Friday
US industrial production, University of Michigan consumer sentiment, Empire Manufacturing, Friday