The stock market posted a mix of gains and losses during Wednesday’s session as investors examined the latest consumer price index (CPI) data, according to a Sevens report.
Ultimately, the index edged up slightly to close with a modest gain of 0.38%. The day started on an upbeat note as the headline CPI figure for July came in slightly below expectations, marking the first time inflation has fallen below 3% since early 2021. However, the core CPI remained in line with estimates at 3.2%, more than 1% above the Fed’s 2% target, leading to a more cautious sentiment in the market.
The S&P 500 opened the session with a strong gain, driven by positive CPI numbers. However, a core CPI number that was in line with expectations dampened enthusiasm, especially among investors who were hoping for a clearer sign of slowing inflation. This cautious tone led to a brief period of flat trading, but as the day progressed, buyers stepped in, pushing the S&P 500 to fresh weekly highs. Despite these gains, the absence of a strong bullish catalyst saw the market retreat slightly in the afternoon before settling just above 5,450.
Sector performance and trading dynamics
Sectors in the market were mixed, with the Nasdaq leading the way with a 0.61% gain, while the Nasdaq Composite was flat, down 0.52%. The financials sector was the most prominent, driven by strong earnings from insurance companies, especially Progressive, which saw a 5% gain.
However, sectors such as telecoms and consumer discretionary were held back by concerns over potential regulatory action against Alphabet (NASDAQ:) and upcoming retail earnings reports.
Why is low inflation no longer boosting stocks?
According to Sevens Report, falling inflation, while historically positive for stocks, is now an expected outcome. This shift represents a significant change in market behavior over the past 18 months, when falling inflation has consistently provided support for stocks.
Strategists explain that the chances of a downside surprise have diminished with inflation now at relatively normal levels. 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—either much weaker inflation or stronger growth—will move the market.
Potential catalysts for future market movements
Looking ahead, strategists say the next potential catalysts for the market will be data on economic growth and the Fed’s policy stance. We’ll be closely watching key economic reports, such as retail sales and manufacturing indicators, along with Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium.
If growth data is strong and Powell leaves the door open for more aggressive rate cuts, it could reignite a stock market rally. However, strategists warn that if growth disappoints or Powell adopts a more dovish tone, the recent market rally could quickly reverse. That underscores the delicate balancing act the market is currently navigating, with little room for error and high volatility.
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