The CPI’s impact goes beyond a more likely Fed cut
Barbara Reinhard, CFA
CIO, Multi-Asset Strategies and Solutions
Hot on the heels of the S&P 500’s strong earnings season, recent inflation data is giving investors another reason to be cheerful: consumer prices rose just 2.7% annually in July, below expectations. This lighter-than-expected print—despite tariff-related pressures in some categories—has led traders to ramp up bets that the Federal Reserve will begin cutting interest rates in September. But a lighter CPI has important implications for the equity market, too.
With 90% of S&P 500 companies having reported, 81% have delivered positive EPS surprises, and 81% have exceeded revenue expectations. Both these figures are above the index’s 5- and 10-year averages. The blended year-over-year earnings growth rate now stands at 11.8%, up from 10.3% last week and 4.9% at the end of Q2. Revenue growth has also accelerated to 6.3%, marking the highest rate since Q3 2022.
Although valuations remain slightly elevated, with the forward P/E ratio at 22.1x also above both the 5-year average (19.9x) and the 10-year average (18.5x), the prospect of rate cuts could provide continued support for equity markets.
Given the potential for lower rates and the resilience shown by U.S. large caps through Q2’s policy turmoil, we continue to favor high-quality companies that demonstrate strong pricing power and operational flexibility in this environment, especially relative to international markets.
Maverick Lin contributed to this article. All data from FactSet.