Wall Street Rallies on More Evidence of Peak Inflation; S&P 500 Recovers 50% of 2022 Drop

Key Points

• US equities surged across the board on Friday after more data alluded to US price pressures having peaked.
• The S&P 500 was last up 1.6%, the Nasdaq 100 up 2.0% and the Dow up 1.1%.
• The S&P 500 was on course for a fourth weekly gain, having now recovered 50% of 2022’s drop.

S&P 500 on Course for Fourth Successive Weekly Gain, Recovers 50% of 2022 Drop

US equities surged on Friday as two more data points on Friday added to the growing pile of evidence that inflationary pressures in the US have now peaked. The S&P 500 rallied 1.6% to reach its highest level since 4 May in the 4,270s, with US import prices down for the first time this year in July and a consumer sentiment survey showed a drop in one-year consumer inflation expectations to a new six-month low of 5.0%.

These two data points come after CPI and PPI data for July out on Wednesday and Thursday showed an easing of price pressures. The S&P 500 was last on course to post a weekly gain of 3.0%, which would mark a fourth successive week in the green, its best run since a five-week rally back that ended in November 2021.

Crucially, on Friday the index was also able to recover back to the north of the key 4,230 mark, meaning it has clawed back just over 50% its peak to trough losses from earlier in the year. For reference, after peaking above 4,800 in January, the index dipped as low as the 3,630s in early June.

The Nasdaq 100 index was last on course to post an even more impressive 2.0% gain, putting the index on course to have rallied about 2.5% this week. The Dow, meanwhile, was last up 1.2% on Friday and 2.8% on the week. All of the eleven S&P 500 GICS sectors gained, with the big tech/growth stock dense Information Technology, Communications Services and Consumer Discretionary sectors leading the way, up 1.9%-2.0% .

Soft-Landing Optimism, Strong Earnings Supports Equity Market Sentiment

Recent data alluding to an easing of US prices pressures follows ISM and jobs data last week that pushed back against the idea that the US economy is in recession in Q3. As a result, there has been a build-up of optimism this week that the economy might still pull off a so-called “soft landing”, a goldilocks scenario for stocks where inflation comes down but growth remains positive/strong.

This optimism, as well as a much stronger than expected Q2 earnings season which is now drawing to a close, has insulated US equity markets from hawkish commentary from Fed policymakers this week, who have been keen to emphasize that the battle against inflation remains far from won and more rate hikes remain necessary. According to Reuters citing Refinitiv data, of the 91% of S&P 500 companies to have reported thus far this earnings season, 78% have beaten analyst forecasts.

According to Refinitiv data, equity analysts now expect S&P 500 company earnings to have grown at a YoY pace of 9.7% in Q2, versus expectations of a 5.6% earnings growth pace prior to the start of the earnings season a few weeks ago. Recall that, a few weeks ago, many macro analysts had even been referring to expectations for a 5.6% YoY pace of earnings growth in Q2 as overly optimistic.

There has clearly been a big narrative shift, with markets clearly much too downbeat on the US economy and prospect for earnings growth a few weeks ago, when equity valuations were much lower. Bank of America said in a note released on Friday that equities saw $7.1 billion in inflows in the week up to Wednesday, the largest weekly inflow since last December, indicative an accelerating shift in sentiment even prior to the latest series of downside inflation surprises.

Earnings from big US retailers like Home Depot, Lowe’s, Walmart and Target will round off the earnings season next week and, alongside next Wednesday’s US Retail Sales report for July, will give further insight into the health of the US consumer/economy.