"Weekly Outlook" The U.S. stock market remains high, and inflation data will test its true strength

Data Focus: U.S. CPI (Thursday) and PPI (Wednesday)

The market generally expects the Federal Reserve to cut interest rates in September.

A U.S. court ruling has once again stirred up uncertainty over tariffs.

Reuters New York, September 5 - As the market faces uncertainty from high tariffs and government bond yields, stock market valuations remain at elevated levels. In the coming week, U.S. stock market investors will face a series of inflation data tests.

Despite September being the worst-performing month for the stock market on average over the past 35 years, the S&P 500 index (.SPX) still set a new closing record high.

Matthew Miskin, co-chief investment strategist at Manulife John Hancock, stated, "Market sentiment in September has always been lackluster. The stock market has not priced in much risk. Their valuations seem to have fully reflected this."

The U.S. monthly Consumer Price Index (CPI) released on Thursday is the focus of economic data, with investors looking for signals regarding interest rate cut prospects and the impact of tariffs on prices.

Federal Reserve Chairman Jerome Powell's speech at the end of last month pointed to rising employment risks, leading the market to generally expect the Fed to cut rates for the first time in nine months at the meeting on September 16-17.

Data from the London Stock Exchange Group (LSEG) shows that federal funds futures reflect a 96% probability of a 25 basis point rate cut at the Fed's September meeting. Art Hogan, chief market strategist at B Riley Wealth, stated that only if the CPI data is "significantly higher than expected" would it undermine the market's assumption of an imminent rate cut by the Fed.

Rate futures indicate an expected cut of about 58 basis points by December, slightly more than two standard cuts.

Miskin noted, "Recently, the prospect of a Fed rate cut has been the overwhelming factor driving confidence in the stock market. Therefore, if this situation reverses, the stock market could be in trouble."

In addition to the CPI, the U.S. Producer Price Index (PPI) report released on Wednesday may also reveal the impact of import tariffs. Last month's PPI data showed that due to soaring costs of goods and services, the U.S. July PPI increase was the highest in three years.

Tariffs and their economic impact were major risks faced by the market earlier this year. However, other factors, such as doubts about the Fed's independence and cautious views on AI trading, have also become more prominent recently.

A U.S. appeals court ruled that most of President Trump's tariffs are illegal. The Trump administration subsequently requested the U.S. Supreme Court to hear the lawsuit to retain these comprehensive tariffs, injecting new uncertainty into the market.

Loss of tariff revenue could exacerbate the U.S. fiscal deficit, and investors believe this may have contributed to a significant rise in U.S. long-term government bond yields earlier this week. Yields on government bonds in the UK and other regions have also surged.

Although global long-term bond yields later retreated, their spike is considered a reason for the stock market's weakness.

Boosted by a strong second-quarter earnings season, the S&P 500 index has risen over 10% so far this year. According to LSEG Datastream, based on earnings forecasts for the next 12 months, the S&P 500 index's price-to-earnings ratio (P/E ratio) has climbed to 22.4 times, well above the long-term average of 15.9 times Ameriprise Financial Chief Market Strategist Anthony Saglimbene wrote in a commentary: "Investors face threats from unknown factors related to trade and tariffs, along with the release of economic data... These could ultimately pose challenges to elevated stock valuations."

"Nevertheless, investors have been monitoring these dynamics for months, and the stock market continues to rise."