Inflation data leaves behind "dovish bomb," Goldman Sachs partner predicts S&P to hit new highs before year-end.

On Thursday, July 13th, due to the weaker-than-expected June PPI (Producer Price Index) and CPI (Consumer Price Index) data released yesterday, which indicated a significant cooling of inflation, the market has increasingly speculated that the rate-hiking cycle of the Federal Reserve is nearing its end.

The U.S. stock market is poised to rise for the fourth consecutive day, with the S&P 500 and Nasdaq continuously hitting 52-week highs, reaching the highest level in 15 months since early April last year. Technology stocks, particularly sensitive to interest rate policies, have dominated the market, with the Nasdaq rising more than 1% for two consecutive days, highlighting investors' optimism.

Analysts from mainstream Wall Street investment banks have also begun to reverse their pessimistic expectations for the U.S. stock market this year. Previously, they believed that the Federal Reserve's most aggressive monetary tightening policy since the 1980s would inevitably drag down economic growth and even lead to a "hard landing" recession.

John Flood, a partner at Goldman Sachs, stated in a research report on Wednesday that since the S&P 500 has fully recovered from all the declines since the Fed's current round of rate hikes, and even exceeded the level by 3% compared to when the rate hikes began in March 2022, several clients of the bank have asked for the first time this year whether they believe the S&P 500 will hit a new all-time high before the end of the year. "I think it will."

He pointed out that the S&P 500 reached a historical high of 4796.56 points in January 2022, with about 7% room for further growth compared to Wednesday's closing price. To break the record again, the U.S. stock market needs both better-than-expected economic growth and corporate profits.

Currently, the consensus expectation on Wall Street is that corporate profits will decline by 9% in the second quarter of the U.S. stock market earnings season, which is considered a "very low threshold" that companies need to outperform. This may further boost the stock market:

"Although the second quarter of this year may mark the trough of the slowdown in U.S. corporate profits, excluding the drag from the energy sector, corporate profit growth has already bottomed out in the fourth quarter of 2022, coinciding with the lowest point of the bear market in the stock market. Therefore, the market's expectations for the second quarter of this year are very low, which is actually a positive signal for the stock market."

According to data compiled in mid-June, the average year-end target price for the S&P 500 among Wall Street analysts has fallen by about 8% from the current level, making it the worst outlook for the second half of the year since at least 1999, indicating that bearish sentiment towards the U.S. stock market is still dominant.

Even the notoriously acerbic financial blog Zerohedge admits that the CPI inflation data released this week is equivalent to a "dovish bomb," directly causing the U.S. dollar and bond yields to plummet, and pushing the S&P 500 and Nasdaq to their highest levels since April last year.

S&P 500 rebounds after initial decline in the current round of rate hikes by the Federal Reserve. In the future, there may be more Wall Street professionals joining the ranks of the aforementioned Goldman Sachs traders, viewing soft inflation data as a signal for continued stock market growth. The main logic behind this is that the Federal Reserve's tightening policy is entering its final stage, with July being the last rate hike.

According to ZH, even Morgan Stanley's chief global market strategist, Marko Kolanovic, who is known for his changing views, has changed his bearish outlook on US stocks this year. He believes that although CPI did not drop to the 2% range as some clients expected, it still supports the argument that deflationary pressures are continuing and is enough to end the current rate hike cycle after July.

Another Morgan Stanley trader and head of market intelligence, Andrew Tyler, who has been bullish on US stocks for the past few months, made similar comments, stating that the Federal Reserve may "unofficially end the rate hike cycle" during the unofficial Jackson Hole Symposium from August 24 to 26. This will further fuel risk assets such as the stock market until the end of the year:

"In general, the latest inflation data supports the market's positive view on the economy and stocks, combining this with the July Federal Reserve rate hike (which has already been fully priced in) and seasonal strength, the stock market should rise in July.

August and September are seasonally weak months, while the fourth quarter is the seasonally strongest quarter. Assuming Powell will unofficially end the rate hike cycle at the Jackson Hole Symposium, combined with positive corporate earnings, it is all positive for US stocks.

Bank/credit card company earnings will reveal details about the health of US consumers, while tech stock earnings will provide insights into whether the next move is gradual growth or a sharp jump. The second quarter will be the last decline in US corporate profits before 2024."

It can be seen that his view on easy earnings beats aligns with the optimistic stance of the aforementioned Goldman Sachs partner.

However, some people are concerned that even if US stocks perform well this year, it is uncertain whether the upward trend can continue next year.

Scott Rubner, a Goldman Sachs trader who tracks fund flows, said this week that the stock market may experience a "blow-off top" after CPI, which means that securities prices and trading volumes will rapidly and sharply rise at technical levels, followed by a rapid and sharp decline in prices.

He remains optimistic about US stocks for the remaining time in July, "because the remaining macro shorts will be covered and investors will shift their focus back to risk assets from the sidelines." However, the definition of a blow-off top indicates that a sharp decline follows a rapid rise, and this explosive trend is also known as an "exhaustion trend," which indicates that the bullish market should not be taken lightly.