A Hot Inflation Print Is Set to Derail S&P 500’s Run to Record

(Bloomberg) — The US stock rally is already on shaky ground due to tariffs and an uncertain outlook about artificial intelligence. Add a hot inflation print to the mix, and the market will sell off.

That’s according to the trading desk at JPMorgan Chase & Co. Market Intelligence, who estimate the S&P 500 will fall as much as 2% in the case consumer prices rose 0.4% or more in January from a month prior. 

“Expect the bond market to react violently as it shifts its view to Fed Funds not being restrictive and the most likely next action of the Fed to be a hike rather than a cut,” the team led by Andrew Tyler wrote in a note. “The move in bond yields would pull the USD higher, further pressuring stocks.”

A lot is riding on the figures due 8:30 a.m. New York time. The market has overreacted to US consumer sentiment and inflation expectations data from the University of Michigan on Friday, Tyler said. “That put an over-emphasis on the CPI print,” they added. 

The strategists are tactically bullish on US equities, expecting the above-trend economic growth in the US, positive earnings and a neutral Federal Reserve with a dovish tilt. A slightly hotter print would refute that outlook, they said, even though the most likely outcome is for the monthly inflation figure to come between the 0.27%-0.33% range. 

The consensus estimate is for a 0.3% rise in month-on-month CPI, while the options implied move for the S&P 500 Index is just below 1%. Last month, the data triggered an outsized upward move for the stock market, and chances are that any small deviation from the forecast will again cause volatility.

After a strong two-year rally for the S&P 500, investors are now grappling with the threat of Donald Trump’s tariffs potentially stoking inflation higher, persistently elevated interest rates and lofty big tech valuations that are increasingly being questioned. Fed Chair Jerome Powell said the central bank doesn’t need to rush to adjust interest rates on Tuesday, sending bond yields higher. Swap markets currently price in just one more rate cut this year. 

Goldman Sachs Group Inc.’s Dominic Wilson said their forecast for the inflation print is slightly above the consensus. 

“If we print around the consensus, there could be some mild relief,” Wilson, a senior markets advisor, wrote in a note. “We do think the underlying inflation pressures ex-tariffs are likely to prove more benign than the market expects, but tariffs are likely to offset that in the near-term and we’ve raised our inflation forecasts recently. Markets have priced some of that risk already.”

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