Stocks Will Rally If Inflation Data Is Soft, Goldman and JPMorgan Say

(Bloomberg) — In a market where conflicting views abound, two major Wall Street trading desks agree on one thing: US stocks will rally on any soft inflation print Wednesday that could pave the way for the Federal Reserve to halt its tightening campaign.

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A consumer-price index around or below the 5% consensus could spark an equity rally, with the S&P 500 rising at least 0.5%, according to John Flood, a partner at Goldman Sachs Group Inc. Meantime, a surprisingly strong reading would send stocks sharply lower. The benchmark index could drop at least 2% on a reading above 5.9%, he added.

“The cooler the data the better for stocks right now,” Flood wrote in a note to clients Tuesday. “Pain trade for fast money community would be cyclicals outperformance on a hot print.”

At JPMorgan Chase & Co., a team led by Andrew Tyler echoes that view.

The most likely scenario to play out is CPI comes in between 5% and 5.2%, and the S&P 500 adds 0.5% to 0.75%, their analysis shows. In an extreme case where inflation tops 5.5%, stocks may tumble more than 3%.

Both trading desks penciled in a stock rally of at least 2.5% should inflation ease below 4.5%. The CPI last approached that level in April 2021 and JPMorgan assigned a probability of 1% for that happening this time.

“Another tail-risk scenario, that would likely push the SPX through the top of its near-term range,” Tyler and his colleagues wrote. “To get this scenario, we likely need an unexpected move lower in all housing price related metrics.”

The S&P 500 has been stuck in a 150-point band since the end of March, with gains capped below the 4,200 level, as traders weigh the prospect of Fed rate cuts against a litany of threats from the spread of banking stress to a drama over the government debt ceiling and an economic recession.

The US equity benchmark closed at 4,119.17 Tuesday.

To be sure, the CPI has weakened for nine straight months, and the heightened anxiety over the event is showing signs of abating.

The Cboe 1-Day Volatility Index, a gauge of implied move for the S&P 500 in the very short term, was priced near 18, the lowest pre-CPI reading in the past year, data compiled by Bloomberg show.

Still, stakes are high with stock investors increasingly showing diverging postures. While rules-based funds have been forced into a buying spree in recent months, discretionary investors have resisted to join. Not since 2019 have quants been this bullish relative to stock pickers, according to data compiled by Deutsche Bank AG.

A soft CPI reading would force bears to unwind positions, according to Brent Donnelly, president of Spectra Markets.

The S&P 500 “should take another run at 4,200,” he said. “The market has been grinding to nowhere for ages and there is plenty of money available to buy stocks if the market can find a reason to do so.”

–With assistance from Emily Graffeo.

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