“A hotter-than-anticipated CPI report will pressure markets this week. An in-line report could be taken in stride as investors have priced in a 75 basis point move by the Fed” in September, wrote Lindsey Bell, chief markets and money strategist for Ally. “Either way, we still have to get through another jobs report, more inflation data, and Jackson Hole before we get to the Fed’s September meeting. It could be a volatile several weeks ahead.”
Timing the peak in inflation isn’t easy, especially after June’s CPI print turned out to be hotter than expected, but being right in doing so has brought investors a hefty return.
Those buying the S&P 500 at major inflation peaks going back to 1940 have seen the index post an average rally of 16% in the next 12 months, according to data compiled by Leuthold Group. A big caveat is that the price-to-earnings ratio has averaged 12.7 in prior instances on a normalized basis, compared with above 20 now.
Meantime, highly optimistic analyst stock recommendations are flashing a warning signal for stocks, according to Citigroup Inc. strategists led by Robert Buckland. An index of global sell-side ratings “is back to peak bullishness levels reached in 2000 and 2007, after which global equities halved,” they wrote.
Strategists from Morgan Stanley and Goldman Sachs Group Inc. already warned analysts’ expectations are unrealistic. Meanwhile, JPMorgan Chase & Co.’s Marko Kolanovic, one of Wall Street’s staunchest bulls, said investors should modestly trim stock holdings.
