Investors are facing a critical week as they anticipate key consumer inflation data that could significantly impact the stock market. Despite recent challenges in the U.S. job market, the markets have demonstrated resilience, but that could soon be tested. Dubravko Lakos-Bujas, the global head of market strategy at JPMorgan, cautions that hotter-than-expected inflation figures could lead to a sharp decline in the S&P 500, potentially dropping as much as 8%. In a pessimistic scenario, the index could tumble to levels between 6,000 and 6,200.
Currently, stocks are trading at unprecedented highs, largely ignoring concerns stemming from weak job growth that has plagued the economy for several months. Investors seem to be betting on an optimistic “Goldilocks scenario,” where the economy is just cool enough to encourage Federal Reserve rate cuts while still demonstrating strength to avoid a recession.
Lakos-Bujas points out that the recent pronounced rally in stocks has further intensified the need for caution. He noted that with near-term positioning looking elevated and historical trends suggesting a weak performance in the September to October period, investors should proceed carefully. He suggested that this week’s August Consumer Price Index report, set for release soon, will serve as a pivotal moment for the markets.
Economists are predicting a 0.3% rise in inflation for August, with a year-over-year increase forecasted at 2.9%, down from the 3.1% recorded in July. If inflation data exceeds expectations, Lakos-Bujas indicated that the current market positioning could be “at risk of correcting.”
Meanwhile, while August saw some relief in producer prices—an indication of wholesale inflation, which fell by 0.1%—JPMorgan’s economists predict that overall inflation pressures are likely to rise in the subsequent months. Historically, rising inflation presents a challenging environment for equities, in contrast to periods of declining or stable inflation. To illustrate, the S&P 500 typically experiences a 2% average increase during rising inflation, compared to a significantly higher 12% when inflation is cooling.
Despite these cautionary forecasts, JPMorgan maintains a bullish outlook on equities overall, projecting that the S&P 500 could reach 7,000 by early next year, which would represent a medium-term upside of approximately 7%. In the short term, the bank favors low-volatility and high-quality growth stocks, particularly in sectors such as technology, pharmaceuticals, and defense, rather than areas more susceptible to fluctuations in interest rates.
