By Daniela Hathorn, senior market analyst at Capital.com
Back-to-back hot inflation prints — CPI at 3.8% annually and PPI surging 6.0% year-on-year — and yet the S&P 500 managed to push to new record highs. Markets are making a clear bet that the earnings cycle, still delivering double-digit growth for a sixth consecutive quarter, can absorb an inflation premium that the Fed will need to stop pretending is transitory. It is worth keeping in mind that energy accounted for more than 40% of the April CPI headline gain, with prices up 17.9% year-on-year as the Iran conflict continues to pressure supply. That makes this a geopolitical inflation story as much as a demand one, if the Strait of Hormuz situation shifts, the headline number could look very different by summer. The PPI reading, however, is harder to dismiss on those grounds. At 1.4% month-on-month against a 0.5% consensus, with the services component rising at its fastest monthly pace since March 2022, there is a meaningful pipeline of cost pressure that has not yet fully arrived in consumer prices.
The bond market is not looking through any of this. The 10-year Treasury yield has climbed to 4.5%, its highest since July, and rate hike odds have risen to nearly 40% for year-end. The disconnect between fixed income and equities is as wide as it has been this cycle. The case for equities holding up rests on AI-driven earnings growth continuing to outpace the cost of capital, a calculation that works at current yield levels, but becomes harder to sustain if the Fed moves from pause to hike, which the data is now actively inviting it to consider.
S&P 500 daily chart:
Past performance is not a reliable indicator of future results.
