The S&P 500 has climbed an impressive 28% this year through early December, putting it on the verge of a potential 30% annual gain—the best performance of the 21st century. However, the path ahead is uncertain as the stock market faces a crucial week.
Much of the optimism surrounding the SPX500, a popular index tracking the S&P 500, has been driven by expectations of interest rate cuts from the Federal Reserve. Futures data suggests an 86% chance of a rate cut in December. But will this prediction hold? The answer depends on key inflation reports due this week.
Why Do Inflation Reports Matter So Much?
Inflation data, including the Consumer Price Index (CPI) and Producer Price Index (PPI), plays a critical role in the Federal Reserve’s decisions. If inflation aligns with market expectations, it could reinforce confidence in a rate cut, possibly driving the stock market higher.
On the other hand, unexpected spikes in inflation could dampen market sentiment. In that case, the likelihood of a rate cut may shrink, potentially causing stock prices to drop.
What Is the Federal Reserve Watching?
The Federal Reserve aims to balance two key goals: keeping prices stable and ensuring strong employment. Interest rates are its main tool for achieving this. Lower rates typically encourage borrowing and spending but can lead to higher inflation. Conversely, higher rates slow the economy but help control inflation.
This year, the Fed began cutting rates, assuming moderate economic growth and a slight rise in unemployment. But those assumptions haven’t held true.
- Economic Growth: GDP grew by 2.8% in the third quarter, surpassing the Fed’s earlier 2% projection for 2024.
- Unemployment: The jobless rate peaked at 4.3% in July, lower than the anticipated 4.4%.
Fed Chair Jerome Powell acknowledged the stronger-than-expected economy, stating, “Labor market growth is definitely stronger than we thought, and inflation is coming in a little higher.” His comments suggest the Fed isn’t fully committed to further rate cuts this year or next.
What Do the Upcoming Inflation Reports Show?
The CPI and PPI reports are scheduled for release later this week. These reports provide crucial insights into how inflation is trending from both consumer and producer perspectives.
- Consumer Price Index (CPI): Measures price changes affecting consumers. In October, inflation rose to 2.6% after six months of decline. Analysts expect it to increase further to 2.7% for November.
- Producer Price Index (PPI): Tracks price changes from a producer’s perspective, often predicting future consumer inflation. PPI inflation rose to 2.4% in October, and forecasts suggest it will reach 2.5% in November.
Both reports will shape expectations ahead of the Federal Reserve’s December 17–18 meeting, where officials will decide the course of interest rates.
How Could This Impact the Stock Market?
The outcomes of these inflation reports could set the tone for the stock market:
- If Inflation Meets Expectations: Confidence in a December rate cut could grow, driving the market higher.
- If Inflation Exceeds Expectations: The likelihood of a rate cut may diminish, potentially leading to a market pullback.
Investors are especially focused on the S&P 500, which could see significant movement depending on how the data aligns with projections.
Will the S&P 500 Break Records This Year?
If the Federal Reserve proceeds with a December rate cut, it could propel the S&P 500 to finish the year with a 30% gain. This would mark its strongest annual performance since the turn of the century.
The coming week’s inflation data and the Fed’s decisions will play a defining role in whether this historic milestone is achieved. Investors are watching closely, but only time will reveal whether the market can sustain its remarkable run.
