Weekly Update: Softer than Anticipated Inflation Provides Relief

Last week's market slide was more about fear than actual bad news. As of Friday, 98% of S&P 500 companies reported earnings for the most recent quarter with 75% beating expectations vs a historical average of 72% beating expectations.¹ However, reported earnings data is backwards looking, and there is more current data that is potentially more worrisome such as the University of Michigan Consumer Sentiment index which fell to 58 and typically ranges from 50 to 100. The level of investor and consumer uncertainty has picked up and is likely due to the fast-moving political winds sweeping across the globe.  

That said, our view remains positive regarding consumer positioning and the likelihood of continued earnings growth. In addition to data points like consumer sentiment, we will keep an eye on employment statistics and consumer spending behavior. Either way, the recent pullback was, to many, an opportunity to invest in businesses whose price tag (via the stock market) presented a much better bargain than just 1 month ago.  

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The U.S. equity markets slumped further last week, with the S&P 500 sliding into correction territory on Thursday, as sentiment regarding on-again off-again tariff talks and concerns of an economic slowdown weighed on investors. 

Aside from these uncertainties, the markets received good news on inflation. Consumer and producer prices came in softer than anticipated, providing some relief.

TheCPI (Consumer Price Index) report showed headline inflation rose by 0.2% in February and 2.8% from a year ago, compared to expectations of 0.3% and 2.9% respectively. Headline CPI eased considerably from the prior month’s readings of 0.5% and 3.0%.

The core rate, which excludes the more volatile categories of food and energy and is considered a better predictor of future prices, rose 0.2% for the month and 3.1% from a year ago. Economists expected 0.3% and 3.2% respective rates, meaning both core measures came in 0.1% below consensus. 

ThePPI (Producer Price Index) report was also released in the prior week, showing wholesale inflation remained flat (0.0%) in February after jumping an upwardly revised 0.6% in January.  Excluding food and energy, the core measure decreased by -0.1% against estimates for a 0.3% increase. 

The reports showed further signs of progress on underlying inflation, with the pace of price increases moderating after January’s strong release.

Markets expect the Fed will hold rates steady at the upcoming central bank policy meeting this week. Fed officials have been consistent in their messaging, stating they are taking a cautious approach, particularly when it comes to gauging the impact of changing fiscal and trade policies. 

While a pause is widely anticipated, the futures market is pricing in the expectation for the Fed to resume cutting interest rates in June, with a total of 0.75 percentage points in reductions by the end of 2025.²

Much of the focus this week will be on the monetary policy meeting, specifically on Fed Chairman Jerome Powell’s remarks about the economy, future expectations for growth and inflation, along with potential impacts of tariffs. 

For the week, the S&P 500 and Dow Jones Industrial Average slid -2.3% and -3.1%, the tech-heavy Nasdaq Composite declined by -2.4%, and the Russell 2000 was down -1.5%.

[1] https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx

[2] CME FedWatch - CME Group

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