Wall St Week Ahead Inflation report and bond yields in focus as U.S. stock rally pauses.

Wall St Week Ahead Inflation report and bond yields in focus as U.S. stock rally pauses.

The Test of Inflation and Elevated Bond Yields on the U.S. Stock Rally

Image source: Reuters1

The U.S. stock rally has seen substantial gains this year, with the benchmark S&P 500 index up 16.6% year to date. This remarkable run has been fueled by an improving economic outlook, excitement over artificial intelligence advancements, and signs that the Federal Reserve is nearing the end of its interest rate hikes. However, this successful trajectory may face a challenge as investors eagerly await the release of next week’s inflation report and closely monitor the path of Treasury yields. Rising bond yields have already sparked unease in the equity market, contributing to the S&P 500’s largest weekly decline since March 10, with a 2.27% drop this week2.

Consumer Prices and Inflation Concerns

“While consumer prices have not been rising as fast lately, some investors worry stubborn inflation may force the Fed to leave rates at current levels longer than expected,” said Jack Janasiewicz, lead portfolio strategist and portfolio manager at Natixis Investment Managers3. The upcoming consumer price data report on August 10 is highly anticipated by investors, as it will shed light on whether consumer prices remain subdued. A stronger-than-expected reading could potentially lead to a decline of up to 5% in the S&P 500, which Janasiewicz considers a “healthy” correction given this year’s substantial gains4.

Rising Stock Valuations and Profit-Taking

Concerns over elevated stock valuations have prompted some investors to take profits and reduce their exposure to the market. Aaron Chan, a managing partner at equity hedge fund Recurve Capital, has trimmed his holdings in companies like Amazon.com and Norwegian Cruise Line, which have experienced significant gains of 68% and 47%, respectively, this year5. The S&P 500 is currently trading at approximately 19.5 times forward 12-month earnings estimates, making it pricier than its long-term average of around 15.6 times6.

Influence of Global Prices and Inflation

Rising global prices for oil and food, which are not significantly impacted by the Fed’s rate increases, may have a more significant influence on inflation in the coming months. Tim Murray, a capital markets strategist at T. Rowe Price, highlights the potential sway of these prices. Brent crude prices have been on the rise, marking their sixth consecutive week of gains with an approximately 17% increase during that period. This growth is attributed to signs of tightening global supply and rising demand7.

The Impact of Inflation on Treasury Yields

In addition to the stock market, inflation can also impact Treasury yields. A stronger-than-expected inflation number next week could further boost Treasury yields, as yields and bond prices move inversely. Rising Treasury yields, viewed as safe investments backed by the U.S. government, can diminish the attractiveness of stocks. Higher interest rates reduce the present value of future company cash flows, which affects stock valuations8.

Positive Earnings and Economic Forecasts

Despite concerns about inflation and rising bond yields, there are reasons to be optimistic. Earnings from Wall Street giants Amazon and Google-parent Alphabet have exceeded analysts’ expectations9. Moreover, more than 79% of S&P 500 companies have beaten earnings estimates for the second quarter, registering the highest beat rate since the third quarter of 202110. This positive news, along with the recent revisions of U.S. recession forecasts by BofA Global Research and JPMorgan analysts, contributes to the continuing rally in the stock market11.

Near-Term Turbulence and Market Expectations

Nevertheless, some market participants anticipate a period of turbulence in the near future. Keith Lerner, co-chief investment officer at Truist Advisory Services, noted, “Our expectation is that the market takes some time to digest the strong year-to-date gains and moves into a choppy period”12. While the stock rally has been resilient, it may encounter short-term challenges as investors reassess the evolving economic landscape and navigate potential fluctuations13.

In conclusion, the U.S. stock rally faces a critical test with the release of the upcoming inflation report and the impact of elevated bond yields. Investors are eager to gauge whether consumer prices remain subdued and closely monitor Treasury yields. Rising inflation concerns and elevated stock valuations have prompted some investors to take profits. However, positive earnings results and optimistic economic forecasts contribute to the ongoing stock market rally. While near-term turbulence may be expected, the resilience of the market remains intact as participants navigate the potential challenges and opportunities that lie ahead14.



  1. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  2. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  3. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  4. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  5. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  6. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  7. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  8. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  9. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  10. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  11. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  12. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  13. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎

  14. Reuters. “U.S. stock rally faces inflation test.” August 4, 2022. Link to Article↩︎