S&P 500 Hits Record High On Strong CPI Inflation Reading

Topline

The S&P 500 stock index hit a new all-time high Wednesday, as investors welcomed a key report which revealed inflation was softer than expected in April, boosting hopes for lower interest rates which would be friendly for stocks.

The “breath of fresh air” inflation report ignited Wednesday’s stock market rally.

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Key Facts

The yardstick S&P rose as much as 0.6% to 5,279.26 shortly after market open, setting a new intraday high for the first time since March 28.

The tech-concentrated Nasdaq Composite also set a new all-time high, rising as much as 0.7% to break its record also set in March, while the blue chip Dow Jones Industrial Average’s 160-point, or 0.4%, rise placed it just short of its record price hit in March.

The rally came as the market grew more confident monetary policy will soon shift to a more friendly level, as yields for 2-year and 10-year U.S. government bonds slipped about eight basis points apiece to their lowest levels since early April, indicating the cost of taking on debt is less pricey.

The lower bond yields indicate investors expect the Federal Reserve to soon bring down interest rates from their highest level in more than 20 years, and lower rates would increase public companies’ valuations as lower debt financing costs would increase earnings power.

Crucial Quote

Wednesday’s inflation reading “was a breath of fresh air” for the Fed, Eugenio Aleman, Raymond James’ chief economist, wrote in emailed comments.

Key Background

Core inflation, which excludes food and energy price changes, hit its lowest level in three years in April, though it remains far higher than the sub-2.5% level it sat throughout the 2010s, before the COVID-19 pandemic initiated a cycle which brought the most painful inflation in four decades. In March 2022, the Fed began hiking interest rates in an effort to cool inflation, inducing a painful stock selloff as collateral damage, as higher rates make corporate profit margins slimmer due to higher debt obligations and lure investors toward the high returns offered by money market funds and government bonds. But stocks have surged as inflation has moderated, with the S&P up almost 30% from its Oct. low point.

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