Analysis-US stock gains may grow elusive as boost from inflation slowdown wanes

investing.com:

By Lewis Krauskopf

NEW YORK (Reuters) — As inflation worries ease, U.S. stocks may need a fresh source of fuel to propel further gains this year, investors said.

Data released on Thursday showed annual inflation, which had been running at 40-year highs a year ago, rose at a more moderate pace than expected in July, supporting the so-called «Goldilocks» narrative of disinflation and resilient growth that has won over bearish investors and boosted risk assets this year. The S&P 500 has gained more than 16% on a year-to-date basis, though it was last trading largely flat on Thursday.

But with many traders now betting the Federal Reserve is unlikely to raise interest rates again this year and fears of a U.S. recession receding, an improving inflationary picture may become less of a driver for stock prices going forward.

That may make it more challenging for stocks to continue their recent rise, with high Treasury yields offering an attractive alternative, equity valuations stretched and investors' stock exposure far higher than it had been at the beginning of the year.

The latest CPI report «is good news. At the same time, I think that the S&P is pretty fully valued,» said Jack Ablin, chief investment officer at Cresset Capital. «With stocks priced where they are, they are going to need a tailwind of lower rates to keep this momentum going.»

Indeed, stock moves have been more constrained on the CPI release dates in 2023 compared to last year, with the S&P 500 moving at least 1% in either direction just once so far this year, compared to six times in 2022, when it was far less clear how far prices would rise and how aggressively the U.S. central bank would respond.

Individual CPI reports have not had «a material and lasting