Option Expiration, Earnings Take Center Stage: Will U.S. Stocks Meet the High Bar?

investing.com:

Stocks finished the week higher following the CPI report, which showed softer than expected core CPI. Again, as I have noted a few times, the stock market inflation fantasy will get harder from here. The easy comparables are now behind us, and to see the headline inflation rate finish the year around 3%, prices will need to be flat for the year’s balance.

Maybe that happens, and rent prices will slow enough to push the CPI sideways for the rest of the year. For the CPI to finish below 3%, the index needs to flat out fall, and while that can happen, the odds of that happening to me seem slim unless the US enters a recession or sees a significant slowdown.

I don’t think a recession in 2023 is likely, given that nominal growth is still high. Unless nominal GDP growth falls a cliff over the next six months, I think the best case is that we are entering the stubborn part of the inflation process, which means we see little to no progress for the year’s balance. So again, I think the smooth period of disinflation is over, and the hopes of the Fed cutting rates to 0% are about to vanish from the stock market slowly.

So here we are now; it seems clear to me that most people still live in a world where they think rates are at zero percent and the Fed is conducting QE. Unfortunately, rates are now at 5%, and the Fed’s balance sheet is shrinking. The dynamics of the past three years no longer exist, and that will limit just how much financial conditions can ease. The funny thing about the Fed rate hiking cycle that I think few understand is that the more inflation falls, the more restrictive policy will get without the Fed raising rates.

Real monetary policy, the Fed Funds rate minus Core PCE, has yet to reach 2018 levels. So be