Santoli: Stocks are in a slow summer drip ahead of Wednesday's inflation report

Published Tue, Jul 12 20221:15 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Slow summer drip near the middle of a two-month range, with the widely anticipated CPI number ahead, but probably not expected to be a clinching argument for or against the dominant "peak inflation" and "recession or not" debates. Still looking at another 3%-5% upside before the doubters start to wonder if this rebound has more behind it than the failed bounces since January. It's a net positive that so few profess high conviction that the mid-June lows will hold, though that alone isn't an instant formula for making it so. We're conditioned to expect upside to CPI reports since most over the past couple years have erred on the hotter side. But since mid-June, energy prices have whooshed lower, market-based inflation expectations have collapsed and asset pricing says inflation is yesterday's enemy. There's still plenty of room for another scare that the Federal Reserve is "full speed ahead," if core CPI remains stubbornly high, and of course lots of room for relief on a cool number, with sentiment and positioning in stocks still pretty defensive. Expectations for Q2 earnings are being reset lower. That's helpful, though it'll be the usual crap shoot/pinball of reactions. Despite all the talk that numbers haven't come down, outside of energy they have, by five percentage points — and ex-energy S & P 500 results are seen down 5% from a year earlier. Investors are now eager to pay up for perceived predictability in certain stock sectors, even as outflows weigh on corporate-bond performance. Heavy inflows into health-care ETFs are chasing outperformance there. Here's the forward P/E of equal-weighted versions of staples vs. tech. Notable equal weighted tech is only at 16x next 12 months' earnings, at the low end of its half-decade range. Staples had the widest premium coming out of the nasty macro/energy shock and earnings recession in 2015-16. Riskier tech and growth in general trying to prove they're basing and working on relative bottoms vs. the rest of the market. It's not nothing but too early to say it's something consequential. We had rolling, asynchronous tops and staged entries into this bear market, decent chance eventually the emergence goes similarly. Decent market breadth today (60/40 up/down), and the equal-weight S & P is up half a percent. It's not comfortable, with the Treasury yield curve continuing to invert in places and the dollar sitting near 20-year highs, but much damage has been done and the blisters are perhaps hardening into callouses. VIX sleepy near 26, no real signal, see if it can slide after CPI report and into earnings season, which tends to be more about independent single-stock moves which can suppress index-level volatility.