Inflation will be on investors' minds next week as worries over sky-high valuations grow

Published Fri, Mar 8 20242:57 PM ESTUpdated Fri, Mar 8 20244:15 PM EST

Next week's inflation reports will give Wall Street a clearer picture of the interest rate outlook ahead of this month's Federal Reserve policy meeting. The reports will come at a time when record highs in stocks have some investors on edge. The February consumer price index, set for release Tuesday, and the producer price index, due out Thursday, could hurt equities if the reports come out hotter than expected. They would also push out expectations of lower interest rates to later in the year. Currently, the consensus holds the Fed will start cutting rates in June by a quarter-percentage point, according to the CME FedWatch Tool. Expectations of lower interest rates, along with the artificial intelligence craze, have been a boon for stocks since late 2023. The S & P 500 closed out the week with losses, but has advanced more than 7% for the year. "A lenient Fed has really played a role in kickstarting this thing in October of last year," said Giuseppe Sette, co-founder and president at Toggle AI. "So, a high inflation print might be a real headwind for the market." Some stubborn spots in inflation February's consumer inflation data next week comes after January's surprisingly hot report dented investor hopes the so-called last mile to the Fed's 2% inflation target will be easy. On a monthly basis, headline CPI is expected to have risen somewhat from the prior month — even as the year-over-year gain remains the same. Economists polled by FactSet are anticipating a 0.4% increase, up from a previous gain of 0.3%. On a yearly basis, it's expected to have risen by 3.1%. Core CPI — which excludes volatile food and energy prices — is expected to show a slight moderation in inflation. Economists forecasts increases of 0.3% and 3.8% on a monthly and yearly basis. That's down from respective gains of 0.4% and 3.9% in January's report. But Wall Street will pay special attention to sectors where inflation has proved stubborn. In the January CPI report, the rise in medical expenses, transportation, airline fares and, notably for consumers, food away from home were troubling. Significantly, shelter prices were higher, with home prices only continuing to rise as demand outstrips supply. "That's a lot of categories. So, to expect them to kind of reverse right away in one month is probably not going to happen," said James Ragan, director of wealth management research at D.A. Davidson. "It'll take time." Consumer stress Next week will also bring more insight into the health of the consumer, as some recent earnings and rising credit delinquencies have investors increasingly concerned. The corporate earnings season has been stronger than expected, with S & P 500 profits tracking to have risen by 4.1% in the fourth quarter, according to FactSet data. But for all the enthusiasm around the potential for artificial intelligence, some consumer-oriented companies have offered more cautious commentary. This week, Nordstrom shares dropped 18% after the department store chain warned of a potential sales drop this year, even after beating fourth-quarter expectations. Meanwhile, credit card delinquencies last year were shown to have risen by more than 50% last year , with consumer debt expanding to $17.5 trillion — signaling "financial stress." That, combined with any uptick in inflation, could put pressure on the consumer. "A slight uptick in inflation is not necessarily a bad thing for consumers. But it does perhaps change spending patterns a little bit," said D.A. Davidson's Ragan. "There's not a whole lot of room for error, because if the economy does start to slow a bit and inflation ticks higher, then you know, it could lead to a little bit of pullback from consumer spending, and that would feed into the markets as well." Wall Street on Thursday will receive retail sales data for February. Economists polled by FactSet are anticipating a rise of 0.9% last month, which would represent an increase in spending from January. "The healthier the consumer is, the more positive things will be in the weeks ahead," said Kathleen Grace, CEO at Fiduciary Family Office. Trimming winners For the moment, stocks continue to have a lot going for them. The economy continues to chug along, earnings growth have surprised to the upside, investor sentiment remains bullish and the consumer remains resilient. But exceedingly high valuations have more investors convinced now is the time to prepare for a pullback, meaning taking profits in some notable winners, and allocating toward some quality names in underperforming sectors that have the potential to rise from here. This week, five of the Magnificent Seven companies posted losses, with Nvidia and Meta Platforms alone pulling away from the pack. Nvidia was higher by more than 6%, while Meta Platforms climbed slightly. The small-cap Russell 2000 outperformed, closing out the week 0.3% higher. "When you have seven to 10 stocks that drive the S & P 500, there's bound to be some healthy pullback in those stocks," Fiduciary Family Office's Grace said. "But there's, you know, 490 plus other stocks in the S & P 500 that I think we have to take a look at." "So I'm optimistic, cautiously optimistic, that we will have a relatively good market this year," Grace added. Week ahead calendar All times ET. Monday March 11, 2024 Earnings: Oracle Tuesday March 12, 2024 8:30 a.m. Consumer Price Index (February) 2 p.m. Treasury Budget (February) Wednesday March 13, 2024 Earnings: Dollar Tree , Lennar Thursday March 14, 2024 8:30 a.m. Producer Price Index (February) 8:30 a.m. Retail sales (February) 10 a.m. Business Inventories (January) Earnings: Dollar General , Adobe , Ulta Beauty Friday March 15, 2024 8:30 a.m. Export Price Index (February) 8:30 a.m. Import Price Index (February) 8:30 a.m. Empire State Index (March) 9:15 a.m. Capacity Utilization (February) 9:15 a.m. Industrial Production (February) 9:15 a.m. Manufacturing Production (February) 10 a.m. Michigan Sentiment preliminary (March) Earnings: Progressive — CNBC's Jeff Cox and Nick Wells contributed to this report.