What Today’s Inflation Data and Early Earnings Indicate for the Stock Market

Two things of importance occurred this morning in market terms, and as one would expect if you have been following along recently, the two taken together sent contradictory signals.

The most widely anticipated news was the release of the CPI report for December. That wasn’t good, with prices rising a higher than expected 0.3% last month and, more worryingly in terms of its potential impact on monetary policy, core inflation, the ex-food and energy number, showing a 3.9% annual gain. Again, that was slightly higher than the forecast 3.8% rate.

Before that came out, though, we had the first calendar Q4 earnings report of the season, from Infosys (INFY), and that was good(ish) news. The Indian IT company’s quarter was roughly in line with expectations for EPS on higher than anticipated revenue, although profits did fall from last year. They also tightened their guidance and announced a buyout of a small semiconductor company. Taken together, this was a decent report, with Infosys not seeming to feel any major ill effects from inflation or from interest rates settled at multi-decade highs.

Of course, one should be careful not to assume too much based on company’s earnings, and we can be pretty sure that Jay Powell and his FOMC buddies won’t overreact to one monthly data point, but it is hard to look at this morning’s news without feeling that it is basically the same old same old. Inflation is still a problem for the Fed, and other central banks around the world for that matter, but companies are doing just fine. In fact, their outlook is so strong that many of them are out hunting acquisitions. 

As I have said many times before, though, from a trader’s perspective, what matters is not necessarily the news, but rather the market reaction to it, and the early signs are that stock traders also feel that the net effect of the two stories this morning is basically zero.

S&P 500 futures dropped immediately following the CPI data, as you would expect, but they quickly bounced back to the point where the index was trading slightly above yesterday’s close in the early market. The market has been obsessed with inflation and its impact on interest rates for a long time, so for the traders and investors to essentially ignore a rise in the most significant inflation number, core CPI, is somewhat baffling, to say the least.

However, stock prices are still, at their core, based on corporate profitability above all else, and the news on that front remains positive. Infosys is just one company, and a foreign one at that, but they are a massive, wide-reaching concern in an important area of business spending. So, the fact that they are navigating an environment where U.S. interest rates are above 5% relatively successfully reinforces the market’s view that this will be a better than expected earnings season. We will know more about that tomorrow and Monday when a few major banks report, starting the flood of Q4 results, but for now, continued optimism is justified.

After a few months of confusion in the face of sticky inflation and an uncertain economic outlook coupled with resilient consumers and corporate profits that are holding up well, the market came into the CPI data and the beginning of earnings season looking for some clarity. However, based on what we heard this morning, things remain finely balanced and could still tip in either direction. For investors, that means holding steady for a while longer. Small shifts to a slightly more defensive portfolio with areas like healthcare, manufacturing and consumer staples taking preference over riskier sectors like tech can be justified, but this is not a time to make any big decisions.   

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.