The end of inflation trade extends: S&P 500 up 1% | Forexlive

The S&P 500 has extended gains to 1.0% and the Nasdaq is up 1.7%. That’s a strong turn after a middling start to the day following PPI.

There are two camps:

1) The inflation trade is over

I wrote about this earlier today and it’s a powerful one. The y/y comps for inflation in the next few months will get it to a 3-handle and, at that point, can you really be worried about 6% Fed funds? The thinking is that the rest of the decade will look much like the 2010s, with low inflation and low borrowing costs. That’s great for stocks.

2) A Fed-provoked recession

The thinking here is that the Fed will stay too high for too long and cause unnecessary pain in the economy. Even when they do cut, it won’t be enough because they will still be worried about a resurrection of inflation. That will stunt the economy for years.

I’m sympathetic to the latter points and there are gathering storm clouds but ultimately I think the Fed starts to cut and with borrowing costs already down, the economy can flourish. There isn’t enough housing supply and industrial investment needs to pick up as well. Cheap duration is great for tech and it’s no surprise that it’s leading today, with generative AI set to add another leg to all corporates.

I agree that the Fed will be more hawkish than it needs to be but ultimately, I don’t think it’s a gamechanger.

So even if we get a recession, it won’t cause the equity market puke that many are waiting to buy.