WMT - Where Is S&P 500 Headed After June CPI Report?

2023-07-12 11:45:31 ET

Summary

• Markets roared higher at the open after CPI fell in June 2023.
• Higher energy prices still on the horizon: impact assessed.
• I have a S&P 500 4,500 target.

Investors heavily exposed to equities will like the cooler June 2023 consumer price index ("CPI") report. Investors on the sideline holding trillions of dollars in money market funds will fear missing further gains. Bearish investors will grumble about the slowing inflation, waiting for markets to turn.

Which group is right? Stock markets are proverbially a voting machine in the short term. Traders are stock voters who will parse every data point from the CPI report. In the long run, markets are weighing machines. The latter group will treat the report as one data point among many data points.

June 2023 CPI Rises By Just 0.2%

In June, the consumer price index rose by 0.2% and by 3.0% over the last 12 months. Shelter, which notably has an impact on most, accounted for 70% of the increase. The index for food at home did not change in the month. As a result, readers may watch these food stocks . In addition, food prices increased by 0.1% in June and are up 5.7% in the last year.

Food away from home increased by 0.4% and by 7.7% in the 12-month period, albeit not seasonally adjusted. Per Wikipedia , FAFH covers meals and snacks supplied by commercial food service establishments and by eating facilities in non-commercial institutions. Readers do not have actionable investments from the FAFH data. For example, Chipotle Mexican Grill ( CMG ) is trading in a holding pattern between $2,034 to $2,100. McDonald’s ( MCD ) shares are on the verge of breaking out. Starbucks ( SBUX ) is deservedly off its $115.48 high. SBUX stock scores a D- on valuation, as shown below.

The three restaurant stocks trade at a premium since they have strong profitability of A+ and great growth grades.

Energy

The CPI report did not benefit from falling energy prices compared to the May report. The energy index gained 0.6% in June, compared to -3.6% in May. Treat the energy inflation trend as a lagging indicator. OPEC+ aggressively cut output. In the next six months, crude oil prices will strengthen. Yesterday, energy topped the S&P sector leaderboard by gaining 2.2%. The U.S. Energy Information Administration ("EIA") expects global oil markets will tighten this year . This might pressure future CPI at persistently high levels. It would validate expectations of the Fed raising interest rates this month and again sometime in H2/2023.

Traders may infer that after the stock market’s 1.0% rally, rate tightening will have little to no impact. Even a special rebalancing of the Nasdaq 100 amid Magnificent Seven domination should hurt neither those stocks nor the index. The Magnificent Seven are Amazon ( AMZN ), Apple ( AAPL ), Netflix ( NFLX ), Microsoft ( MSFT ), Alphabet ( GOOG ), Nvidia ( NVDA ), and Meta Platforms ( META ).

Those firms earned their weighting. For example, Meta is encroaching on Twitter with Threads. Netflix cracked down on password sharing and raised subscription fees. It successfully protected its moat. Despite disturbingly weak graphics card sales in the PC market, Nvidia will rely on surging H100 sales for the AI market this quarter.

The potential energy inflation after the supply cut in H2 may not cause markets to reverse their bullish sentiment. The energy index fell by 16.7% in the past 12 months. WTI crude prices would need to trade well past $100 per barrel in the near term to worry investors, if at all.

Cumulative Inflation Considerations

Investors should compare the June CPI to last year’s inflation increase. In 2022, the CPI of 1.2% shook stock market confidence.

Markets are ignoring the impact of the 2021-2023 or two-year inflation rate. Real income worsens with persistent inflation. Management issues aside, companies like CVS Health ( CVS ), Advance Auto Parts ( AAP ), Walgreens ( WBA ), and Dollar General ( DG ) are grappling with shrinkage (including theft rates) and weaker demand. Conversely, investors expect Costco ( COST ), Walmart ( WMT ), and Amazon to navigate lower sales without any major issues.

Other Risks

The 3.0% inflation is above the 2.0% target rate. This will justify the Fed raising interest rates at its next policy meeting. The higher for longer rates, however, introduce growing risks for the credit market. Look out for weak commercial real estate markets hurting regional banks and big banks. JPMorgan Chase ( JPM ) may offer insight about CRE markets when it reports results on Friday.

In the automotive sector, tighter credit requirements are hurting used car and truck demand and their prices. The credit crunch might lead to an increase in auto repossession rates.

Your Takeaway

Currently trading at nearly double the relative volume, the S&P 500 may continue its climb toward 4,500. Fully invested readers have few reasons to take profits. Neutral investors collecting interest income have no incentive to chase the 2023 index rally. Bears who are hurting the most may wait for the next credit crisis to unfold. The Fed’s higher interest rates should push CPI lower. This adds risks to sectors dependent on lending and leverage.

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