The S&P 500 could rally as much as 19% over the next year if June's CPI reading marked peak inflation, Bank of America says

  • The S&P 500 could see significant upside over the next year if inflation peaked in June, BofA analysts said.
  • Historically, the index saw an average rise of 16.8% and a median of 19.1% after inflation peaked above 6.3%.
  • Consumer price inflation cooled to an annual rate of 8.5% in July from 9.1% in June.

The stock index could rise significantly over the next year if June’s Consumer Price Index reading marked peak inflation, Bank of America said in a note on Monday.

Consumer price inflation cooled to an annual rate of 8.5% in July, according to data released last week, from 9.1% in June.

“Believe it or not, the S&P 500 (SPX) usually rallies during periods of rising inflation,” analysts wrote. 

In fact, when the CPI peaks above 6.3%, historical data show that the S&P 500 saw an average upside of 16.8% and a median of 19.1% in the 12 months after an inflation peak.

That compares to an average upside of just 0.09% and a median of 0.1% over the next year if inflation peaked below 6.3%. 

“The surge in YoY CPI in June was frightful, but SPX rallies from CPI peaks above 6.3% can be delightful,” bank analysts said. 

But the timing of those gains is dependent on whether inflation actually peaked in June, which markets don’t know for certain yet. “A 1-month drop in YoY CPI in the June level of 9.1% is not necessarily a trend,” analysts warned.

Meanwhile, BofA’s analysts don’t think the Fed is as far behind the curve as it was last year, pointing out that the spread on the 2-10 Treasury yield curve has been tightening.

The 10-year Treasury yield in particular has been coming down, the bank said, suggesting that the curve may soon undo its inversion and signal less volatility in the near term.

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