Inflation is expected to shake up the U.S. stock market soon. Investors are worried about former President Donald Trump’s plans to impose tariffs, which could put a halt to hopes for lower interest rates this year. The S&P 500 index is still about 1% below its all-time high, and stocks are reacting strongly to news about tariffs on major trading partners.
Tariffs are believed to increase prices for consumers, making it difficult for the Federal Reserve to decide whether to cut interest rates. The Fed paused its rate cuts last month as it looks for clear signs showing when it can lower rates again. On Wednesday, the monthly Consumer Price Index (CPI) report will show the current inflation trends that many investors are anxious about.
A survey of traders found that inflation and tariffs are the biggest concerns for the market this year. Charlie Ripley, an expert from Allianz Investment Management, said that if inflation rises, the Fed may not be able to cut rates, which could worry investors. The January report is expected to show a 0.3% increase in CPI, based on a Reuters poll. Analysts warn that predicting CPI in January can be tricky, so there might be unexpected changes in the market when the report comes out.
Though inflation is lower than the high levels seen in 2022, it has not reached the Fed’s goal of a 2% yearly increase. Art Hogan, a strategist at B. Riley Wealth, said that if CPI goes up again, it could mean that interest rates stay where they are for longer than expected. Right now, markets think there’s an 80% chance the Fed will keep rates steady at their next meeting in March, with about two expected cuts by the end of the year, according to LSEG data.
However, some investors are adjusting their hopes for more cuts this year. Economists at Morgan Stanley now predict only one rate cut in June instead of two. They say that tariff uncertainties are making it harder for the Fed to cut rates. This week, investors also dealt with changing tariff news, as Trump announced and then delayed tariffs on imports from Canada and Mexico while placing a 10% duty on China.
After the news on tariffs, the Cboe Volatility Index spiked but then eased back down. Lawrence Gillum from LPL Financial noted that tariff threats are increasing market movement. In addition, corporate earnings reports for Coca-Cola, Cisco, and McDonald’s will be in the spotlight next week. Fourth-quarter earnings for the S&P 500 are expected to have increased by 12.7% compared to last year, which is better than the earlier 9.6% estimate. Anthony Saglimbene from Ameriprise Financial said that despite tariff uncertainty, earnings reports have been positive.
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