The next key inflation read is the Producer Price Index (PPI) on Thursday

Stock bulls once again push the S&P 500 to a fresh record closing high while the Dow and Nasdaq are within striking distance of setting their own new records. The move higher comes despite a stronger-than-expected Consumer Price Index (CPI). February headline CPI rose to +3.2% year-over-year from +3.1% in January. Remember, the bulls are wanting to see this number come down not move higher.

Bulls’ point

The main culprit was gasoline prices which surged almost +4% last month. The good news is that the Fed’s preferred “core” rate, which strips out food and energy, pulled back to +3.8% from +3.9%. Both reads were a bit higher than Wall Street economists were forecasting, but the market didn't seem to care.

Bulls believe the main takeaway is that the “disinflation” trend remains mostly in tact and supportive of the current outlook for the Fed to issue three or four -25 basis point rate cuts in 2024, starting in June.

Bulls are quick to point to Fed Chair Jerome Powell’s comment last week that the Fed was “not looking for better inflation readings than we’ve had. We’re just looking for more of them.” Bulls also point out that the first rate cut isn’t expected until June, meaning there are several more months of data between now and then.

Bears’ point

Bears argue that February CPI indicates the slowdown in inflation is stalling out and supports the Fed’s decision to remain cautious on rate cuts. Longer-term, bears believe that a pause in the “disinflation” trend, coupled with tricky timing around the November election, will likely lead to fewer rate cuts than most on Wall Street are currently penciling.

Data to watch

The next key inflation read is the Producer Price Index (PPI) on Thursday. There is really no economic data of note today.

On the earnings front, highlights today include Dollar Tree, Lennar, and Williams Sonoma. It’s worth noting that Oracle earnings yesterday topped Wall Street expectations thanks to surprisingly strong demand for its cloud infrastructure. Sales grew +52% year over year, which Oracle credited to demand for its Gen2 AI infrastructure, which the company said “substantially exceeds supply.” 

The question that more Wall Street insiders are starting to debate is not so much whether AI-related companies can keep growing profits but rather how soon before that growth slows down? Meaning that it seems improbable that the massive earnings growth being generated by AI is sustainable, which could lead to disappointment in the quarters ahead if expectations remain overly optimistic. Lower profit gains could also dim the excitement surrounding AI and leave high-flying stocks treading water.