The U.S. July CPI is coming next week! The rise in U.S. stocks will be put to the test

According to the Zhitong Finance APP, the new round of inflation trend data will test the upward trend of the U.S. stock market next week. Some investors have indicated that after U.S. stocks soared to record highs, the market may face a correction.

The S&P 500 index has risen more than 8% this year, approaching its historical peak; the tech-heavy Nasdaq Composite Index has also reached a new high. Earlier this month, a weak employment report caused the stock market to decline, but the market subsequently rebounded.

Strategists from institutions such as Deutsche Bank and Morgan Stanley have recently stated that after nearly four months of uninterrupted gains, market valuations have been pushed to historical highs, and a seasonally unfavorable phase is approaching, which may lead to a certain degree of correction in the stock market.

According to LSEG Datastream, the current expected price-to-earnings ratio of the S&P 500 index exceeds 22 times, well above the long-term average of 15.8 times. Additionally, investors are also wary of risks associated with timing. Data from the Stock Trader's Almanac shows that over the past 35 years, August and September have been the worst-performing months for the S&P 500 index, with average declines of 0.6% and 0.8%, respectively, being the only two months during this period with negative average returns.

Dominic Pappalardo, Chief Multi-Asset Strategist at Morningstar Wealth Management, stated, "I do believe the market is prepared for a slight correction." "There are many concerns brewing beneath the surface of the market." Morgan Stanley equity strategist Michael Wilson noted, "Weak non-farm data combined with concerns about tariff-related inflation could be the recipe for a correction during the third quarter (seasonally weak period)." However, he emphasized that his outlook for the next 12 months remains bullish and added, "We will buy on the dip."

The U.S. Consumer Price Index (CPI) report for July will be released next Tuesday, which may trigger market volatility. If the data indicates inflation is higher than expected, it will undermine the market's optimistic expectations for imminent interest rate cuts. A survey of economists shows that the U.S. July CPI is expected to rise 2.8% year-on-year. Investors will closely monitor whether tariffs imposed by Trump on imported goods have pushed up prices; the June CPI report indicated that some commodity prices were affected by tariffs.

Following the recent release of weak employment data, market bets on the Federal Reserve cutting interest rates have intensified, with investors expecting the Fed to ease monetary policy to support the labor market. LSEG data shows that the implied probability of a rate cut in September from federal funds futures exceeds 90%, and the market has priced in at least two rate cuts this year.

Investors have indicated that if the CPI increase exceeds expectations, this narrative may face risks, and the Fed may be more hesitant to cut rates. Edward Jones Senior Investment Strategist Angelo Kourkafas stated, "If the CPI shows that market expectations are somewhat overstated, it could trigger volatility." "But if the data is not worse than expected, it will further reinforce the judgment that we are at a turning point in Fed policy."

Moreover, higher tariffs and their economic impact have been a persistent theme overshadowing the market. Despite these uncertainties, U.S. stocks have still reached new highs. New high tariffs took effect on Thursday, affecting imported goods from dozens of countries, with the average U.S. import tariff level rising to its highest in a century This week, Trump also announced plans to impose tariffs on imports of semiconductor chips and pharmaceuticals.

Matt Rowe, Senior Portfolio Manager at Man Group, stated that the impact of higher tariffs on the economy may take some time to manifest, "The market has basically ignored the negative shocks that this friction could bring to the economy." He added, "The market has become accustomed to treating tariffs as a trivial matter, but I believe this is a mistake."