The "transitory inflation" theory reappears! Wall Street is optimistic that U.S. stocks will continue to rise after the CPI announcement

According to Zhitong Finance APP, economists expect the latest consumer price data to show a slight rise in inflation, but Wall Street professionals are not worried that this will disrupt the recent stock market rally.

The inflation impact of President Trump's comprehensive global tariff increases is expected to begin reflecting in the latest CPI data, which will be released before the market opens on Tuesday. Nevertheless, Wall Street investment banks, including JP Morgan and Morgan Stanley, anticipate that investors will disregard these concerns and maintain soaring stock prices by focusing on strong corporate earnings and interest rate cuts.

Andrew Taylor, head of global market intelligence at JP Morgan, wrote in a report to clients on Monday that macroeconomic data still "supports bullish arguments, and earnings may maintain their positive trend," adding that the Federal Reserve is moving towards interest rate cuts.

Taylor believes that any potential rise in inflation may be temporary, and the peak could be lower than expected. In fact, his team has set the probability of further gains in the S&P 500 index at 70% after the CPI data is released on Tuesday, predicting that if the data meets or falls below expectations, the index could rise by 2%.

The S&P 500 index is expected to rise after the CPI release.

Taylor wrote that the main risk of a pullback is seasonal, as the S&P 500 index has averaged a decline of 1.5% in September over the past 25 years—only to rise 4% in the fourth quarter thereafter.

According to the median forecast from a Bloomberg survey of economists, the core CPI, excluding volatile food and energy costs, is expected to rise by 0.3% in July compared to June.

This would be the largest increase since the beginning of the year—after a slight rise of 0.2% in June. However, according to data from Citigroup's trading division, options traders have largely remained unmoved ahead of the report, with the S&P 500 index pricing in a two-way volatility of about 0.74%, while the 12-month average implied volatility is close to 1%.

The S&P 500 index is trading near historical highs before the Tuesday data release, having surged 28% since the April low, setting 10 new records just in July. These significant fluctuations are noteworthy, as investors are largely uncertain about how the Trump administration's trade plans will impact the economy.

However, the market may not necessarily interpret bad news as bad news. For example, recent employment data showed a significant slowdown in the job market, prompting Trump to fire the head of the Bureau of Labor Statistics and accuse her of political bias without evidence.

Wall Street has ignored this, instead focusing on how this data supports the Federal Reserve's interest rate cuts. This seems sufficient to keep the stock market climbing, despite these numbers indicating the possibility of stagflation, where prices rise but growth does not.

Michael O'Rourke, chief market strategist at JonesTrading LLC, stated, "Due to the weak July employment report, investors are more confident that the Federal Reserve will resume easing policies next month, which is more important than the expected rise in inflation." Three Federal Reserve officials—Vice Chair Michelle Bowman, Governor Christopher Waller, and Minneapolis Fed President Neel Kashkari—expressed concerns about the U.S. labor market last week and indicated a possible interest rate cut in September.

Morgan Stanley Chief U.S. Equity Strategist Mike Wilson also expects a significant rate-cutting cycle to lay the groundwork for a stock market rally next year, although there may be some minor issues in the short term.

In his weekly commentary to clients on Monday, Wilson stated, "Ultimately, our internal view is that tariff-induced inflation will fade later this year, paving the way for a significant rate-cutting cycle," adding, "This supports our constructive long-term outlook for the U.S. stock market."