Friday's Market Minute: Is The Market In A Bullish Continuation Or A Topping Process?

Equity investors were not surprised by any higher-than-expected inflation readings this week. The headline U.S. Consumer Price Index (CPI) has continued to slow down further, but year-over-year core inflation has essentially stalled at 5.5% since the beginning of the year. U.S. producer prices didn’t rebound as strongly as expected, while jobless claims continue to rise and confirm expectations that the labor market will continue to soften. Overall, this latest set of inflationary data has supported calls for the Fed to keep rates on hold coming up in June.

Despite the somewhat lower than expected CPI numbers, optimism did not create any positive spillovers towards regional banks, which continue to be under pressure. Bank shareholders have been on edge for nearly two months, and awareness of bank-specific balance sheet stress is assisting the Fed by slowing down credit creation to subdue inflation. Some concerns are mounting about potential air pockets of liquidity, valuation of commercial real estate loans, and whether stress in the banking system will become something more systemic.

Disregarding these concerns, the S&P 500 remains resilient, having risen approximately 8% in six months and trading higher than when the banking issues began to manifest. With approximately 90% of S&P 500 Index companies having reported, this earnings season has generally been a success which supports the narrative for a bullish continuation. However, the market has been led by mega-cap technology names while the broad equal weight market cap indices are underperforming, which suggests that perhaps the market may be in a near-term topping process.

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