S&P 500 rises sharply after inflation report as stocks bounce back from Thursday slump

What’s driving markets

U.S. stocks advanced as investors digested economic data confirming that inflationary pressures have eased in recent months, with the S&P 500 on track for its biggest daily percentage gain since the end of June.

The market is reacting to a “Goldilocks backdrop” of disinflation and a resilient U.S. economy, said Ed Perks, chief investment officer of Franklin Templeton’s income investors group, in a phone interview Friday. “The trend continues to be generally pretty favorable economic data that endorses this view that the Fed is kind of winning.”

The Federal Reserve has been raising interest rates to fight elevated inflation, aiming to cool the economy without triggering a recession.  

While Franklin Income Investors CIO Perks said he sees a “healthier” backdrop for stocks as this year’s equity-market rally shows signs of broadening, he said he remains worried about the lag effects from the Fed’s monetary tightening. Perks expressed concern that the economy will slow next year, even if it avoids a recession, and that the inflation tailwind benefiting companies with “pricing power” will fade.

“It’s going to be tougher for companies to deliver the same kind of revenue growth going forward without that tailwind,” he said. 

U.S. economic data released Friday showed that the cost of goods and services rose a mild 0.2% in June as inflation eased again. Core price pressures, excluding food and energy, eased from a 0.3% rise in May, according to the personal consumption expenditures index. At the same time, the rise in the employment-cost index for the second quarter slowed to 1%, from 1.2%.

Meanwhile, consumers’ outlook brightened thanks to the still-robust labor market and waning inflation, with the consumer-sentiment index from the University of Michigan reaching a 22-month high of 71.6 in July.

Krishna Guha and Marco Casiraghi, economists at Evercore ISI, said in emailed commentary that the PCE and ECI numbers would be welcome news for the Fed as it continues to try to wrangle inflation back to its 2% target. They boosted hopes for a soft landing for the U.S. economy, which is seen as an ideal scenario for stocks.

Investors also digested on Friday a flurry of earnings reports, including from Exxon Mobil Corp.
XOM,
-1.20%,
Procter & Gamble Co.
PG,
+2.83%
and others, as one of the busiest weeks for companies reporting second-quarter earnings came to a close.

Exxon shares fell after the company reported a profit miss. Meanwhile, P&G shares rose after the company blew past Wall Street’s earnings estimates for the consumer giant’s latest quarterly earnings results.

“We’re hearing on company earnings calls that it’s not as easy to pass higher costs onto consumers anymore,” said José Torres, senior economist at Interactive Brokers, in a phone interview Friday. “The consumer has to stay resilient for the soft-landing narrative to manifest.”

But the consumer-price index report for July, which is due out next month, may show that price pressures are stronger than anticipated, according to Torres. “The way I see it now, commodities and services are going to push inflation higher” in July, he cautioned. 

Read: Shunned commodity ETFs starting to ‘perk up’ as Fed watches grain prices

Also see: Why are gas prices going up again? Brace for further increases, analysts say

Companies in focus

• Intel Corp.’s
  INTC,
  +6.60%
  stock surged after the Dow Jones Industrial Average
  DJIA,
  +0.50%
  component reported results that showed PC and data-center sales beat expectations.

• Ford Motor Co.
  F,
  -3.42%
  shares dropped after the Detroit automaker had a beat-and-raise quarter but spooked investors by shifting its EV production goals.

• Tupperware Brands Corp.
  TUP,
  +3.70%
  shares added to their blistering rally, with the stock on pace for a more than 275% weekly gain.

• Palantir Technologies Inc.
  PLTR,
  +10.28%
  shares surged after a Wedbush analyst described the company as “the [Lionel] Messi of AI on the golden track to success” after initiating coverage on the software maker with an outperform rating.

Steve Goldstein contributed.