US Stocks Near Record High as Inflation Moderation Expected

Inflation Outlook and Fed Policy

• 💡 The main event is the expectation that inflation could moderate more than anticipated, potentially returning to the Fed's 2% target later this year.
• ⚠️ Many colleagues are concerned about inflation remaining stuck at 3% or accelerating, but the economics team believes moderation is likely.
• 🎯 The Fed's target of 2% core PCE is seen as achievable, with potential rates of 2.1% to 2.3%, which is not fully priced into the market.

Factors Driving Inflation Moderation

• 📉 Goods prices are expected to moderate as the tariff narrative fades and is no longer a significant driver of inflation.
• ☁️ A soggy labor market with an unemployment rate around 4.6% should lead to softer non-housing services inflation.
• 🏠 The shelter component of core inflation, a major sticky factor, is also expected to cool off in 2026.

Labor Market Dynamics

• 📊 Optimists on Wall Street anticipate a reacceleration in payroll data due to residual seasonality, with potential for the unemployment rate to tick down.
• 📉 However, historical analysis suggests it's rare for job growth to slow significantly and then reaccelerate, making it likely that job growth remains slow and the unemployment rate rises.
• 📉 Weak payroll growth is seen as a precursor to weaker consumer income and spending.

Market Sentiment and Diversification

• 📈 US stocks are approaching a new record, fueled by demand for AI-linked shares, despite geopolitical tensions.
• 🌍 Given macro uncertainty in the US compared to the rest of the world, diversification is recommended.
• 💰 Gold and silver have seen significant gains, while US Treasury yields and the dollar have crept higher.