Tame Inflation Report, Tech Earnings Put 7000 Point S&P 500 in Sight — Barrons.com

By Martin Baccardax

U.S. stocks cleared a key performance barrier as inflation pressures moderated. It should set markets up for solid gains over the final months of the year and could deliver a historic milestone for the S&P 500.

Friday's delayed September inflation report, ostensibly published by the Bureau of Labor Statistics to help calculate cost-of-living adjustments for Social Security payments, instead injected the latest round of rocket fuel into a market that has soared more than 36% from its early April lows.

The headline reading showed price pressures quickened by 3% from last year, just inside Wall Street's 3.1% forecast, with the September increase pegged at 0.2%.

The benign report, which includes a good sampling of tariff-related price hikes from levies introduced in August and September, should allow the Federal Reserve to comfortably lower its benchmark lending rate next week in Washington while signaling further reductions into the end of the year and beyond.

"The cooler-than-expected CPI confirms what we've seen overall from private data during the government shutdown — little indication that inflation is surging or that the labor market is falling off a cliff," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.

"For a Fed focused on prudent "risk management," that should translate into another rate cut next week, and likely more to follow," she added.

The CME Group's FedWatch tool sees the fed-funds rate falling to between 3.5% and 3.75% by the end of the year, and to between 3.75% and 3% by September of 2026.

The dovish interest rate outlook is likely to provide further support to what has been a much stronger-than-expected third quarter earnings season for the S&P 500.

With around a quarter of the benchmark reporting so far, collective S&P 500 profits are set to rise 10.4% from last year, according to LSEG projections, to around $580 billion.

That's an $8 billion improvement from earlier forecasts and comes ahead of updates from five of the s0-called Magnificent Seven megacap tech stocks, and around a third of the S&P 500 itself, starting next week.

The Mag Seven cohort is set to post collective earnings growth of around 16.6%, but the gap between those gains and the overall benchmark is the smallest in nearly three years, suggesting better market breadth and potentially more predictable advances for the S&P 500.

That could allow stocks to test historic highs before the end of the year, according to projections published earlier this week by Jeff deGraaf at Renaissance Macro Research.

deGraaf noted that investors entering the market on Oct. 23 have usually enjoyed a 3.5% S&P 500 gain over the subsequent three months. That compares with a historic median gain of around 2% for a similar time frame.

If history holds, that would take the S&P 500 to just over 7000 points by New Year's Eve, marking a full-year gain of just under 20% for the overall benchmark.

That improved market breadth could also help shield investors from the recent spate of headline risks, which have included weakness in private credit markets, U.S.-China trade tensions, the continuing government shutdown and a brief surge in market volatility gauges.

"We doubt that the recent turbulence in financial markets and credit losses will mark an imminent end to the AI-driven equity market surge," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

"We think the wider equity market surge has further to run and that valuations will stretch further before a broader reckoning arrives," he added .

Write to Martin Baccardax at martin.baccardax@barrons.com

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