Stock markets rocket after shock US inflation data

It’s not just American shares that responded well to today’s positive inflation surprise. There’s plenty for UK investors to cheer too.  

One set of US inflation figures today swept aside uncertainty over midterm elections and mixed earnings as Wall Street cheered a potential lower peak for interest rates.

The S&P 500 index jumped over 4% shortly after the opening bell and the Nasdaq tech index surged 5.6%. And the FTSE 100 index went from 0 to 80 points higher in a matter of seconds after the US consumer price index surprised on the downside at 7.7%, compared with 8.2% in September.

• Find out about: US Earnings Season | Top US Stocks | Interactive investor Offers

Better still for interest rate expectations, the core inflation figure excluding food and energy slowed from last month’s 40-year high of 6.6% to 6.3%.

Today’s news eases concerns that inflation has become entrenched in the US economy as companies battle to pass on this year’s significant hike in supply chain and other costs.

Analysis of third-quarter results suggests that many firms in the S&P 500 have been successful in protecting their bottom line, with Bank of America reporting this week that 44% have beaten expectations on both sales and profits.

Overall, however, the performance is not so impressive given that the historical average beat for a quarter is 2.7% and this most recent period was only in line with expectations.

• Meta shares jump after confirming massive job cuts
• Investors stunned as Federal Reserve issues threat in war on inflation
• A share to buy, another to sell and one to hold

Bank of America adds that 2023 estimates have been cut three times more than usual, meaning no growth in earnings is expected for next year.

With 10% of the S&P still to report, the bank said energy, healthcare and staples have posted the biggest beats. One of the stand-out successes came today when shares in electric truck maker Rivian Automotive (NASDAQ:RIVN) jumped by almost a fifth thanks to reassuring production guidance.

Financials, materials and communications services saw the largest drags. According to Bank of America, companies missing expectations in this quarter have underperformed the S&P 500 by an average of 636 basis points the next day, which is the largest in history.

High-profile casualties of an advertising slowdown have included social media’s Meta Platforms (NASDAQ:META) and Snap (NYSE:SNAP), while Google owner Alphabet (NASDAQ:GOOGL) also struggled.

Technology had been seen by many on Wall Street as a new defensive sector, especially after Covid when earnings grew despite an economic recession.

However, Bank of America is not convinced: “Since the '80s, tech has been just as cyclical as the S&P 500 based on the frequency of sales declines but has been buoyed by cost benefits from globalisation and (more recently) a pull forward in demand.

“But mega-cap tech companies are not immune from economic downturns and are facing the biggest challenges amid de-globalisation.”

The rest of the US earnings season should provide a clearer insight into how much higher inflation and interest rates have impacted consumer confidence, with Home Depot (NYSE:HD) and Walmart (NYSE:WMT) due to report before Tuesday’s opening bell and Alibaba (NYSE:BABA) the following day.

A recent survey found that 41% of Americans are reporting difficulty paying their bills compared with the peak of 38% during the Covid pandemic.

• This US midterm election investing trick has worked 100% of the time
• Terry Smith tech-buying spree continues with Apple purchase
• A tech stock as cheap as chips?

Four consecutive 0.75% rate rises have heightened the pain for many households, leaving the funds rate in a range of 3.75%-4%. Another rise of 0.5% is expected in December despite today’s inflation reading, with Federal Reserve chair Jerome Powell recently describing talk of a pause in rate hikes as “very premature”.

He went further than Wall Street expected by signalling the ultimate level of interest rates may be higher than forecast.

Following today’s inflation print, Capital Economics doubts the Fed will overreact to one month’s data and expects policymakers to maintain their hawkish stance.

However, it thinks today's figures are the start of a much longer disinflationary trend that could convince the Fed to halt its tightening cycle early next year. The consultancy forecasts the policy rate peaking at 4.50% to 4.75%, with rate cuts before the end of 2023.