Inflation data poses a test for the stock market rebound. Can the upward trend in the US stock market continue?

Zhitong App has learned that the inflation indicators favored by the Federal Reserve will be the main obstacle for the stock market bulls to continue their recent upward trend in the coming week. The US will release the Personal Consumption Expenditures (PCE) index for October on Thursday, and economists expect that the core PCE, which the Federal Reserve favors, will rise by 3.5% YoY last month.

The economic calendar will also include the latest data on manufacturing activity, consumer confidence, and housing prices.

On the corporate front, Salesforce (CRM.US), Snowflake (SNOW.US), Okta (OKTA.US), Dollar Tree (DLTR.US), Foot Locker (FL.US), Kroger (KR.US), and Ulta Beauty (Ulta.US) are expected to release their quarterly reports.

Due to the dramatic leadership changes at OpenAI and the latest quarterly report from Nvidia (NVDA.US), which attracted a lot of investors' attention, the stock market closed higher during the short trading week. The three major stock indices all rose by about 1% at the end of the three-and-a-half trading days.

Inflation is the main obstacle to the rise of US stocks

Overall, the coming week will be a test for the current market, as the stock market closed with the best monthly gain in over a year last Friday.

Thursday's inflation data will provide the final opportunity for economic data to overturn the current belief that the US economy may be heading for a "soft landing," with inflation falling to the central bank's target of 2% without a severe economic recession.

Recent economic data has been consistent with this trend, leading to a rebound in areas of the market that have been hit hard, such as small-cap stocks and meme stocks.

These data have also affected market expectations for the Federal Reserve. According to data from the Chicago Mercantile Exchange Group (CME Group), the market currently expects only a 12% chance of the Federal Reserve raising interest rates again.

Economists expect that based on the Federal Reserve's preferred inflation indicator, the core PCE, it will increase by 3.5% YoY in October. Compared to the previous month, economists expect the core PCE to rise by 0.2%.

Michael Feroli, Chief US Economist at JPMorgan Chase, pointed out in a report to clients earlier this month that a monthly increase of 0.2% "would bring the annualized increases for 3 and 6 months to 2.5% and 2.6%, respectively," which is closer to the Federal Reserve's 2% target than the 12-month increase in October.

Feroli added, "These increases are close enough to the Federal Reserve's 2% inflation target that most Federal Open Market Committee members may be satisfied with maintaining the policy unchanged and allowing the cooling labor market activity to bring inflation back to the target level." "We still believe that the Federal Reserve's next move is to adopt a looser policy, but we have to wait until the third quarter of 2024."

Earlier this month, after the Consumer Price Index for October showed a continued slowdown in inflation, the stock market soared and bond yields fell.Can software companies bring surprises in performance?

In terms of enterprises, a small portion of quarterly performance will further inform investors about the health of consumers, the demand for software, and whether artificial intelligence is bringing changes for these companies' clients.

The market will closely monitor Foot Locker, Ulta Beauty, and Dollar Tree to understand any forecasts regarding the holiday sales season, as well as comments on whether rising interest rates and a soft job market will prompt consumers to reduce spending.

Salesforce's guidance for the current quarter will be closely watched by Wall Street, with Goldman Sachs analysts noting that this period is when customers decide to renew and add services for the coming year.

Wall Street analysts expect the company's performance to reveal how companies paying for cloud services or tools like Slack are coping with price increases. Demand updates for Salesforce's artificial intelligence products will also be a focus of attention.

In a report to clients on Wednesday, Citigroup analyst Tyler Radke wrote, "Customers continue to optimize spending, reduce shelfware, and prioritize software that can deliver near-term value creation, which presents a challenging demand environment for Salesforce."

Results from Workday, Intuit, Snowflake, and Okta will touch on similar themes in the coming week.