Did the sharp drop in US stocks at the beginning of the month come as a "surprise"? Wall Street is in an uproar

After the "Black Monday" in August, will the US stock market make a comeback or continue to be gloomy?

The comprehensive slowdown in the US July PPI announced on Tuesday exceeded expectations, further supporting rate cut expectations, showing the significant effectiveness of the Federal Reserve in curbing inflation. Boosted by this, the three major US stock indexes rose collectively overnight, with various industry ETFs closing up, and the two-year US Treasury yield dropping by about 8 basis points.

Angelo Kourkafas, Senior Investment Strategist at Edward Jones, stated that despite the recession risks facing the US economy, rate cut expectations are still boosting the market.

Kourkafas pointed out:

"We see that the market has almost fully priced in the US entering an easing cycle."

"Based on the expectation that the Fed will cut rates next month, the market has responded well, with US Treasury yields falling and US stocks rising."

However, the July CPI to be announced tonight at 20:30 Beijing time will also be a key factor in confirming whether inflation is easing.

Kourkafas also noted that although the largest home decor retailer in the US, Home Depot, lowered its same-store sales guidance for this year in its latest financial report, he observed that some weakness in consumer spending was due to the high-interest rate environment.

Home Depot stated in its report that consumers have been delaying large spending projects while waiting for the Fed to cut rates on mortgage shopping.

This means that if the Fed starts cutting rates as scheduled in September, this weak part of consumer spending will also increase.

Considering that overall consumer spending is still rising, income is growing, and job positions are increasing, Kourkafas said:

"The pullback in early August is not necessarily the beginning of a worse situation, all signs indicate that the bull market can continue."

Stubborn Housing Inflation, US Stocks May Retrace 10% from Highs

Industry analysts with different views believe that inflation still has stickiness, and there is still room for downside in US stocks.

Barry Bannister of Stifel, on the other hand, believes that although the stock market has recovered some of its losses, there are still reasons to remain cautious.

Bannister believes that "inflation with stronger stickiness than expected" will be a catalyst for further declines in the stock market, and he expects the S&P 500 index to retrace about 10% from recent highs to 5000 points before the end of the third quarter.

The biggest drag factor is housing inflation. According to Bannister, due to the persistent housing inflation, it is expected that inflation will reach close to 3% by the fourth quarter, making the Fed's 2% inflation target a "pipe dream."

Furthermore, considering that the market has almost fully priced in a Fed rate cut in September, a large influx of funds will further push up housing costs, leading to a significant rebound in housing inflation by 2025Bannister added that it is expected that GDP, consumption, fixed asset investment, and net exports data in the second half of the year will also be weak, which is not a good sign for the economy