Wentz Weekly: Stocks Extend Rally on Latest Inflation Data

Wentz Weekly Insights
Stocks Extend Rally on Latest Inflation Data With a Broadening of Performance

The stock market rally that began shortly after Trump’s “Liberation Day” tariff announcement in early April continued last week with stocks (the S&P 500) now up 33.4% since the lows in April and up 4.9% from the highs it hit before the Liberation Day selloff back in February. As mentioned last week, the market upside has been very narrow, with just a small group of names generating the performance. As Bank of America noted, just 10 stocks in the S&P 500 have made up over 80% of the index’s gain since April (the 10 stocks include the Magnificent 7 stocks of Nvidia, Microsoft, Meta, Tesla, Alphabet, Amazon, and Apple, as well as Palantir, the largest gain of 127%, Broadcom, and Oracle).

However last week that performance broadened out – the Russell 2000 (an index of mostly small cap companies) was the best performing of the big four indices for the week with a weekly gain of 3.07%, compared to 0.94% for the S&P 500. The rally came after the most recent inflation report last Tuesday.

The consumer price index increased right in line with expectations on just about every measure. The index increased 0.2% in July, slowing slightly from the 0.3% increase it saw in June. Food prices were flat and energy prices fell 1.1%, which drove the smaller increase in the month. These two categories make up 20% of the index and are often volatile month to month so it is common to also look at the “core” index which excludes these two categories.

The core index increased 0.3%, accelerating slightly from the 0.2% increase it saw in June. The core index is now up 3.1% over the past 12 months, accelerating from 2.9% from June. This is mostly due to weak inflation readings from 12 months ago (it makes the year-over-year comparison easier). Inflation has been more in line with normal levels for many months this year and there are little signs of tariffs driving higher prices, something the market celebrated Tuesday after the release with higher stock prices, lower bond yields, and a higher chance of rate cuts this year.

This avoided a worst case scenario and as a result the expectations for rate cuts at the Fed’s next meeting in September increased to the highest level so far. Investors are putting 96% odds of a rate cut September, up from 80% prior to the data and up from just 35% prior to the labor market data earlier this month.

However, we are still only in the very early stages of higher tariffs. At the beginning of the year monthly revenue collected by the Treasury from tariffs was $7.34 billion, it moved to $15.63 billion by April, and hit a record $27.67 billion in July, the latest month of data, according to the monthly Treasury statement. July’s pace would generate an annualized revenue of $332 billion from tariffs, much more than the roughly $84 billion annual pace from recent years.

It will take time until we actually see the full effects of tariffs, whether that is higher prices that consumers pay as businesses pass on the higher costs or lower profit margins for companies as they eat the higher costs. We have seen limited data on this, but a note from Goldman Sachs said its analysis showed US businesses are absorbing two-thirds of the tariff costs so far, with 22% absorbed from US consumer and 14% by foreign exporters.

If inflation remains on this trajectory, we would expect rate cut expectations to move higher and market strength to broaden out, as was seen last week. If inflation does pick back up, we would expect greater concern of stagflation, a deteriorating jobs market, and potential pullback or weakness in stocks.

Moving ahead, the big event this week is the Jackson Hole Economic Symposium. This annual event includes the gathering of central bankers from around the world that hits on timely central bank issues and this year’s event is titled “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” The focus will be on Chairman Powell’s speech Friday.

The economic calendar will focus on several housing reports while the earnings calendar will move to retailers with several big box stores like Walmart, Target, and Home Depot. In addition, geopolitics are top of mind to begin the week Monday as Ukraine President Zelenskyy is expected to meeting with European leaders at the White House with President Trump.

Week in Review:
It was a positive week for stocks and one that saw a broadening out of participation as the equally weighted S&P 500 outperformed the cap weighted index by over half a percent. Volatility moved higher Monday but fell Tuesday after the inflation data to finish the week relatively unchanged. The four major US stock indices finished as follows: Russell 2000 +3.07%, Dow +1.74%, S&P 500 +0.94%, and Nasdaq +0.81%. The dollar index fell 0.3% while gold declined 3.0% as interest rate cut bets increased (putting downward pressure on the dollar). Bitcoin increased slightly on the week. Meanwhile, oil fell 1.7% in hopes of a de-escalation between Russia and Ukraine.

Recent Economic Data

• Consumer Price Index: Inflation was in line with expectations in July basically across the board, though the annual core rate was slightly higher than expected. The consumer price index increased 0.2% in July, a tick down from a 0.3% increase in June. Food prices were flat in the month while energy prices fell 1.1%. Excluding these two volatile segments, which make up 20% of the index, the core index increased 0.3% as expected. There were a lot of core categories that saw price increases close to 1% in the month and some may be tariff related – medical care and transportation costs up 0.8%, used cars up 0.5%, footwear up 1.4%, and household furnishings up 0.7%. Compared to a year ago the headline index increased 2.7% as expected, matching June’s increase, while the core index increased 3.1% over the past 12 months, accelerating from 2.9% from June, slightly more than expected, and the highest since February. Finally, the index for services prices increased 0.3% and was up 4.0% over the past year, accelerating from 3.8% in June.

• Producer Price Index: Inflation at the producer level increased a lot more than expected for July. The producer price index increased 0.9%, much more than the 0.2% increase that was expected and accelerating from the no change in June. The index accelerated on an annual basis from 2.3% last month to 3.3% in July. Excluding food and energy the index was still much higher than expected, rising 0.9% in the month and 3.7% on an annual basis. Price increases were pretty broad based and seen across all major index categories. Prices for final demand goods rose 0.7%, driven by a 1.4% increase in food and a 0.9% increase in energy. Prices for final demand services were up 1.1%, driven by a 2.0% increase in trade and 1.0% increase in transportation and warehousing.

• Retail Sales: Retail sales growth in July came in exactly as was expected. Retail sales increased 0.5% in July, coming after an upwardly revised 0.9% increase from June. A lot of the increase was due to vehicle sales which increased 1.6% in the month. Of the 13 major categories, 9 of them saw an increase in sales in the month. Excluding vehicle sales the index was up 0.3%. Seeing the biggest gains were categories like furniture sales, clothing, sporting goods/hobby stores, and online sales. Seeing declines were electronics, building materials, miscellaneous store retailers, and bars/restaurants. Retail sales are up 3.9% over the past year, with real retail sales (taking out the impact of inflation) up 1.2%. 

• Jobless Claims: The number of unemployment claims the week ended August 9 was 224,000, down from 227,000 from the week prior with the four-week average up only slightly to 221,750. The number of continuing claims was 1.953 million, down 15k from the prior week with the four-week average up only slightly to 1.951 million.

• Consumer Sentiment: The consumer sentiment index took a drop in the first August survey, down to 57.2 from 61.8 in July. The current conditions index fell 7 points to 60.9 while the expectations index fell slightly to 57.2. The expectation for inflation over the next year increased to 4.9%, up from 4.5% in July, while the longer-term 5-year inflation expectation rose to a pretty elevated 3.9%, up from 3.4%.

Company News

• Nvidia: The Financial Times reported late last Friday that the Commerce Department has begun granting licenses for Nvidia to ship its H20 graphic chips that power artificial intelligence to China, the first time since restrictions were put in place in April. Recall these are the chips Nvidia developed specifically for China due to restrictions on its most powerful Blackwell chips. A couple days later, last Monday, Nvidia and AMD were reported to have agreed to share 15% of the revenue from their Chinese AI chip sales to the US government in exchange for receiving the export licenses. Separately, China media reports are saying Nvidia’s H20 chips are raising security concerns as well as claiming they lack technological innovation and are unfriendly to the environment. One day after the news Trump administration would allow Nvidia to export its H20 chips (its AI chips it developed for China) in exchange for a 15% cut of its sales to China, The Information reported Chinese regulators have ordered Chinese tech companies to suspend purchases of the chips. The regulators say the suspension is needed for the government to investigate potential security risks as well as to help persuade Chinese companies to purchase chips from local manufacturers.

• TKO Group: Paramount and TKO Group, the parent company to UFC, announced they have signed a 7 year $7.7 billion media rights deal to make Paramount the exclusive broadcaster for all UFC events beginning in 2026. All events, which include numbered events and Fight Nights, will stream on Paramount+ while some select fights will simulcast on CBS. The deal will end UFC’s pay-per-view model.

• Ford: Ford announced it will spend $2 billion to overhaul a factory to build a new line of affordable, high tech electric vehicles in a move to better compete with cheaper Chinese EVs that continue to gobble up market share. It said it aims to launch the new lower priced EV pickups, planned to price around $30k, in 2027.

• Google Chrome: One of the largest artificial intelligence start up firms, Perplexity, has reportedly made a long shot offer to acquire Google’s Chrome, which has about a 60% global market share in the browser market, for $34.5 billion from its parent company Alphabet, according to an exclusive report from the Wall Street Journal. Perplexity’s latest valuation was around $18 billion so the acquisition would be nearly twice its size. Google has been facing antitrust lawsuits with some pushing for a breakup of its browser.

• Spirit Airlines: Spirit warned there is a substantial doubt regarding its ability to continue as a going concern within 12 months, saying it might not continue to operate if its financials do not improve faster than previous expected. It recently emerged from bankruptcy in March but travel demand for the budget airline has continued to be under pressure. As the Wall Street Journal reported, it has taken steps to enhance its business in response, like premium economy travel and cost saving measures, but said it expects demand concerns to continue through the remainder of the year.

• Apple: Bloomberg reported Apple is preparing to release a slate of new and updated AI powered devices, a move to quiet those that doubt Apple can take advantage of the AI theme. Its centerpiece strategy is a tabletop robot that would serve as a virtual companion and is expected to be available in 2027. It is also planning to introduce a smart speaker with a display for next year. It views home security as another growth opportunity and plans to have new cameras that can automate household functions. Separately, Apple said it is introducing a new blood oxygen feature to its Watches through a software update.

• Walmart: The Wall Street Journal reported Walmart is offering its employees a 10% discount on groceries in a push to attract and retain employees, extending the discount from just general merchandise. It added Walmart sent a letter to staff saying extending the discount to more goods was the most requested employee benefit.

• UnitedHealth: Shares of UnitedHealth received a lot of attention at the end of the week and were up over 10% after it was reported via a filing that Warren Buffet has taken a stake in the company.

• Intel: Intel shares were up nearly 10% late in the week after it was reported by Bloomberg the Trump Administration is considering having the US take a financial stake in the company to help it expand its domestic foundry plants (chipmaking plants), including the factory it planned to build outside of Columbus.

Other News:

• Trump/Putin Meeting: Trump confirmed a meeting has been scheduled between himself and Putin that took place last Friday in Alaska as Trump continues to push for Putin to end the war in Ukraine. The takeaway from the meeting was no formal agreement or ceasefire, with both leaders leaving the meeting without answering any reporters questions, however both noted the meeting was productive. Post-meeting reports say Trump has shifted his strategy, pushing for a full peace agreement rather than just a ceasefire as there is the belief a ceasefire may not hold, whereas Putin demands concessions to the territory it has overtaken in Ukraine.

• Bureau of Labor Statistics: Trump’s nominee to head the Bureau of Labor Statistics, after firing the previous commissioner, recently called for the suspension of the monthly employment report, saying it has flawed methods and misleading data. The White House said the plan is to continue to post the monthly jobs numbers.

• Tariffs: Treasury Secretary Bessent said in an interview with Nikkei Asia (the world’s largest newspaper, from Japan) the US plans to have all trade/tariff negotiations finalized by the end of October. Regarding China, shortly before the deadline, Trump signed an executive order to extend the pause on increasing tariffs on Chinese goods for another 90 days. The previous pause was scheduled to expire last Tuesday.

• Fed Talk: Kansas City Fed President Schmid said he still prefers a patient approach to rate policy for two reasons – monetary policy is not very restrictive currently and because recent price pressures warrant current rate levels. He added the labor market is in balance and inflation remains too high. Chicago Fed President Goolsbee commented on tariffs saying they are stagflationary as the impacts have begun to show up in the data with more price pressure, low hiring, and a low firing labor market. He believes the Fed needs to figure out which part of its mandate (full employment or stable inflation) is going more wrong and how long will it last.

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Economic & Market Outlook Meeting:

Please note that due to unforeseen circumstances, we had to make the decision to postpone our Economic and Market Outlook meetings indefinitely. We will send along updates as they become available