Inflation vs. the Market: Why the S&P 500 Withstood the Blow

SP500

Key zone: 7,200 - 7,300

Buy: 7,400 (on a decisive break of 7,350); target 7,650; StopLoss 7,330

Sell: 7,150 (on strong negative fundamentals); target 6,900; StopLoss 7,220

May inflation data in the United States once again reminded markets of the risks associated with maintaining a restrictive monetary policy. The annual Consumer Price Index (CPI) accelerated to 4.2%, the highest level since April 2023. In theory, such a figure should increase pressure on the stock market through rising bond yields and lower fair valuations for equities.

However, investor reaction proved significantly calmer than expected. Instead of a large-scale selloff, the market limited itself to a controlled correction, indicating a deeper analysis of the inflation structure and its underlying drivers.

Reminder

According to BLS data, consumer prices rose by 0.5% in May compared with the previous month, while annual inflation accelerated from 3.8% to 4.2%. This marks the third consecutive acceleration in monthly inflation and the highest annual reading in the past three years. At the same time, the published data fully matched the analyst consensus forecast, helping to avoid any surprise effect.

Following the release, the S&P 500 remained near the 7,350-point level, losing approximately 0.7%, or 52 points. An additional source of uncertainty remains the renewed tensions between the United States and Iran, which increase the influence of energy prices on inflation expectations.

Other stock market indicators also helped support the U.S. market.

• Nasdaq Composite came under the greatest pressure, falling approximately 1.6%, or 411 points. Selling was once again concentrated in the technology sector and among semiconductor manufacturers, which remain the market's primary source of weakness during the first weeks of June.
• The Dow Jones Industrial Average appeared considerably more resilient. The index lost around 0.45%, or 230 points, thanks to demand for defensive assets. Investors continued reallocating capital into consumer-sector companies, telecommunications firms, and energy businesses.
• Russell 2000 became the main exception. The small-cap index gained approximately 0.4%, which is particularly noteworthy after several years of dominance by the largest technology corporations.

As a result, the market showed signs of capital rotation rather than a mass exodus from equities.

The VIX volatility index rose approximately 6.5%, reaching 20.15 points. This indicates growing caution among market participants but does not yet signal the emergence of a full-scale panic regime.

The market was not frightened by inflation — the key factor lies in the structure of inflationary pressure.

The gap between headline inflation at 4.2% and core inflation at 2.9% amounts to roughly 130 basis points. For the U.S. economy, this is an unusually large divergence.

For investors, this suggests that the primary pressure remains concentrated in the energy sector and has not yet spread across most other areas of the economy.

It is particularly important that indicators traditionally associated with the formation of persistent structural inflation remain relatively favorable:

• Core goods prices declined by 0.1%;
• The impact of tariff-related factors remains limited;
• Companies have not yet demonstrated a widespread pass-through of additional costs to end consumers.

This is precisely why market participants are not rushing to price in a new aggressive tightening cycle from the Federal Reserve.

The main source of pressure remains concentrated in technology companies and semiconductor manufacturers. Among the most notable declines were: Nvidia (−1.4%); Broadcom (−1.3%); Micron (−2.0%).

Super Micro Computer experienced an especially sharp decline. The company's shares lost approximately 12% after announcing plans to raise around $7 billion in additional capital.

At the same time, defensive sectors continue to play a stabilizing role for the market. Among the leaders in gains were Coca-Cola (+1.5%); Verizon (+1.5%); Chevron (+1.2%).

Such dynamics confirm that investors currently prefer to reallocate capital within the market rather than exit it entirely.

And what is the result?

Market participants increasingly view the current inflation spike as a consequence of an energy shock.

If oil prices stabilize or begin to decline, inflation may reach a local peak as early as this quarter, followed by moderation during the second half of the year.

Such a scenario would allow the Federal Reserve to maintain current monetary policy settings without additional tightening.

The futures market already reflects such expectations. The probability that the Fed will keep rates within the 3.5%–3.75% range is estimated at approximately 96.3%.

At the same time, following strong employment data and accelerating inflation, the market has almost completely abandoned expectations of near-term rate cuts and has begun pricing in the risk of additional tightening in the future.

The primary source of inflationary pressure remains the energy sector, while core inflation continues to stay at a relatively moderate level. Until the Federal Reserve meeting on June 17, the key market drivers will remain inflation, oil price dynamics, and developments surrounding Iran. It is the combination of these factors that will determine the future direction of the U.S. stock market and interest-rate expectations.

So we act wisely and avoid unnecessary risks.

Profits to y’all!