Inside Markets — CPI, Tariffs and Credit Spreads

Wednesday’s CPI report is the macro data highlight of the week with consensus looking for a headline increase of +0.30% MoM with core CPI expected to print +0.23%. These levels align with YoY headline CPI of +2.9% and a core rate of 3.1%, which would be the lowest since April 2021. The focus for Wednesday will be on core CPI with anything above +0.27% MoM generating a bearish equity market reaction. The bearish tail risk is something north of +0.40% that would drive as much as -2% downside in the SPX. The upside tail risk would be core CPI printing at or below+0.20%. That type of outcome could result in SPX upside in the 1.25-1.75% range.

Uncertain tariff outcomes could ultimately pressure forward multiples as investors demand higher ‘equity risk premia’. The forward multiple on the S&P 500 (SPX) currently sits at an historically elevated ~21x EPS estimates. A long, drawn-out trade war could result in a lower multiple, but for now, we view tariffs uncertainty capping near-term SPX upside. Tariffs that raise the price of US goods would hurt lower-income consumers most. These consumers are already stretched after 2 years of high/rising inflation. A legitimate tariff threat should first appear in widening credit spreads that now appear in our Markets section above. Investment grade and High yield credit spreads peaked just prior to the inauguration before returning to benign levels.