The battle against inflation is far from over, but markets can’t be blamed for rushing to judgment after an unequivocally positive consumer price index report on Tuesday .
There should be some meaningful debate among committee members about making the next rate increase the Fed’s last, and markets will be waiting with bated breath for signs of how receptive chairman Jerome Powell is to that argument.So, what does that mean for the medium term? For starters, it means price-earnings multiples can continue to drift higher.
But a quick resolution to the inflation problem at least increases the odds of avoiding that outcome and opens the door to an upside surprise.P 500 strategists are already bracing for meagre 3 per cent earnings-per-share growth in 2023. A very modest uptick in EPS expectations , combined with a reasonable 19 times multiple, gets you back to about 4400 on the index, another 8 per cent upside from current levels.
“Nobody likes to get headfaked, and the way for Powell and his colleagues to get headfaked is to overreact to a couple of encouraging releases,” said David Wilcox, director of US economic research at Bloomberg Economics.At his Brookings Institution speech last month, Powell laid out four pillars for thinking about the inflation outlook, implying that he won’t consider lower interest rates until he finds ample comfort in each of them.