Stock market rally faces headwinds amid strong economy, sticky inflation

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The stock market rally faces a conundrum as inflation can't fall enough to please the Fed while the economy is this strong

But the rally could falter soon, as prices may not be able to ease to the Fed's 2% inflation target without additional rate hikes, the firm said.

"The fly in that optimistic ointment is the threat that a strong economy and declining inflation are mutually incompatible, and the Fed will be forced to keep raising rates in this scenario. Markets have gotten the 'peak Fed' call wrong 3 times so far; a fourth unforced error is not out of the question," DataTrek co-founder Nicholas Colas said.

Colas predicted that the rally in stocks will continue through the end of June, though the market could face a conundrum in the third quarter as inflation and Fed rate expectations become repriced.

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