Stock market outlook: July CPI report to spark a big rally for stocks

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This week's inflation report will spark a big rally in the stock market, Fundstrat says

Lee believes a cooler-than-expected July CPI report would be more than enough for a stock market rally that recovers all of the losses since the start of the month. Such a rally would equate to at least a 2% move higher in the S&P 500.

Part of Lee's confidence in a cooler CPI report stems from the fact that since the end of 2019, auto and shelter prices accounted for 66% of the increase in inflation. But now those price increases in cars and shelter are moderating considerably. "Investors overlook that used cars and housing are such outsized contributors to inflation. And as these components cool, the remaining components will not necessarily lead to a renewed surge in overall core inflation," Lee said.

Also helping the potential for a stock market rally following the July CPI report is the fact that investor sentiment has soured amid the one-week stock market decline. "Investors seem to have already become far more wary and that is a good thing from a sentiment perspective. Equities seem oversold as well. So, we think the probability for stocks to rally strongly after CPI is very high," Lee said.

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