Inflation Data Looms as Major Test for US Equities
US equities are trading near record highs as investors await the latest inflation data to determine the next leg of the rally. The Consumer Price Index (CPI) report on Wednesday will be a crucial indicator for the Federal Reserve's policy decisions in 2026. A modest easing in inflation is expected, which would reinforce the view that policymakers can continue their 'wait-and-see' approach, supporting equities further.
Recent economic releases have painted a mixed picture, with the labor market softening and second-quarter GDP growth undershooting expectations. However, core CPI surprised to the downside last month, fuelling hopes that price pressures are finally moving sustainably towards the Fed's 2% target.
If inflation proves more resilient than expected, it could push Treasury yields and the US dollar higher, forcing markets to reconsider whether the recent optimism around policy and valuations is justified. Strong corporate earnings have been a positive factor for equities, but they also suggest that economic activity remains robust enough to sustain underlying price pressures.