Key Insights
Inflation remains a primary threat to equity markets. Persistent inflationary concerns have pushed bond yields higher in recent weeks; should this trend continue, it could jeopardize stock valuations and stall the bull market rally that took hold in April 2025.
In a recent note, Goldman Sachs cautioned investors regarding this trend: “There is a growing risk that rising bond yields, along with a slowing economy or inflationary pressures, could trigger a stock market correction.”
The upcoming series of inflation updates will be vital in determining whether the stock market can maintain its upward trajectory.
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The first critical data point arrives Thursday morning, as the Bureau of Economic Analysis releases the Personal Consumption Expenditure (PCE) Price Index for April. The PCE is the Federal Reserve’s preferred inflation metric because its comprehensive nature more accurately captures how consumers shift their spending in response to price fluctuations.
In March, the headline PCE Price Index rose 3.5% year-over-year, while Core PCE—which excludes volatile food and energy costs—increased by 3.2%.
Analysts Anticipate Potential Upside Surprise in Thursday’s Data
Market analysts suggest that Thursday’s PCE report may exceed expectations due to rising oil prices linked to Middle East tensions. This projection is supported by recent data from the Consumer Price Index (CPI) and the Producer Price Index (PPI). April’s CPI rose 3.8% year-over-year (2.8% core), while the PPI, which tracks producer-level inflation, climbed by 6%.
With the Federal Reserve targeting a 2% annual inflation rate, these recent figures remain significantly above the central bank’s ideal threshold.
According to the Cleveland Federal Reserve’s Inflation Nowcasting model, April’s PCE is forecasted at 3.81% (3.31% for Core). The model further anticipates an increase to 4.06% for headline PCE and 3.36% for core PCE in May.
An upside surprise in the PCE data could create significant volatility in the stock market. Higher inflation typically intensifies sell-offs in the bond market, driving prices down and yields up. Since higher yields influence borrowing costs for both consumers and businesses, increased financing expenses can ultimately compress corporate revenues and profit margins.
While both the S&P 500 and the Nasdaq Composite reached new milestones this week—driven largely by optimism regarding Middle East diplomacy—Thursday’s PCE reading has the potential to erase these recent gains.
