Welcome to “make-or-break” week for the stock market, where we will learn whether stocks are going to soar over the next month … or crash.
Fortunately, this should be a good week for stocks, kicking off the market’s huge rebound rally. That means the next few days could present us with some great buying opportunities.
To capitalize on those opportunities, though, we need to first understand why this week is so important for Wall Street.
It all comes down to one word: inflation.
Inflation has been the enemy of markets ever since the COVID pandemic emerged nearly five years ago. When inflation has been tame – like 2020, 2021, 2023, and 2024 – the markets have soared. In three of those years – 2021, 2023, and 2024 – the S&P 500 rallied more than 20%.
But in 2022, when inflation was a big problem, the market suffered through one of its worst years in recent history. Back then, the S&P sunk nearly 20%! See the chart below:
Point being: Inflation has driven the stock market over the past five years. When inflation has been tame, stocks have soared. When inflation has been a problem, stocks have struggled.
Right now, there are worries on Wall Street that inflation is going to become a problem again in 2025.
Reinflation Fears and Upcoming Economic Reports
After consistently falling from summer 2022 to late 2024, the headline inflation rate in the U.S. economy has started to rise over the past few months. The core inflation rate – which strips out volatile food and energy prices – has also stopped falling. Consumer inflation expectations, meanwhile, have been rising over the past few months, too.
With potential inflationary policies like tariffs, deportations, and deregulation in the pipeline, many market professionals are concerned that inflation could make a nasty comeback this year.
That’s a major problem because if inflation does make a nasty comeback this year, it means the Fed won’t cut interest rates again. It even means the Fed may be forced to hike rates – not cut them – to fight off the new inflation. That would result in higher mortgage rates, higher auto financing rates, higher lending rates, higher credit card interest rates, and more.
It means life gets more expensive for Americans at a time when they simply cannot afford life getting more expensive.
Which, of course, means that if inflation does make a serious comeback this year, the U.S. economy could fall into a recession.
That’s the fear. And this week is so important for Wall Street because we will get the first fresh batch of inflation reports in a month.
We get the Producer Price Index report on Tuesday…
The Consumer Price Index report on Wednesday…
And the Import/Export price report on Thursday.
In other words, we are going to learn this week whether the recent inflation-driven recession fears percolating on Wall Street are well-founded or not.
Spoiler alert: We don’t think they are.
We understand the recent fears. Inflation moved in the wrong direction throughout much of late 2024, but it appears to be moving in the right direction again.
The headline consumer inflation rate rose in October and November and is expected to rise again in December. However, it is anticipated to increase by less in December (11 basis points) than it did in November (15 basis points), both of which are less than the rise reported in October (16 basis points). Real-time estimates for inflation suggest it could fall seven basis points in January.
In other words, the velocity of inflation is positive these days. Reinflation is waning, and it looks like disinflation is returning.
It is the same story with core inflation. The core inflation rate rose in October by two basis points but fell by one basis point in November. It is expected to fall by four basis points in December and ten basis points in January.
Core inflation velocity is positive, too. Check out the table below:
In other words, after inflation trends suffered through a late 2024 setback, they appear to be improving right now – and that makes us think that this week’s inflation reports will be better than what the market expects.
If they are, stocks should rebound nicely over the next few weeks.
The Final Word on Inflation
The S&P 500 has fallen to major technical support levels at the bottom of its 2024 uptrend trading channel and its 100-day moving average. The S&P 500 has bounced two times since late 2023 off the bottom side of its uptrend trading channel: October 2023 and August 2024. It has also bounced two times off its 100-day moving average since late 2023: April 2024 and September 2024.
All four of those times presented great buying opportunities in the stock market.
Today, we are getting support from both the bottom side of the trading channel and the 100-day moving average. If the market does bounce this week because of soft inflation reports, it could be the start of a big rebound to new highs across the market.
That’s why we are excited about the prospects of finding some great stock picks this week.
To help us find some of the best stocks to buy for 2025, we’re looking toward the world’s richest man — Elon Musk — and his big AI venture, xAI.
Click here to learn more about xAI now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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