* Rally lifted benchmark S&P 500 to all-time highs this week

* CPI data for July due on Wednesday

* PPI, retail sales also on tap, earnings due from Applied

Materials ( AMAT ), Cisco ( CSCO )

By Lewis Krauskopf

NEW YORK, Aug 7 (Reuters) - A sharp technology-led rally

that has lifted the U.S. stock market to record peaks will be

tested next week by fresh inflation data, which could build the

case for the Federal Reserve to raise interest rates.

The S&P 500 this week posted its first all-time

closing high in two months, propelled by tech and semiconductor

shares that had stumbled in between the record peaks. Over a

four-session stretch ending on Tuesday, the benchmark index

gained 5.75%, its biggest four-day surge since April 2025.

Calming of U.S.-Iran tensions also buoyed stocks, with a

pullback in oil prices alleviating some worries about inflation,

ahead of the closely watched U.S. consumer price index report

due on Wednesday.

"The market has inflation anxiety," said Matthew Miskin,

co-chief investment strategist at Manulife John Hancock

Investments. "We will see next week if the inflation data gives

the market a sigh of relief."

The recent market upturn has pushed the S&P 500's

year-to-date gain to more than 12% as of Thursday. Corporate

profit reports are surpassing lofty expectations for a second

consecutive quarter, underpinning investor optimism about the

backdrop for equities.

"We've had some strong earnings, particularly from some of

the bigger companies that needed to report good numbers," said

Matt Orton, chief market strategist at Raymond James Investment

Management.

At the same time, "a big part of the (July) sell-off was

that positioning became way too crowded and expectations were

too exuberant," Orton said. "And so you saw that get worked off

during the month."

CPI REPORT ON WEDNESDAY

The July CPI report comes on the heels of a Fed meeting that

revealed divisions about how the central bank should handle

inflation that has run above its 2% annual target for several

years.

Economists expect CPI to rise 3.4% on a year-over-year

basis, according to a Reuters poll as of Thursday. A 2.5% annual

rise is projected for core CPI, which excludes the volatile food

and energy components.

"CPI coming down the last couple of months may be enough to

prevent the Fed from hiking rates this year," said Dominic

Pappalardo, chief multi-asset strategist for Morningstar Wealth.

"Should CPI snap back higher and come in above forecast on

Wednesday, then I would expect stocks to sell off on that news."

The Fed held interest rates steady at its meeting last

month, but three of 12 policymakers dissented in favor of a

hike. Markets as of Thursday were pricing in a nearly 60% chance

of a rate increase at the Fed's next meeting in September.

INVESTORS EYE YIELDS, OIL PRICE VOLATILITY

Concerns about persistently high inflation and Fed rate

hikes have contributed to a rise in Treasury yields, which

investors cite as a major risk to the rally in stocks.

Higher Treasury yields ⁠can make bond investments more

competitive with equities. Higher yields also translate into

higher borrowing costs for consumers and companies, dragging on

economic growth and stocks.

The benchmark 10-year Treasury yield in late

July hit its highest level since January 2025. But the yield has

since pulled back to 4.67%, with U.S. crude dropping below $80 a

barrel this week.

"Any oil price volatility is something the market is

watching closely," Miskin said. "If oil prices keep going up, it

increases inflation, and then that increases the likelihood that

the Fed needs to hike."

PPI, RETAIL SALES, TECH EARNINGS ALSO ON TAP

The monthly report on producer prices, due a day after CPI,

will also flesh out the inflation picture. Retail sales data on

Friday offers a view into consumer spending, which is a key

gauge for the strength of the broader economy.

After a flood of quarterly reports the past few weeks, the

earnings calendar hits a relative lull. But the high-flying AI

and tech trade still could be sensitive to reports next week,

including from semiconductor company Applied Materials ( AMAT ),

networking equipment maker Cisco ( CSCO ) and cloud

infrastructure technology company CoreWeave ( CRWV ).

Semiconductor shares in particular have driven the stock

market's rally this year, with the companies expected to benefit

from massive spending on AI data centers. The Philadelphia SE

Semiconductor index is up 70% in 2026, but the SOX index

remains down more than 17% from its late-June high and is seeing

huge swings on a daily basis.

"We need to see more technical recovery across a number of

the SOX components to really be convinced that the worst is

behind us," Orton said. "Earnings have generally been

encouraging, but there's still more work to do before we can say

we're out of the woods."