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CPI for July due on Tuesday after June data showed some

tariff

impact

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Rate-cut bets rise in wake of weak employment data earlier

in

month

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S&P 500 near record highs, up over 7% in 2025

By Lewis Krauskopf

NEW YORK, Aug 8 (Reuters) - A fresh look at inflation

trends will test the U.S. stock market's rally in the coming

week, with some investors saying equities are primed for a

potential pullback after rocketing to records.

The benchmark S&P 500 was last up more than 7% on the

year and within about 1% of its all-time closing high set in

late July, as stocks largely rebounded from declines following a

weak employment report earlier this month.

Strategists at firms including Deutsche Bank and Morgan

Stanley have recently said the market could be poised for some

level of pullback after a largely unabated climb over the past

four months, which has pushed valuations to historically

expensive levels as a seasonally treacherous period for stocks

begins.

The monthly U.S. consumer price index report, due on

Tuesday, could cause volatility. Data showing

higher-than-expected inflation could undermine the growing

expectation for impending interest rate cuts.

"I do think the market is set up for a bit of a pullback,"

said Dominic Pappalardo, chief multi-asset strategist at

Morningstar Wealth. "There's a lot of concern bubbling

underneath."

The S&P 500 has soared well over 20% since its low for the

year in April, as investor fears about a tariff-induced

recession calmed after President Donald Trump's "Liberation Day"

announcement earlier that month had set off extreme asset

volatility.

The index is trading at 22.4 times its earnings estimates

for the next year, well above its long-term average P/E ratio of

15.8 after recently reaching its highest valuation in over four

years, according to LSEG Datastream.

Investors are also wary of risks posed by the calendar. Over

the past 35 years, August and September have ranked as the

worst-performing months for the S&P 500, according to the Stock

Trader's Almanac. The index has declined an average of 0.6% in

August and 0.8% in September -- the only months of negative

average performance for the index during that time period.

"The combination of a softer payroll number with concerns of

tariff-related inflation could be the recipe for ... a

correction, especially in the seasonally weak third quarter,"

Morgan Stanley equity strategist Michael Wilson said in a note

this week. Still, Wilson said his 12-month outlook was bullish,

adding "we're buyers of pullbacks."

The CPI for July is expected to have climbed 2.8% on an

annual basis, according to a Reuters poll of economists.

Investors will be watching to see if Trump's tariffs on imports

are translating into higher prices after the June CPI report

suggested levies were impacting the prices of some goods.

Market bets on Fed rate cuts rose following the recent weak

jobs data as investors expect the central bank will ease

monetary policy to help shore up the labor market. Fed funds

futures indicate an over 90% chance the Fed will cut at its next

meeting in September, with at least two cuts priced in for this

year, LSEG data showed.

That narrative could be at risk if CPI rises more than

expected, making the Fed more hesitant to cut rates, investors

said.

"If the CPI suggests that the market got a little ahead of

itself, that can create volatility," said Angelo Kourkafas,

senior investment strategist at Edward Jones. "But if it's not

worse than feared ... that can further reinforce that we are now

in an inflection point for the Fed."

The prospect of higher tariffs and the economic fallout from

those levies already instituted by the Trump administration has

been a persistent theme clouding markets, but stocks have

managed to rise to records despite the uncertainty.

Higher tariffs on imports from dozens of countries took

effect on Thursday, raising the average U.S. import duty to its

highest in a century, while the president also this week

announced plans for levies on semiconductor chips and

pharmaceutical imports.

China could face a potential tariff increase on Tuesday

unless Trump approves an extension of a prior truce.

The impact of higher tariffs on the economy could take a

while to show up, and "the market has kind of ignored the

potential negative impact of this friction to the economy," said

Matt Rowe, senior portfolio manager at Man Group.

"The market has gotten comfortable with tariffs being kind

of a non-event, which I don't think is correct," Rowe said.