The US CPI release for April suggests that inflationary pressures are picking up quite sharply. Two critical questions facing investors are whether these emerging inflationary pressures will persist beyond the next few months and how the Fed will respond.
We think the higher-than-expected inflation reading increases the case for some short-term caution against a US equity market that looks overdue for a correction/consolidation phase. However, our 12-month view on equities remains positive. Our base case remains that inflation pressures will ease through the second half of the year as supply chain shortages ease and consumer demand shifts from goods to services.
We believe the strong earnings cycle that is unfolding can lift equities to fresh highs. However, the one-way traffic of the last year is likely giving way to a more volatile phase as the tug of war between better growth/profits and higher inflation/rates becomes more intense.
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David is one of Australia’s leading investment strategists.