Falling Inflation Sparks Rally in Tech Stocks

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published 12 July 2023

The latest inflation data lit a fire under stocks Wednesday, with all three major indexes closing solidly higher.

Data from the Bureau of Labor Statistics showed that consumer prices rose at their slowest pace in two years, though this did little to lower expectations of another quarter-point rate hike coming down the pike.

Taking a closer look at the numbers, the June Consumer Price Index (CPI) was up 0.2% month-over-month and 3.0% year-over-year – the latter the smallest increase since March 2021. Meanwhile, core CPI, which excludes volatile food and energy prices and is often a better tell on future inflation, rose 0.2% on a monthly basis. Year-over-year, core CPI was up 4.8%, the slowest pace of growth since October 2021. Areas that saw the biggest price increases were shelter and food.

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"The trend of slowing year-over-year inflation prints continues for its 12th consecutive month indicating the Federal Reserve's actions since March 2022 have been working well to slow price increases," says Dustin Thackeray, chief investment officer at Crewe Advisors, a wealth management firm based in Salt Lake City. "This has been done while maintaining a strong jobs market, for the time being."

Following today's better-than-expected June CPI report, expectations remain for another 0.25% rate hike at the next Fed meeting, Thackeray says, adding that "the focus now turns to whether a second rate hike, which has been previously indicated, will be necessary in 2023."

According to CME Group, futures traders are pricing in a 92.4% chance of a quarter-point rate hike in July, with no additional rate increases anticipated for the remainder of this year.

The rate-sensitive Nasdaq Composite outperformed as Treasury yields plummeted, with the tech-heavy index adding 1.2% to 13,918. The broader S&P 500 gained 0.7% to 4,472, while the blue chip Dow Jones Industrial Average rose 0.3% to 34,347.

The best financial stocks to buy

Today's rally was fairly broad-based, with nine of the market's 11 sectors finishing higher. Materials (+1.3%) and communication services stocks (+1.2%) led the way higher, while industrial (-0.2%) and healthcare stocks (-0.3) lagged.

One notable pocket of strength was the financial sector (+0.6%) thanks to rallying regional bank stocks. Both have lagged this year due to the banking crisis last spring, although this created opportunities for investors as many stocks are now trading at a discount. However, beware of value traps among some of the most discounted bank stocks that may have sold off on slumping fundamentals. Instead, focus on "high-quality financial services stocks with strong balance sheets that are undervalued," writes Kiplinger contributor Deborah Yao in her feature on the best financial stocks to buy. To compile our list of the best stocks to buy from this sector, we homed in on those that have Buy or better ratings from the analyst crowd, as well as high-quality business models.

Investors will get a closer look at bank fundamentals over the next few weeks, with many lenders making an appearance on the Q2 earnings calendar.

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at Schaeffer's Investment Research. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.