Following the June 10th inflation release, headline CPI rose to 4.2% year-over-year (up from 3.8% the prior month), with energy and fuel costs driving much of the increase. While Domestic Equities (U.S. stocks) benefited from three 25 basis point (0.25%) rate cuts in 2025, the policy backdrop has shifted, and the new Fed Chair now faces a more complex path in managing inflation going forward.
As inflation pressures build, markets have begun to price in the possibility of a rate hike later this year. According to the CME FedWatch Tool, there is currently a 56.5% probability of a rate hike at the December 9th, 2026 Fed meeting.
Source: Nasdaq Dorsey Wright
The key question is how stocks will respond. Markets tend to react quickly to changes in economic data, and if inflation continues to rise—keeping rate hike expectations elevated—stock markets could face pressure in the months ahead. Higher discount rates would weigh on valuations, potentially leading to weaker returns.
The chart below examines prior rate hike cycles, showing S&P 500 (SPX) forward returns across various time horizons following the initial hike. Several patterns stand out:
- Short-term returns are mixed, with 1-week forward returns averaging +0.09%.
- 1-month and 3-month returns tend to soften, averaging -0.10% and -0.26%, respectively.
- 6-month returns average +3.43%, remaining below long-term historical averages
Source: Nasdaq Dorsey Wright
Taken together, the data suggests that stocks may experience some near-term headwinds around the onset of tightening cycles. However, it is important to avoid overreacting. Rate expectations remain fluid and will continue to adjust as new data emerges. Positioning too defensively too early can lead to missed opportunities, especially as Domestic Equities continue to exhibit underlying strength despite recent short-term volatility.
The S&P 500 Index sits on two consecutive buy signals, after its latest double top break at $700 in April. Although the Index did reverse into a column of O’s over the past week, this only demonstrates near-term minor weakness, as the weight of the evidence is still overwhelmingly positive. Initial support is at $630, with additional strong support $510.
Source: Nasdaq Dorsey Wright
The current reading for the PR4050 is: U.S. Equity Core = 98.59% & Money Market = 2.82%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing International Equities and Domestic Equities in the top two spots, while both maintain a commanding lead over Cash and Fixed Income.
Source: Nasdaq Dorsey Wright
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