The topic of inflation sure gets people riled up. My email inbox is filled messages from readers and analysts who passionately assert that inflation has been vanquished and the Federal Reserve should immediately pause its tightening, and with equally passionate assertions that inflation is still way too hot and crushing it will require more rate increases and higher unemployment.

So who’s right? We got new data on Tuesday that further tilted the argument in favor of the inflation doves.

The U.S. Bureau of Labor Statistics reported Tuesday that the consumer price index (CPI) for May rose 4.0% on an annual basis and 0.1% month over month, with both numbers in line with estimates. The “core” CPI, excluding food and energy, rose 5.3% year over year, also matching the estimate.

The annual CPI rate of 4.0% for May was down from 4.9% in April and a 40-year high of 9.1% last June. Inflation eased in May for the 11th consecutive month, marked by big drops in gasoline and grocery prices. The further cooling of inflation paves the way for a Fed pause. Additional factors arguing against another rate hike are decelerating jobs growth and increasing signs that a recession is imminent.

Of course, most people outside of the financial world (“real Americans” as politicians are fond of calling them) don’t even know that the Fed exists, let alone what it does. But when the Fed makes its announcement on rates tomorrow, millions of us will feel the direct effects. Stay tuned.

Wall Street is betting that the Fed will stand pat on rates, especially as the CPI retreats, but in the words of Fats Waller: “One never knows, do one.”

Another lackluster earnings season ahead…

Now that the first quarter earnings season is in the books, what can we expect for the second quarter?

Another decline, according to FactSet. For Q2 2023, the projected year-over-year earnings decline for the S&P 500 is -6.4%. That number is below the five-year average earnings growth rate of 13.4% and below the 10-year average of 8.7%.

For the quarter so far, 66 S&P 500 companies have issued negative earnings guidance and 44 have issued positive earnings guidance.

But take heart. Although the Wall Street consensus calls for the S&P 500 to decline in Q2 2023, earnings growth is expected to return in the second half of the year. For Q3, the estimated earnings growth rate is 0.8%. For Q4 2023, the estimated earnings growth rate is 8.2% (see chart).

For all of calendar year 2023, analysts forecast earnings growth of 1.2%.

Sentiment remains bullish. Overall, there are 10,930 ratings on stocks in the S&P 500. Among these 10,930 ratings, 54.7% are Buy ratings, 39.5% are Hold, and 5.8% are Sell. The energy (64%) and communication services (62%) sectors sport the highest percentages of Buy ratings, at 64% and 62%, respectively.

It’s also encouraging that the S&P 500 index hovers well above its 50- and 200-day moving averages, and the New York Stock Exchange Advance/Decline (NYAD) line is rising. When the NYAD is on the upswing, market breadth is improving.

WATCH THIS VIDEO: The S&P 500’s New Bull Market Is Underway…What Now?

Recession-resistant plays are prudent choices now, but the economy should pick up steam in the latter part of this year, making small stocks and cyclicals appealing assets after the Fed eases up on tightening.

We’ll continue to see volatility along the way, but it’s clear that the stock market is in the throes of a positive phase, propelled by unexpected economic strength, the imminent end of the Fed’s tightening and excitement over artificial intelligence.

Oil’s not well…

It’s counterintuitive considering the recent production cuts from OPEC+, but crude oil prices have been falling.

Energy demand and per-barrel prices should regain altitude over the long haul as global economies get back on track. Over the short term, though, oil prices are likely to remain turbulent and caught in a downdraft.

China is the world’s second-largest oil consumer and the country’s economy is sputtering. Uncertainty over China is offsetting OPEC+ production cuts.

Lower oil prices are disinflationary and help consumers and certain businesses by reducing their costs. However, if crude sinks too low, it clobbers the energy sector, with collateral damage spilling into the broader stock market. We’ll see if global energy markets regain equilibrium; that’s a tough goal considering the continuing disruptions of the Russia-Ukraine war.

Regardless, the favorable CPI data for May points to improving economic conditions. The main U.S. stock market indices closed higher Tuesday as follows:

• DJIA: +0.43%
• S&P 500: +0.69%
• NASDAQ: +0.83%
• Russell 2000: +1.23%

I recommend that you stick to your strategic, long-term allocation for the asset classes that comprise a well-diversified portfolio, including bonds which currently offer historically attractive yields. Start increasing your exposure to your “wish list” of growth stocks that previously seemed too risky.

I also suggest you consider the advice of my colleague, Robert Rapier.

As chief investment strategist of Rapier’s Income Accelerator, Robert has developed strategies that make money in bull or bear markets.

Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.

John Persinos is the editorial director of Investing Daily.

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