Short answer:
Yes, softer CPI raises the probability of rate cuts. But whether the S&P 500 extends gains depends less on inflation alone and more on growth, earnings, and positioning.
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1. Does softer CPI increase rate-cut odds?
Yes, but not automatically or immediately.
January CPI cooled to 0.2% MoM and 2.4% YoY, below expectations, reinforcing the ongoing disinflation trend.
Markets reacted exactly as theory suggests:
Treasury yields fell as traders priced earlier easing.
Futures increased expectations of Fed cuts later this year.
Economists broadly interpret this as giving the Fed “breathing room,” but policymakers still want several months of confirmation before cutting, with many forecasts pointing to a first cut around mid-year (June).
Key nuance:
Inflation is improving, but still slightly above the 2% target and labour markets remain resilient, so the Fed will likely move cautiously.
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2. Will the S&P 500 extend gains on rate-cut optimism?
Near term: supportive.
Medium term: conditional.
Cooling inflation typically helps equities because:
Lower yields raise equity valuations.
Discount rates fall, benefiting growth stocks.
Indeed, equities initially moved higher after the data as easing bets increased.
However, markets are already pricing cuts aggressively. That creates three limits:
(a) “Good news already priced”
If cuts are expected, upside requires earnings acceleration, not just macro relief.
(b) Growth sensitivity
If inflation falls because demand weakens, markets shift from “Goldilocks” to slowdown risk.
(c) Sector rotation risk
Recent trading shows defensive sectors still attracting flows, signalling lingering caution despite softer CPI.
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Bottom line
Yes, softer CPI materially increases the probability of rate cuts, likely starting mid-2026 if the trend persists.
S&P 500 upside is possible, but gains will likely be incremental rather than explosive unless earnings and AI capex monetisation confirm continued economic strength.
In short: CPI removed a major headwind, but it has not yet created a new bull catalyst on its own.
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