The stock market wrapped up the week with a surge in investor optimism as softer-than-expected inflation data paved the way for potential interest rate cuts. The Nasdaq Composite saw a notable rise of over 3%, while the S&P 500 experienced a pop of nearly 1.5%. This propelled the S&P 500 to close above 5,400 for the first time ever, with both the Nasdaq and S&P 500 achieving record highs for four consecutive days. However, the Dow Jones Industrial Average slid by more than 0.7%.

Looking ahead, a relatively quiet week awaits investors, with no major corporate news expected. The market will be closely watching for updates on the May retail sales report, as well as tracking activities in the manufacturing and services sectors. Additionally, attention will be paid to the weekly jobless claims report.

Inflation, a key concern for investors, showed favorable signs in May. The "core" Consumer Price Index (CPI), which excludes volatile food and energy categories, saw a modest increase of 0.2% month over month, the lowest reading since June 2023. In a similar vein, the "core" Producer Price Index (PPI) remained unchanged from the previous month, below economists' expectations. These indicators point to a positive reading for the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, in the coming weeks.

Bank of America US economist Stephen Juneau views these inflation data as supportive of his prediction that "disinflation is the most likely path forward" and anticipates an "A+ report" for May core PCE. BofA estimates suggest that core PCE increased by 0.16% month over month in May. Juneau believes this data significantly diminishes the likelihood of the Fed raising rates, and with favorable labor market data, suggests that rapid rate cuts are also unlikely. An easing cycle beginning in September remains a possibility, especially if shelter inflation continues to moderate.

Despite declining inflation and slowing economic growth, the Fed has expressed the possibility of only one interest rate cut this year. This cautious stance has made some Wall Street economists nervous, as they believe the Fed risks being too restrictive in its approach. Concerns arise from signs of a softening economy, such as an uptick in the unemployment rate. The initial weekly jobless claims release on Thursday morning will be closely scrutinized to analyze any potential impact.

The balance of risks for the Fed, according to Allianz chief economic adviser Mohamed El-Erian, leans towards the possibility of waiting too long for a rate cut. Renaissance Macro's head of economics Neil Dutta believes further disinflation is imminent and calls for a shift in the Fed's rhetoric. Dutta warns that if the Fed fails to alter its current stance, it may miss an opportunity to address rising unemployment and declining core inflation.

On Tuesday, investors will eagerly anticipate the monthly retail sales report for May, which will provide insights on consumer sentiment amid higher rates. Economists predict that retail sales will show a 0.3% increase from the previous month, indicating a rebound in spending after unexpected flat sales in April. However, economists at Wells Fargo caution that consumption may experience a more modest pace of growth in the second half of the year, due to factors such as a lower personal saving rate, slower consumer credit growth, and fading growth in real disposable income.

Despite a challenging start to 2024, the recent inflation data could bolster the ongoing stock market rally. Inflation's downward trajectory has been cited as a primary factor driving the bull market in stocks. Investors digested the softer inflation readings for both consumer and wholesale prices, leading to the S&P 500 and Nasdaq achieving four consecutive record closes last week. This has contributed to the markets remaining optimistic about the possibility of two interest rate cuts this year, despite the Federal Reserve officials favoring one cut in the Summary of Economic Projections (SEP) released on June 12.

UBS Investment Bank's chief US equity strategist, Jonathan Golub, who holds one of the highest S&P 500 year-end targets on Wall Street at 5,600, believes that this week's inflation data, and its implications for eventual interest rate cuts, provide the potential for even greater upside to his year-end outlook.