The Dow Jones Industrial Average hit 40,000 last week, an all-time high. But before you start naming your new yacht “Dow 50K,” I have a word of caution. Volatility is likely to roil the markets in the weeks ahead, as every inflation report and central bank utterance whipsaws investor sentiment.

As equity valuations get stretched, we also face the prospects of occasional selloffs, but you should view those as buying opportunities.

The S&P 500 and technology-heavy NASDAQ also closed at record highs last week. Equities were bolstered by a positive inflation report and accommodative remarks from Federal Reserve Chair Jerome Powell.

I think the peaks in inflation and interest rates are behind us, and the equity peak still lies ahead. The bull market is alive and well, but the ride from here will get choppy. Options traders love volatility; ordinary investors…not so much.

The consumer price index (CPI) report for April, released last week, alleviated concerns about a resurgence in inflation. Despite remaining uncomfortably elevated, the data indicated that consumer price pressures are easing.

Stocks surged and interest rates dropped due to the positive inflation news as well as robust corporate earnings, suggesting potential Fed rate cuts later this year.

The stock market reached lofty levels last week. While I foresee potential volatility ahead, I believe this is not the ultimate peak for equities. Stocks are supported by ongoing economic growth, increasing profits, and a more dovish Fed.

The following chart shows that stocks are rising not only in the U.S. but also overseas, as foreign central banks adopt looser monetary stances as well:

The critical question is which side of the peak we are on. Currently, I believe we are on the favorable side, with inflation and rates descending and equities climbing.

Overall inflation peaked in 2022, with headline CPI reaching its zenith in the summer amid soaring food and energy prices. “Core” CPI, excluding volatile food and energy costs, peaked in September as supply chains began recovering, input prices stabilized, and restrictive Fed policies took effect.

Last week’s April CPI report was the positive news the market needed, suggesting inflation is resuming its moderation trend after months of higher-than-expected reports.

Core CPI fell to 3.6% year-over-year, the lowest in three years. Insurance premiums, a recent inflation driver, showed signs of easing, and prices for services, although still high, also moderated. Goods prices continued to decline, helped by falling auto and home-furnishing costs. Shelter prices remain a gradual concern.

April’s CPI report calmed fears of resurging inflation, keeping the possibility of a Fed rate cut open, though likely later in the year.

Key trends to watch include shelter prices and the diminishing impact of improving supply chains. While goods prices are still declining, their contribution will lessen, highlighting the role of slowing economic growth and consumer demand.

The trough in autumn…

The stock market’s post-pandemic peak came early in 2022 after a surge in stock prices driven by economic reopening and stimulus. However, the Fed’s rate hikes in 2022 to combat inflation ended that rally, causing stocks to drop over 25% and bottom out in October.

Since October 2022, a new bull market has emerged, despite setbacks linked to the Fed’s prolonged high rates. The S&P 500 has rebounded nearly 52% since then, with a 11.2% rise in 2024 alone, including a 1.5% gain last week. Recent market gains have broadened beyond the technology sector to include industrials, financials, utilities, and other cyclical areas.

Stock and bond markets will continue to respond to anticipated Fed policy moves. The April CPI report was crucial in maintaining hope for a potential rate cut this year. Despite likely volatility from fluctuating inflation readings, corporate earnings growth will be a significant driver of the bull market. I expect corporate profits to reach new heights in 2024, supporting continued equity market gains.

Last week saw a resurgence in “meme stocks” such as GameStop (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC), reminiscent of the speculative peaks of 2021. Despite significant gains, these stocks remain far below their 2021 highs, indicating a return of risk-taking behavior during strong market runs.

The main U.S. stock market indices closed mostly higher Monday, with the tech-heavy NASDAQ hitting a new record as Nvidia (NSDQ: NVDA) shares jumped 2%. Several analysts issued bullish recommendations over the chipmaker, citing its pole position in artificial intelligence. Nvidia’s Q1 earnings results are due Wednesday.

Monday’s trading session ended as follows:

• DJIA: -0.49%
• S&P 500: +0.09%
• NASDAQ: +0.65%
• Russell 2000: +0.32%

The week ahead…

The following economic reports scheduled for release this week bear scrutiny: existing home sales, minutes of the Fed’s May Federal Open Market Committee (FOMC) meeting (Wednesday); initial jobless claims, S&P flash U.S. services and manufacturing PMIs, new home sales (Thursday); durable-goods orders and consumer sentiment (Friday).

Throughout the week, various Fed officials are slated to speak; their words will likely move markets. Stay vigilant.

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John Persinos is the editorial director of Investing Daily.

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