For the past few years, CPI prints were major market events. Traders positioned around them. Volatility spiked. Equity multiples compressed or expanded depending on whether inflation came in hot or cool. The data shaped everything: rate expectations, credit spreads, sector rotation, and currency moves. | That's no longer the case. | Inflation data has quietly become background noise. The market processes it, acknowledges it, and moves on. Understanding why this shift happened—and what it means—matters more than most investors realize. |
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| | The Inflation-Valuation Relationship | There is an inverse relationship between S&P 500 P/E ratios and CPI inflation. According to LPL Research, when inflation is below 2%, the S&P 500 trades at its highest average P/E of 19x+, and the situation is reversed if inflation reaches hyperinflation levels. | | Investors view inflation as a valuation tax, as higher inflation increases uncertainty around margins, policy, and discount rates, forcing investors to expect stocks at lower multiples—even if earnings hold up. Historically, markets don't need a recession to de-rate; inflation alone is enough. | However, that has not been the case in the past year. Markets are looking beyond the impact of inflation on stocks, as CPI data no longer moves markets. |
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| What the Data Shows | CPI releases that once triggered sharp market spikes now generate muted and inconsistent reactions. The table shows how the S&P 500 has performed around CPI release dates over the past year, comparing returns before, on, and after the release (T-5, T-3, T, T+3, and T+5). | CPI Date | T-5 → T-1 | T-3 → T-1 | CPI Day | T+1 → T+3 | T+1 → T+5 | 2024-11-13 | +0.93% | -0.19% | -0.02% | -0.93% | -0.54% | 2024-12-11 | -0.85% | -0.91% | -0.82% | +0.38% | -2.96% | 2025-01-15 | -1.12% | +0.27% | -1.83% | +1.88% | +3.05% | 2025-02-12 | +0.12% | +0.71% | +0.27% | +0.24% | +0.04% | 2025-03-12 | -4.63% | -3.43% | -0.49% | +2.78% | +2.78% | 2025-04-10 | +1.12% | +7.80% | +3.46% | +0.62% | -1.50% | 2025-05-13 | +4.23% | +3.18% | -0.72% | +1.12% | +0.81% | 2025-06-11 | +1.14% | +0.64% | +0.27% | -0.20% | -1.07% | 2025-07-15 | +0.69% | -0.19% | +0.40% | +0.53% | +0.73% | 2025-08-12 | +1.18% | +0.53% | -1.13% | -0.26% | -0.85% | 2025-09-11 | +0.46% | +0.57% | -0.85% | +0.34% | +0.72% | 2025-10-24 | +1.12% | +0.05% | -0.79% | +0.22% | -0.51% | 2025-11-13 | +1.94% | +0.27% | +1.66% | -1.73% | -2.90% | 2025-12-18 | -2.60% | -1.39% | -0.79% | N/A | N/A |
| | The average return on T-5 days is 0.27%, while T-3 provided 0.57%. Meanwhile, the market return on the day of CPI announcements remains low at -0.1%, indicating the market efficiently prices CPI information in advance. This data confirms that inflation releases no longer drive sustained equity returns. They've become informational noise rather than catalysts. | The standard deviation, a measure of volatility, is also normal; T-1 and T+1 deviations are around 1.35%, not significantly elevated from typical market conditions, further supporting this conclusion. |
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| | What Markets Care About Instead | Attention has migrated elsewhere. AI stocks and the search for the next tech unicorn dominate flows and sentiment. Liquidity conditions matter more than inflation prints. Mega-cap concentration and passive flows now drive price action. | This raises an uncomfortable question: Do markets even care about fundamentals anymore? | The answer is nuanced. Markets always care about fundamentals, but which fundamentals command attention shifts with the regime. Right now, inflation isn't the binding constraint on valuations or returns. Earnings growth from AI adoption, liquidity availability, and tech sector dominance are the active variables. | Inflation has become a known quantity embedded in baseline assumptions. Unless it breaks out of its current range dramatically, it's not the marginal driver of returns. |
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| | The Bottom Line | Inflation data has lost its market-moving power because inflation itself has normalized into a stable, if elevated, range. Markets efficiently price incremental changes before releases, leaving no volatility or directional edge around announcement days. | This isn't permanent—it's regime-dependent. The current market structure is dominated by liquidity flows, AI concentration, and passive buying, which emphasize growth narratives and funding conditions more than marginal inflation variations. | But regimes change. If inflation breaks its range convincingly in either direction, attention will snap back violently. The longer markets ignore inflation data, the more explosive the reaction will be when inflation returns to the narrative. | For now, inflation has been demoted from main character to a supporting role. But don't mistake background actors for irrelevant—they're still in the scene, and sometimes they steal the show when you least expect it. |
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| | | | | Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions. |
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