July very "hot" PPI and yet stocks rose, is evidence too many investors are carrying an "inflation hammer"

VIDEO: Equities managed to rise on Thursday, despite a very “hot” July PPI.  This is evidence that investors were expecting higher PPI and similarly, markets are not viewing this rise in incoming inflation reports as structural.  Rather, these are viewed as transitory arguably.

Please click below to view our Macro Minute (duration: 4:22).

There is an adage that says when one is a hammer, everything is a nail. And for some time, we have noted that too many investors have carried an “inflation hammer” — Thursday’s very “hot” July PPI is evidence of this.

• July Core PPI came in at a blazing +0.92% MoM (vs Street at +0.23%) and yet the S&P 500 closed up +0.13%. Many pundits said this is evidence that inflation will accelerate in coming months. But even Fed funds expectations barely changed. The odds of a September cut remain 90% and implied number of cuts by year-end remain 2.3.
• In other words, markets are not reacting to these higher incoming inflation reports. Part of this may be that this is expected. And part of this could reflect that markets see the inflation readings as transitory. But we think the broader implication is that there are too many investors carrying “inflation hammers.”
• This bias is not new. And shown below, there have been many “hammers” investors carried in the past 15 years:
  – 2002-2015: Tech valuations are a “bubble”
  – 2009-2019: “Lehman moment” again
  – 2009-2019: “Fed only reason stocks rise”
  – 2020-2024: “Another pandemic can happen”
  – 2023-now: “Inflation can surge again”
  – 2025-now: “tariffs will cause a recession”
• As for the core PPI reading itself, it was not pretty. Trade services saw a rise. And there was a rise from financial services. But keep in mind, June Core PPI was negative. So, was there a statistical aberration at work?

• There are some important data points for the remainder of this week:
  – 8/12 Tue 8:30 AM ET: Jul Core CPI MoM    0.32% vs 0.29%e
  – 8/14 Thu 8:30 AM ET: Jul Core PPI MoM    0.92% vs 0.23%e
  – 8/15 Fri 8:30 AM ET: Jul Retail Sales    0.6%e
  – 8/15 Fri 8:30 AM ET: Aug Empire Manufacturing Survey    0.0e
  – 8/15 Fri 10:00 AM ET: Aug P U. Mich. 1yr Inf Exp    4.4%e   
  – 8/15 Fri 4:00 PM ET: Jun Net TIC Flows
• Lastly, we continue to be constructive on stocks in August and we expect equities to continue to strengthen. But the standouts have been:
  – IWM 0.63%  small-caps +3.5% in August vs +1.0% S&P 500
  – ETH -0.81% ethereum +25% in August vs +1.0% Bitcoin
• Both ethereum and small-caps are sensitive to a dovish Fed. So we also see these are evidence a dovish Fed is coming in the final months of 2025.

BOTTOM LINE: Still “most hated rally”

This still remains the “most hated” V-shaped stock rally. We view Bitcoin as a leading indicator and thus, we expect stocks to reattain all time highs, which Bitcoin achieved last week. We see S&P 500 reaching 6,600 by year-end.

And the expected drivers for this upside are:

• Still most hated rally
• Sizable perception gap: Tariff “bark worse than bite”
• Hedge funds increased short interest recently
• $7 trillion cash on sidelines
• Investment outlook better now than in Feb 2025:
  – tariff visibility
  – tax and de-regulation visibility
  – US cos survived 5^th major “stress test”
  – Fed more dovish in 2026

As for what we would buy

• MAG7 & Bitcoin & Ethereum
• Industrials
• Financials: Large-cap and regional banks
• Small-caps

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45 SMID Granny Shot Ideas: We performed our quarterly rebalance on 5/22. Full stock list here -> Click here

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Key Incoming Data August:

• 8/1 8:30 AM ET: Jul Non-farm Payrolls Mixed
• 8/1 9:45 AM ET: Jul F S&P Global Manufacturing PMI Tame
• 8/1 10:00 AM ET: Jul F U. Mich. 1yr Inf Exp Tame
• 8/1 10:00 AM ET: Jul ISM Manufacturing PMI Tame
• 8/4 10:00 AM ET: Jun F Durable Goods Orders MoM Tame
• 8/5 8:30 AM ET: Jun Trade Balance Tame
• 8/5 9:45 AM ET: Jul F S&P Global Services PMI Tame
• 8/5 10:00 AM ET: Jul ISM Services PMI Tame
• 8/7 8:30 AM ET: 2Q P Unit Labor Costs Tame
• 8/7 8:30 AM ET: 2Q P Nonfarm Productivity QoQ Tame
• 8/7 9:00 AM ET: Jul F Manheim Used Vehicle Index Tame
• 8/7 11:00 AM ET: Jul NYFed 1yr Inf Exp Tame
• 8/12 6:00 AM ET: Jul Small Business Optimism Survey Tame
• 8/12 8:30 AM ET: Jul Core CPI MoM Tame
• 8/14 8:30 AM ET: Jul Core PPI MoM Hot
• 8/15 8:30 AM ET: Aug Empire Manufacturing Survey
• 8/15 8:30 AM ET: Jul Retail Sales
• 8/15 10:00 AM ET: Aug P U. Mich. 1yr Inf Exp
• 8/15 4:00 PM ET: Jun Net TIC Flows
• 8/18 10:00 AM ET: Aug NAHB Housing Market Index
• 8/19 9:00 AM ET: Aug M Manheim Used Vehicle Index
• 8/20 2:00 PM ET: Jul FOMC Meeting Minutes
• 8/21 8:30 AM ET: Aug Philly Fed Business Outlook
• 8/21 9:45 AM ET: Aug P S&P Global Services PMI
• 8/21 9:45 AM ET: Aug P S&P Global Manufacturing PMI
• 8/21 10:00 AM ET: Jul Existing Home Sales
• 8/25 8:30 AM ET: Jul Chicago Fed Nat Activity Index
• 8/25 10:00 AM ET: Jul New Home Sales
• 8/25 10:30 AM ET: Aug Dallas Fed Manuf. Activity Survey
• 8/26 8:30 AM ET: Jul P Durable Goods Orders MoM
• 8/26 9:00 AM ET: Jun S&P CS home price 20-City MoM
• 8/26 10:00 AM ET: Aug Conference Board Consumer Confidence
• 8/26 10:00 AM ET: Aug Richmond Fed Manufacturing Survey
• 8/28 8:30 AM ET: 2Q S GDP QoQ
• 8/28 11:00 AM ET: Aug Kansas City Fed Manufacturing Survey
• 8/29 8:30 AM ET: Jul Core PCE MoM
• 8/29 10:00 AM ET: Aug F U. Mich. 1yr Inf Exp

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