CPI Data Exceeds Expectations, Record-High Nasdaq Index Rally May Pause

TradingKey - On May 12, Eastern Time, the U.S. CPI data for April significantly exceeded market expectations, reaching its highest level since May 2023, rising 3.8% year-over-year, which was higher than the market expectation of 3.7%. Core CPI also rose 0.4% month-over-month, with prices for energy, rent, and airfare all on the rise.

Following the data release, the three major U.S. stock indices continued to decline after the opening bell. After the market digested the bearish sentiment brought by the data, the three major indices staged a V-shaped reversal during the session. At the close, the Nasdaq Composite was down 0.87% at 29,064.8 points, the S&P 500 fell 0.16%, and the Dow Jones Industrial Average edged up 0.11%.

Performance of the three major U.S. stock indices. Source: TradingView

From a trading logic perspective, the Nasdaq typically reacts more sharply to inflation data than the Dow or the S&P because its core weighting is concentrated in high-growth, long-duration assets. Whenever inflation data raises market expectations for rates staying "higher for longer," the discount rates for tech valuations are revised upward, naturally putting share prices under pressure.

More importantly, this inflation was not driven by a single factor. Data from the Bureau of Labor Statistics shows that energy prices were still up 17.9% year-over-year in April, while gasoline prices rose 28.4%. Within core inflation, housing-related items continued to rise, with both owners' equivalent rent and actual rent increasing 0.5% month-over-month. This means the market is facing not just oil price shocks, but also sticky pressure from services and rent.

For the Nasdaq, this type of inflationary structure is more problematic than simple commodity price increases because it makes it easier for the Fed to maintain a cautious stance, thereby extending the suppression of tech valuations by high interest rates.

Views at the institutional level are also shifting toward the more cautious side. Reuters, citing various brokerages, reported that large global institutions have lowered their expectations for Fed rate cuts in 2026, with some institutions no longer even expecting a rate cut this year.

Meanwhile, market pricing for a rate hike by the end of the year is also rising. According to the CME FedWatch Tool, the probability of a year-end Fed rate hike has risen to 30%.

Edward Jones believes that the U.S. economy remains somewhat resilient, but the continuous rise in energy costs will gradually erode consumer purchasing power.

Spartan Capital stated bluntly that as long as energy prices do not fall back significantly, it will be difficult to see any room for rate cuts this year.

The view from Annex Wealth Management is more representative; they believe current inflation data is affected by the overlapping impact of multiple shocks, while AI-related capital expenditure is also creating spillover pressure on certain price items, which will cause the Fed to continue its policy stance of prioritizing a "wait-and-see" approach.

However, this does not necessarily mean that the Nasdaq will weaken in the future. At present, index levels are constrained by interest rate expectations, but structurally there is still earnings support from AI and cloud computing.

From a market perspective, AI remains the most important fundamental anchor for tech stocks, but the focus is on whether capital expenditure can be translated into revenue as quickly as possible. In this process, the market will prefer companies that can directly benefit from the expansion of AI infrastructure, rather than tech leaders whose gains are driven purely by valuation expansion.

Overall, the April CPI shows that U.S. inflation has still not completely returned to a controllable range, and it will be difficult for interest rate expectations to loosen significantly in the short term, which will limit the Nasdaq's room for further rapid upside. In the future, whether the Nasdaq can hit new highs will depend on whether corporate earnings can continue to outperform interest rate pressure, whether capital expenditure can be translated into real revenue, and whether the Fed will remain on hold for a longer period.