Wall Street's Scariest Inflation Report of the Year Is Hours Away -- and It Has the Ability to Change the Stock Market's Fortune

This has been a historic year for Wall Street. The Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) all hit fresh record closing highs last week.

Meanwhile, America witnessed a rare changing of the guard at the Federal Reserve's lead position a few weeks ago. Jerome Powell's second term as Fed chair ended on May 15, while President Donald Trump's handpicked successor, Kevin Warsh, officially took the reins on May 22.

Warsh's ascent to Fed chair comes at a precarious time for the U.S. economy and a historically expensive stock market. In just a few hours, at 08:30 a.m. ET, the Bureau of Labor Statistics (BLS) will release the highly anticipated May inflation report. Estimates suggest it'll be the scariest inflation data we've seen this year, and it has the ability to turn the stock market on its head.

Image source: Getty Images.

Buckle up! The May inflation report is nearly here!

To preface this discussion, a modest level of inflation is ideal. Since January 2012, the central bank has targeted long-term inflation of 2%.

In February, the BLS reported trailing 12-month inflation (TTM) of just 2.4%. With the Federal Open Market Committee (FOMC) cutting interest rates six times between September 2024 and December 2025, a 2.4% TTM inflation rate kept the prospect of additional rate cuts firmly in place.

However, the Iran war changed everything.

US inflation is red hot.

1. CPI Inflation: 3.8%, highest since May 2023
2. PCE Inflation: 3.8%, highest since May 2023
3. PPI Inflation: 6%, highest since March 2023
4. Services Inflation: 3.4%, highest since Sept 2025
5. Shelter Inflation: 3.3%, highest since Sept 2025
6.... pic.twitter.com/u8kaSN54G3

-- The Kobeissi Letter (@KobeissiLetter) May 28, 2026

Shortly after Trump gave the order to attack Iran, the latter responded by closing the Strait of Hormuz to most commercial shipping traffic. This has halted the flow of approximately 20 million barrels of petroleum liquids per day, equating to 20% of global demand.

Prices at the fuel pump have soared, and so has inflation. In April, TTM inflation clocked in at 3.8%, driven mostly by rapidly rising energy commodity costs.

Estimates for May point even higher.

Image source: Getty Images.

The May inflation report sets the stage for Warsh and the FOMC to act

According to the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool, TTM inflation is projected to be 4.18% -- 38 basis points higher than April.

What's even more worrisome than the inflation rate hitting a three-year high is that Core Personal Consumption Expenditures (PCE) -- one of the FOMC's favorite inflationary measures -- is also climbing. Core PCE excludes volatile energy and food costs. If it continues to rise, it signals that the inflationary effects of the Iran war are spilling over into the broader economy.

Target Federal Funds Rate Upper Limit data by YCharts.

In other words, new Fed Chair Kevin Warsh is going to be put to the test right away. While the FOMC meeting on June 17 is unlikely to yield any change in the federal funds target rate, it could very well mark the end of the central bank's easing bias.

Shifting to a neutral or hiking bias would be a difficult realization for a stock market that's come within a stone's throw of its priciest valuation in history. The artificial intelligence data center build-out is what's powered the Dow, S&P 500, and Nasdaq Composite to fresh highs, with some influential businesses leaning on debt to finance this expansion. If the prospect of rate cuts is removed, a stock market that's priced for perfection would, in theory, be vulnerable to significant downside.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.