US stock rally faces inflation test as investors weigh Fed rate path

A sharp technology-led rally that has pushed US stocks to record highs will face a key test this week as fresh inflation data could influence expectations for the Federal Reserve's interest-rate path, Reuters reported.

The S&P 500 posted its first record closing high in two months last week, powered by technology and semiconductor stocks that had previously retreated from their peaks. Over the four sessions through Tuesday, the benchmark index gained 5.75%, its strongest four-day advance since April 2025.

The easing of tensions between the United States and Iran also supported equities, while a decline in oil prices helped reduce concerns over renewed inflationary pressures. Stocks gained on Friday after data showed the U.S. economy unexpectedly lost jobs in July, easing some expectations that the Federal Reserve may need to raise interest rates soon.


The rally lifted the S&P 500's gain for the year to more than 13%, with stronger-than-expected corporate earnings providing further support. Companies have exceeded elevated profit expectations for a second consecutive quarter, reinforcing investor optimism about the outlook for equities.

CPI report in focus
Investors will turn their attention to the U.S. Consumer Price Index report due on Wednesday. Economists polled by Reuters expect headline CPI to rise 3.4% year-on-year in July, while core CPI, which excludes food and energy prices, is expected to increase 2.5%.

The data will come after the Federal Reserve's latest policy meeting highlighted divisions among policymakers over how aggressively to tackle inflation, which has remained above the central bank's 2% target for years.

The Fed kept interest rates unchanged at its latest meeting, but three of its 12 policymakers dissented in favour of a rate increase. Financial markets were pricing in a 44% probability of a rate hike at the Fed's September meeting as of Friday, although those odds declined after the weaker-than-expected jobs data.

A hotter-than-expected inflation reading could revive concerns about further monetary tightening and put pressure on stocks, while a softer reading could ease fears over the Fed's policy outlook.

Treasury yields and oil remain key risks
Investors are also watching Treasury yields and oil prices, both of which could influence the durability of the equity rally.

Persistent inflation pressures and expectations of higher interest rates have pushed Treasury yields higher in recent months. The benchmark 10-year Treasury yield reached its highest level since January 2025 in late July before retreating to around 4.64%.

Higher bond yields can make fixed-income investments more attractive relative to equities while increasing borrowing costs for households and companies, potentially weighing on economic growth and corporate valuations.

Oil prices will also remain closely watched because a sustained rise in crude could add to inflationary pressures and increase expectations of further Fed tightening. U.S. crude fell below $80 a barrel this week as tensions in the Middle East eased.

PPI, retail sales and tech earnings ahead
The inflation picture will receive another update on Thursday with the release of producer price data. Retail sales figures due on Friday will provide a further indication of the strength of U.S. consumer spending and the broader economy.

The corporate earnings calendar will be relatively light after a busy reporting season, but several technology companies could still influence investor sentiment. Results from semiconductor company Applied Materials, networking equipment maker Cisco Systems and cloud infrastructure provider CoreWeave will be closely watched.

Semiconductor stocks have been among the biggest drivers of the U.S. market's gains this year, supported by expectations of continued investment in artificial intelligence data centres. The Philadelphia Semiconductor Index has risen more than 70% in 2026, although it remains more than 15% below its late-June peak and has experienced sharp day-to-day swings.

According to Reuters, investors are likely to look for further technical improvement across semiconductor stocks before concluding that the sector's recent weakness has fully run its course.

For the broader market, this week's inflation data could determine whether the recent technology-led rally has further room to run or whether renewed concerns over interest rates trigger another bout of volatility.