Next week’s U.S. inflation data may answer Wall Street’s biggest question: has the market accurately forecast interest rates?

With last month’s financial crisis, investors believe the Fed will drop rates in the second half to avoid an economic collapse. Such investments have lowered bond rates, helping tech and growth sectors dominate broad market indices. 2023’s S&P 500 (.SPX) is up 6.9%.

Next week’s U.S. inflation data may answer Wall Street’s biggest question: has the market accurately forecast interest rates?

With last month’s financial crisis, investors believe the Fed will drop rates in the second half to avoid an economic collapse. Such investments have lowered bond rates, helping tech and growth sectors dominate broad market indices. 2023’s S&P 500 (.SPX) is up 6.9%.

Friday’s March employment report revealed ongoing labor market tightness that might drive the Fed to raise rates again next month.

Investors fear the March Silicon Valley Bank failure would limit lending and slow development, causing a recession.

The Fed’s favorite recession predictor fell to new lows in the bond market last week, supporting the argument for rate cuts. The metric compares the present expected future rate on Treasury notes 18 months from now to the three-month Treasury bill yield.

Futures markets indicate investors expect central bank easing to lower the fed funds rate from 4.75% to 5% to 4.3% by year-end. However, Fed officials see no rate reduction until 2024.

“Financial markets and the Federal Reserve are reading from two distinct playbooks,” LPL Research analysts said this week.

Tech and growth stocks have benefited from a more dovish Fed because lower interest rates discount future revenues. As a result, since March 8, the S&P 500 technology sector (.SPLRCT) has gained 6.7%, more than twice the total index.

Reuters economists forecast March consumer price index data, expected April 12, to show a 5.2% annual increase, down from 6% the month before.

First-quarter profits begin this week, with JPMorgan and Citigroup reporting on Friday. According to Refinitiv I/B/E/S statistics, first-quarter S&P 500 earnings are expected to dip 5.2% from the year before.

Nationwide’s chief investment research officer Mark Hackett said the Fed’s recent efforts to stabilize the banking system may have resurrected prospects of a Fed-put or predictions that the central bank will intervene if equities fall too far, even though it has no mandate to sustain asset prices.

The Fed could safeguard investors by cutting rates, “Hackett remarked. “The market is betting they will, properly or wrongfully.”

A recession might hurt stock values even if the Fed cuts rates sooner. Several investors worry that stock prices have not factored for a dramatic downturn in valuations and corporate earnings.

“One just needs to go back to 2001 or 2008 to understand that a move in Fed policy alone is not necessarily enough to stop an economy on a downward track or launch a new bull market,” said Truist Advisory Services co-chief investment officer Keith Lerner in a note earlier this week.

He said the market is now baking in a lot of good news and leaving little tolerance for mistakes.