How Has The Stock Market Historically Performed Once Inflation Peaked?

The consumer price index (CPI) grew just 4.9% year-over-year in April, down from a peak of 9.1% back in June 2022. With the U.S. now roughly a year past peak inflation, LPL Financial asset allocation strategist Barry Gilbert recently took a look back at how the SPDR S&P 500 ETF Trust SPY has historically performed following previous peaks in U.S. inflation cycles.

Right out of the gate, Gilbert noted that the current inflation cycle is unique in that past inflation peaks have typically coincided with a U.S. economic recession. However, the stock market has behaved the way one would expect based on historical data.

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The Numbers: Since 1937, the S&P 500 has averaged a 3.1% drop in the year leading up to peak inflation. From mid-June 2021 to mid-June 2022, the S&P 500 dropped about 10.7%. In the 12 months following peak inflation, the S&P 500 has historically averaged a 6.3% gain. Since inflation peaked last year, the S&P 500 is now up about 9.2%.

Surprisingly, Gilbert noted that higher inflation peaks have historically led to stronger stock market rebounds. In fact, when CPI inflation has peaked at above 9%, the S&P 500 has averaged a 20.4% over the following 12 months.

"For markets, it’s been the direction of inflation rather than the level that matters, even though a higher peak meant the economy was still dealing with higher inflation," Gilbert said.

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Benzinga's Take: The Federal Reserve raised interest rates to combat inflation, and those high rates will continue to weigh on economic growth and corporate earnings. However, it appears declining inflation has been enough to drive the stock market higher in the past, even if the magnitude of the inflation remains historically high.