As Wall Street wraps up another week, it stands on the brink of marking its 12th positive performance out of the last 13 weeks for both the S&P 500 and the Nasdaq 100.

Additionally, the U.S. stock market is on track for the strongest three-month run since June 2020, the second strongest one since May, and each major stock average has extended its record-high levels this week.

But before we break out the celebratory champagne, there’s a significant economic indicator on the horizon that could sway the market’s direction.

Set for release at 8:30 a.m. ET Friday, the Bureau of Economic Analysis will unveil the Personal Consumption Expenditure (PCE) price index report for December. This index is also referred as the Federal Reserve’s favorite inflation gauge, heavily influencing their monetary policy decisions in the coming months.

December PCE Report: What Economists Expect

• The consensus among economists anticipates that the headline PCE inflation rate will hold steady at 2.6% year-on-year for December 2023, mirroring November’s figures.
• On a monthly scale, a slight acceleration is expected, with the PCE predicted to rise by 0.2%, compared to November’s 0.1% decrease.
• Focusing on the core PCE price index, which excludes volatile components like food and energy, a slight deceleration is anticipated. Forecasts suggest a dip from November’s 3.2% to 3% year-on-year in December.
• The core PCE is expected to tick up by 0.2% month-on-month, a nudge higher than the previous month’s 0.1% increase.
• The PCE report comes on the heels of the Consumer Price Index (CPI) for December 2023, which rose to 3.4%, surpassing the 3.2% market forecast and November’s 3.1% figure.
• Moreover, the backdrop of stronger-than-anticipated economic growth figure unveiled this week adds another layer to the narrative. The U.S. economy outperformed expectations in the fourth quarter with a robust 3.3% growth rate, significantly outpacing the forecasted 2%.

Weighing Potential Market Impacts

If the PCE report aligns with or dips below expectations, it could reinforce the ideal scenario for the stock market: a combination of robust growth and inflation gradually nearing the Fed’s 2% target.

Such an outcome could likely spell positively the SPDR S&P 500 ETF Trust SPY and the tech-heavy Invesco QQQ Trust QQQ.

Conversely, should the PCE data indicate a resurgence in inflationary pressures, exceeding estimates, it could trigger market skepticism regarding the anticipated six rate cuts by December 2024.

A recalibration of these expectations, potentially leading to fewer rate cuts, could pose significant challenges for a stock market trading at record highs.

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