AI Stocks Rally After Positive Inflation Data

The Nasdaq Composite (^IXIC 2.20%) experienced a boost of approximately 2% following the release of new economic data indicating a decrease in inflation. This news brought relief to investors and contributed to a drop in Treasury yields. Meanwhile, the Dow Jones Industrial Average (^DJI 1.56%) surged by over 600 points.

In the wake of this positive news, shares of various artificial intelligence (AI) companies saw an increase. Notably, Micron Technology (MU 5.98%) traded 5.7% higher around 12:12 p.m. ET. Similarly, AI software firms BigBear.ai (BBAI 2.83%) and C3.ai (AI 2.57%) appreciated by nearly 5% and 3%, respectively.

The Market Responds Optimistically

Investors began to show optimism yesterday as new figures from December's Producer Price Index (PPI) report came in lower than expected, hinting that inflation is on a downward trend. Today, attention turned to the Consumer Price Index (CPI), which met expectations.

Consumer prices saw a monthly increase of 0.4% in December, slightly above what analysts predicted. However, the core CPI, which excludes the more volatile categories of food and energy, rose only 0.2%, suggesting that pricing pressures might be easing. Year over year, the CPI climbed by 2.9%, consistent with forecasts. Following these developments, the yield on the 10-year U.S. Treasury bond decreased by about 12 basis points to 4.67%, retreating from its recent peaks.

The report was viewed positively as the bulk of the increase was attributed to a significant 2.6% rise in energy prices, surpassing prior trends. Furthermore, the shelter component, which holds the largest weight in the CPI, showed signs of relief as its prices continued to ease.

"Today's CPI might encourage the Federal Reserve to adopt a more lenient stance. While it won’t alter expectations for a pause in rate changes later this month, it should reduce concerns about the Fed potentially increasing rates," stated Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, in an interview with CNBC. "Market reactions indicate that investors felt a sense of relief following several months of persistently high inflation readings."

Additionally, major banks reported strong earnings this morning, reflecting a robust economy. While there remains caution among traders regarding future Federal Reserve rate changes, the probability of more than one rate cut this year appears to have increased, although most still anticipate only a single cut.

The Economic Outlook: Improving but Still Cautious

The inflation report today offers an optimistic perspective. Inflation appears to be declining, the job market remains strong, and elevated yields could signify economic growth. This combination leads many investors to positively respond to the news. However, the market has been volatile, and a sense of stability may not yet be fully realized. Inflation continues to be above the Federal Reserve's preferred target of 2%, and a single negative report could revive doubts about the Fed's ability to handle inflation effectively.

There was minimal company-specific news today. Both BigBear.ai and C3.ai show great promise, resembling smaller versions of Palantir Technologies. However, as they are not yet profitable and have seen significant stock price increases in recent years, it is wise to maintain small positions until their future prospects are clearer.

On the other hand, Micron Technology appears to be a solid buy. The company holds a significant position in the memory chip sector, which is vital for the AI landscape. The stock is trading at lower multiples than many AI companies, at less than 15 times its projected earnings.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and C3.ai. The Motley Fool has a disclosure policy.

AI, Stocks, Inflation