Next week’s inflation reports will give Wall Street a clearer picture of the interest rate outlook ahead of this month’s Federal Reserve policy meeting. The reports will come at a time when record highs in stocks will have some investors on edge. February’s consumer price index, due on Tuesday, and producer price index, due on Thursday, could hurt stocks if the reports come out hotter than expected. They will also drive expectations for lower interest rates later in the year. Currently, the consensus is that the Fed will begin cutting interest rates in June by a quarter of a percentage point, according to the CME FedWatch Tool. Expectations of lower interest rates, along with the AI craze, have been a boon for stocks since late 2023. The S&P 500 ended the week with losses, but is up more than 7% for the year. “A lenient Fed really played a role in starting this thing in October of last year,” said Giuseppe Sette, co-founder and president of Toggle AI. “So a high inflation print can be a real headwind for the market.” Some stubborn spots in inflation Next week’s February consumer inflation data comes after a surprisingly tepid January report that led investors to hope the so-called last mile to the Fed’s 2% inflation target will be easy. On a monthly basis, the headline CPI is expected to have increased somewhat from the previous month — although the year-over-year gain remains the same. Economists polled by FactSet expect a 0.4% increase, compared with a previous estimate of a 0.3% increase. On an annual basis, it is expected to have increased by 3.1%. Core CPI — which excludes volatile food and energy prices — is expected to show a slight hold in inflation. Economists forecast increases of 0.3% and 3.8% on a monthly and annual basis. This is down from respective gains of 0.4% and 3.9% in the January report. But Wall Street will pay particular attention to areas where inflation has proven stubborn. In the January CPI report, the rise in medical expenses, transportation, airline fares and, especially for consumers, food away from home was a concern. Importantly, shelter prices were higher, with house prices only continuing to rise as demand outstrips supply. “It’s a lot of categories. So to expect them to reverse immediately in a month probably isn’t going to happen,” said James Ragan, director of wealth management research at DA Davidson. “It will take time.” Consumer anxiety Next week will also bring more information on the health of the consumer, as some recent earnings and rising credit defaults increasingly worry investors. Corporate earnings season was stronger than expected, with S&P 500 earnings rising 4.1% in the fourth quarter, according to FactSet data. But for all the excitement surrounding AI’s potential, some consumer-oriented companies have offered more cautious commentary. This week, Nordstrom shares fell 18% after the department store chain warned of a possible drop in sales this year, even after beating expectations for the fourth quarter. Meanwhile, credit card delinquencies last year were shown to have risen more than 50% last year, with consumer debt rising to $17.5 trillion – signaling “financial stress”. This, combined with any rise in inflation, could put pressure on the consumer. “A slight rise in inflation is not necessarily a bad thing for consumers. But it might change spending patterns a little bit,” said DA Davidson’s Ragan. “There’s not a lot of room for error because if the economy starts to slow down a little bit and inflation picks up, then you know, it could lead to a little bit of a pullback in consumer spending and that would feed the markets as well.” Wall Street on Thursday will get retail sales data for February. Economists polled by FactSet expected an increase of 0.9 percent last month, which would represent an increase in spending from January. “The healthier the consumer, the more positive they will are things in the coming weeks,” said Kathleen Grace, CEO at the Fiduciary Family Office. Earning winners For now, stocks continue to have a lot going for them. The economy continues to move, earnings growth has surprised to the upside, investor sentiment remains bullish and the consumer remains resilient However, extremely high valuations are convincing more investors that now is the time to prepare for a pullback, meaning they will take profits on some notable winners and allocate to some quality names in sectors with low performance that have the potential to go up from here. This week, five of the Magnificent Seven companies posted losses, with Nvidia and Meta Platforms alone pulling away from the pack. Nvidia was higher by more than 6%, while Meta Platforms rose slightly. The small-cap Russell 2000 outperformed, ending the week 0.3% higher. “When you have seven to 10 stocks leading the S&P 500, there’s bound to be some healthy pullback in those stocks,” said Grace of the Fiduciary Family Office. “But there are, you know, 490 plus other stocks in the S&P 500 that I think we should take a look at.” “So I’m optimistic, cautiously optimistic, that we’ll have a relatively good market this year,” Grace added. Week Ahead Calendar All times ET. Monday March 11, 2024 Earnings: Oracle Tuesday March 12, 2024 8:30 AM Consumer Price Index (February) 2 p.m. State Budget (February) Wednesday March 13, 2024 Earnings: Dollar Tree , Lennar Thursday 302 AM Thursday, March 14 Producer Price Index (February) 8:30 AM Retail Sales (February) 10am Business Stocks (January) Earnings: Dollar General , Adobe , Ulta Beauty Friday, March 15, 2024 8:30 AM Export Price Index (February 30) 8:00 AM Import Price Index (February) 8:30 am Empire State Index (March) 9:15 AM Capacity Utilization (February) 9:15 am Industrial Production (February) 9:15 am Production Production (February) 10 a.m. Michigan Sentiment (March preliminary ) Earnings: Progressive — CNBC’s Jeff Cox and Nick Wells contributed to this report.