When Hard Comps Fade, Markets Rally

When Hard Comps Fade, Markets Rally

• Annualized CPI growth was 2.7% in November.

• The most difficult comps fade in January and April.

• Annualized growth could hit 2% by May.

Inflation’s toughest stretch is about to roll off, clearing the way for a softer trend…

Investors are always chasing a good growth story. Often, it’s a company with an established business that looks like it’s slowing—thanks to tough comparisons against prior-year success. Then, suddenly, revenue laps easy year-over-year numbers, the sales outlook brightens, and shares rally.

The same dynamic applies to economic data. Right now, we’re heading into a similar setup for annualized inflation growth. In early 2026, the consumer price index (“CPI”) faces its toughest comparisons from 2025. January and February alone account for just over 40% of the current pace. That makes it hard for monthly growth to accelerate…

As those heavyweights drop out and new data replaces them, the annualized pace should ease. That expands the Federal Reserve’s rate-cut cushion—giving it more room to support the economy if growth slows. The switch should underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us.

November CPI Data

Yesterday, the U.S. Bureau of Labor released its November CPI report. The release wasn’t without controversy. Because of the October government shutdown, no month-over-month change was calculated. Still, the underlying index was tabulated for November, giving us the more important year-over-year results.

Inflation rose 2.7% on an annualized basis, down from 3% in September and below the 3.1% consensus estimate…

Real Rates Matter

The annualized result lets us measure the real rate of interest (effective fed funds minus inflation):

• Effective fed funds (Nov) 3.9%

• CPI (Nov) 2.7%

• Real Rate (Nov) 1.2%

In other words, our central bank could cut rates five more times before it hits neutral (neither hurts nor helps economic growth)…

Now, keep in mind, inflation lags monetary policy decisions. Consider this:

• The Fed cut by another 25 basis points in December.

• That lowers the real rate to 1%.

• The average real rate since 2000 has been -0.6%.

Put together, the Fed has about 160 basis points of room before reaching the traditional real rate. That’s serious economic firepower.

Looking Forward

To gauge the path of inflation, let’s frame the next 12 months against the prior year. The green highlights are easy (meaning inflation could accelerate), the red are hard (inflation could slow), and the blue are neutral…

The data shows:

• January and February are the toughest comparisons.

• They account for 1.1% of the current 2.7% number.

• After February is neutral to easy.

That tells me:

• The odds are against hot inflation early in the year.

• March is the most likely month for a seasonal bump.

• Beyond that, expect a roughly 0.2% pace.

Forecasting Ahead

So, the next step is to project that 0.2% monthly growth through August…

In the above table, I ran the inflation growth estimates based on the underlying November index data. I also incorporated the current bond market expectations for rate cuts to determine real rates.

Here’s what it suggests:

• Annualized CPI growth could fall to 2% by May.

• The Fed could cut in March, yet the real rate cushion would grow.

• It could ease again in July, and real rates would hold steady.

Bottom Line

The missing October data isn’t ideal, but it’s the hand we’ve been dealt. It will be a headache next year, but we work with what we have.

From here, the odds favor easing annualized inflation. That makes real rates look tighter, giving the Fed more room to support growth. And that backdrop should underpin a steady rally in the S&P 500.

To see how I'd invest, check out the BentPine Growth Portfolio here.

Five Stories Moving the Market:

The Bank of Japan raised its benchmark interest rate by 25 basis points to 0.75%, the highest level since 1995, as broadly expected by market participants – Bloomberg. (Why you should care – the BOJ is expected to raise rates by another 25 basis points in mid-2026 to 1%)

OpenAI is aiming to raise as much as $100 billion in a fundraising round that could value the company at as much as $830 billion; the company is likely seeking funds to pay for ambitious growth plans in a market that has cooled recently on the artificial-intelligence boom – WSJ. (Why you should care – the lack of a diversified investor base for this round of financing could increase investor skepticism about OpenAI’s spending plans)

President Trump directed the federal government to reclassify cannabis as a less-dangerous drug, a seismic shift in U.S. drug policy that is poised to boost the legal marijuana industry – WSJ. (Why you should care – a move to a schedule 3 classification could ease tax burdens and open up new lending outlets for cannabis companies)

European Central Bank officials expect the cycle of interest-rate cuts to most likely be finished based on the latest outlook for growth and inflation; policymakers recently raised their growth forecasts and predicted that inflation will return to 2% in 2028 after some time below that goal in 2026 and 2027 - Bloomberg. (Why you should care – given the ECB has lowered interest rates eight times in the last 18 months, stepping back makes sense)

British inflation looks on course to return to close to its 2% target by April or May next year, about a year earlier than previously expected, according to Bank of England Governor Andrew Bailey; Bailey said he was "very encouraged" by how far inflation had fallen since the middle of the year – Reuters. (Why you should care – Bailey said he expects interest rate cuts to be less frequent moving forward)

Economic Calendar:

Earnings - PAYX

Bank of Japan Monetary Policy Announcement

Japan – CPI for November

BOJ’s Ueda (Governor) Speaks

U.K. – Retail sales for November (2:00 a.m.)

Germany – GfK Consumer Climate Index for January (2:00 a.m.)

U.S. – PCE for October (8:30 a.m.)

U.S. – Personal Income, Spending, Consumption for October (8:30 a.m.)

Canada – Retail Sales for October (8:30 a.m.)

U.S. – Existing Home Sales for November (10:00 a.m.)

U.S. – University of Michigan Consumer Sentiment for December (10:00 a.m.)

Eurozone – Consumer Confidence for December (10:00 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)