The US data drop gave us a sneak preview of what’s likely to happen to stocks when inflation looks beaten, interest rate cuts are more certain and there’s no suggestion that a recession is on the cards. That’s why Wall Street and the Nasdaq Composite on Times Square with all four most-watched indexes spiked higher after the Fed’s favourite inflation indicator, the Personal Consumption Expenditure Index (PCE) came in up 0.1% for the month of June and, importantly, up 2.5% for the year.

And this happened in a week when US economic growth showed it was stronger than expected at 2.8%, which was double the rate in the first quarter number and a lot higher than what economists expected at 2%.

Looking at those readings, Reuters reported this Goldilocks assessment from Christopher Rupkey, chief economist at FWDBONDS: “Economic growth is solid, not too hot and not too cold…inflation looks to be going the Fed’s way and an easing of monetary restraint with an interest rate cut is likely in September”.

Of course, that’s the situation for the US, which will be tested later this week when the Yanks get the latest jobs report for July, which needs to show a loosening labour market and shrinking wage pressures. Meanwhile, our economy gets tested big time on Wednesday with the June quarter Consumer Price Index (CPI). AMP’s Shane Oliver gave us the test we probably have to pass to stop the Reserve Bank spoiling share market positivity by raising interest rates on Tuesday week. “Our view is that the RBA probably won’t hike again unless underlying inflation as measured by the trimmed mean comes in at 1.1% quarter-on-quarter or 4.1% year-on-year or higher,” AMP’s chief economist explained.

Back to the USA’s run of numbers and CFRA Research’s Sam Stovall, one of the best history checkers of what markets have done, told CNBC this: “Today’s benign PCE report helped talk the market off the ledge…with this pullback, the great rotation lives on, and breadth continues to be on our side.” By this he means that smart investors — big and small — will lighten their exposure to big tech and other companies whose share prices have spiked incredibly over the past year, to put their money into stocks that will rise on lower interest rates. This makes the rally wider rather than narrow, and the breadth of stock price rise gets wider including more companies seeing their share prices go higher.

That’s what we want to see here. For that to happen in earnest, US economic data needs to keep powering Wall Street to give us the tailwind it frequently delivers. And local inflation has to be heading down, not up. Furthermore, China has to be on a convincing economic recovery. To date, China’s growth of 4.7% for April-June, which was under the 5.1% forecast from a Reuters survey and a lot less than the 5.3% it registered in the previous quarter.

But it’s not all bad news for Beijing, with China’s industrial profits up at a faster rate in June, with a 3.6% year-on-year rise in profits, following a 0.7% gain in May, while first-half earnings were up 3.5%, accelerating from a 3.4% increase in the January-May period. This contrasts with consumption readings that have been disappointing. However, the country’s policy makers cut interest rates again last week, so there are reasons to believe that 2025 could show some stronger economic signs.

If this can coincide with lower Australian inflation and interest rate cuts, then it makes perfect sense to expect a solid leg up for local stocks, assisted by the tailwinds out of Wall Street. We also should expect a better global growth picture, given the course of interest rates worldwide, which are falling nicely.

The chart below captures the turning point for global interest rates and is another reason to be positive on stocks for 2025. Investopedia tells us: “Lower rates make borrowing money cheaper. This encourages consumer and business spending and investment and can boost stock prices.”

To prepare for the next leg up, helped by better news on inflation (and hopefully it will be closer than we think after Wednesday’s CPI), I like the following investment plays:

1. The ETF called EX20, which gives me exposure to the 180 stocks in the S&P/ASX 200 Index that haven’t benefitted from the support for many of our top 20 stocks, such as CBA, Wesfarmers, Macquarie, Goodman, Xero and others. I went through the top 20 and 11 stocks have had big gains, with CBA up 27% in a year, Wesfarmers 43%, NAB 33%, Westpac 29%, Macquarie 18%, Suncorp 22%, CSL 16%, Scentre Group 19%, IAG 23%, ANZ 12% and Goodman a whopping 70%! These ‘heaven eleven’ could be victims of profits-taking, like what has happened to the Magnificent Seven on the US market, while others in the S&P/ASX 200 index should gain friends and stock price gains.
2. BHP because it looks attractive, especially if China comes good in 2025. FNArena’s consensus rise for the big miner is +8.5% but Morgans sees a 16.86% rise ahead.
3. Audinate (AD8), which has been on a slide but the likes of Rudi Filapek-Vandyck and Michael Wayne of Medallion Financial both expect the company to report well in the upcoming reporting season. (See Thursday’s Switzer Report for Wayne’s assessment on AD8.) And the table below shows we’re not alone in liking this company.

4. Provided the CPI on Wednesday comes in around 1% for the quarter and 4% for the year, I could be encouraged to top up my exposure to GEAR, on the basis that the S&P/ASX 200 will have a nice rise if the US Fed cuts rates in September and our local inflation rate suggests we could cut by year’s end or early in 2025. On the other hand, if the CPI points to another rate rise, then I could be forced to rethink the timing of the next significant leg up for the overall market index and that more risky GEAR play.

Important informati on: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.