This week, the S&P 500 hit a record while producer inflation posted its worst reading since 2022. That is not normal. But it has happened before. Three times in the last 25 years, the market ignored inflation and kept climbing. Each time, the rally ended the same way.
Save this edition. The pattern will repeat. Here is how to recognize the turn and protect your money when it does.
Key Idea
Markets can ignore inflation for months. Sometimes years. But the pattern always resolves the same way. A dominant thesis powers the rally past the inflation data. Then either the thesis breaks or the Fed acts. The turn comes fast. Today’s thesis is AI. The trigger has not fired yet. But the setup looks familiar.
Our Partners
Most people think Washington is going to “regulate” AI to save jobs.
They are 100% wrong. In fact, the Trump administration has just signaled a “Scorched Earth” policy via Executive Order 14365.
I call it the “One Rule.”
It effectively tells all 50 states to step aside.
It declares AI a national security imperative – on par with the Manhattan Project.
Because Washington has realized that if they pump the brakes to save a few million middle-class jobs, China wins the AI war. And if China wins, the U.S. dollar dies.
The government is no longer a referee. They are now the lead investor.
They are taking equity stakes in companies like Intel and MP Materials.
They are stockpiling lithium and rare earth minerals like they used to stockpile oil. We are no longer living in a free-market democracy. We are living in a Technological Republic.
If you are still investing using the “old rules” of the 1990s or 2000s, you are going to get steamrolled by this new government-backed machine.
But if you know which companies are being “chosen” by this new power structure… the wealth potential is unlike anything we’ve seen since the Gilded Age.
The Pattern
This week gave you a textbook setup. Consumer prices rose 3.8% annually on Tuesday. Producer prices surged 6.0% on Wednesday. Both hotter than expected. And the S&P 500 set a new all-time high on both days.
That feels wrong. Your grocery bill says inflation is real. Your brokerage app says records. Both are telling the truth.
But this is not the first time the market has ignored inflation. It has happened three times in the last 25 years. Each time, a single powerful thesis drove the rally past the data. Each time, the rally ended when one of two things broke: the thesis or the Fed’s patience.
Episode 1: The Dot-Com Bubble (1999 – 2000)
The thesis: The internet would change everything.
The inflation: CPI rose from 1.6% in 1998 to 3.4% by early 2000. Oil jumped 140% in 18 months. The Fed raised rates six times between June 1999 and May 2000.
What the market did: Ignored it. The Nasdaq gained 85% in 1999 alone. The rally narrowed. By early 2000, five stocks accounted for most of the gains. Sound familiar?
The turn: It came when the thesis cracked. Internet companies started missing revenue forecasts. The Nasdaq peaked in March 2000 and lost 78% over the next two years. The S&P 500 fell 49%.
Episode 2: The Oil Shock Rally (2007 – 2008)
The thesis: Global growth was unstoppable. Emerging markets would carry the world.
The inflation: Oil broke $100 for the first time in early 2008. CPI climbed to 5.6% by July 2008. Gas hit records. That is exactly what is happening now.
What the market did: The S&P 500 peaked in October 2007 and rallied back near those highs in spring 2008 even as oil surged. Investors believed global growth would power through.
The turn: Housing collapsed underneath. Lehman Brothers filed for bankruptcy in September 2008. The S&P 500 fell 57% from peak to trough. The trigger was not inflation itself. It was the hidden weakness beneath the thesis.
Episode 3: The “Transitory” Rally (2021 – 2022)
The thesis: The pandemic recovery would drive earnings higher forever.
The inflation: CPI rose from 1.4% in January 2021 to 9.1% by June 2022. The Fed called it “transitory” for nine months.
What the market did: The S&P 500 set 70 all-time highs in 2021. Every dip was bought.
The turn: The Fed pivoted. Jerome Powell stopped saying “transitory” in November 2021. Rate hikes started in March 2022. The S&P 500 fell 25% that year. Growth stocks lost 30% to 70%.
The Two Triggers
In all three episodes, the market ignored inflation for months. Each time, the turn came from one of two triggers. The dominant thesis cracked on its own. Or the Fed forced the issue. Right now, the AI thesis is intact and the Fed has not acted. Both triggers are still ahead of you. Knowing what to watch for is the entire edge.
Where You Are Right Now
CPI at 3.8%. PPI at 6.0%. Real wages negative. Consumer sentiment at a 73-year low. And the S&P 500 at an all-time high.
The thesis powering this rally is AI spending. Cisco doubled its AI order book. Constellation Energy beat on data center power demand. AMD is up 90% in a month. The money is real.
But so is the inflation. And fewer than 60% of S&P 500 stocks are above their 50-day moving average while the index sits at a record. The last time breadth was this narrow at a record high was 1998 to 2000. You already know how that ended.
What To Watch For — The Two Triggers
AI earnings miss or guide flat. Hyperscaler capital spending slows. Cloud revenue decelerates. If this happens, the rally loses its engine. Watch: NVDA, AMAT, CSCO guidance. If two or more guide down in the same quarter, reduce your tech exposure.
The Fed raises rates or signals a tightening cycle. The 10-year yield breaks above 4.5% and stays there. If this happens, rate-sensitive holdings (XHB, VNQ, IWM) sell off first. Watch: Warsh’s first public comments as Fed Chair. Any mention of tightening resets the clock.
The rally continues. History says you can ride it as long as you recognize the turn. Stay invested but tighten your stops. Know which names you sell first. And check breadth weekly.
Our View
This was the most important week of the year. Not because of any single number. Because the pattern revealed itself.
CPI came in hot. PPI came in hotter. The market rallied through both. If you have been reading this brief all week, you watched it happen in real time. You saw the two economies diverge. You saw the bond market flash warnings. And you saw the stock market say: AI is bigger.
Maybe it is. Cisco, AMD, and the semiconductor stack are delivering growth that dwarfs the inflation headwind. That is real.
But every rally that ignores inflation eventually meets one of two endings. The thesis breaks. Or the Fed breaks it for you. Neither has happened yet. That is the opportunity and the risk, sitting in the same seat.
Bookmark this edition. The pattern will come back. When it does, you will want the playbook in front of you.
Have a good weekend. We will be here Monday morning.
The post “Three Times the Market Ignored Inflation. Here’s What Happened Next.” first appeared on Elite Market Point