Stocks Hold Their Ground as Inflation Cools, but Leverage and Earnings Remain the Biggest Risks

The latest inflation data came in better than expected, and that gave the market another modest lift. Producer prices fell 0.3% month over month versus a forecast of positive 3.3%. Headline PPI came in at 5.5% year over year versus 6.3% expected. Core PPI matched expectations at 2%, while the year over year reading came in at 4.7% versus 4.9% expected.

That follows the better CPI report from the previous day, so inflation is moving in the right direction according to the government data. But the market reaction is still fairly restrained. S&P 500 Index futures were up about 23 points, roughly 0.3%, and the previous session gained only around 0.4%.

The S&P 500 is still trading between major resistance near 7,725 and support around 7,325. The support level is the more important one. It has been defended repeatedly, but every test increases the risk that an eventual break could trigger a much faster liquidity flush. A breakdown could send the index toward 7,000, which would be another decline of more than 300 points. As long as support holds, institutional algorithms and retail buyers will probably continue buying. If it breaks, the market structure changes quickly.

The bond and currency markets are also sending a more cautious message. The 10 year Treasury yield only declined from 4.63% to 4.56% after two strong inflation reports. The U.S. dollar also gave back only a small portion of its recent gains. That suggests the market still does not believe inflation is returning to 2% anytime soon, which means rates may remain elevated.

The U.S. dollar against the Japanese yen also deserves attention. The yen remains historically weak, and the pair is forming an upward sloping wedge near levels that preceded the carry trade unwind in 2024. During that episode, the Nasdaq Composite fell 15% in roughly two weeks.

Positioning adds another layer of risk. Hedge funds are holding only 3.6% in cash, historically an extremely low level. That leaves very little protection if investors are forced to deleverage.

Earnings are showing how sensitive individual stocks have become. International Business Machines Corporation fell 25%, its largest one day decline ever, after warning that results could miss expectations by about 5%. The stock found support between $215 and $218, and the technical retracement target remains between $240 and $244, roughly 10% higher.

The larger warning is what that reaction could mean for artificial intelligence, semiconductor, and memory stocks. SK hynix gained more than 25%, but Micron Technology rose only 4.9%, SanDisk gained about 5%, and Seagate Technology added only 2%. SK hynix then gave back about 8% in premarket trading. That suggests investors may be becoming more selective across the group.

ASML Holding reported $8.81 per share on $10.84 billion in revenue, beating expectations, yet the stock gave up its early gains and traded near flat. Apple is also reportedly working on technology that could reduce memory usage by about one third, which could eventually reduce demand for physical memory.

In financials, BlackRock moved higher after earnings and now manages more than $15 trillion. Its chart may be forming an inverse head and shoulders pattern with a measured target near $1,275. Johnson & Johnson has support near $245. Morgan Stanley faded after testing resistance, while Goldman Sachs is testing major channel resistance near 1,160.

In commodities, oil reached its first technical target and is now trading roughly flat. Natural gas remains weak near support after its cup and handle pattern failed. That pattern normally succeeds about 65% of the time, while stronger confirmation can raise the probability to around 70% to 75%.

Gold remains vulnerable to a decline toward $3,500 to $3,600 unless it breaks above resistance. Silver also remains weak.

Bitcoin continues to look constructive after confirming an inverse head and shoulders breakout. The measured move points toward the next major trend line, and the broader altcoin market also remains firm.

The main message is simple: inflation data is improving, but bonds, currencies, and precious metals remain cautious. Stocks are still holding key support, but leverage is high and earnings reactions are becoming more severe. The market can continue higher, but the margin for error is getting smaller.