The Inflation Ghost Has Vanished. Now What?

The Inflation Ghost Has Vanished. Now What?

We got the inflation print we've been waiting for, and the market responded with the energy of a person who ordered steak and received a lukewarm salad. Friday's CPI report—0.2% month-over-month, 2.4% year-over-year—was soft enough to crack. Bond traders lit it up. Treasury yields collapsed by 15 basis points, the biggest drop in developed markets all week. Fed futures pivoted. Rate cuts suddenly felt plausible again, not sometime in late summer but sooner. The playbook worked.

So why does everything feel off?

The inflation number did its job perfectly. Headline inflation hit 2.4% year-over-year, the lowest reading since May. Core inflation came in cool. The data was designed to solve one problem, and it did. But it arrived at the worst possible moment—not the worst for the economy, mind you, but for the market's attention span, which has already moved on to a different crisis entirely.

For the past ten days, equities have been grappling with something no central bank can print away: the idea that artificial intelligence might actually work.

This sounds insane written out loud. AI working is supposed to be bullish. Except the market has shifted its prism. From November through early February, AI meant semiconductors mooning and earnings surprises. Now it means Cisco guidance misses, Morgan Stanley brokers becoming obsolete, and commercial real estate brokers—brokers, plural—getting cut in half on fears that AI will commandeer their pricing models. CBRE tumbled 13.5% early in the week, reaching levels especially alarming given that the only other times the stock has tumbled further was during Covid and the height of the global financial crisis.

The soft CPI report was the wrong drug for this disease. What the market actually needed was reassurance about earnings quality, about whether the capex spending blitz makes sense anymore, about whether the companies getting disrupted will survive the transition. A 15-basis-point drop in Treasury yields doesn't answer any of those questions. It just makes the wait cheaper.

Here's the geometry of the moment: rate cuts in a healthy economy are good for growth stocks and bad for bond substitutes. Rate cuts in an economy where large chunks of corporate profit are under structural threat don't help anyone much. The software platform that loses 30% of its TAM doesn't care what the Fed funds rate is. The financial advisor running a wealth management business that's about to be automated doesn't celebrate lower mortgage rates for his clients—he starts updating his LinkedIn.

The CAPE ratio sits at 40.4, its highest level since the dot-com bubble at the turn of the century. We're being asked to believe that this is fine, that dominant tech platforms with wide economic moats and strong cash flows justify expansion multiples on a risk-adjusted basis, that passive investing's structural demand props everything up. Maybe. Or maybe the market is pricing in a world where the earnings pool remains stable, and we're about to discover it's not.

Friday afternoon, after the CPI relief, the Nasdaq pared gains. Treasury yields touched their lowest levels since December, but stock futures barely moved. That's the tell. The bond market is pricing in what it wants: lower rates, softer landings, the cycle extending. Equities are pricing something darker: that the category rotation from 2025 into 2026 has further to run, and the winners haven't been named yet.

The inflation ghost has vanished. Now the market gets to stare at something worse—uncertainty about which businesses will matter in two years.

Markets return Tuesday. Earnings season ramps. Walmart, Booking Holdings, Deere & Company, and Palo Alto Networks report this week. Those results will tell us more than any inflation number ever could.