Will Inflation Ruin the “Meme Stock” Rally?

The market fell this morning as “meme stocks” stole the show once again. Shares of AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) both impressed, logging double-digit gains shortly before noon.

Some analysts say that they could go higher despite the recent run-ups. Interactive Brokers Chairman Thomas Peterffy believes that, despite how overvalued both companies look, the timing still isn’t quite right to be a bear.

“It is extremely tempting to short these stocks, but unless you have huge liquid resources, please try to resist the temptation because these prices can go to unimaginable highs before they settle down to a reasonable valuation, and you may have to cover on the high point,” Peterffy said.

“On the long term, stocks always approach their fundamental values, which in this case is much, much lower.”

Don’t tell retail speculators that, though, who insist that their due diligence has revealed a pathway to even higher valuations. Investors from Reddit’s WallStreetBets are rationalizing greener pastures through fundamentals, technical analysis, and options trading activity.

Will they be proven right again? It’s certainly possible.

Professional strategists are getting on board with longer-term bullish hopes, too.

AMC’s building a “strategic war chest” by selling equity according to B Riley analyst Eric Wold.

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“In addition to our continued expectation that AMC could improve its balance sheet and future cash flows through debt repurchases/pay-downs, we could now see either acquisitions of smaller exhibitor chains or the takeover of leases from troubled chains,” Wold added.

He’s absolutely right; “meme stock-mania” likely saved AMC and GME alike.

But it could also be a sign that the mega-rallies are over as both companies move past the speculative blitz.

“The graduation of these high-fliers could be the beginning of the end of their epic run,” explained Wells Fargo analysts Christopher Harvey, Gary Liebowitz, and Anna Han.

What could also spoil the fun is the highly anticipated May Consumer Price Index (CPI) reveal, set for this Thursday. The inflation data is expected to come in strong again after April’s eyebrow-raising 4.2% year-over-year (YoY) increase. The consensus May CPI estimate shows an increase of 0.4% for both headline and core inflation month-over-month (MoM), bringing the YoY CPI increase to 4.7% and 3.4%, respectively.

If expectations are met, both core and headline CPI will have hit their highest levels since late 2008.

“This will undoubtedly be the most-watched data release this year so far,” wrote Deutsche Bank analysts in a note to clients.

Bank of America economists, who correctly predicted a jobs report “miss” in May, believe inflation will come in hotter than the consensus, rising 0.5% MoM.

And even if they’re wrong, anything close to the consensus estimate would likely shock stocks. Bulls have long feared “taper talks” from the Fed.

An out-of-control housing market and equity bubble have already convinced many Fed officials that it might be time to start having that discussion.

Add a “red hot” May inflation print into the mix, and you’ve got the makings of the next market tantrum.

All while Russia works quickly to decouple itself from a sinking dollar.

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