By Alex Eule | Tuesday, August 12

Climbing the Worry Wall. Stocks passed the inflation test today after the consumer price index showed slower than expected year-over-growth in July. The CPI was up 2.7% on the month versus a 2.8% estimate from economists. 

The tame reading likely puts the Federal Reserve on track for a rate cut next month, with another one or two cuts still to come by the end of the year. 

Investors, already buoyed by a solid earnings season, are feeling good about those cuts -- and their benefit to growth. The S&P 500 and Nasdaq Composite both surged to fresh records today, up 1.1% and 1.4%, respectively. The Dow Jones Industrial Average rose 484 points, or 1.1%. It's 1.2% away from its December record. 

"Markets are continuing to climb a wall of worry -- about tariffs, inflation and higher valuations -- but as long as the unemployment rate remains low and inflation isn’t high enough to deter the Fed, the bull market will continue," Chris Zaccarelli, chief Investment officer for Northlight Asset Management, wrote today. 

The odds for a September rate cut now stand at 93%, based on Fed Funds futures pricing. That's up from 57% one month ago. There's now a 50% chance of three quarter-point cuts by the end of the year, up from a 25% likelihood last month. 

"It’s rare that the Fed is cutting rates before a recession seems imminent and that has investors excited," Zaccarelli added.

It wasn't a perfect CPI report, though. The core inflation figure, which strips out volatile food and fuel, was up 3.1% year over year in July, up from a 2.9% gain in June.

The Fed, it's worth remembering, has a 2% goal for inflation. It's been a long journey from the post-pandemic inflation highs, but the problem isn't solved yet. And that won't be lost on the Fed in the coming months. It's still too soon to declare mission accomplished.

DJIA: +1.10% to 44,458.61
S&P 500: +1.13% to 6,445.76
Nasdaq: +1.39% to 21,681.90

The Hot Stock: United Airlines +10.2%
The Biggest Loser:  Cardinal Health -7.2%

Best Sector: Communication Services +1.9%
Worst Sector: Real Estate +0.2%

Tech's Warning

Shares of Eastman Kodak tumbled Tuesday after the film pioneer said "there is substantial doubt about its ability to continue as a growing concern." Kodak lost $26 million in the second quarter, and the company said it hasn't extended or refinanced preferred stock which has a mandatory redemption in May.

It's a sad coda for a great American innovator. And a clear warning for tech investors, writes my colleague Adam Levine:

George Fisher, Kodak CEO in the 1990s, articulated strategies for the digital future, even as film photography remained dominant through the the decade, and his successors followed that path. Kodak had its peak profit year in 2000, with $1.4 billion in net income on $14 billion in revenue.

But then digital cameras did start to take off, and camera and electronics companies like Canon, Nikon, and Sony were much better suited for this market than Kodak, primarily a film and processing company.

As Adam notes, the real competition came from the camera phone. 

There is a lesson here for incumbents in the age of AI: It’s hard to know where the competition is coming from during an inflection point like today. Kodak thought it was in a race with Canon and Nikon, when it was Apple, Samsung, and Alphabet’s Google that ultimately passed all three.

As the internet was blossoming in the mid-1990s, Google and Meta didn’t yet exist, and Amazon.com had just been founded. Some of the winners from the AI revolution may not be on anyone’s radar yet, and some of the losers may be household names like Kodak.

Read the rest of Adam's Kodak story here.