The stock market is poised to surge 2% on Tuesday if new inflation data cools down as expected, JPMorgan says

• The stock market is poised to see big gains on Tuesday if the consumer price index cools down as expected.
• JPMorgan said investors could expect a 2% surge in the S&P 500 if the CPI report prints between 6.0% and 6.3%.
• "This bullish outcome would likely pull yields lower, along with the US Dollar, and boost risk assets," JPMorgan said.

The January consumer price index report is likely to jolt the stock market in a big way when it's released this Tuesday, according to a note from JPMorgan.

The bank said it expects a big move in stock prices in either direction, depending on whether the inflation report is higher or lower than consensus estimates.

Based on current estimates, headline year-over-year inflation is expected to come in at 6.2%, while core inflation is expected to be 5.5%.

The most likely scenario with a 65% chance of happening, according to JPMorgan, is the January CPI report revealing headline inflation of between 6.0% and 6.3%. If that occurs, JPMorgan expects a bullish move from the S&P 500 with a gain of between 1.5% and 2%, though the rally could ultimately be faded.

"This bullish outcome would likely pull yields lower, along with the US Dollar, and boost risk assets. It may have investors question the pace of disinflation given the previous two prints had 60 basis point declines from the prior month," JPMorgan said.

The next most likely scenario with a 25% chance of happening is CPI printing between 6.4% and 6.5% in January, which would ultimately spark a sell-off up to 1.5% in the S&P 500, according to the note.

"The hawkish outcome here would ne be as negative as if this occurred last year and may be proxied by the September 2022 print where we saw CPI step down from 9.1% in July to 8.5% in August to 8.3% in September. That print triggered a 4.3% reaction in the S&P 500. Positioning is unlikely to lead to as dramatic a result," JPMorgan said.

The most dramatic move in the stock market would be triggered if the CPI prints above 6.5% or below 6.0%. In either scenario, JPMorgan expects the S&P 500 to fall or rise upwards of 3%, respectively. But both scenarios are unlikely to happen, with the bank assigning a 5% likelihood to each scenario.

In recent weeks, investors have been wary that inflation could make a big comeback following the strong January jobs report and a rebound in used car prices.

But Fundstrat's Tom Lee believes these fears are unfounded. "We think investors are just overlooking the far greater story arc," Lee said in a Monday note. That story is that inflation continues to fall from its peak, and a reweighting in the housing component of the CPI index later this year should lead to a big deceleration in inflation.

"34% of CPI basket is in outright deflation, well above the 50-year average of 30%... this tells us that disinflationary forces are widening as energy, goods, food and other components are in disinflation," Lee said.

Whether inflation surprises to the upside or downside after Tuesday's release of the January CPI report, investors should be prepared for a volatile move in the stock market in either direction.