Despite a rocky week, the S&P 500 is still up over 5% from last month’s lows, which saw the benchmark index extend its decline to 20% from its all-time high. The index lost 1% in the past week and was down about 14% from its January 3 record.

A rally that lifted U.S. stocks from the brink of a bear market faces an important test next week, when consumer price data gives insight on how much more the Federal Reserve will need to do in its battle against the worst inflation in decades. Despite a rocky week, the S&P 500 is still up over 5% from last month’s lows, which saw the benchmark index extend its decline to nearly 20% from its all time high. The index lost 1% in the past week and was down about 14 percent from its January record.

If investors think policymakers are making progress against surging prices, there will be more upside. The case for even more aggressive monetary tightening may get a boost from the fact that inflation remains strong.

“This market is likely to remain range-bound until we get a meaningful move lower in inflation”, said Mona Mahajan, senior investment strategist at Edward Jones, which currently favors large-cap stocks over small-cap, given the ability for larger companies to absorb higher input and wage costs The print next week is going to be crucial. The consumer price index for the 12 months through April rose 8.3%, down from an 8.5% annual rate reported in the prior month which was the largest year-on-year gain in 40 years. Friday’s inflation report for May is one of the last pieces of data before the Fed’s June 14-15 meeting and is expected to raise rates by 50 basis points. Paul Nolte, portfolio manager at Kingsview Investment Management, said that if inflation is continuing to be a problem, the Fed may not have the option of coasting later this year. Nolte has lightened his equity positions in the portfolios he manages, especially in growth stocks, and raised his cash levels, pointing to factors such as still-lofty stock valuations.

The 75 basis points of monetary tightening already delivered by the Fed this year is affecting growth as investors gauge how it will affect the economy. Friday’s employment data showed that the US economy hired more workers than expected in May, and that wage increases were strong enough to keep the Fed from hiking monetary policy.

The hope that the central bank can cool inflation without hurting the economy has been weighed down by gloomy views from several top business leaders. In an email to executives, Musk said he had a bad feeling about the economy and that he needed to cut 10% of the company’s workforce. Higher prices can cause the Fed to raise interest rates, with higher bond yields in turn reducing the value of future corporate profits, as investors’ view of inflation is critical to how they value the stock market. Businesses and consumers pay more for rising prices. The S&P 500 trades at 18.7 times its trailing 12 month earnings, a rich valuation compared to other inflationary periods that suggests investors believe the current level of price increases may not last. It is believed that inflation will eventually fall and that companies have good earnings momentum. As of Friday afternoon, the firm’s year-end target on the S&P 500 was between 4,800-4,900, which was about 16% above the index’s level. Others have been less positive. Morgan Stanley strategists said this week’s rebound was a “bear market rally” and that the S&P 500 would fall to around 3,400 by mid-August. Art Hogan, chief market strategist at National Securities, said there is consensus that we have seen the high prints or the peak inflation numbers. That is going to tip over the cart for markets if that is not true.

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