The “peak inflation” narrative is not dead, but it hasn’t won the argument either. You’d think it would be, after that surprisingly strong CPI report Wednesday, but it’s not. As the earnings season starts, investors are expecting to hear a barrage of cautious comments from corporate America about higher costs, rising rates and a slowing consumer. Yet, a small but persistent group insist that peak inflation is indeed here or approaching, that commodity and freight prices have dropped substantially and that housing and rents (a big driver of CPI) will also soon be dropping. My colleague Jim Cramer is in that camp. So is Wharton School professor Jeremy Siegel, a regular on our air. Here’s the bear case, which is still the dominant narrative: Inflation is indeed out of control and will persist at these levels for many months, forcing the Federal Reserve to be even more aggressive. Companies will be forced to raise prices, even in the face of weaker demand. As a result, earnings expectations will drop 10%-20% (there are currently expectations of a gain of 10% in 2022 for the S & P 500 and 9% in 2023), and multiples (P/E ratios) will further contract, from roughly 16.5 now to 14-15. The bulls don’t want to price in this dire scenario. They think the signs are already there for a slowing, not crashing, economy. The bulls readily admit growth will be subdued, and even concede the U.S. may experience a mild recession (a third of the traders I talk to think we are already in one). But unemployment is now at 3.6%, in a recession it invariably goes way above 6%, and that still seems unlikely, they say. They also concede the Fed will push another 175-200 basis points rise in the Fed funds rate. But they insist the market has already priced this in. Binky Chada at Deutsche Bank is in this camp: “We think it is unlikely the market sells off further merely on weaker earnings or guidance cuts as those are now widely expected,” he said in a recent note to clients. “The market has usually (75%) rallied during earnings season, especially following a selloff and when investor positioning is very low going into the earnings season as is the case presently.” Active traders also point to stabilization in speculative technology names such as the Ark Innovation ETF (ARKK), which has stopped going down. They also point out that commodity stocks (energy and metals) have gone straight down for the past six weeks and that no one is buying them even at bottoms — and that no one is chasing overpriced defensive consumer stocks like Procter & Gamble anymore. There is a simpler explanation for why we are in a trading range for the last few weeks: fatigue. Trading volumes have been light recently, and the selling intensity we saw in June has abated. There is not only selling fatigue, there is inflation fatigue. Selling may have abated, but there is way too much pessimism to see any significant buying. That’s why you don’t see big up days with big volume. We rally on weak volume, then drop back. That is not healthy bull market activity. Instead, the bulls are pushing for that most glorious of objectives: the fourth-quarter revival. “OK, Bob,” they say, “maybe we’ll get another leg down in August or September.” But look ahead. Not going down much on bad news is a good sign, but a market bottom will need a lot more than that. We need a far better catalyst, a reason to start buying. “Selling pressure has abated” doesn’t come close. And a pause in the selling could be just that — a pause. “What could drive a market selloff in our view are signs of corporate risk aversion, in particular large cost cutting measures or changes in capital spending plans,” Chada said, hedging himself. That’s what everyone is doing: hedging themselves.