Wall Street is in rally mode again, with investors taking advantage of the latest sign that interest rates could start falling this year.
The S&P 500 rose 1.2 percent on Wednesday, adding to three consecutive weeks of gains and surpassing its previous record, set on March 28.
It marks a sharp turn from the sour mood that helped send the index down more than 5 percent in early April, as investors grew accustomed to the idea that high interest rates could persist longer, weighing on the economy and markets.
New inflation data on Wednesday morning provided the catalyst for the index to surpass its previous record. The S&P 500 is now almost 7 percent above its most recent low in April.
Wednesday’s report (closely watched Consumer Price Index data) showed a modest slowdown in the pace of price growth, in line with economists’ expectations. Investors welcomed the figures and a return to the trend of gradually receding inflation after months of disappointing data that roiled financial markets and sent stock prices tumbling.
“This is the first good CPI report in four months and the market likes it,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth US.
Earlier in the year, investors had largely ignored stubbornly high inflation data, choosing to focus on the solid growth underpinning the stock market. That prompted the market to repeat records until March.
Then, in early April, things took a turn. After a third consecutive CPI report undermined the trend toward a gradual slowdown in inflation, concerns began to emerge that the Federal Reserve might not only delay rate cuts but also raise interest rates. The S&P 500 fell for three straight weeks, its worst streak of the year so far, falling a total of 5.5 percent from its April 19 peak.
Investors became more hopeful again this month when Federal Reserve Chairman Jerome H. Powell poured cold water on the likelihood of the central bank raising interest rates. Then, a report last week showing a slowdown in hiring in April, along with weaker wage inflation, brought the possibility of rate cuts this summer back into the picture, giving the stock market a boost.
“Those two things have really helped the stock market,” said David Kelly, chief global strategist at JP Morgan Asset Management.
Wednesday’s CPI report had been seen as the next big test for the market, either undermining the relief that came from April’s jobs report or, as turned out to be the case, supporting it.
The two-year Treasury yield, which is sensitive to changes in interest rates, has fallen to just over 4.70 percent from more than 5 percent in late April, as cooled fears that rates will rise. The benchmark 10-year Treasury yield, which underpins borrowing around the world, has fallen back to around 4.35 percent from 4.7 percent over the same period.
Investors in futures markets are now betting that the Federal Reserve is likely to cut interest rates by a quarter percentage point in September, assuming there are no further disinflation shocks that could send stocks lower.
Another major tailwind has been better-than-expected earnings results, as corporate leaders spent recent weeks updating investors on their profitability through the first three months of the year and where they see the economy heading from From now.
Corporate profits have so far grown 5.4 percent, with just over 90 percent of companies reporting their financial results as of Friday. At the end of March, analysts expected growth of only 3.4 percent.
On Friday, the S&P 500 posted its third consecutive week of gains, a feat it had not accomplished since mid-February. Importantly, the Russell 2000 stock index of smaller companies that are more exposed to the ebbs and flows of the U.S. economy is also now positive this year, after rallying in recent weeks. The index rose 1 percent on Wednesday.
Kelly said that after the “tumultuous” changes of recent years, including the pandemic and the wars in Ukraine and Gaza, a “balance” has begun to return to the economy.
“We are adapting to a boring economy and a boring economy can last a long time,” he said.
J. Eduardo Moreno contributed with reports.