NEW YORK (AP) — Relief washed over Wall Street Tuesday, and stocks leaped to one of their best days of the year following a surprisingly encouraging report on inflation.
The S&P 500 jumped 1.9% for its best day since April and hit a two-month high. The Dow Jones Industrial Average rallied 489 points, or 1.4%, while the Nasdaq composite charged 2.4% higher.
The highly anticipated report showed not only that overall inflation slowed last month, but so did a key underlying figure that economists see as a better indicator of future trends. The slowdown bolstered bets on Wall Street that inflation is cooling enough for the Federal Reserve to finally be done with its market-crunching hikes to interest rates.
Such hopes lifted all kinds of investments, and more than 90% of the stocks in the S&P 500 climbed in a widespread rally.
Technology and other high-growth stocks tend to get some of the biggest boosts from easier rates, and a 2.3% rise for Amazon and 2.1% lift for Nvidia were two of the strongest forces pushing the S&P 500 upward.
Stocks of smaller companies also got a huge boost, with the Russell 2000 index of small stocks surging 5.4% for its best day in a year. Smaller companies are often seen as more dependent on borrowing cash to grow, which can make them more vulnerable to higher interest rates.
The inflation data helped to buoy Wall Street’s hopes that the Fed may actually pull off the balancing act of slowing the economy and hurting investment prices just enough to grind down inflation, but not so much as to cause a painful recession. That is still not a certainty, though.
The Fed has yanked its main interest rate to its highest level since 2001, up from virtually zero early last year, in hopes of grinding inflation lower. The moves have already sent shockwaves through the financial system, with stocks still down from their peak in early 2022 and several high-profile U.S. bank failures earlier this year shaking investors’ confidence.
Even if it doesn’t hike rates any more, the Fed has indicated plans to keep its main rate high for a while to ensure victory in its battle against inflation.
Still, Tuesday’s report was immensely encouraging for Wall Street. After the report’s release, Treasury yields in the bond market tumbled immediately as traders flooded into bets that the Fed won’t hike rates again.
Investors also pushed up the expected timetable for the Fed’s first cut to rates, which can act like steroids for financial markets and provide oxygen across the financial system. Many are betting on cuts to begin by the summer, though some economists say they likely won’t begin until the end of 2024.
“Ain’t no reason to believe the last inflation mile will be the most difficult,” said EY Chief Economist Gregory Daco. “Slower consumer demand, reduced housing rents, lower profit margins, easing wage growth and restrictive monetary policy represent the ideal disinflationary combo heading into 2024.”
The yield on the 10-year Treasury tumbled to 4.44% from 4.64% late Monday, which is a significant move for the bond market. Just a few weeks ago, the 10-year yield was above 5% and at its highest level since 2007.
Traders now see zero chance of a rate increase at the Fed’s next meeting next month, down from a 14.5% probability a day before, according to data from CME Group.
The prospect of no more rate hikes reverberated across all kinds of financial markets.
The value of the U.S. dollar fell against many other currencies, further slowing its strong run since the summer, while the price of gold rose $16.30 to settle at $1,966.50 per ounce. Higher rates tend to hurt gold because the metal looks less attractive as an investment when bonds are paying higher yields and gold continues to pay nothing.
On Wall Street, real-estate stocks and others beaten down particularly hard by higher rates soared to some of the market’s biggest gains.
Alexandria Real Estate Equities jumped 11.7%, for example. It owns mega campuses catering to life sciences companies in hubs around the country.
Real-estate investment trusts send out most of their earnings to investors as dividends, which means they typically compete with bonds for the same kind of investors. When rates are rising and bonds are paying higher yields, those investors often turn away from REITs, utility companies and other high-dividend stocks.
Bank stocks were also strong on hopes that a halt to rate hikes will mean less pressure on the financial system. Zions Bancorp jumped 8.1%, and Comerica rose 7.8%. Both their stock prices fell sharply earlier this year following the collapses of Silicon Valley Bank and other banks a tier or two below in size of the industry’s behemoths.
Elsewhere on Wall Street, Home Depot rallied 5.4% after reporting stronger profit for the latest quarter than analysts expected.
Target, Walmart and other big retailers will report their latest results later this week. They’re at the tail end of an earnings reporting season that has been better than analysts expected. Companies in the S&P 500 are on track to deliver their first overall growth in earnings in a year, according to FactSet.
All told, the S&P 500 rose 84.15 points to 4,495.70. The Dow gained 489.83 to 34,827.70, and the Nasdaq climbed 326.64 to 14,094.38.
In stock markets abroad, indexes were mostly higher across Europe and Asia.