The S&P 500 hit a new record on Tuesday, closing at 6,445.76 after climbing 1.13%, while the Nasdaq Composite also broke fresh ground, ending at 21,681.90 with a 1.39% gain.
The Dow Jones Industrial Average added 483.52 points, or 1.10%, to finish at 44,458.61. The rally came after inflation numbers for July came in slightly cooler than expected, fueling expectations that the Federal Reserve could cut interest rates as soon as next month, according to data from Dow Jones.
The July consumer price index showed a 2.7% increase compared to last year, just under the 2.8% projection. Core CPI, which removes food and energy costs, rose 3.1% from a year earlier, slightly above the 3% forecast.
The softer headline reading pushed traders to raise their bets on upcoming rate cuts. Before the report, markets priced in an 85% chance of a September cut. After the data, the probability shot up to 94%. Traders also lifted their expectations for additional cuts in October and December.
Rate expectations and sector moves
Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group, said the setup right now has rates moving lower and earnings moving higher, creating what he called “a pretty good environment for the broad stock market.”
Smaller companies saw the biggest boost, with the Russell 2000 rising nearly three times as much as the S&P 500. In the crypto space, Circle Internet Group gained 3% after reporting that its second-quarter revenue jumped 53% from a year ago.
The inflation data wasn’t the only factor moving markets. On Monday, President Donald Trump said he would extend a 90-day pause on higher tariffs for Chinese goods. That decision came as traders waited for Thursday’s producer price index report, which will give a broader picture of wholesale inflation.
Both sets of figures arrive ahead of the Fed’s Jackson Hole gathering later this month, followed by the September policy meeting where a rate decision will be made.
Wolfe Research noted that while summer market swings have been typical, the firm expects investor caution to fade by fall.
In a Sunday note, it said that although it still officially expects the Fed to hold rates in September, last week’s payrolls report gives the central bank “reason to deliver the cuts they still want to do.” The firm added that by fall, the economy could “look better than feared” as growth starts to turn higher.
Analysts weigh in on market rally sustainability
BCA Research suggested the rally could continue even if the economy slows. In a Monday note, the firm said it is leaning toward the conclusion that slower growth won’t impact markets over the next six to twelve months, as long as it happens gradually. BCA also said that signs of weaker economic activity could even be “celebrated as a catalyst” for more Fed rate cuts.
The firm warned, however, that strong bullish momentum is making it difficult for those positioned defensively. It also said the first wave of key economic data releases had reinforced its view that the economy isn’t as strong as the market believes. BCA added that the labor market and consumer spending are “walking a tightrope above a stall-speed quagmire,” signaling that any misstep could quickly expose underlying weakness.
From here, Wall Street’s focus will stay locked on inflation readings, upcoming Fed meetings, and the ongoing tariff situation with China as traders position themselves for what could be a volatile end to the summer.
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