Wall Street is back in bullish mode, with investors seizing on the latest signs that interest rates could start falling this year.
The S&P 500 rose 1.2% on Wednesday, adding to its third straight week of gains and surpassing its all-time high set on March 28.
This is a shift from the sour mood that helped send the index down more than 5% in early April as investors grew accustomed to the idea that high interest rates could continue to weigh on the economy and markets. It indicates a sudden change.
New inflation data on Wednesday morning triggered the index to a new all-time high. The S&P 500 is currently nearly 7% above its recent low in April.
Wednesday's report, closely watched Consumer Price Index data, showed the pace of price growth slowing slightly, in line with economists' expectations. Investors welcomed the numbers and a return to a trend of gradual decline in inflation after months of disappointing data that spooked financial markets and sent stock prices lower.
“The market is feeling good about the first good CPI report in four months,” said Gary Zegeo, head of fixed income at CIBC Private Wealth US.
Earlier this year, investors largely ignored persistently high inflation statistics, choosing instead to focus on the solid growth supporting the stock market. This caused the market to repeat records until March.
Then, in early April, things took a turn for the better. After three consecutive CPI reports undermined the trend of gradually slowing inflation, concerns began to emerge that the Fed would not only delay cutting rates but actually raise rates. The S&P 500 has fallen for the third consecutive week, its worst level this year, and has fallen a total of 5.5% from its peak reached on April 19th.
Investors got their hopes up again this month after Federal Reserve Chairman Jerome H. Powell poured cold water on the possibility of the central bank raising interest rates. Then last week's reports of slowing employment in April and further slowing in wage inflation re-emerged the possibility of a rate cut this summer, boosting stock markets.
“Those two things are really helping the stock market,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Wednesday's CPI data was expected to undermine the sense of reassurance generated by April's jobs report, or, as it has proven to be the case, be the next big test for markets.
The yield on two-year U.S. Treasuries, which are sensitive to interest rate fluctuations, fell from over 5% at the end of April to just over 4.70% as concerns about rising interest rates subsided. The yield on the 10-year U.S. Treasury, the benchmark that underpins borrowing around the world, fell to about 4.35% from 4.7% in the same period.
Investors in the futures market are currently betting that the Fed is likely to cut interest rates by a quarter of a percentage point in September, assuming there is no further disinflationary disruption that could depress stock prices. .
Another key tailwind has been better-than-expected financial results, with company leaders spending the past few weeks updating investors on profitability in the first three months of the year and the outlook for the economy.
Corporate profits have increased 5.4% so far, with just over 90% of companies reporting results as of Friday. At the end of March, analysts had expected growth of just 3.4%.
On Friday, the S&P 500 index posted its third consecutive week of gains, a feat not achieved since mid-February. Importantly, the Russell 2000 index of smaller companies, which are more susceptible to the rise and fall of the U.S. economy, is also positive this year after rising in recent weeks. The index rose 1% on Wednesday.
Mr Kerry said the economy was beginning to return to “equilibrium” after the “tumultuous” changes of recent years, including the pandemic and wars in Ukraine and Gaza.
“We are settling into a boring economy, and the boring situation is likely to continue for a long time,” he said.
J. Edward Moreno Contributed to the report.
