A surge in major technology stocks propelled the S&P 500 to new heights, with Federal Reserve Chair Jerome Powell’s congressional testimony failing to dissuade traders from expecting interest rate cuts this year.
For the first time ever, the S&P 500 surpassed the 5,600 mark. Renewed interest in mega-cap stocks led the U.S. equity benchmark to its longest winning streak since November. Nvidia Corp. rose over 2.5%, and Apple Inc. gained on news of plans to increase iPhone shipments by 10% following a challenging 2023. Treasuries remained stable after a successful $39 billion sale of 10-year bonds, with swaps pricing in two Fed cuts in 2024 and increased odds of the first cut occurring in September.
As Wall Street anticipated the consumer price index report, Powell indicated the Fed does not need inflation to drop below 2% before reducing rates but noted that more work remains. He mentioned that the labor market has cooled “pretty significantly” and stated that commercial real estate does not pose a threat to financial stability.
“The key takeaway from his testimony is the Fed’s assessment of the balance of risks is shifting in ways that—if supported and sustained by incoming data—will deliver a rate cut in September,” said Krishna Guha at Evercore.
The S&P 500 rose 1%, marking a seventh consecutive day of gains and its 37th record of the year. Gold and silver mining stocks rallied on expectations of Fed easing, while banks underperformed. Alphabet Inc., Google’s parent company, has reportedly abandoned its efforts to acquire HubSpot Inc., according to sources.
U.S. 10-year yields fell two basis points to 4.28%. Bank of England Chief Economist Huw Pill suggested that the timing of a rate cut remains uncertain, leading traders to reduce bets on an August cut. Oil prices increased as a U.S. holiday boosted demand for gasoline and jet fuel.
“Markets remain remarkably calm despite the flood of data this week, including Fed Chair Powell’s testimony, CPI/PPI reports, and the beginning of earnings season,” said Mark Hackett at Nationwide.
The core CPI, excluding food and energy costs and considered a better measure of underlying inflation, is expected to rise 0.2% in June for the second month in a row. This would represent the smallest consecutive gains since August—a pace more acceptable to Fed officials.
“June’s CPI report looks to be another ‘very good’ report that should boost the FOMC’s confidence about the inflation trajectory,” said Anna Wong at Bloomberg Economics. “That should set the stage for the Fed to start cutting rates in September.”
A survey by 22V Research shows 55% of investors expect a “risk-on” market reaction to Thursday’s CPI report, 16% predict a “risk-off” reaction, and 29% expect a “mixed/negligible” response.
“There is optimism about inflation generally,” said Dennis DeBusschere at 22V, adding that the survey also indicated investors believe “CPI is on a Fed-friendly glide path.”
Meanwhile, some trading desks suggest investors should prepare for potential market volatility.
The options market indicates the S&P 500 could move 0.8% in either direction following Thursday’s consumer price report, based on the price of at-the-money straddles, according to Stuart Kaiser, Citigroup’s head of U.S. equity trading strategy. This would be the biggest move for the index since June 12, the day of the last CPI print and interest-rate decision.
Market volatility may increase in the coming days and weeks due to U.S. political uncertainty, comments from the Fed chair, and the start of the second-quarter earnings season, according to Mark Haefele at UBS Global Wealth Management.
For the first time since 2022, S&P 500 earnings might not solely focus on technology, with the quarter’s success depending on sectors outside of the mega-cap tech heavyweights that have driven stocks to all-time highs, according to Bloomberg Intelligence strategists led by Gina Martin Adams.
“While forecasts for the ‘Magnificent Seven’ remain robust, their earnings are expected to slow in the second quarter—just as the rest of the S&P 500 may finally post their first year-on-year growth in at least five quarters,” they noted.
The Magnificent Seven may have already peaked, while the remaining S&P 500 stocks could see their first earnings expansion in at least six quarters, the strategists concluded.
