Stocks Rally to New Highs as Investors Price in Fed Rate Cuts After Mixed Economic Data

Wall Street extended a string of record closes Thursday as investors digested mixed economic reports that reinforced expectations the Federal Reserve will cut interest rates soon.

The S&P 500 rose 0.8% to 6,587.47, marking its third consecutive all-time high. The Dow Jones Industrial Average climbed 1.4% to 46,108, while the Nasdaq composite gained 0.7% to 22,043.07. Smaller-company stocks outperformed, with the Russell 2000 advancing 1.8% to 2,421.53.

Traders pared back bets on higher yields after government reports on joblessness and inflation suggested cooling pressures in the economy, prompting a shift toward expectations that the Fed will cut its benchmark rate for the first time this year at its policy meeting next week. Treasury yields eased in afternoon trading, supporting risk assets.

For the week, the S&P 500 was up 1.6% (105.97 points), the Dow rose 1.6% (707.14 points) and the Nasdaq increased 1.6% (342.69 points). Year to date, the S&P 500 has climbed 12% (705.84 points), the Nasdaq is up 14.1% (2,732.28 points), the Dow has gained 8.4% (3,563.78 points) and the Russell 2000 has risen 8.6% (191.37 points).

Market participants said the tape reflected a growing belief that the central bank will have to loosen policy to guard against an economic slowdown, after recent data pointed to a moderation in inflation and labor-market strength. The move toward lower expected short-term rates supported cyclical and value-oriented names, boosting the Dow’s broad-based advance.

Across the Atlantic, European stocks rose after the European Central Bank left its main interest rate unchanged Thursday. The ECB’s decision added to a global backdrop in which markets are weighing divergent central-bank signals while anticipating future easing from the Fed.

Analysts noted that while stocks have been buoyed by hopes for rate cuts, investors remain watchful of incoming economic reports and company earnings that could alter the path of inflation and growth. The upcoming Fed meeting will be closely scrutinized for any language that changes the likelihood or timing of rate reductions.

Volume on U.S. stock exchanges was in line with recent sessions, and breadth was positive as more stocks advanced than declined. The stronger performance in smaller-company shares suggested investors were willing to take on incremental risk in the face of easier financial conditions.

The day’s moves left benchmark indexes near multi-month highs and continued a rotation that began earlier in the year as investors adjusted portfolios to a lower-rate outlook. Whether the rally can be sustained will depend on the Fed’s next moves and the trajectory of the economy, as reflected in jobs, inflation and corporate profit figures due in the coming days.