Stocks Rally After Inflation Report Ends a Turbulent Week for the S&P 500

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U.S. stocks rebounded following a volatile week for the S&P 500, as investors analyzed new inflation data from the Federal Reserve’s preferred measure.

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Larry Adam, chief investment officer at Raymond James, commented, “I think the Fed is pretty close to declaring ‘mission accomplished’ when it comes to inflation,” in a phone interview on Friday.

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The personal-consumption expenditures (PCE) price index, a key measure of inflation, rose by 0.1% in June, bringing the year-over-year rate down to 2.5%, according to a report from the Bureau of Economic Analysis. The Fed’s preferred gauge of core inflation, which excludes volatile food and energy prices, increased by 0.2% last month, resulting in an annual rate of 2.6%, as per the PCE data.

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This inflation report bolstered investor optimism that the Fed might start reducing interest rates as early as September. The Dow Jones Industrial Average surged by 1.6% on Friday, the S&P 500 climbed by 1.1%, and the technology-focused Nasdaq Composite rose by 1%.

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Despite the positive performance on Friday, the S&P 500 recorded a weekly loss of 0.8%, dragged down by declining Big Tech stocks such as Alphabet Inc., Nvidia Corp., and Tesla Inc. Alphabet fell by 6% for the week, Nvidia decreased by 4.1%, and Tesla dropped by 8.1%, according to FactSet data.

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Adam remained optimistic about the tech sector, stating, “I still like tech. It’s still one of our favorite sectors.”

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Although the S&P 500’s information-technology sector fell by 2.4% this week, it has gained 23.4% this year through Friday, making it the best performer among the S&P 500’s 11 sectors in 2024, based on FactSet data.

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Adam highlighted that sectors such as technology, industrials, and healthcare, which are more exposed to business spending rather than consumer spending, are favored. He expressed concern over signs of a weakening U.S. economy and its impact on consumer spending.

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Industrial stocks are expected to benefit from business investments in artificial-intelligence data centers and efforts by U.S. companies to reshore manufacturing, according to Adam. The S&P 500’s industrials sector rose by 1.7% on Friday, making it the top-performing sector for the trading session, based on FactSet data.

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While significant gains in Big Tech earlier in 2024 have driven the S&P 500’s year-to-date climb of over 14% through Friday, other market areas have rallied in July. For instance, small-cap equities, as measured by the Russell 2000 index, jumped by 1.7% on Friday, marking their third consecutive week of gains. Bank stocks and real-estate-related equities also saw increases this week, continuing their strong performance this month.

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Additionally, the Dow Jones Industrial Average finished Friday with its fourth straight week of gains, its longest winning streak since May, according to Dow Jones Market Data. The blue-chip index closed just 1.5% below its record high on July 17.

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Jeffrey Roach, chief economist for LPL Financial, noted in emailed comments on Friday, “Investors are interested in taking more risk as the so-called soft landing looks more likely. We have an economy with low unemployment, rising wages, decelerating inflation, and a Fed on the cusp of cutting rates.”

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This optimistic outlook is supported by the recent inflation data, which suggests that the Fed’s efforts to control inflation are bearing fruit, potentially paving the way for lower interest rates. The market’s response reflects growing confidence in a stable economic environment, characterized by sustained growth and manageable inflation.

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The rebound in U.S. stocks and the positive performance of various market sectors indicate a renewed investor confidence, driven by the prospect of a favorable economic outlook and the potential for reduced interest rates in the near future. As the market continues to navigate these developments, the focus will remain on key economic indicators and the Fed’s actions in response to changing inflation dynamics.

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