The S&P 500 Reaches 5,500 Following 'Near Perfect' Economic Data

Wall Street traders pushed stocks to new all-time highs as signs of cooling inflation strengthened bets that the Federal Reserve might begin cutting interest rates this year.

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This year's rally continued with equities, particularly the S&P 500, surpassing 5,500 points, led by the influential technology sector. The Nasdaq 100 briefly exceeded the historic 20,000 mark, aiming for its best month since November. Treasuries lost momentum after an initial rise following the data release. Swap traders predicted nearly two rate cuts this year, with a quarter-point reduction fully anticipated by November.

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US consumer sentiment fell slightly less than initially estimated, amid expectations that inflationary pressures will ease. The Fed's preferred measure of core inflation decelerated, with household spending rebounding and incomes showing solid growth. This suggested that price pressures could be managed without significantly harming consumers.

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"Today's PCE report was nearly perfect from the market's perspective," stated David Donabedian at CIBC Private Wealth US. "The Fed's favorite inflation gauge showed inflation moving toward its target while the economy remained resilient. Consumer spending and take-home pay increased after a few sluggish months."

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The S&P 500's year-to-date gain extended to over 15%, led by Nvidia Corp., which saw significant gains among megacaps. Conversely, Nike Inc. fell nearly 20% due to a disappointing outlook. Treasury 10-year yields rose by four basis points to 4.32%. In France, a sharp selloff in the markets resumed on Friday as traders sold assets ahead of Sunday's elections.

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The core personal consumption expenditures (PCE) price index, excluding volatile food and energy items, rose by 0.1% from the previous month—the smallest increase in six months. On a more detailed level, it was up just 0.08%, the least since late 2020.

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Separate data revealed that the University of Michigan’s final June index decreased less than a point to 68.2. Consumers expect prices to rise at an annual rate of 3% over the next year, down from 3.3% in May, marking the lowest in three months.

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Seema Shah at Principal Asset Management noted that while the inflation data is encouraging and likely welcomed by the Fed, the policy path remains uncertain. "A further deceleration in inflation, ideally with additional evidence of labor market softening, will be necessary to pave the way for a first rate cut in September," she said.

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Mary Daly, President of the Federal Bank of San Francisco, told CNBC that the latest inflation data suggests monetary policy is effective but cautioned that it’s too early to determine when it will be appropriate to reduce borrowing costs. Earlier, Thomas Barkin of the Richmond Fed said the inflation fight isn't over and the US economy will likely stay resilient as long as unemployment remains low and asset values high.

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Quincy Krosby at LPL Financial agreed that the recent data increase the probability of a September rate cut. The higher-than-expected personal income figures suggest that consumer spending can continue, albeit at a more modest pace, as consumers become more discerning across income levels.

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"As markets quickly interpret all data releases through the lens of future Fed policy, today’s reports are clearly positive for the data-dependent yet cautious Fed," Krosby added.

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Julian Howard at GAM Investments mentioned that hopes for a clear path to looser monetary policy might be tempered by the movement of underlying components of the inflation measure. While transportation and healthcare costs are showing some cooling, spending on goods like software and autos remains firm.

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"The Fed can take some comfort in the year-on-year number being lower, but for inflation to reach the target 2% level, US consumers will need to spend less," Howard concluded.

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