The Dow Jones Industrial Average surged more than 800 points, or 2%, on Friday, amid growing optimism that the Federal Reserve may soon cut interest rates. The S&P 500 and Nasdaq Composite also climbed, with gains of 1.6% each.
This surge comes on the back of strong corporate earnings and recent cooling inflation data, which have buoyed investor sentiment. The Personal Consumption Expenditures (PCE) price index, the Fed’s favored measure of inflation, rose by 2.5% year-over-year through June, marking a continued deceleration from the peak inflation rates seen earlier.
The upbeat economic data, including a robust 2.8% annualized GDP growth rate for Q2, has bolstered hopes that the Fed might be able to manage inflation without triggering a recession—a rare achievement in recent decades.
Wall Street is now betting on potential rate cuts as early as September. While the Fed has currently indicated only one rate cut for the year, market expectations suggest there could be as many as three reductions, according to the CME FedWatch Tool. The Fed’s policy meeting next week will provide more clarity on the central bank’s future actions.
Small-cap stocks, tracked by the Russell 2000 index, have been particularly strong, gaining 10.1% so far this month, significantly outperforming the S&P 500’s modest 0.5% rise. Investors are also exploring opportunities beyond Big Tech, with particular interest in sectors that could benefit from lower interest rates. For instance, Stephen Lee of Logan Capital has increased investments in homebuilder stocks, anticipating that easing inflation could lead to Fed rate cuts and a more favorable housing market.
