Wall Street closes on wave of recovery supported by inflation data

Wall Street’s major stock indexes ended higher today as investors turned to technology stocks that sparked a massive sell-off earlier this week. Inflation data boosted optimism that the Federal Reserve will soon begin cutting interest rates.

In the case of the S&P 500 and Nasdaq Composite indices, gains were not able to fully recover losses incurred in the previous two sessions. Both indices ended the week in the red for the second week in a row.

The Dow Jones Industrial Average ended the week higher. Friday’s gains were helped by industrial conglomerate 3M, which jumped 23% for its biggest daily percentage gain in decades after raising the low end of its full-year adjusted profit forecast.

Five members of the Magnificent Seven rose today, led by Meta Platforms, which rose 2.7%. The two exceptions were Tesla and Alphabet, whose poor earnings prompted a big sell-off Wednesday. Both companies fell 0.2%, with Alphabet falling to its lowest close since May 2.

With Magnificent Seven’s financial results due out next week, the markets’ near-term outlook may hinge on the companies’ performance.

“What we get next week from Apple, Microsoft, Amazon.com and Meta will really set the tone for whether this rotation continues and, therefore, where the market goes,” said Greg Boutle, head of U.S. equities and derivatives strategy at BNP Paribas.

Rotation involves moving high-growth stocks that now appear overvalued into underperforming sectors such as mid- and small-cap stocks.

That shift has gained momentum in recent weeks, with the Russell 2000 and S&P Small Cap 600 indexes hitting their fourth weekly closing highs.

The Russell 2000 Index posted its third consecutive weekly gain in two months, its best three-week performance since August 2022.

These economically sensitive small caps gained support today from a moderate rise in US prices in June, which underscored a decline in inflation and potentially positioned the Fed to begin easing policy in September.

Bets on a 25-basis-point rate cut at the Fed’s September meeting remained at around 88% after the PCE reading, according to CME’s FedWatch. Traders still largely expect two rate cuts by December, LSEG data showed.

“We think (stable economic data) is supportive of broadening trade,” said Adam Hetts, global head of multi-asset at Janus Henderson, noting that small-caps have outperformed the S&P 500 by more than 10% over the past month.

Expanding trade also benefited cyclical sectors of the economy. All 11 S&P sectors were higher today, with Industrials and Materials leading the gainers.

The S&P 500 Index gained 59.88 points, or 1.11%, to 5,459.10 today, while the Nasdaq Composite added 176.16 points, or 1.03%, to 17,357.88. The Dow Jones Industrial Average rose 654.27 points, or 1.64%, to 40,589.34.

This week, the Dow Jones is up 0.75%, while the S&P 500 is down 0.82% and the Nasdaq is down 2.08%.

Among stocks that saw earnings rise, Deckers Outdoor rose 6.3% after raising its full-year profit forecast, and oil services company Baker Hughes rose 5.8% after beating second-quarter profit estimates.

Norfolk Southern shares rose 10.9%, their biggest one-day percentage gain since March 2020, after the rail operator reported second-quarter profit that beat Wall Street estimates on solid pricing.

Medical device maker Dexcom fell 40.6% after lowering its full-year revenue forecast.

Trading volume on US exchanges amounted to 10.92 billion shares, while the average for the full session over the last 20 trading days was 11.61 billion.