Dow closes more than 600 points higher as investors brace for interest rate cuts – Boston News, Weather, Sports

New York (CNN) — There is a noticeable change in sentiment on Wall Street.

Strong corporate profits helped stocks reach new record highs in 2024, even as stubborn inflation forced investors to lower expectations for how many times the Fed will cut interest rates this year.

But falling inflation data in recent weeks has Wall Street betting that the Federal Reserve will finally cut interest rates in September — and that there are now other profit opportunities beyond the big technology stocks that have dominated the market this year.

Data released Friday morning showed the personal consumer price index, the Federal Reserve’s preferred measure of inflation, fell to 2.5% in the 12 months through June — another sign to hopeful investors that inflation is continuing to fall from its 40-year high.

The Dow rose 654 points, or 1.6%, on Friday after gaining more than 800 points earlier in the day. The S&P 500 gained 1.1% and the Nasdaq Composite added 1%.

This week, the S&P 500 and Nasdaq fell, while the Dow Jones rose.

Economic data also remained remarkably resilient, even as interest rates remain at 23-year highs. That, combined with a slowdown in inflation, has raised hopes that the central bank will be able to rein in prices without triggering a recession, something some economists say it has achieved only once since the 1990s. Data on Thursday showed the economy expanded at a solid annual rate of 2.8% in the second quarter, exceeding economists’ expectations.

Wall Street will get more clues about the Fed’s next move at its policy meeting next week, where the central bank is likely to keep interest rates unchanged. While the Fed has scheduled just one rate cut this year, According to the CME FedWatch Tool, investors are betting on as many as three.

Big tech companies are getting hit hard

Brightening prospects for interest-rate cuts typically spell good news for stocks, since the market tends to do better when higher interest rates don’t weigh on companies’ balance sheets. But you wouldn’t get that from the stock market carnage this week.

Although the market was generally higher on Friday, on Wednesday the S&P 500 and Nasdaq recorded their worst daily performances of 2022.

The reason for the sell-off: Investors are dumping shares of the Magnificent Seven, the tech mainstays that have dominated the market for the past two years, their large market share dragging down major indexes. Tech companies account for 32% of total market capitalization, the highest level since the late 1990s, according to June 28 data from MRB Partners.

A less-than-impressive start to the earnings season for the group has only exacerbated the declines: Tesla shares fell 12.3% on Wednesday after the electric vehicle maker reported a more than 40% drop in profit the previous evening. Alphabet shares fell 5% after beating earnings expectations but missing analysts’ expectations for YouTube ad revenue.

Smaller stocks dominate

One area that has recently benefited from the prospect of lower interest rates is small-cap stocks.

Smaller company stocks tend to do poorly when interest rates are high because they hold more floating-rate debt than their larger peers. But they have historically tended to do well when the Fed begins to ease its high lending rates.

The Russell 2000 index, which tracks small-cap stocks, is up 10.4% this month, outpacing the S&P 500’s loss of 0.03%.

Investors are also targeting other areas of the market that are poised to profit if interest rates fall. Stephen Lee, founder of Logan Capital, said his firm boosted its position in developer stocks earlier this quarter, betting that cooling inflation would allow the Fed to lower interest rates and ease a tight housing market.

High interest rates have caused homeowners to hold off on selling their properties to keep pandemic-era mortgage rates low, even as demand has surged, pushing home prices to record highs.

More pain for Big Tech?

Investors have worried over the past year that the market’s gains are driven by a handful of tech stocks, making the rally more vulnerable to pullbacks when a few stocks stumble. The Magnificent Seven generated about 60% of the S&P 500’s total return in the first half of the year, according to Adam Turnquist, chief technical strategist at LPL Financial.

The recent rally in small-cap stocks has some investors hopeful that the market’s gains will continue.

There are signs that the pain for tech stocks may not be over yet. Sharp declines in tech stocks after tepid quarterly results from Alphabet and Tesla suggest investors are losing patience with companies that are investing heavily in artificial intelligence with nothing to show for revenue growth.

Many big tech companies have released AI-powered chatbots and other flashy consumer tools since OpenAI’s ChatGPT kicked off the AI arms race two years ago, but the path to monetizing the technology remains unclear.

During Alphabet’s earnings conference call on Tuesday, UBS analyst Stephen Ju noted that the initial use cases for AI models that big tech companies have invested in building “are more focused on cost savings or efficiency.”

“When do you think we’re going to start thinking about products that can help generate revenue for Fortune 500 and Fortune 1,000 companies, which is probably something that can hopefully create more value in the long term, as opposed to just cutting costs?” Ju said.

As the AI arms race continues to heat up, companies are unlikely to slow down on AI spending. But it’s unclear when that investment will grow their balance sheets.

“The risk of underinvestment for us is much greater than the risk of overinvestment,” Alphabet CEO Sundar Pichai said on the call.