NEW YORK (AP) โ Relief washed over Wall Street on Tuesday, with stocks jumping to one of their best days of the year following a surprisingly encouraging report on inflation.
The S&P 500 jumped 1.9% on its best day since April and hit a two-month high. The Dow Jones Industrial Average rose 489 points, or 1.4%, while the Nasdaq composite rose 2.4%.
The highly anticipated report showed not only that headline inflation slowed last month, but so did a key underlying figure that economists see as a better indicator of future trends. The slowdown reinforced bets on Wall Street that inflation is cooling enough for the Federal Reserve to finally end its market-crushing interest rate hikes.
Those hopes fueled all kinds of investments, and more than 90% of S&P 500 stocks rose in a broad-based rally.
Technology and other high-growth stocks tend to get some of the biggest boosts thanks to lower rates, and a 2.3% rise for Amazon and 2.1% for Nvidia were two of the strongest forces driving up the S&P 500.
Stocks of smaller companies also got a big boost, with the Russell 2000 index of small stocks rising 5.4% on its best day in a year. Smaller businesses are often considered to be more reliant on cash loans to grow, which can make them more vulnerable to higher interest rates.
The inflation data helped stoke Wall Street's hopes that the Federal Reserve can actually pull off the balancing act of slowing the economy and hurting investment prices enough to reduce inflation, but not so much as to cause a painful recession. However, that is still not a certainty.
The Federal Reserve has raised its main interest rate to its highest level since 2001, from virtually zero early last year, in hopes of reducing inflation. The measures have already sent shockwaves through the financial system, with stocks still below their peak in early 2022 and several high-profile US bank failures earlier this year shaking investor confidence.
Even if it doesn't raise rates again, the Federal Reserve has indicated plans to keep its main rate high for a while to ensure victory in its battle against inflation.
Still, Tuesday's report was immensely encouraging for Wall Street. After the report was released, Treasury yields in the bond market immediately fell as traders flooded in bets that the Federal Reserve would not raise rates again.
Investors also brought forward the expected timeline for the Fed's first rate cut, which can act as steroids for financial markets and provide oxygen to the entire financial system. Many are betting the cuts will begin in the summer, although some economists say they probably won't begin until late 2024.
"There is no reason to believe that the last leg of inflation will be the most difficult," said EY chief economist Gregory Daco. "Lower consumer demand, lower home rents, lower profit margins, easing wage growth and tight monetary policy represent the ideal disinflationary combination heading into 2024."
The 10-year Treasury yield fell to 4.44% from 4.64% late Monday, marking a significant move for the bond market. Just a few weeks ago, the 10-year yield was above 5% and at its highest level since 2007.
Traders now see zero chance of a rate hike at the next Federal Reserve meeting next month, down from a 14.5% chance a day earlier, according to CME Group data.
The prospect of no further rate hikes reverberated across all types of financial markets.
The value of the US dollar fell against many other currencies, further slowing its strong run since the summer, while the price of gold rose $16.30 to settle at $1,966.50 an ounce. Higher rates tend to hurt gold because the metal appears less attractive as an investment when bonds pay higher yields and gold still pays nothing.
On Wall Street, real estate and other stocks, particularly hit by higher rates, soared and posted some of the market's biggest gains.
Alexandria Real Estate Equities rose 11.7%, for example. It has megacampuses serving life sciences companies in centers across the country.
Real estate investment trusts send most of their profits to investors in the form of dividends, meaning they typically compete with bonds for the same type of investors. When rates rise and bonds pay higher yields, those investors often shy away from REITs, utilities and other high-dividend stocks.
Bank stocks also strengthened on hopes that a halt to rate hikes will mean less pressure on the financial system. Zions Bancorp rose 8.1% and Comerica rose 7.8%. Its share prices fell sharply earlier this year following the collapses of Silicon Valley Bank and other banks a notch or two below the industry giants.
Elsewhere on Wall Street, Home Depot surged 5.4% after reporting stronger final-quarter earnings than analysts expected.
Target, Walmart and other big retailers will report their latest results later this week. They are at the end of an earnings reporting season that has been better than analysts expected. According to FactSet, S&P 500 companies are on track to achieve their first overall earnings growth in a year.
In total, the S&P 500 rose 84.15 points to 4,495.70. The Dow gained 489.83 to 34,827.70 and the Nasdaq rose 326.64 to 14,094.38.
In foreign stock markets, indices rose mostly in Europe and Asia.
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AP Business writers Yuri Kageyama and Matt Ott contributed.
