On Friday, the Dow Jones Industrial Average surpassed the 40,000 mark for only the second time, closing the week on a high note and instilling confidence in investors about a potential rate cut from the Federal Reserve. The blue-chip index climbed 0.6% to just above 40,000, marking its second close past this threshold since its first in May. Additionally, the S&P 500 and Nasdaq Composite each saw a 0.6% increase, contributing to weekly gains for all three major indices.
This upbeat end to the week followed data released on Thursday, indicating a continued decline in consumer inflation. The encouraging inflation data sparked a stock market rotation into sectors that had lagged earlier in the year. Investors maintained this momentum on Friday, with the Russell 2000 index of small-cap stocks rising by 1.1% to secure a weekly gain of 6%, its best weekly performance since November 2022.
The S&P 500’s real estate sector also experienced gains, closing the week with a 4.4% increase. Despite this positive movement, the real estate sector remains the only segment of the S&P 500 that is down for the year. As consumer-price index data continues to ease, investors are shifting their focus to sectors likely to benefit from lower interest rates. This trend persisted despite new data on Friday showing a slight increase in producer prices.
“There’s absolutely no question that the Fed will end up cutting by the end of the year. And there’s nothing that happened today that would change that,” said David Bahnsen, Chief Investment Officer of The Bahnsen Group. This sentiment is widely shared in the market, with traders on Friday pricing in a 94% chance that the Federal Reserve will cut interest rates in September, up from 78% a week earlier, according to CME Group data. While the Federal Reserve is expected to hold rates steady at its upcoming meeting later this month, the anticipation of a rate cut is driving market behavior.
The S&P 500 has risen 18% so far this year, with 10 of its 11 sectors showing positive growth. However, the financial sector faced challenges, particularly with the first slate of earnings from major banks. Shares of JPMorgan Chase fell by 1.2% despite an increase in second-quarter profit driven by rising investment banking fees. Wells Fargo saw a significant decline of 6% after missing estimates for quarterly interest income, and Citigroup’s shares fell by 1.8% despite reporting a surge in investment banking revenue and setting aside more provisions for potential credit card losses.
As the earnings season progresses, investor expectations are high. Overall, companies in the S&P 500 are projected to report a fourth consecutive quarter of earnings growth, with profits expected to have climbed 8.8% from last year’s second quarter, according to FactSet. This would represent the largest increase since the first quarter of 2022. However, some stocks are not receiving the anticipated rewards, even with decent results, due to elevated expectations and softer economic data.
Financial stocks broadly outperformed, with the S&P 500 financials sector index nearing a new record. Shares of Bank of New York Mellon and State Street surged by 5.2% and 2.7%, respectively. Treasury yields remained steady, with the 10-year yield slipping to 4.187% on Friday. This followed a drop to 4.192% on Thursday, as the positive inflation data boosted investor optimism about future rate cuts.
On the international front, markets showed mixed results. Hong Kong’s Hang Seng Index rallied, and the Stoxx Europe 600 also saw gains, while Japan’s Nikkei 225 fell by 2.5%, impacted by a significant decline in SoftBank shares.
In summary, the Dow’s climb above 40,000, coupled with strong performances in the S&P 500 and Nasdaq Composite, highlights a week of positive gains driven by expectations of a rate cut. Despite some sector-specific challenges, particularly in financials, the broader market sentiment remains optimistic as investors anticipate further economic easing measures from the Federal Reserve.