Stock market rises amid signs of cooling inflation

NEW YORK — Stocks climbed Tuesday after a cooler reading on inflation cemented Wall Street’s estimation that the Federal Reserve will hold off on raising interest rates today.

The S&P 500 rose 30.08 points, or 0.7%, to 4,369.01, its highest level since April 2022. The Dow Jones Industrial Average gained 145.79, or 0.4%, to 34,212.12, while the Nasdaq composite rallied 111.40, or 0.8%, to 13,573.32.

The U.S. stock market has been on a roll amid hopes the economy can avoid a severe recession and inflation can fall enough for the Federal Reserve to ease off its rate increases. Tuesday’s report showed that food, fuel and other prices for consumers were 4% higher in May than a year earlier, the latest slowdown from inflation’s peak of 9.1% last summer.

The Fed has already pulled its benchmark short-term rate up to its highest level since 2007, which has slowed inflation but has also helped cause several U.S. bank failures and a contraction in the manufacturing industry.

Nvidia rallied 3.9% and was the strongest force pushing up the S&P 500, along with other technology stocks. Tech and other high-growth stocks are seen as some of the biggest beneficiaries of an ease-up on rate increases.

Nvidia has gotten help from Wall Street’s recent frenzy around artificial intelligence, which has helped a select group of stocks soar to huge gains this year.

But unlike earlier this year, when a small cadre of stocks was responsible for most of the S&P 500’s gains, Tuesday’s climb was widespread, with four out of five stocks in the index rising.

Raw-material producers and industrial companies had some of the biggest gains in the S&P 500 amid hopes for a resilient economy. Shares of Miner Freeport-McMoRan rose 5.3%, and United Airlines climbed 3.7%, for example.

For all the optimism, though, much of Wall Street doesn’t believe the end has arrived yet for rate increases. Many traders expect the Fed to resume raising rates in July, even if it holds steady today.

Tuesday’s inflation report showed that overall inflation still too high, as are price gains underneath the surface. The Fed prefers to look at inflation after stripping out food, fuel and housing costs, hoping to get a better view of where the trend is heading. Such “supercore” inflation is still above the Fed’s comfort level.

The worry is that additional increases by the Fed will mean more pressure on the U.S. banking system when it’s already cracked under higher rates. Bank customers are pulling deposits in search of higher yields at moneymarket funds. At the same time, higher rates are knocking down the values of bonds that banks bought and other investments they made when rates were low.

Three high-profile U.S. bank failures since March have shaken confidence in the system, causing some banks to toughen lending standards for households and businesses. That puts additional brakes on the economy, raising the risk of a recession.

Shares of Zions Bancorporation fell 1.6% after it appeared to cut its forecast for coming net interest income in an investor presentation.

Just two weeks remain until the start of the third quarter of the year. That’s notable because many investors came into this year predicting a recession would hit in the third quarter, yet the job market has remained remarkably resilient and has propped up the economy.

“Today, the recession has not arrived, and we are witnessing that reckoning in public market equity valuations via the recent rally,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset solutions at Goldman Sachs Asset Management.

But that doesn’t mean the economy is in the clear. “With inflation stubbornly high, we do see the business cycle eventually ending in recession, as the Fed will have to break the back of the labor market to make material progress toward their 2% target” on inflation, she said.

In the bond market, yields initially dropped after the inflation report, but later recovered. The yield on the 10-year Treasury rose to 3.83% from 3.74% late Monday. It helps set rates for mortgages and other important loans.

The two-year yield, which moves more on expectations for the Fed, rose to 4.69% from 4.58%.