Dow surges over 600 points as investors anticipate rate cuts

The Dow Jones Industrial Average surged by over 600 points as investors grew optimistic about potential interest rate cuts. This increase reflects market anticipation of the Federal Reserve’s moves to ease monetary policy, aiming to support economic growth amidst recent financial uncertainties. The significant gain underscores positive investor sentiment and the potential impact of lower rates on the market's future performance.

Economic data has also remained remarkably resilient, even as rates stay at a 23-year high. Spencer Platt/Getty Images

Boston Brand Media discovered the trending news - Wall Street is experiencing a noticeable shift in sentiment.

Strong corporate earnings have driven stocks to new record highs in 2024, even as persistent inflation leads investors to lower their expectations for how often the Fed will cut rates this year.

However, recent cooling inflation data has prompted Wall Street to anticipate a Federal Reserve rate cut in September, expanding investment opportunities beyond the dominant Big Tech stocks of the year.

Friday's data revealed the Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, slowed to 2.5% for the 12 months ending in June, offering hopeful signs that inflation is easing from its four-decade peak.

The Dow surged 654 points, or 1.6%, on Friday after earlier gains of over 800 points. The S&P 500 rose by 1.1%, and the Nasdaq Composite increased by 1%.

For the week, the S&P 500 and Nasdaq declined, while the Dow recorded a gain.

Despite high rates, economic data has remained resilient. This, combined with slowing inflation, raises hopes that the Fed might control prices without causing a recession, a feat achieved only once since the 1990s. Data on Thursday showed the economy grew at an annualized rate of 2.8% in the second quarter, exceeding economists’ expectations.

Next week’s Fed policy meeting will offer more insights, with the central bank expected to hold rates steady. Although the Fed plans just one rate cut this year, traders are betting on up to three, according to the CME FedWatch Tool.

Tech Stocks Take a Hit Anticipation of rate cuts usually bodes well for stocks as lower borrowing costs benefit companies' financials. Yet, the market saw significant selloffs this week.

Tesla and Alphabet, key tech stocks, faced disappointing earnings results, leading to sharp declines. Tesla's profits dropped over 40%, and Alphabet missed expectations for YouTube ad revenue, causing their shares to fall 12.3% and 5%, respectively.

Rise of Small-Cap Stocks Small-cap stocks, which suffer with high rates due to more floating rate debt, have recently thrived amid lower rate expectations. The Russell 2000 index gained 10.4% this month, outperforming the S&P 500.

Investors are also betting on other sectors, like homebuilder stocks, anticipating rate cuts will ease the tight housing market. High rates have discouraged homeowners from selling, maintaining pandemic-era low mortgage rates and driving home prices up.

Ongoing Tech Struggles? There are concerns that the market's reliance on a few tech stocks makes it vulnerable to pullbacks. The Magnificent Seven tech stocks drove about 60% of the S&P 500’s gains in the first half of the year.

Recent losses suggest investors are growing impatient with the slow revenue gains from AI investments. Despite numerous AI product releases, monetizing the technology remains a challenge.

As the AI arms race heats up, companies are unlikely to reduce their AI spending, though the financial benefits are yet to be seen. Alphabet CEO Sundar Pichai emphasized the greater risk of underinvesting compared to overinvesting in AI.

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Source: CNN‍