Both the S&P 500 and Nasdaq Composite closed at fresh record highs on Tuesday after a tamer-than-expected inflation report raised the possibility that the Federal Reserve could cut interest rates next month.
The broad-based S&P ended the day up 1.13% at 6,445.76, while the tech-heavy Nasdaq finished up 1.39% at 21,681.90. The Dow Jones Industrial Average added 483.52 points, or 1.10%, to close at 44,458.61.
Tuesday's fresh inflation data release reassured investors, who have feared that President Donald Trump's broad tariff policies could spike prices in the U.S. economy.
The consumer price index rose 2.7% on an annualized basis in July, while a Dow Jones estimate had called for a 2.8% rise. So-called core CPI, which strips out volatile food and energy prices, increased by 3.1% year on year — slightly more than the expected 3%.
Expectations for lower rates soared following the report. Traders are now pricing in a 94% chance of a rate cut next month, per trading data from the CME's FedWatch Tool. That's up from a 85% chance before the data release. Traders also increased their bets on rate cuts in October and December.
"It looks like a bit of Goldilocks right now for the stock market," said Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. "More and more people are expecting a rate cut in September. So, rates kind of on a downward bias, earnings on an upward bias — that's a pretty good environment for the broad stock market."
Small caps, seen as a big beneficiary of lower short-term borrowing rates, led the rally with the Russell 2000 up nearly triple the gain in the S&P 500.
Tuesday's moves come as traders weigh the latest developments on the tariff front. Trump said Monday he'd extend a 90-day pause on higher levies on Chinese goods.
Wall Street will also parse Thursday's producer price index report for a reading on wholesale inflation. Both reports come ahead of the Fed's Jackson Hole gathering at the end of August and the central bank's September policy meeting.
