S&P 500 and Nasdaq Composite set records after encouraging inflation data

The S&P 500 and Nasdaq Composite indices set new records at the end of the trading session on August 12. Stocks rose as investors were relieved by the news that the U.S. inflation rate was below expectations. This could give the Fed the green light to cut interest rates in September, with Wall Street now expecting a total of three rounds of cuts before the end of the year.

- The S&P 500 index rose 1.1% in trading on August 12, setting a 16 record this year. It crossed the 6,400-point mark for the first time.

- The Nasdaq Composite Technology Index also closed at an all-time high, jumping nearly 1.4%. This is the 19th record for the index since the beginning of the year.

- The Dow Jones Industrial Average was up 1.1 percent.

- Small-cap stocks, which are considered the main beneficiaries of lower short-term borrowing rates, led the gains, with the Russell 2000 Index soaring 3%.

- Two-year bond yields, which are more sensitive to a possible change in Fed policy, fell four basis points.

- The dollar and gold fell in price amid investors' willingness to invest in riskier assets.

U.S. consumer prices rose less than Wall Street had expected in July, according to data released Aug. 12. This reassured investors who feared that President Donald Trump's sweeping trade policies could lead to a spike in inflation.

The Consumer Price Index (CPI) increased 2.7% year-over-year in July, while the Dow Jones forecast called for a 2.8% increase. Meanwhile, core CPI, which excludes volatile food and energy prices, rose 3.1% from a year ago - slightly higher than expected - and 0.3% relative to June, the largest gain since January. The data suggests that the pickup in goods inflation is no longer being offset by its contraction in the services sector, according to Yahoo Finance.

Expectations of a U.S. Federal Reserve rate cut have risen sharply since the report was published. Traders are now laying down a 94 percent probability that this will happen in September, follows from FedWatch data of the Chicago Mercantile Exchange. Before the inflation statistics were released, that probability was 85 percent. Traders have also increased bets that the Fed will take further steps to ease policy in October and December.

Wall Street will also closely analyze data on the producer price index, which will be released on Thursday, Bloomberg notes .

"The published data tells the Fed that the impact of duties on prices will mostly be temporary," said Alexandra Wilson-Elizondo of Goldman Sachs Asset Management as quoted by CNBC. In her opinion, inflation statistics support the idea of a rate cut in September, which will be a key driver for the markets.

Neil Datta of Renaissance Macro Research called the market reaction "surprising." "Stocks are rising because the September rate cut is already seen as a done deal. However, if you take the [inflation] data literally, it implies that the duties are not being passed on to consumers, which means companies are putting up with the squeeze on profit margins for now," the analyst warned .

"This could be the calm before the storm," Bankrate's Greg McBride told Bloomberg. - A raft of duties go into effect this month, and it could be months before those costs fully reach the consumer, but inflation is likely to keep rising for the rest of 2025."

"The CPI report is reminiscent of the philosophical question, 'If a tree falls in a forest [and no one hears it, does it make a sound as it falls?"'" - argues Art Hogan, chief market strategist at B. Riley Wealth's Art Hogan, also quoted by CNBC. He explains: the data was pretty much in line with expectations and likely won't change the Fed's course. Hogan expects rate cuts at the next three Fed meetings.

The forecast of easing in September has already been largely factored in by the markets, agrees Josh Jamner, senior investment strategy analyst at ClearBridge Investments. Investors can now turn their attention to possible trade deals, he believes.

With investors betting on lower Fed rates rather than stronger economic growth and expanding corporate profits, many stocks will be left behind, Barron's warns . That's already evident in the structure of the S&P 500, where just two companies - Nvidia and Microsoft - account for about 15% of the index's total value. Adding Apple, Amazon, Alphabet and Meta Platforms brings the total weighting of the six players to about 35%. These stocks, along with the largest companies in the financial sector, are likely to benefit the most from the Fed's rate cuts, Barron's said. "The technology sector and other long-cycle growth sectors tend to benefit the most from lower yields," Charu Chanana, chief investment strategist at Saxo Bank, told the publication.

"In the current environment, stocks could continue to rise, and it would take either a much higher inflation figure or another shock to start a correction," suggests Chris Zaccarelli, chief investment officer at Northlight Asset Managemen, his opinion cited by CNBC. - With many strategists expecting volatility in the coming months but advising buying on drawdowns, it's hard to envision a major correction without a real recession."

This article was AI-translated and verified by a human editor