Wall Street rallies to record high

The S&P 500 jumped 1.2% to top its prior high set a month and a half ago. The Nasdaq composite added 1.4% to its own record set a day earlier, and the Dow Jones Industrial Average gained 349 points, or 0.9%, to beat its all-time high set in March.

Relief came from the bond market, where Treasury yields eased to release some of the pressure on the stock market. The moves resulted from strengthening expectations among traders that the Federal Reserve may indeed cut its main interest rate this year.

Stocks that tend to benefit the most from lower interest rates helped lead the market. Real-estate stocks in the S&P 500 climbed 1.7%, while stocks of electricity companies and other utilities rose 1.4%. The dividends they pay look better to investors when bonds are paying less in interest.

Homebuilders were strong on hopes that cuts by the Fed could lead to easier mortgage rates, with Lennar, D.R. Horton and PulteGroup all rallying more than 5%. Big Tech and other high-growth stocks also rode the wave of expectations for lower rates, and Nvidia’s gain of 3.6% was the strongest force pushing the S&P 500 upward.

The optimism came from a report showing U.S. consumers had to pay prices for gasoline, car insurance and everything else in April that were 3.4% higher overall than a year earlier. While that’s painful, it’s not as bad as March’s inflation rate of 3.5%.

Perhaps more importantly, the slowdown was a relief after reports for the consumer price index, or CPI, earlier this year had consistently come in worse than expected. That string of disappointing data had washed out forecasts for the Federal Reserve to lower its main interest rate soon.

The federal funds rate is sitting at its highest level in more than two decades, and a cut would goose investment prices and remove some of the downward pressure on the economy.

“There was a lot lying on today’s CPI print to prove that disinflation was simply delayed these last three months and not derailed,” according to Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.

A separate report showed no growth in spending at U.S. retailers in April from March. It was a weaker showing than the 0.4% growth economists expected.

Slowing growth in retail sales could be seen as a positive for markets, because it could reduce the upward pressure on inflation. But a stalling out also raises worries about cracks forming in U.S. consumer spending, which has been one of the main pillars keeping the economy out of a recession. Pressure has grown particularly high on lower-income households.

“Hopefully the consumer isn’t running out of steam, but with pandemic savings spent, rising delinquencies, slower wage growth, and now flat retail sales, a more abrupt slowing of the economy can’t be ruled out,” said Brian Jacobsen, chief economist at Annex Wealth Management.

That could threaten one of the main hopes that’s rallied the U.S. stock market toward its records: The Federal Reserve can pull off the balancing act of slowing the economy enough through high interest rates to stamp out high inflation but not so much that it causes a bad recession.

A separate discouraging report released in the morning, meanwhile, said manufacturing in New York state is contracting more than expected.

On Wall Street, Petco Health + Wellness helped lead the market after soaring 27.9%. It named Glenn Murphy, who is CEO of investment firm FIS Holdings, as its executive chairman.

On the losing end were GameStop and AMC Entertainment, as momentum reversed following their jaw-dropping starts to the week. GameStop fell 18.9%, though it’s still up 126.5% for the week so far.

AMC Entertainment sank 20% after it said it will issue nearly 23.3 million shares of its stock to wipe out $163.9 million in debt.

All told, the S&P 500 rose 61.47 points to 5,308.15. The Dow added 349.89 to 39,908.00, and the Nasdaq jumped 231.21 to 16,742.39.

In the bond market, the yield on the 10-year Treasury eased to 4.34% from 4.45% late Tuesday. The two-year yield, which moves more closely with expectation for Fed action, sank to 4.72% to from 4.82%.

Traders are now forecasting a nearly 95% probability that the Fed cuts its main interest rate at least once this year, according to data from CME Group. That’s up from just below 90% a day before.

In stock markets abroad, Shanghai’s fell 0.8% after China’s central bank left a key lending rate unchanged. Indexes were mixed elsewhere in Asia and modestly higher in Europe.