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US Stock Market Soars to 14-Month Highs Amid Modest Inflation Increases

Inflation data indicates a likely pause in rate hikes, leading to optimistic trading.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US

Stock Market Reacts to Mild Inflation

US stocks witnessed a significant surge on Tuesday as S&P 500 and Nasdaq touched their highest closing figures in 14 months. This spike followed the data revealing a modest increase in consumer prices in May. These favorable numbers fueled expectations of the Federal Reserve not proceeding with an interest rate hike this Wednesday.

NVDA Takes the Lead in the Chip Industry

Leading the charge among tech stocks, Nvidia (NASDAQ: NVDA) saw a leap of 3.9% in its value. The chipmaker became the first in its sector to close a trading day with a market capitalization surpassing the $1 trillion mark. This success came on the heels of a less-than-stellar update on artificial intelligence strategy from its rival, Advanced Micro Devices (NASDAQ: AMD), which subsequently faced a 3.6% drop.

Understanding the Inflation Data

The optimism was sparked by a US Labor Department report which revealed a marginal 0.1% rise in the Consumer Price Index (CPI) last month, succeeding a 0.4% increase in April. Core inflation remained stable at 0.4%. Year-on-year, headline inflation climbed a lower-than-forecast 4.0%, indicating a reduction in the cost of energy services and products, such as gasoline and electricity.

Federal Reserve's Stance on the Data

Liz Young, the head of investment strategy at SoFi (NASDAQ: SOFI) in New York, commented, "If the Fed was looking for data to indicate a 'pause' in June, they found it today." She also noted that the interpretation of the data could be flexible, supporting both bullish and bearish outlooks.

Market Expectations on Interest Rates

Currently, traders have factored in a 93% chance that the US central bank will maintain interest rates within the 5%-5.25% range this Wednesday, while there's a 62% probability of a 25-basis-point hike in July, based on the CME Fedwatch tool.

Market Recovery and High-Performing Stocks

The S&P 500 has made an impressive recovery since October 2022, climbing about 22% from its low. This recovery has been largely driven by the gains made by market heavyweights such as Apple Inc (NASDAQ: AAPL), Nvidia Corp, and Tesla (NASDAQ: TSLA) Inc. Energy and materials sectors have been on the rise as well, along with small-cap stocks.

Chinese Stocks Gain Momentum

In another positive development, U.S.-listed shares of Chinese companies witnessed growth following China's central bank's decision to lower its short-term lending rate for the first time in ten months. Alibaba (NYSE: BABA) Group and JD (NASDAQ: JD).com saw 1.9% and 3.5% gains, respectively.

S&P, Nasdaq, and Dow Jones Performance Highlights

The S&P 500 closed the session at 4,369.01 points, rising by 0.69%. Meanwhile, the Nasdaq gained 0.83%, finishing at 13,573.32 points, and the Dow Jones Industrial Average saw a 0.43% increase, closing at 34,212.12 points. The trading volume was heavier than usual, with 11.6 billion shares being exchanged on US exchanges, compared to the average of 10.6 billion shares over the last 20 sessions.

Sector-wise Gains and High-Performing Indexes

Materials led the charge among the 11 S&P 500 sector indexes, rising by 2.33%, closely followed by industrials at 1.16%. In addition, the small-cap Russell 2000 index experienced a significant surge of 1.2%, achieving a three-month high.

Other Noteworthy Stock Movements

There were some notable movements in individual stocks. Intel Corp (NASDAQ: INTC) appreciated 2.5% following reports of its talks with SoftBank Group Corp's Arm to become an anchor investor in its IPO. Bunge (NYSE: BG) Ltd also rallied 2.5% as it announced a merger with Glencore-backed Viterra to form a trading behemoth worth about $34 billion in the agricultural sector. Tesla Inc was the most traded stock in the S&P 500, with shares worth $40.8 billion changing hands during the session, pushing the shares up by 3.55%.

Trading Highlights

The positive trend was evident as advancing issues in the S&P 500 outnumbered the declining ones by a 4-to-1 ratio. The S&P 500 and Nasdaq both posted several new highs and a few new lows, indicating the market's upward momentum.