Stocks Extend Rally on Inflation, Rate Optimism

U.S. stocks' November bull run extended into a new month as growing investor optimism over inflation and Federal Reserve interest rate policy fueled a broad rally Friday, lifting the S&P 500^® index (SPX) and Nasdaq Composite^® (COMP) to their fifth straight weekly advances. The S&P 500 settled at its highest level since March 2022.

Friday's gains were led by banks and other financial shares and fueled by a further drop in Treasury yields, signaling that investors are increasingly confident inflation will continue to recede and the Fed will hold off on additional rate hikes. The 10-year Treasury note yield (TNX) fell near 4.21%; its lowest level since mid-September.

Investors also appear to be embracing beliefs the Fed's next rate move will be a cut, possibly by spring 2024. Fed chair Jerome Powell seemed to tamp down those hopes in a speech earlier Friday, saying it would be "premature" to speculate when monetary policy might ease.

"Powell's comments were consistent with the belief that the Fed is on hold" with interest rates, said Cooper Howard, director of fixed income Strategy at the Schwab Center for Financial Research. "That's not too surprising in our view, because inflation continues to move lower and there are signs of weakness in the labor market."

"Still, we think the Fed will likely keep rates elevated until late in the second quarter of 2024 or early in the third quarter," Cooper added.

Here's where the major benchmarks ended:

• The S&P 500 index was up 26.83 points (0.6%) at 4,594.63, up 0.8% for the week; the Dow Jones Industrial Average^® (DJI) was up 294.61 points (0.8%) at 36,245.50, up 2.4% for the week; the Nasdaq Composite was up 78.81 points (0.6%) at 14,305.03, up 0.4% for the week.
• The 10-year Treasury note yield was down about 14 basis points at 4.213%.
• The Cboe^® Volatility Index (VIX) was down 0.27 at 12.65.

Friday's gains followed the market's strongest month of the year, as the S&P 500 and Nasdaq surged 8.9% and 10.7% in November, respectively, their best monthly performances since July 2022. Among sectors, the KBW Regional Bank Index (KRX) jumped 5.3% Friday, and retail shares were also among the top gainers. Shares of smaller companies extended a recent rally as the small-cap-focused Russell 2000^® Index (RUT) gained 3.1% for the week and ended at a 2-1/2-month high.

Stocks on the move

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Big Lots (BIG) jumped 21% after the discount retailer reported third-quarter net income swung to $4.73 million from a loss a year earlier. The company also said it expected comparable-store sales in the current quarter to improve to the "high-single-digit negative range" compared with a 13.2% decline in the previous quarter.
• BioNTech (BNTX) fell 1% after JPMorgan analyst Jessica Fye downgraded the company from "neutral" to "underweight," citing slowing demand for COVID vaccines.
• Dell Technologies (DELL) fell 5% after the computer maker reported softer-than-expected third-quarter revenue of $22.3 billion, overshadowing stronger-than-expected earnings per share of $1.88.
• Marvell Technology (MRVL) fell over 5% after the semiconductor company's fourth-quarter revenue outlook disappointed investors.
• Norfolk Southern (NSC) rose nearly 4% after Bank of America upgraded the railroad from "neutral" to "buy" and boosted its price target 22% to $248, citing expectations for better-than-expected fourth-quarter shipping volumes.
• Paramount Global (PARA) gained nearly 10% after The Wall Street Journal reported the media conglomerate discussed the prospect of bundling their streaming services at a discounted price with Apple.
• Pfizer (PFE) fell over 5% after the pharmaceutical company said it would halt development of danuglipron, a twice-daily experimental weight loss pill.
• Ulta Beauty (ULTA) rallied 11% after the beauty products retailer's third-quarter results surpassed Wall Street expectations.

Nearly all S&P 500 members have reported results for the most recent quarter, and it appears the market has ended an earnings "recession" that set in the previous three quarters. S&P 500 companies reported earnings growth of 4.7% on average compared to the same period a year earlier, the first year-over-year increase since the third quarter of 2022, according to FactSet.

Companies on next week's calendar include homebuilder Toll Brothers (TOL), scheduled for Tuesday, followed by enterprise software company Broadcom (AVGO), discount retailer Dollar General Corp. (DG), and athletic apparel maker Lululemon (LULU) on Thursday. Next Friday includes results from Darden Restaurants (DRI).

Fed still aiming for 2% inflation target

The stock market's gains over the past month have been driven in part by a string of relatively subdued inflation readings that appear to have led many investors to conclude that the Fed's most-recent rate hike in late July could be its last in a historically sharp tightening cycle.

Thursday's Personal Consumption Expenditures (PCE) report for October was seen as further evidence that inflation is moving in the right direction. Overall PCE in October rose 3% compared with the same month in 2022, slightly lower than expected, while the core rate, which excludes food and energy prices, met expectations with a 3.5% gain, the smallest year-over-year increase since April 2021. The PCE is the Fed's preferred inflation gauge.

Inflation remains above the Fed's 2% long-term target, Powell pointed out in his address earlier Friday.

"While the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2% objective," Powell said, according to a statement. "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so."

Powell's remarks did little to derail buying enthusiasm in stocks or alter market expectations on Fed rate moves. Late Friday, the market placed 97% odds the Federal Open Market Committee (FOMC) will hold its benchmark funds rate unchanged following its December 12–13 meeting, according to the CME FedWatch Tool. The market also projects an 89% chance the Fed could cut rates by a quarter-point or more in by May 2024.