Stocks closed broadly higher again Thursday as investors grew more optimistic that a slowing U.S. economy means the Federal Reserve can temper its aggressive interest rate hikes aimed at taming inflation.
The S&P 500 rose 1.2% as more than 80% of the stocks in the benchmark index closed higher. The Dow Jones Industrial Average gained 1% and the Nasdaq rose 1.1%. Smaller company stocks edged out the broader market, lifting the Russell 2000 by 1.3%.
The Commerce Department reported that the economy contracted at a 0.9% annual pace last quarter. The decline in the gross domestic product - the broadest gauge of the economy - followed a 1.6% annual drop from January through March. Consecutive quarters of falling GDP are an informal, though not definitive, indicator of a recession.
The GDP report signaled weakness across the economy. Consumer spending slowed as Americans bought fewer goods. Business investment fell. Inventories tumbled as businesses slowed their restocking of shelves, shedding 2 percentage points from GDP.
The Federal Reserve has made slowing the U.S. economy to tame the highest inflation in 40 years its goal by raising interest rates, most recently on Wednesday. The latest GDP report, along with other recent weak economic data, could be giving some investors confidence that the central bank will be able to ease up on the size of any further rate hikes in the months to come, analysts said.
As the Federal Reserve announces a rate change, traders work and watch at the New York Stock Exchange in New York, Wednesday, July 27, 2022. Stocks on Wall Street are solidly higher in afternoon trading Wednesday after the Federal Reserve raised its key interest rate by a widely expected three-quarters of a point as the central bank ratchets up its campaign to quell surging inflation. (AP Photo/Seth Wenig)"Sometimes bad news is good news," said Megan Horneman, chief investment officer at Verdence Capital Advisors. "The Fed may not have to be as aggressive as once thought. That's what investors are looking at."
Traders now see a 74% chance that the Fed will raise its key rate by a half-point at its next policy meeting in September, and only a 26% chance of another 0.75-point increase, according to CME Group.
The central bank raised its key short-term interest rate by 0.75 percentage points on Wednesday, lifting it to the highest level since 2018. The move sparked a broad market rally led by technology stocks that helped give the Nasdaq its biggest gain in over two years. The major indexes are now all on pace for a weekly gain, extending Wall Street's strong July rally.
On Thursday, the S&P 500 rose 48.82 points to 4,072.43, while the Dow added 332.04 points to close at 32,529.63. The Nasdaq gained 130.17 points to 12,162.59. The Russell 2000 rose 24.69 points to 1,873.03.