Chips Power S&P 500 to Fresh Record, Chipmakers Surge on AI Optimism

• Friday's market surge set records, driven by optimism over anticipated Federal Reserve rate cuts and strong corporate profits.
• S&P 500 rose 1.2% to 4,839, Dow Jones surged 1.1%, and Nasdaq climbed 1.7%.
• Greg McBride noted a shift in the Federal Reserve's approach, from avoiding rate hikes during the last peak to a recent acceleration. Attention now focuses on when interest rate trimming will begin.

The stock market experienced a surge to unprecedented levels on Friday, as investor optimism regarding anticipated interest rate cuts by the Federal Reserve and robust corporate profits fueled a rally on Wall Street.

Fueled by strong performance in technology stocks at the beginning of the year, the S&P 500 achieved a remarkable 1.2% increase, reaching an all-time high of 4,839. This surpassed the previous closing peak of 4,796 recorded in January 2022.

The Dow Jones Industrial Average also reached new heights, registering a substantial surge of nearly 400 points, or 1.1%, marking its second record high since December. Simultaneously, the Nasdaq Composite demonstrated a notable climb of 1.7%.

Federal Reserve's Shifting Focus

Greg McBride, Chief Financial Analyst for Bankrate, highlighted the contrast between the current market situation and the last peak, emphasizing that the Federal Reserve had not initiated interest rate hikes to counter inflation during the previous peak.

In the two years since, there was a notable acceleration in interest rate hikes, marking the fastest pace in 40 years. Now, as inflation appears to be moving back toward the 2% target, attention is focused on when the Federal Reserve will commence the process of trimming interest rates.

A University of Michigan study that said consumer sentiment in the United States is improving and has reached its highest level since July 2021 gave investors hope on Friday. Approximately two thirds of economic activity comes from consumer expenditure.

Expectations among consumers for future inflation also appear to be anchored, which may be of greater significance to the Fed. There has been significant concern that these assumptions would become a reality and set off a vicious cycle that maintains excessive inflation.

The central bank is expected to begin reducing its benchmark interest rate in March and make five reductions overall throughout the year, according to Goldman Sachs economists' predictions at the beginning of the week.

The investment bank anticipates a "soft landing" for the US economy this year, with growth in GDP gradually moderating and inflation continuing to decline. According to Goldman, the central bank will progressively lower interest rates, which would lower the cost of borrowing money for both individuals and companies.

Comerica Wealth Management's senior investment strategist, John Lynch, believes that strong corporate earnings and anticipations of falling interest rates would likely propel markets higher in 2024.