Dow soars more than 700 points, sending Wall Street to new highs on rate-cut hopes

The Dow Jones Industrial Average reached an all-time closing high on Tuesday after retail sales data supported the narrative that the Federal Reserve is approaching its easing cycle , reining in inflation while avoiding a recession.

The blue-chip index jumped 742.76 points, or 1.9%, to 40,954.48, it’s best day in more than a year.

The Nasdaq rose 0.2%, while S&P 500 gained 0.6%, setting another record.

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“This rotation underscores the likelihood of interest rate cuts as early as September,” said Greg Bassuk, CEO at AXS Investments in New York. “Small cap companies are among the best-positioned to benefit from rate cuts, and today we’re seeing this trifecta of strong earnings, a resilient economy and high confidence of a rate cut in September.”

Economic data on Tuesday included stronger-than-expected retail sales reported by the Commerce Department. This provided reassurance that consumers, responsible for about 70% of US gross domestic product, have stayed resilient despite restrictive monetary policy, and eased fears that high interest rates could tip the economy into recession.

“As you look at the economic data, it’s slowing down but not at a concerning pace,” said Tom Hainlin, national investment strategist at US Bank Wealth Management in Minneapolis. “The Fed is seeing what it wants to see – it’s that sweet spot of the economy slowing down but not too much and not too fast.”

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“This small cap rally seems predicated on the Fed cutting rates at the September meeting, where the futures markets are setting up a 100% probability,” Hainlin added.

Second-quarter earnings season is ramping up.

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UnitedHealth Group  jumped after reporting consensus-topping profit, lifting the Dow and the S&P 500 Health Care index to all-time highs.

Bank of America’s second-quarter profit beat expectations, and underwriting fees rose as capital markets resurged. The second-largest US bank also provided upbeat net interest income guidance, sending its shares higher.

Morgan Stanley rose even after the investment bank posted disappointing wealth management revenue.

Charles Schwab slid after reporting a dip in interest income.

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