S&P 500 Scores Best Weekly Gain in Over a Month, Thanks to Easing Inflation

The S&P 500 had an impressive week, climbing 1.58% to close at 5,431.60 points, with gains in four out of five sessions. Its companion, the SPDR S&P 500 ETF Trust (SPY), also rose 1.64% for the week.

This week marked the best performance for Wall Street's benchmark index in over a month. The S&P 500 even set a fresh record close for four days straight, peaking at an all-time high of 5,447.25 points on Wednesday and hitting a closing high of 5,433.64 on Thursday.

So, what got everyone so excited? 

The answer lies in surprisingly soft inflation data. Think of it like going to the grocery store and seeing that prices haven’t gone up for once. On Wednesday, the Consumer Price Index (CPI) showed its first flat reading of the year, while the core CPI had its smallest month-over-month increase since August 2021. Then on Thursday, the Producer Price Index (PPI) also slipped unexpectedly. This is like finding out that not only are your grocery bills staying the same, but your utility bills might go down a bit too.

These reports were a breath of fresh air for Wall Street, with traders now hopeful that the Federal Reserve might cut interest rates in September.

“A series of soft inflation data for May fueled optimism that the Fed will start cutting rates at the September meeting. This week’s data shows progress on the inflation front, even if it's been slow and bumpy,” Wells Fargo said.

The inflation data even managed to steal the spotlight from another major event: the Fed's latest policy decision and their updated Summary of Economic Projections (SEP), or "dot plot." The Fed decided to keep its benchmark federal funds rate at a 23-year high, but they did note “modest further progress” towards their 2% inflation goal. However, the dot plot showed expectations for only one 25 basis point rate cut in 2024, down from the previous forecast of three cuts.

Fed Chair Jerome Powell, during his post-decision press conference, emphasized the need for “greater confidence” that inflation is moving in the right direction. It’s like needing more proof before committing to a big decision, like buying a new car.

Powell acknowledged Wednesday’s CPI report but also pointed out that the labor market remains strong. He stayed noncommittal about rate cuts, saying the monetary policy committee is looking at a “range of plausible outcomes.”

"Fed Chair Jay Powell’s approach to cutting interest rates based on forecasts that inflation will continue moving lower could be summed up by the phrase 'Trust, but verify.' He used the word 'confident' or 'confidence' 20 times at the press conference," noted Wall Street Journal’s Fed watcher Nick Timiraos on X (formerly Twitter).

One thing on investors' minds was the divergence in market breadth, with megacap technology stocks driving most of this week’s S&P 500 gains. It’s like having a potluck where a few guests bring all the food, and everyone else just brings napkins.

"CNN's Fear and Greed sentiment gauge is actually in 'Fear' territory right now because of how weak its market breadth readings are," Bespoke Investment Group noted on X.

Looking at the S&P 500 sectors' weekly performance, seven out of 11 ended in the red. Technology soared more than 6%, underscoring just how much support the heavyweight growth sector provided to the broader market. Energy and Financials topped the losers. Here’s a breakdown:

1. Information Technology: +6.42%, Technology Select Sector SPDR Fund ETF (XLK): +5.60%
2. Real Estate: +1.19%, Real Estate Select Sector SPDR Fund ETF (XLRE): +1.47%
3. Communication Services: +0.88%, Communication Services Select Sector SPDR Fund (XLC): -0.32%
4. Consumer Discretionary: +0.27%, Consumer Discretionary Select Sector SPDR ETF (XLY): +0.38%
5. Utilities: -0.07%, Utilities Select Sector SPDR Fund ETF (XLU): Flat
6. Health Care: -0.40%, Health Care Select Sector SPDR Fund ETF (XLV): -0.38%
7. Materials: -0.90%, Materials Select Sector SPDR Fund ETF (XLB): -0.90%
8. Industrials: -1.01%, Industrial Select Sector SPDR Fund ETF (XLI): -0.96%
9. Consumer Staples: -1.20%, Consumer Staples Select Sector SPDR Fund ETF (XLP): -0.91%
10. Financials: -2.00%, Financial Select Sector SPDR Fund ETF (XLF): -2.00%
11. Energy: -2.32%, Energy Select Sector SPDR Fund ETF (XLE): -2.17%