US stock markets continued their upward trajectory on Friday, , buoyed by a Supreme Court ruling striking down tariffs imposed by the previous administration and positive economic data. The S&P 500 rose 0.7%, while the Dow Jones Industrial Average gained roughly 0.2%. The Nasdaq Composite led gains, jumping over 1%.
The Supreme Court’s decision invalidated President Trump’s “Liberation Day” tariffs, finding that he lacked the authority to impose them using emergency powers. This ruling removed a significant source of uncertainty for businesses and investors, contributing to the market’s positive response. The court determined that the invocation of the International Emergency Economic Powers Act was an overreach of executive authority.
The gains came despite mixed economic signals released earlier in the day. US GDP growth in the fourth quarter was reported at 1.4%, falling short of expectations. Simultaneously, the Personal Consumption Expenditures (PCE) index – the Federal Reserve’s preferred measure of inflation – rose more than anticipated in December, both on a monthly and annual basis. This suggests continued, albeit moderating, inflationary pressures within the economy.
The market’s resilience in the face of these conflicting data points underscores the prevailing sentiment that the Federal Reserve is likely to proceed with its planned course of interest rate cuts. The Fed had previously indicated it anticipates three rate cuts by the end of , a projection reaffirmed in a recent policy announcement. This expectation of easing monetary policy continues to support risk assets, including stocks.
The reaction to the Fed’s stance was initially observed on , when the S&P 500 closed above 5,200 for the first time, rising 0.8% to finish at 5,224.62. The Dow Jones Industrial Average also reached a record close of 39,512, up approximately 1%. The Nasdaq Composite saw the largest gains, increasing by over 1% to close at a record level of 16,369. These gains were a reversal of initial declines experienced before the Fed’s decision was released.
The updated economic forecasts released alongside the Fed’s policy announcement, known as the Summary of Economic Projections (SEP), included the “dot plot,” which outlines policymakers’ expectations for future interest rate movements. Fed officials foresee the fed funds rate declining to 4.6% by the end of , implying a total of 0.75% in rate cuts. This aligns with market expectations, suggesting a degree of consensus between the central bank and investors.
Bond yields remained relatively stable following the Fed’s announcement. The yield on the 10-year Treasury was slightly lower, around 4.28%, after having increased by over 20 basis points in the preceding two weeks. This indicates that the market has largely priced in the anticipated rate cuts and is not reacting dramatically to the Fed’s confirmation of its plans.
The broadening of the market rally was also notable. The small-cap benchmark index rallied nearly 2% and six of the eleven S&P 500 sectors experienced gains exceeding 1%. This suggests that the positive momentum is extending beyond the large-cap technology stocks that have driven much of the market’s gains in recent months.
However, concerns remain regarding the health of the private credit sector. Blue Owl’s (OBDC, OWL) decision to halt withdrawals has raised fears that it could be an early warning sign of broader financial instability, particularly given concerns about the sector’s exposure to software stocks potentially threatened by the rapid advancement of artificial intelligence. This situation is being closely monitored by investors and regulators.
Minutes from the Fed’s January meeting, released on , revealed a divergence of opinion among policymakers. While some favored maintaining current interest rates, others indicated a willingness to consider rate cuts if inflation continues to decline as expected. The minutes stated that “several participants commented that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation were to decline in line with their expectations.”
The market is currently pricing in at least two rate cuts this year, and the Fed minutes did little to alter this expectation. Investors are now focused on upcoming economic data releases and any further signals from the Fed regarding the timing and magnitude of future rate adjustments. The interplay between economic growth, inflation, and monetary policy will continue to shape market performance in the coming months.
Despite recent gains, investors remain cautious, weighing the potential impact of geopolitical tensions, particularly in the Middle East, and the evolving landscape of the private credit market. The Supreme Court ruling provides a temporary reprieve from trade-related uncertainty, but broader economic and political risks remain on the horizon.
