U.S. stocks powered higher Tuesday, notching fresh 2023 peaks across the major indexes as investors geared up for a pivotal Federal Reserve interest rate decision this week.
The Dow Jones Industrial Average climbed 0.48%, logging its third-highest close ever. The blue-chip index finished just shy of 34,000, buoyed by gains in Boeing, American Express and Walgreens Boots Alliance.
The S&P 500 added 0.46%, hitting 4,649 and marking its best settle since January 2022. The broad index was lifted by outperformance in consumer discretionary and tech shares.
The tech-heavy Nasdaq Composite led the charge higher, surging 0.70%. The index landed just below 11,500 as Tesla and Nvidia shares gained.
Driving the risk-on move was a cooler-than-expected inflation report, which reinforced bets of a Fed policy pause. Consumer prices rose just 0.1% in November, below estimates for a 0.3% jump.
Core inflation, stripping out volatile food and energy items, increased 0.2% against projections of 0.4%. While still hot relative to the Fed’s 2% target, the moderate pace boosted hopes that four consecutive 0.75 percentage point rate hikes are finally restraining price pressures.
All Eyes Shift to Fed’s Final 2022 Policy Decision
The inflation data comes ahead of the pivotal two-day Federal Open Market Committee (FOMC) meeting that kicks off Tuesday. The policy gathering is the last of 2022 and arguably the most crucial in years.
Markets have fully priced in a 50 basis point rate pause following the four consecutive 0.75 percentage point hikes at the prior four meetings. If delivered, it would lift the fed funds target range to 4.25% to 4.50%, the highest since late 2007.
While the Fed is still poised to formally shift into restrictive territory, the pause would end the most aggressive tightening campaign since the 1980s. It would also tee up crucial debates over the path forward in 2023.
The Fed’s updated Summary of Economic Projections, along with Chair Jerome Powell’s press conference, will hint at whether policymakers foresee cutting rates in 2023 if inflation keeps cooling or sticking near target.
For now, futures markets are pricing in steady rates through September 2023 before 25 basis point cuts materialize in November and December, taking the fed funds rate to 3.75% to 4% by early 2024.
The projections will help investors discern if this is aligned with policymaker expectations or if the tightening cycle still has room to run before any easing is on the table.
Strategists Parse Fed’s Messaging as Risks Remain
The Fed faces no easy task in plotting the policy path from here. Inflation remains well above target but has cooled from 40-year highs, while economic growth is deteriorating but still positive. Questions swirl over how long it will take supply chains to fully heal and the job market to soften.
According to Wells Fargo Investment Institute, risks remain tilted to the upside on inflation, especially core prices. Further moderation is needed before the Fed can sound the all-clear on bringing prices under control.
BlackRock investment strategists note that, historically, the two to three Fed meetings between the end of hiking cycles and start of cuts produce superior stock market returns.
With markets now viewing the “pause” phase as commencing, they suggest investors take the opportunity to position for further equity gains.
Morgan Stanley Wealth Management warned that confusion over the Fed’s messaging could spark volatility. While the bank’s strategists expect a positive 2023 for stocks, they recommend gradually adding exposure given lingering uncertainties.
Individual Stock Moves: Oracle Tanks While Netflix Boosts Transparency
On the individual stock front, Oracle (ORCL) shares plunged 12.08% after the enterprise software maker posted quarterly sales shy of Wall Street targets. Future revenue guidance also disappointed.
Cloud license and on-premise license revenues grew just 2% year-over-year in constant currency. Total cloud revenues, including infrastructure offerings, rose 20%.
The deceleration follows rival Microsoft reporting 50% Azure cloud platform sales growth last quarter. Oracle is seeking to catch up with more cloud investments and acquisitions, like its $28 billion deal for electronic health records firm Cerner.
Meanwhile, Netflix (NFLX) shares edged 0.70% higher as the streaming giant boosted content transparency with its first biannual viewership report.
The report unveiled Netflix’s top titles based on hours viewed from January through June. It included insights across over 18,000 movies and shows, spanning 99% of platform viewing.
Season 1 of new spy thriller “The Night Agent” logged over 800 million streaming hours to notch the top spot. Long-running legal drama “Suits” demonstrated the power of Netflix’s recommendation engine, finding new life years after airing elsewhere.