Wall Street drifts toward the edge of its all-time high set 2 years ago

Tech stocks were also strong for a second straight day after heavyweight chipmaker Taiwan Semiconductor Manufacturing Co. delivered a better-than-expected forecast for revenue growth this year. Broadcom rose 2.7%, and Texas Instruments climbed 3.7% after announcing its dividend.

Companies in the S&P 500 are likely to report only slight growth in overall profits for the fourth quarter of 2023, if any, if analysts’ estimates are close to accurate. But optimism is higher for 2024. Inflation is on the way down, and the U.S. economy has managed to avoid a recession that many investors had earlier seen as inevitable.

Those factors, along with strong expectations for the Federal Reserve to cut interest rates sharply this year, are what have driven the S&P 500 to the brink of its record. It had earlier dropped as much as 25% from its all-time high after inflation topped 9% to reach its most painful level since 1981.

The main medicine the Federal Reserve uses to break high inflation is high interest rates, which tighten the brakes on the entire economy by making borrowing more expensive.

With inflation down to 3.4%, the big question on Wall Street now is how many times the Federal Reserve will cut rates this year and when it will begin. Cuts to the Fed’s main rate from its highest level since 2001 would relax the pressure on the financial system and give a boost to investment prices.

Yields have already tumbled since autumn on such expectations, helping to give the stock market a head start in its rally. After topping 5% in October, the yield on the 10-year Treasury dropped back below 4% recently.

This week, though, yields recovered some of those losses after reports showed the economy is stronger than expected. While such solid numbers keep worries about a recession at bay, they could also keep upward pressure on inflation.

That in turn has forced traders to drop many of their bets that the Fed will begin cutting rates as soon as March. The Fed has been hinting at fewer rate cuts this year than investors had been betting on.

“The truth is likely somewhere between what the Fed is saying and what the market is expecting” in terms of when the first rate cut will arrive, said Brian Jacobsen, chief economist at Annex Wealth Management. “That will continue to cause dips and rips” for financial markets “until the two reconcile with each other.”

The 10-year yield climbed to 4.16% from 4.14% late Thursday, adding some pressure on the stock market.

Yields rose after a preliminary report suggested the mood among U.S. consumers is roaring higher. Sentiment may have jumped to its highest level since July 2021, according to the University of Michigan, and spending by consumers is the main driver of the economy.

Perhaps more importantly for the Fed, expectations for upcoming inflation among households seem to be anchored. One of the Fed’s bigger worries has been that such expectations could take off and trigger a vicious cycle that keeps inflation high.

A separate report said sales of previously occupied homes weakened in December, when economists were expecting improvement. The hope is that marks a bottom for the figure. If interest rates come down, so too could mortgage rates, which would help invigorate the industry.

On Wall Street, Spirit Airlines recovered some of its steep losses from earlier in the week. It rose 20.3% after it said bookings for the peak holiday travel period were strong, and it expects to report fourth-quarter revenue at the high end of its earlier forecast.

The stock is nevertheless still down 54.2% for the week after a federal judge blocked its purchase by JetBlue Airways out of worries it could lead to higher airfares.

Wayfair jumped 10.4% after it said it would cut about 1,650 jobs, or 13% of its workforce, to help it save more than $280 million annually.

On the losing end was PPG, even though the supplier of paints, coatings and other materials reported stronger profit for the end of 2023 than analysts expected. It fell 1.9% after it also gave profit forecasts for the first three months of 2024 and for the full year that fell short of analysts’ expectations.

In stock markets abroad, Japan’s Nikkei 225 jumped 1.4% to continue its strong gain since the start of the new year. Japan’s inflation rate slowed for a second straight month, upping the chance that the Bank of Japan may keep its ultra-low interest rates around a bit longer.

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AP Writers Matt Ott and Zimo Zhong contributed.