Benign U.S. inflation could support stock market laggards

Signs of falling U.S. inflation on Wednesday and growing hopes for interest rate cuts from the Federal Reserve could be a positive signal for large swathes of the stock market that have languished in a rally led by Big Tech.

Short-term interest-rate futures are now pricing in more than a 70% chance of a rate cut by September, up from only slightly better than a coin toss earlier in the day. One such episode came in the final months of last year, when small caps soared on expectations the Fed was done cutting rates. The small cap-focused Russell 2000 gained 13.6% in the final quarter of 2023, compared to an 11.2% gain for the S&P 500.

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