By Sinead Carew and Shashwat Chauhan
(Reuters) – Wall Street’s main indexes ended higher on Friday as investors focused on the chance of further interest rate cuts by the Federal Reserve next week, with interest-rate-sensitive small-cap stocks outperforming.
Bets on the size of the Fed rate cut were mixed, and were nearly even by late Friday. Expectations for a 50 basis point rate cut rose to 49% from 28% on Thursday, according to the CME’s FedWatch tool, which showed a 51% chance of a 25 basis point rate cut.
Former New York Fed President Bill Dudley said late Thursday that there is a strong case for a 50 basis point interest rate cut.
The Wall Street Journal and other media outlets reported early Thursday that the Federal Reserve faces a tough decision on how much to ease on Sept. 18.
“There are rumors again that the Fed discussion is leaving 50 basis points on the table,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Southfield, Michigan.
In contrast, bets that the Federal Reserve may opt to cut interest rates by 25 basis points were boosted on Thursday after news of a slight increase in producer prices and consumer price data on Wednesday.
While renewed hopes for a bigger cut boosted large-cap indexes on Friday, the optimism was most evident in the Russell 2000 index of small-cap companies, which rose 2.5% on the day and 4.4% for the week.
Small businesses are more sensitive to price changes because they rely more on borrowed funds and floating-rate loans.
Baird said stocks appeared to be showing investor optimism that a 50 basis point rate cut would not signal an impending recession.
“If investors look at this and say they have to move faster because they are behind the curve, we won’t see riskier assets like small-caps rally,” Baird said. “We are seeing some of the riskier areas of the stock market rally strongly today.”
Friday’s gains were likely due to Dudley’s comment on the case for a 50 basis point rate cut, said Jason Pride, head of investment strategy and research at Glenmede in Philadelphia.
A poll on Friday also showed U.S. consumer sentiment improved in September as inflation eased, although Americans remained cautious ahead of the November presidential election.
The index rose 297.01 points, or 0.72%, to 41,393.78 points, gained 30.26 points, or 0.54%, to 5,626.02 points, and gained 114.30 points, or 0.65%, to 17,683.98 points.
The three major U.S. stock indexes closed near their highest levels in nearly two weeks, posting strong weekly gains.
For the week, the S&P 500 rose 4.02% and the Nasdaq climbed 5.95%, both posting their biggest weekly gains since early November. The Dow Jones added 2.60% for the week.
Adobe (NASDAQ:) stock closed down 8.5% after the Photoshop maker forecast fourth-quarter earnings that fell short of estimates.
Boeing (NYSE:) shares fell 3.7% after workers at its West Coast factory walked off the job early Friday after overwhelmingly rejecting the contract deal.
Shares of Chinese e-commerce company PDD Holdings fell 2.4% after the Biden administration said it was moving to limit low-value shipments entering the United States duty-free below a “de minimis” threshold of $800.
Uber (NYSE:) shares rose 6.4% after the ride-hailing platform said it will bring self-driving ride-hailing service to Austin, Texas, and Atlanta in partnership with Alphabet Inc.’s (NASDAQ:) Waymo.
Advancing issues outnumbered declining issues by a ratio of 5.54 to 1 on the New York Stock Exchange as there were 653 new highs and 27 new lows.
On the Nasdaq, 3,275 stocks advanced and 1,026 declined, with advancers outpacing decliners by a ratio of 3.19 to 1. The S&P 500 recorded 60 new 52-week highs and lows, while the Nasdaq Composite recorded 116 new highs and 54 new lows.
On US exchanges, 10.15 billion shares were traded, compared to the average of 10.78 billion shares over the past 20 sessions.