U.S. stocks closed higher following signals that the economy is growing more powerfully than economists expected. The S&P 500 rose 0.5% Thursday, setting another record high. The Dow Jones Industrial Average rose 0.6%, and the Nasdaq composite edged up 0.2%.

IBM helped lead the market’s gains after reporting a stronger profit than expected. That helped offset a sharp drop for Tesla, which warned of slowing sales growth. Treasury yields eased in the bond market after the blowout data on the economy’s growth at the end of 2023 also indicated that inflation is moderating.

The electric-vehicle maker reported earnings and revenue that fell short of forecasts and warned of notably lower sales growth this year. As one of the largest stocks on Wall Street, its movements carry extra weight on indexes, and it was the heaviest weight by far on the S&P 500.

Wall Street’s main focus, though, was on a report indicating the U.S. economy continues to steam ahead, demolishing last year’s forecasts for an imminent recession because of high interest rates.

The economy grew at a 3.3% annual rate in the last three months of 2023, according to an initial estimate by the U.S. government. That was much stronger than the 1.8% growth economists expected, according to FactSet. Such a resilient economy should drive profits for companies, which are one of the main inputs that set stock prices.

The report also gave encouraging corroboration that inflation continued to moderate at the end of 2023. Hopes are high that inflation has cooled enough from its peak two summers ago for the Federal Reserve to start cutting interest rates this year. That in turn would ease the pressure on financial markets and boost investment prices.

Such cuts would be a sharp turnaround from the prior two years of dramatic hikes to rates by the Fed, which was trying to get painfully high inflation under control.

“The headline data are the perfect mix of strong consumption and dropping inflation,” said Jamie Cox, managing partner for Harris Financial Group. “This is exactly what you want to see if you are running the Fed and want to move rates lower this year.”

A separate report showed that more U.S. workers applied for unemployment benefits last week, but the number remains low relative to history and indicates a still-resilient job market.

Of course, critics say traders on Wall Street are still overly optimistic about how many times the Federal Reserve will cut interest rates in 2024, and when it will begin. Traders are betting on a roughly coin flip’s chance for six cuts this year, which would be double what the Fed has indicated.

Wall Street also added to bets that the Fed would begin cutting rates as soon as March following the morning’s economic report. They bumped the perceived probability closer to 50%, according to data from CME Group.

“The problem for traders is that rate cut expectations still have a ways to go to adjust to the reality that the Fed doesn’t need to be in a hurry to cut,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Treasury yields fell in the bond market on those expectations for rate cuts. The yield on the 10-year Treasury slipped to 4.12% from 4.16% before the report’s release and from 4.18% late Wednesday. In October, it was at 5% and its highest level since 2007.

Elsewhere on Wall Street, earnings season continued to pick up the pace with more than two dozen companies in the S&P 500 reporting their latest results late Wednesday or early Thursday.

American Airlines rose 9.7% after reporting profit for the latest quarter that was more than double what analysts were expecting. United Rentals jumped 12.6% after the equipment rental company reported stronger profit than expected, raised its dividend and said it would buy back $1.5 billion of its stock this year.

On the losing end of Wall Street, Humana tumbled 11.2% after the insurer reported worse results for the end of 2023 than expected. It also gave a forecast for the full year of 2024 that fell well below Wall Street’s estimate because of higher medical costs. Other insurers also dropped, including a 4.9% fall for UnitedHealth Group.

In Europe, stock indexes were little changed after the European Central Bank held interest rates steady.

In Asia, stocks jumped more in China after authorities made moves in hopes of bolstering financial markets and the economy. They rose 2% in Hong Kong and 3% in Shanghai but remain down for the year so far.


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