S&P 500 rises as cooler U.S. inflation cuts rate-hike fears

0.4% — that was the monthly drop in U.S. consumer prices in June, the largest decline in four years and the number that helped steady stocks on Tuesday. The S&P 500 gained 0.4% by early afternoon, while the Nasdaq climbed 1.1%, as investors sharply reduced expectations of an imminent Federal Reserve rate increase. For Canadians holding SPY or other U.S. index funds, the rally offered relief, but renewed oil-price pressure and a historic plunge in IBM kept the session far from calm.

The Bottom Line

• The S&P 500 rose 0.4%, recovering part of the previous session's 0.8% decline.
• June consumer prices fell 0.4% from May, while annual inflation slowed to 3.5% from 4.2%.
• Core inflation, which excludes food and energy, was flat for the month and eased to 2.6% annually.
• Traders cut the implied chance of a July Federal Reserve rate increase to less than 13%, down from nearly 42% one day earlier.
• IBM fell 24.5%, offsetting part of the broader market's advance, while Nvidia and Micron rebounded.

Breaking It Down

The market's first reaction centred on the inflation report. According to the June consumer-price data, lower gasoline, clothing and used-car costs pushed the headline index down 0.4% from May. Gasoline prices fell nearly 10%, while apartment rents rose only 0.1% and grocery prices increased 0.2%.

The details mattered more than the headline alone. Core prices were unchanged from May, and RBC said the unrounded figure represented the first negative monthly core reading since May 2020. Only about one-quarter of the CPI basket recorded price growth of at least 3% on a one-month basis, below the pre-pandemic average share of 35%. That broader cooling gave investors more confidence that inflation was not accelerating across the economy.

Bond yields moved lower as investors adjusted their interest-rate expectations. The 10-year U.S. Treasury yield fell to 4.58% from 4.62% late Monday. Lower yields can support equity valuations because future corporate earnings are discounted at a less demanding rate, a dynamic that tends to matter particularly for large technology companies.

That helped Nvidia rise 3.7% and Micron Technology gain 4.8% after both stocks had fallen sharply a day earlier. Bank earnings also provided support: Bank of America, JPMorgan Chase, Goldman Sachs, Citigroup and Wells Fargo all reported quarterly profits above analysts' expectations, although their share-price reactions varied widely.

The session also showed how much company-specific news can overwhelm a favourable macroeconomic backdrop. IBM plunged 24.5% after its software and infrastructure performance missed expectations. Chief executive Arvind Krishna said customers had shifted spending toward servers, storage and memory ahead of expected price increases, while several large deals failed to close on schedule.

Why This Matters

SPY is an exchange-traded fund designed to track the S&P 500, so its performance is driven by the combined movement of the index's largest companies rather than a single stock. Tuesday's advance showed how quickly expectations for inflation and interest rates can move the entire benchmark, even while a major constituent such as IBM suffers a severe decline.

For Canadian investors, the immediate effect extends beyond the U.S. market's headline gain. Many Canadian retirement accounts and self-directed portfolios hold U.S. index funds directly or through Canadian-listed funds. Changes in Treasury yields, the U.S. dollar and expectations for Federal Reserve policy can therefore affect portfolio values even when the underlying investor is based in Canada.

The main risk is energy. Brent crude briefly moved above $87 a barrel before paring its gain, as renewed U.S.-Iran hostilities raised concerns about traffic through the Strait of Hormuz, a route used for roughly one-fifth of the world's oil. A sustained rise in oil could reverse some of June's progress by lifting transportation, manufacturing and household energy costs.

What Comes Next

Investors will watch the Federal Reserve's meeting later in July after the inflation report cut the market-implied probability of a rate increase to below 13%. Fed Chair Kevin Warsh told lawmakers that the central bank had no tolerance for persistently high inflation, but he did not signal a specific next step.

Producer-price data is also due before the next personal consumption expenditures inflation report. Those figures will help show whether cost pressures are still moving through supply chains, particularly in electronics, transportation and other areas affected by tariffs, artificial-intelligence infrastructure spending and higher energy prices.