On Tuesday, both the S&P 500 and Nasdaq Composite achieved new record highs, following a less severe inflation report than anticipated, which has increased speculation regarding a potential interest rate cut by the Federal Reserve in the upcoming month.

The broad-based S&P concluded the trading session with an increase of 1.13%, reaching a level of 6,445.76, whereas the tech-heavy Nasdaq recorded a rise of 1.39%, closing at 21,681.90. The Dow Jones Industrial Average experienced an increase of 483.52 points, representing a rise of 1.10%, concluding the trading session at 44,458.61. The recent release of inflation data on Tuesday has provided reassurance to investors, alleviating concerns that President Donald Trump’s extensive tariff policies might lead to a surge in prices within the U.S. economy.

The consumer price index experienced an annualized increase of 2.7% in July, in contrast to the Dow Jones estimate, which projected a rise of 2.8%. The core Consumer Price Index, which excludes the more volatile food and energy sectors, experienced a year-on-year increase of 3.1%, marginally surpassing the anticipated 3% rate.

Anticipations for reduced rates surged in the aftermath of the report. Market participants are currently assessing a 94% probability of a rate reduction occurring next month, according to trading data derived from the CME’s FedWatch Tool. That represents an increase from an 85% probability prior to the data release. Market participants have heightened their expectations regarding potential rate reductions in both October and December.

“It appears to be a somewhat favorable scenario for the stock market,” remarked Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. There is a growing consensus among individuals regarding the anticipation of a rate cut in September. In the current economic landscape, we observe a downward trend in interest rates coupled with an upward trajectory in earnings. This scenario creates a favorable environment for the overall stock market.

Small caps, perceived as significant beneficiaries of reduced short-term borrowing rates, spearheaded the rally with the Russell 2000 rising nearly three times the increase in the S&P 500. Tuesday’s movements reflect the considerations of traders as they assess the most recent developments regarding tariffs. On Monday, Trump announced his intention to prolong a 90-day suspension of increased tariffs on Chinese imports.

Market participants will closely analyze Thursday’s producer price index report to gauge the trends in wholesale inflation. Both reports arrive in anticipation of the Fed’s Jackson Hole gathering at the end of August and the central bank’s policy meeting in September.