Dow Jones and S&P 500 soar to record highs on rate cut rally

Key points

• The market rallied Thursday one day after the Fed cut rates by 50 basis points.

• The S&P 500 and Dow Jones both set new record highs.

• Semiconductor stocks and bank stocks led the rally.

It was a great day for stocks, as the markets responded positively to the Fed’s interest rate cuts.

It was somewhat of a delayed reaction, as the markets seemed to take the Federal Reserve’s massive 50 basis point interest rate cut in stride on Wednesday afternoon. But after some time to digest the news, markets rallied on Thursday, with both the S&P 500 and Dow Jones Industrial Average touching record highs.

On Thursday, the Dow Jones Industrial Average was up 522 points, or 1.3%, rising above 42,000 points for the first time to 42,025. The S&P 500 also hit a record high, as it was up 95 points, or 1.7%, to an all-time high of 5,714.

The tech-heavy Nasdaq Composite had the biggest day, surging 441 points, or 2.5%, to break back over 18,000 for the first time since July, finishing the day at 18,014. The small cap Russell 2000 was also having a good day, rising 45 points, or 2.0%, to 2,251.

Tech stocks and banks lead the rally

The interest rate cuts sparked a rally across the board, but semiconductor stocks were the biggest gainers.

The largest chipmaker, NVIDIA (NASDAQ:NVDA), rose about 5% on the day to $119 per share, but AMD (NASDAQ:AMD) was the fastest mover, rising 6.6% to $158 per share. ASML Holding (NASDAQ:ASML), up 6%, GlobalFoundries (NASDAQ:GFS), up 5.8%, ON Semiconductor (NASDAQ:ON), up 5.6%, Marvell Technology (NASDAQ:MRVL), up 5.6%, and Broadcom (NASDAQ:AVGO), up 4.8%, were also some of the leading semiconductor stocks on Thursday.

In addition, banks were big movers on Thursday, which is a sign that investors are bullish on the economy. Bank stocks are typically bellwethers for economic growth, so the fact that investors were loading up on bank shares shows they feel good about the where the economy Is headed.

The KBW Bank Index was up 3% on Thursday, as large banks saw their prices. Bank of America (NYSE:BAC) stock jumped 3.4% Thursday, while Citigroup (NYSE:C) climbed 5%. Wells Fargo (NYSE:WFC) was also having a good day, up 3.1%, as was Goldman Sachs (NYSE:GS), up 4.2%.

“The Federal Reserve is embarking on what will likely be a series of rate cuts over a number of meetings over the balance of this year and next,” said Scott Wren, senior global market strategist at Wells Fargo, said. “We see a total of 175 basis points of cuts between now and year-end 2025. We anticipate that these Fed cuts should have a positive effect on the economy and markets in 2025. We believe the global economy is likely to benefit as well as major central banks around the world have already cut rates or are on the verge of doing so.”

Dividend stocks and small caps should benefit

Bank of America sees two more rate cuts in 2024, and that should provide a lift for stocks, said Chris Hyzy, chief investment officer for Merrill and Bank of America Private.

“When rates begin to fall, that has generally been positive for equities over the following 12 months,” Hyzy said. “Investors may also find potential opportunities in dividend-paying stocks, which have historically done well as rates decline.”

In the four previous rate cutting cycles, the top dividend beat the S&P 500 by 7.3% one year after the first cut, said Hyzy. The spread widens to 12% after three years, he added. Hyzy also sees opportunities in small cap stocks.

“Lower rates improve access to capital, and small companies have recently regained earning momentum after several disappointing years,” Hyzy said. He added that housing, automotive, and financials stocks should also benefit.