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US stocks posted their best week since Donald Trump's election victory, boosted by strong bank earnings and weak core inflation data, raising the chances of further interest rate cuts this year.
The S&P 500 closed up 1 percent on Friday, leaving the index up 2.9 percent for the week.
That represented its best weekly gain since rising 4.7 percent in the five sessions through November 8, when Trump's election victory raised hopes that tax cuts and deregulation under the next administration would boost American companies. The Nasdaq Composite Index, which is dominated by technology stocks, added 2.5 percent, its best weekly gain since early December.
Last week's rise came as banks including JPMorgan Chase, Goldman Sachs and Citigroup kicked off the US earnings season by announcing strong profit increases at the end of last year, supported by a boom in trading and deal-making.
Investor sentiment also benefited from figures released this week from the Bureau of Labor Statistics that showed headline annual inflation rose in line with expectations to 2.9 percent in December from 2.7 percent in November. Core inflation, which excludes volatile food and energy costs, unexpectedly fell to 3.2 percent from 3.3 percent in the previous month.
Mike Zygmunt, co-head of trading and research at Visdom Investment Group, said this week's inflation data meant sentiment had “flipped into exciting territory” again.
He added that at present, “the inflation man is no longer a worry (and) good earnings and guidance from reporting banks have encouraged bulls.”
Signs of slowing inflation have revived hopes among investors that the US Federal Reserve, which holds its next two-day policy meeting at the end of January, will continue to cut interest rates over the coming months.
Last week's hot jobs numbers left some market participants calling for an end to the central bank's easing cycle or even higher interest rates to offset the potential inflationary strength of the world's largest economy.
Stocks have also been under pressure in recent weeks amid a global bond sell-off centered on the United States.
However, the decline stalled this week, with the policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, falling from a recent high of 4.42 percent on Monday to 4.27 percent.
The 10-year yield – a benchmark for global borrowing costs – fell from about 4.8 percent to 4.61 percent over the same period. Returns fall as prices rise.
“Lowering interest rate risks and improving earnings are a good combination to renew weak risk appetite,” said Florian Ilbo, head of macroeconomics at Lombard Odier Investment Managers.
“The second half of January may see a reversal of the trends that marked its beginning: lower interest rates leading to higher stocks,” he added.
Weak inflation numbers in December may reduce the risk of impending interest rate hikes, according to Aditya Bhave, a strategist at Bank of America. Resilient economic growth, solid consumer spending and a solid jobs market nonetheless mean “we maintain our view that the Fed's cutting cycle is over,” he said in a note to clients.
