S&P 500: Was Friday’s Rally the Start of Sustained Gains or a Short-Lived Bounce?

How Did Markets Respond to Inflation Data on Friday?

U.S. stocks climbed on Friday, driven by softer-than-expected inflation data and supportive comments from Federal Reserve officials. The Personal Consumption Expenditure (PCE) index rose 2.4% in November year-over-year, slightly under the 2.5% forecast. This eased concerns over aggressive rate policies and spurred optimism that the Fed may adopt a more dovish stance in 2025.

The Dow Jones Industrial Average gained 498.82 points (1.18%) to close at 42,841.06. The S&P 500 rose 1.09% to finish at 5,930.90, while the Nasdaq Composite advanced 1.03%, ending at 19,572.60. These gains marked the largest single-day percentage increases since early November.

However, despite Friday’s rebound, the major indexes posted weekly losses. The Dow dropped 2.25%, recording its third straight week in the red. The S&P 500 slipped 1.99%, while the Nasdaq declined 1.78%, snapping a four-week winning streak.

What Drove Sector Performance?

All 11 major S&P sectors ended higher on Friday, with real estate leading the way, rising 1.8% as Treasury yields retreated. Information technology and financials followed closely, each climbing over 1%. Small-cap stocks, represented by the Russell 2000, added 0.9%, reflecting optimism that lower rates could provide growth opportunities for smaller firms.

Energy, materials, and industrials also posted solid gains, reflecting broad market participation in the rebound. Only 53 stocks in the S&P 500 closed lower, underscoring the strength of Friday’s rally.

What Are Fed Officials Indicating for 2025?

Fed officials struck a more optimistic tone following the inflation data. Chicago Fed President Austan Goolsbee noted that the latest PCE figures suggest inflation remains on track toward the 2% target. This boosted trader confidence that rate cuts could begin as early as March, with another likely by October.

However, the Fed’s midweek decision to forecast just two rate cuts in 2025—down from four previously—sent markets into turmoil earlier in the week. The Dow plunged 1,100 points on Wednesday, its largest single-day drop in months. This hawkish stance tempered some of the bullish sentiment despite Friday’s rally.

Why Did Trading Volume Surge on Friday?

Friday’s session saw heightened trading activity due to the quarterly expiration of derivatives contracts—commonly known as triple witching. This event, which involves the simultaneous expiration of stock options, index options, and futures contracts, drove volume to 21.58 billion shares, significantly above the 20-day average of 14.87 billion.

Market breadth was positive, with advancing issues outpacing decliners by nearly 3-to-1 on the NYSE and by 2-to-1 on the Nasdaq. This suggests strong demand across equities, reinforcing the day’s gains.

What Can Traders Expect Next Week?

Looking ahead, market sentiment could stabilize as investors process the Fed’s cautious outlook and softer inflation data. While the broader trend remains uncertain, reduced chances of near-term downside catalysts may provide room for modest upside.

Traders will closely monitor economic data and further Fed commentary for signs of confirmation regarding rate cuts. If inflation continues to moderate, equities could see incremental gains into the holiday season. However, the path remains fragile, with volatility likely to persist.

A cautiously bullish stance may emerge, with the potential for further rallies if inflation trends align with the Fed’s goals.

More Information in our Economic Calendar.