S&P 500, Russell 2000 Hit Record Highs on Rate Cut Hopes
A cooling jobs report fuels investor bets that the Federal Reserve has room to lower interest rates, broadening the market rally beyond mega-cap stocks.
Wall Street’s main indices surged to close the week, with the S&P 500 and the small-cap Russell 2000 index reaching new all-time highs. The rally was fueled by fresh labor market data that, while showing signs of cooling, was interpreted by investors as a 'Goldilocks' scenario that keeps hopes for a Federal Reserve interest rate cut firmly on the table.
The S&P 500 climbed 1.2% to a new peak, while the Russell 2000, a barometer for smaller, domestically-focused companies, also posted a record close. The rally in the Russell 2000 is particularly significant, suggesting that investor appetite for risk is broadening beyond the handful of mega-cap technology companies that drove much of last year's market gains.
The catalyst for Friday's optimism was the December employment report from the U.S. Bureau of Labor Statistics. The report presented a mixed but ultimately market-friendly picture: the economy added a modest 50,000 nonfarm payrolls, below consensus estimates, while the unemployment rate unexpectedly fell to 4.4%.
Perhaps most importantly for the inflation outlook, wage growth showed signs of moderation. Average hourly earnings rose 0.3% for the month and were up 3.8% from a year ago. This slowdown in wage gains is a critical data point for the Federal Reserve, suggesting that wage-price pressures are not accelerating.
Investors seized on the data as evidence that the labor market is slowing just enough to allow the central bank to begin easing its restrictive monetary policy. The logic is that a less-overheated job market reduces the risk of persistent inflation, giving the Fed the flexibility to lower the federal funds rate from its current multi-decade highs.
"While the headline job creation was soft, the drop in the unemployment rate and moderate wage growth is the perfect combination for a market hoping for rate cuts," noted one analyst. The report, coupled with significant downward revisions to job growth in October and November, paints a picture of a labor market that is returning to a healthier, more sustainable balance.
The bond market reacted accordingly, with yields on government debt ticking lower as traders increased their bets on future easing. According to some market observers, investors are now anticipating one to two rate cuts in 2026, with the first potential move coming as early as the second quarter.
With the Federal Reserve's January meeting widely expected to result in a hold, all eyes will now turn to upcoming inflation data and commentary from Fed officials for clues on the timing of the first cut. For now, the market's bullish sentiment is clear: signs of a gentle economic cooling are being celebrated as the clearest path toward a less restrictive, and more supportive, monetary policy environment.