Wall Street rallied Monday as prospects of the U.S. Federal Reserve cutting interest rates as early as July offset fears that Iran would disrupt crude transport in the Middle East.
All three major U.S. stock indexes closed higher. Consumer discretionary stocks led the gainers, with a solid boost from Tesla.
"The rally is a bit surprising," said Jay Hatfield, CEO and portfolio manager at InfraCap in New York. "In a way the U.S. attack puts an end to the uncertainty of whether the U.S. is going to attack."
"The market action is extremely bullish because this is the time frame in June when we're supposed to have a pullback," Hatfield added. "People do not want to sell in this market."
Federal Reserve Vice Chair Michelle Bowman said on Monday that "it is time to consider adjusting the policy rate," as risks to the job market outweigh inflationary concerns related to tariffs. Federal Reserve Bank of Chicago President Austan Goolsbee said that thus far, tariffs have had a more modest economic impact than expected.
On Friday, Fed Governor Chris Waller said that the Federal Reserve should consider cutting interest rates at its next meeting given recent tame inflation data and the fact that any price shock from import tariffs will be short lived.
Financial markets are pricing in at least two 25-basis-point rate cuts before year-end. The first cut is widely expected to happen in September.
"I've been in the camp that the Fed probably would not move at all this year," said Paul Nolte, senior wealth advisor & market strategist at Murphy & Sylvest in Elmhurst, Illinois. "(Fed Chair) Powell’s ‘wait and see’ is probably not a bad tactic, but of course, the markets always love lower interest rates."
Tesla shares surged after the long-awaited launch of the company's robotaxi service in Austin, Texas. Israel continued to bombard Iran the day after the U.S. joined the war.
Still, oil prices tumbled 7% after Iran's retaliation did not include action to disrupt oil and gas tanker traffic through the Strait of Hormuz. Tehran had warned it would close the Strait of Hormuz, a crucial oil shipping route.
"The markets are reading this as 'hey, we're successful,' we took out their nuclear capabilities, and we were able to support any counter-strikes," Nolte said. "I think there was a lot of concern that Iran would do much more than it did."
On the economics front, S&P Global's advance "flash" purchasing managers' indexes (PMI) showed the U.S. economy is expanding at a slightly more robust pace than analysts anticipated. A separate report showed new home sales, while under pressure from elevated borrowing costs, posted an unexpected gain in May.
Later in the week, the Commerce Department's final take on first-quarter GDP and its Personal Consumption Expenditures (PCE) and Fed Chair Jerome Powell's congressional testimony are likely to be parsed for clues regarding the near-term path of monetary policy.
According to preliminary data, the S&P 500 gained 57.20 points, or 0.96%, to end at 6,025.04 points, while the Nasdaq Composite gained 183.98 points, or 0.95%, to 19,631.39. The Dow Jones Industrial Average rose 374.97 points, or 0.89%, to 42,581.78.
Fiserv's shares rose following its announcement that it would launch a new digital asset platform.
Northern Trust jumped after a Wall Street Journal report said Bank of New York Mellon broached the topic of a potential merger.
AI-server-maker Super Micro Computer dropped after it announced a private offering of $2 billion five-year convertible bonds.
Quarterly results from sportswear company Nike and package delivery firm FedEx are expected later in the week.
(Reporting by Stephen Culp; Additional reporting by Kanchana Chakravarty and Nikhil Sharma in Bengaluru; Editing by David Gregorio)
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