Stocks rallied Friday to close out a winning March and first quarter of the year, feats that looked questionable just a couple weeks ago when Wall Street was tumbling in turmoil.
The S&P 500 rose 1.4% to cap a 3.5% gain for the month. The benchmark index also locked in a second winning quarter in a row after falling sharply most of last year on worries about high interest rates meant to get inflation under control.
The Dow Jones Industrial Average rose 1.3%, while the Nasdaq composite climbed 1.7%. For the Nasdaq, big leaps for technology stocks drove a gain of 16.8% for the quarter, its best since the surge out of the coronavirus-caused crash in the spring of 2020.
Friday's gains came after a report showed inflation across the United States slowed in February, though it was still high relative to history. A continued slowdown is expected to give the Federal Reserve more leeway to take it easier on interest rates after raising them at a furious pace over the past year.
The threat of higher rates has been behind the stock market's struggles since it peaked in early 2022. High rates can undercut inflation but only by bluntly slowing the entire economy, which raises the risk of a recession. They also drag down prices for stocks, bonds and other investments.
A blitz of economic reports earlier in the year suggesting stubbornly high inflation raised worries the Fed would have to keep rates even higher than feared for longer.
A recession hasn't hit the economy, at least not yet, but the pressure of higher interest rates helped cause the banking industry to crack earlier this month.
The second- and third-largest U.S. bank failures in history rocked markets after depositors rushed to pull their money out of Silicon Valley Bank and Signature Bank. The runs pushed investors to cast harsher scrutiny on banks globally in the hunt for seemingly weak links.
Forceful actions by regulators have since helped to rebuild some confidence. Almost as importantly, traders have also built bets that the banking system's woes will force the Fed to stop hiking rates soon and even to begin cutting rates later this year.
The overriding mood in the market seems to be that the "Fed blinked and off we rally into April" before waiting to see if a recession or new panics around commercial real estate or something else awaits in the second half of the year, investment strategist Michael Hartnett wrote in a Bank of America Global Research report.
Expectations for an easier Fed have helped tech stocks in particular because such high-growth stocks are seen as some of the biggest beneficiaries of lower rates. That's helped to prop up the S&P 500, where tech stocks play an outsize role because of their size. Apple Inc., Microsoft Corp. and Google's parent Alphabet Inc. each posted double-digit gains for March.
Strength in tech has helped to mask weakness for other parts of the market that are still down for the month but play smaller roles in indexes, such as smaller-sized stocks or financial companies.
Some professional investors on Wall Street say the expectations for rate cuts are premature and could be setting the market up for disappointment. Cuts can act like steroids for markets, but they're likely coming only if the economy looks to be in serious trouble.
The Fed, meanwhile, has hinted it envisions raising rates one more time before keeping them steady later this year. Friday's inflation data suggests that could still be the case, economists said.
"Elevated price pressures coupled with strong job growth that is restoring incomes and is supporting demand should keep the Fed on track to hike rates further over coming meetings," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
What makes the Fed's upcoming decisions particularly tricky is that the banking industry's troubles could act like increases to interest rates on their own if they cause banks to pull back on lending. That in turn could stifle hiring and growth for the economy.
All the drastically changing expectations for what the Fed will do have meant historic-sized moves for Treasury yields in the bond market.
The yield on the two-year Treasury zoomed through particularly rattling moves. It was sitting above 5% at its highest level since 2007 earlier this month, when investors were bracing for the Fed to keep rates higher for longer.
It then quickly plunged below 3.60% as bets built for the Fed to ease up because of the banking industry's troubles. Analysts said the moves were so violent because so many bets had piled up on the same side: for yields only to climb higher.
The yield has since steadied somewhat. It fell to 4.04% Friday from 4.12% late Thursday.
The 10-year yield, which helps set rates for mortgages and other important loans, fell to 3.48% from 3.55%. It also swung sharply through the quarter, but not by as much as the two-year yield. It was sitting above 4% earlier in the month.
All told, the S&P 500 rose 58.48 points to 4,109.31 Friday. The Dow gained 415.12 points to 33,274.15, and the Nasdaq jumped 208.44 points to 12,221.91.
Abroad, stocks across Europe rose modestly after a report showed inflation in the 20 countries that use the euro currency slowed to the slowest level in a year, though food costs were still on the rise.
Stocks rose modestly in Shanghai after a report said China's factory activity was stronger in March than expected. They also gained across much of the rest of Asia.
Information for this article was contributed by Joe McDonald and Matt Ott of The Associated Press.