The stock market was having a strong day on Wednesday, with the S&P 500 (^GSPC 1.92%) up by about 2% at 3:30 p.m. ET. However, the financial sector was one of the better performers, and American Express (AXP 4.12%) was up by as much as 5%.
There are two main reasons for this move: bank earnings and inflation data. So, let's take these one at a time.
First, several big banks kicked off earnings season on a high note. Wells Fargo (WFC 6.88%), Goldman Sachs (GS 5.87%), Citigroup (C 7.05%), and JPMorgan Chase (JPM 2.25%) all reported better-than-expected results for the fourth quarter. Some even surprised the market with an optimistic outlook. For example, Wells Fargo said that it expects net interest income to rise in 2025.
Second, the reason the entire market is rallying higher is inflation, or more specifically, slower inflation than many had expected.
On Tuesday, the latest Producer Price Index (PPI) data came in significantly lower than expected, followed by a core Consumer Price Index (CPI) reading on Wednesday that confirmed that inflation was lighter than expected in December.
Tame inflation increases the likelihood that the Federal Reserve will continue to cut interest rates in 2025. With banks' interest margins under pressure in recent years due to rising rates, further rate cuts could be a catalyst for higher bank profits. This means the financial sector is one for investors to watch.
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