US stocks have closed higher, extending recent gains as data showing a fall in consumer prices in December bolstered expectations of less aggressive interest rate hikes from the Federal Reserve.
US consumer prices fell for the first time in more than two-and-a-half years in December, the report released on Thursday shows, giving some hope that inflation is on a sustained downward trend.
"Most investors are seeing inflation come down. That's a positive sign, and I would expect earnings to be decent," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas.
Friday brings results from a number of big US banks, kicking off the start of the fourth-quarter earnings season for S&P 500 companies.
Trading was choppy following the CPI data. Rents remain very high in the report, while the labour market remains tight, and inflation is still well above the Fed's target.
A separate report released on Thursday shows weekly jobless claims fell last week.
But some strategists said the slowdown in US inflation might pave the way for the Fed to be able to bring down consumer prices without badly damaging growth.
Traders' bets of a 25-basis point rate hike by the Fed in February shot up to 91 per cent after the data, from 77 per cent previously.
Microsoft shares rose 1.2 per cent, providing the biggest boost to the S&P 500 and Nasdaq, while energy shares also were higher along with oil prices. Energy rose 1.9 per cent and was the day's best performer among sectors.
The Dow Jones Industrial Average rose 216.96 points, or 0.64 per cent, to 34,189.97, the S&P 500 gained 13.55 points, or 0.34 per cent, to 3,983.16 and the Nasdaq Composite added 69.43 points, or 0.64 per cent, to 11,001.11.
The S&P 500 is now up 3.7 per cent for the year so far.
"The (CPI) report confirms that inflation is in a downward trend and that it has reversed," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
Philadelphia Fed President Patrick Harker and St Louis Fed President James Bullard acknowledged the moderation in prices, but stressed on the need for further monetary policy tightening to bring inflation down to the central bank's target.
The Fed raised the key rate by 50 basis points in December, after four back-to-back 75bps hikes.
Big US banks are forecast to report lower fourth-quarter profits, as lenders stockpile funds to prepare for an economic slowdown.
Also, overall S&P 500 earnings are expected to have declined year-over-year in the fourth quarter, according to IBES data from Refinitiv, which would be the first quarterly US earnings decline since 2020.
Tesla Inc shares ended near flat after Bloomberg, citing people familiar with the matter, reported the carmaker has delayed plans to expand its Shanghai factory.