Dow rallies 700 points for best day in more than a year, Russell 2000 small-cap index jumps 3%

The Dow Jones Industrial Average advanced to new highs on Tuesday, as the bull market broadened out beyond technology names on hopes of forthcoming interest rate cuts.

The Dow surged by 742.76 points, or 1.85%, to close at 40,954.48. The 30-stock index hit an all-time high and closed at a record, in addition to notching its best session since June 2023. The small cap-focused Russell 2000 rose more than 3% for its fifth straight day of gains.

The S&P 500 added 0.64%, closing at 5,667.20. The Nasdaq Composite ended the day higher by just 0.2% at 18,509.34, lagging as technology names largely sat out of Tuesday’s rally.

Industrial bellwether Caterpillar climbed more than 4%, making it the second-biggest gainer in the Dow behind UnitedHealth. The insurer advanced 6.5% on the back of better-than-expected second-quarter results.

Financials — another trailing bull market group — gained after earnings from Bank of America and Morgan Stanley came in ahead of analyst forecasts. Bank of America jumped more than 5%, while Morgan Stanley added nearly 1%.

The rotation from megacap technology shares into small-cap and cyclical stocks began a week ago when June’s consumer price index showed the lowest inflation in three years. The reading was seen as a sign that inflation was nearing the Federal Reserve’s 2% target, and the central bank might be able to lower interest rates.

Traders now see 100% odds the Fed will lower rates in September, according to the CME FedWatch tool. A rate cut is seen as boosting small caps and industrials more reliant on borrowing costs than cash-rich, megacap technology stocks that have been riding a wave of optimism around artificial intelligence.

In the last one week alone, the Russell 2000 has soared more than 11%, while the blue-chip Dow has gained more than 4%. The Nasdaq is up just 0.4% over the same period.

Notably, AI darling Nvidia and Google parent Alphabet dropped more than 1% each on Tuesday. This extended their losses over the past week as the rest of the market has taken off.

“There’s a lot of momentum behind this rotation trade from big-cap tech into small caps and into the average stock,” said Ross Mayfield, investment strategist at Baird. “It’s a rotation, but it’s much more about the upside in the more cyclical sectors in the market than a referendum on AI’s long-term potential.”

Retail sales data out Tuesday further validated investors’ belief that the Fed had achieved a so-called soft landing with the economy. June sales were unchanged, versus expectations for a decline. Excluding autos, Junes sales rose 0.4%, a larger gain than the 0.1% consensus forecast collected by Dow Jones.

This data “should be positive for markets,” said Quincy Krosby, chief global strategist at LPL Financial. “Investors prefer the launch of a Fed easing cycle to begin with a still solid economic backdrop.”