Markets reversed a two-day slide after the latest reading on consumer inflation all but ensured a quarter-point rate cut from the Federal Reserve later this month. As per usual, a rally in mega-cap tech stocks led the charge.
Tech stocks gapped higher at the open, led by the Magnificent 7, after the November Consumer Price Index (CPI) helped confirm market expectations for short-term monetary policy.
Headline CPI increased 0.3% month over month, a slight increase from the 0.2% rise seen in the previous four months. On an annual basis, headline CPI rose 2.7%, according to the Bureau of Labor Statistics, up from 2.6% in October.
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Although inflation accelerated on a year-over-year basis, the print essentially matched market forecasts.
Core CPI, which excludes food and energy costs and is considered a better indicator of future prices, also matched estimates. The gauge increased 0.3% in November, or the same rate seen over the previous three months. Annual core CPI advanced 3.3% to match consensus expectations.
"This morning's in-line CPI results are flashing a green light to equity investors clapping their hands while yelling Santa Claus," writes José Torres, senior economist at Interactive Brokers. "The enthusiasm is also extending to fixed income as rate watchers cement another quarter-point trim from the Fed in response to the well-received inflation figures."
As of December 11, interest rate traders assigned a 95% probability to the Federal Open Market Committee (FOMC) cutting the federal funds rate by 25 basis points (bps), or 0.25%, to 4.25% to 4.50%, according to CME Group's FedWatch Tool. That's up from 78% one week ago and 65% a month ago.
Although a quarter-point reduction appears locked in for the next Fed meeting, the outlook for easing next year is complicated by the incoming administration's economic policies, including the imposition of sweeping tariffs. These developments are complicating forecasters' calculus for the path of interest rates in 2025.
As for Wednesday, however, a December rate cut was mostly good news. It sparked a rally in risk assets – and in tech stocks in particular.
The tech-heavy Nasdaq Composite closed up 1.8% at 20,034, led by heavyweights such as Google parent Alphabet (GOOGL, +5.5%), Tesla (TSLA, +5.9%) and Amazon.com (AMZN, +2.3%).
Microsoft (MSFT, +1.3%) and Nvidia (NVDA, +3.1) also rallied, but these Buy-rated Dow stocks weren't able to lift the price-weighted Dow Jones Industrial Average, which slipped 0.2% to 44,148. The market-cap weighted S&P 500 added 0.8% to 6,084.
Are utilities a cheap AI play?
As a highly regulated sector, utilities are known for low growth, low volatility and dividends. In other words, this is a defensive sector – at least traditionally.
The emergence of AI appears to be changing the sector's characteristics, however. Electricity demand will grow exponentially with the build out of AI data centers, and that's boosting this sleepy sector's growth prospects.
Indeed, it's not clear how much of this potential might already be priced in. The Utilities Select Sector SPDR ETF (XLU) is up 26% on a total return basis (price change plus dividends) so far this year, while the broader market gained 28%.
Utilities have always generated relatively stable revenue and profits. They also generate loads of free cash, thanks to all those folks paying their energy bills every month.
Utilities then turn right back around and hand much of that cash back to shareholders in the form of dividends. In fact, utilities are almost always among the best-yielding market sectors.
Between their steady businesses and substantial dividends, you can see how these stocks can sometimes provide not just some level of safety, but upside potential when most other equities are on the rocks.
At the same time, utilities are not tech stocks. For example, while the Nasdaq jumped on Wednesday, the utilities sector actually ended in the red. Investors interested in sussing out cheap utilities that could double as AI plays would do well to study the best utility stocks to buy now.
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