U.S. stocks were on track for their best week since Donald Trump's election, buoyed by strong bank earnings and weak underlying inflation data, raising the prospect of further interest rate cuts this year.
The blue-chip S&P 500 index rose 1% in early trading on Friday and was on track to end the week up 3%.
That would mark the best weekly gain since a 4.7% gain in the five sessions through Nov. 8, when Trump's election raised concerns that the incoming administration's tax cuts and deregulation would boost the U.S. Hope for the corporate world. The tech-heavy Nasdaq Composite is expected to rise 2.4%, its best weekly gain since early December.
The gains over the past week came as banks including JPMorgan Chase & Co., Goldman Sachs and Citigroup kicked off the U.S. earnings season by reporting strong profit growth late last year, driven by a trading and trading boom.
Investor sentiment also benefited from data released this week by the U.S. Bureau of Labor Statistics, which showed headline annual inflation rose to 2.9% in December from 2.7% in November, in line with expectations. Excluding volatile food and energy costs, core inflation unexpectedly fell to 3.2% from 3.3% a month ago.
Mike Zigmont, co-head of trading and research at Visdom Investment Group, said this week's inflation data means market sentiment is once again "in a state of excitement."
For now, "the impact of inflation is no longer a concern, and bulls are further encouraged by reporting good earnings and guidance from banks," he added.
Signs of slowing inflation have revived investor hopes that the Federal Reserve will continue to cut interest rates in the coming months. The next two-day policy meeting will be held in late January.
Last week's blockbuster employment data led some market participants to call for an end to the central bank's easing cycle or even a hike in interest rates to offset potential inflationary pressures in the world's largest economy.
Stocks have also come under pressure in recent weeks due to a global bond selloff centered on the United States.
However, the decline has stalled this week, with the policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, falling to 4.26% from Monday's recent high of 4.42%.
Over the same period, the 10-year Treasury yield, a benchmark for global borrowing costs, has fallen from around 4.8% to 4.6%. As prices rise, output falls.
Florian Ielpo, head of macro at Lombard Odier Investment Managers, said: "Reduced interest rate risk and improved earnings make for a good combination to revive subdued risk appetite."
He added: "The second half of January may see a reversal of the initial trend: lower interest rates leading to higher stocks."
Bank of America strategist Aditya Bhave said soft December inflation data could reduce the risk of an imminent rate hike. But strong economic growth, strong consumer spending and a strong job market still mean "we maintain our view that the Fed's rate-cutting cycle is over," he said in a note to clients.