Markets: News  

By Frances Yue and Andrew Keshner

The S&P 500 closed Tuesday at its highest level in 10 months and the Nasdaq Composite finished at a 14-month high, as investors wait for May inflation data due next week, just ahead of the Federal Reserve's June policy meeting.

How stocks are trading

On Monday, the Dow Jones Industrial Average fell 200 points, or 0.59%, to 33,563, the S&P 500 declined 9 points, or 0.2%, to 4,274, and the Nasdaq Composite dropped 11 points, or 0.09%, to 13,229.

What's driving markets

Stocks traded up on Tuesday even though there was a dearth of fresh catalysts for traders to feed off of, with no U.S. economic data or company results of note due during the session and no Federal Reserve speakers ahead of the central bank's June policy meeting, which starts next Tuesday.

The Fed will decide at its meeting whether to pause or again raise its benchmark interest rate.

The Labor Department will release its May inflation report next Tuesday as the Federal Open Market Committee kicks off its meeting.

The small-cap Russell 2000 index , which is made up of the smallest 2,000 companies in the broader Russell 3000 by market capitalization, was up 2.7% on Tuesday, its highest close since March 9, according to Dow Jones Market Data.

Read:Small-cap stocks are surging Tuesday as broader U.S. market sleeps. Here's why

Also read:Small-cap stocks lag in 2023, but here's where they're 'finally' starting to see positive earnings revisions

It shows a potential reversal of a trend, as the performance of small-cap companies has been lagging large-cap peers in the year to date. The Russell 2000 has gained 5.4% so far in 2023, compared with an 11.6% gain for the large-cap benchmark S&P 500 and a 26.8% jump for the tech-heavy Nasdaq.

"The difference between the S&P 500's return this year and small caps is driven by investor skittishness about the state of the economy, or its potential state sometime later this year," said Andy Kapyrin, co-chief investment officer at CI RegentAtlantic Private Wealth.

Tuesday's rally for small-cap stocks is a response to economic data published over the past few weeks, which indicate "we are not likely in a recession," Kapyrin said. Such a rally also bodes well for the broader market, as it indicates a "healthier degree of market breadth," he said.

"Small-caps tend to be on the more risky side of the stock market, with higher levels of volatility and bigger potential for drawdown," Kapyrin added. "When small-caps experience large rallies, in my view it suggests that investors aren't just eager to own something that they view as more stable -- they're eager to own something that is more tied to the state of the economy."

Meanwhile, many investors may still be chugging along on the upward drift of recent rallies --particularly for technology stocks, noted Andres Garcia-Amaya, founder and CEO of Zoe Financial.

"Something that has been surprising is how strong momentum has been," Garcia-Amaya said. A rate hike and a hawkish tone at next week's Fed meeting could stop that momentum and be "a cold bucket of water," he said. But that's an open question for the time being, he added: "Unless we get new news from the Fed, the market is trading on that soft landing."

Read also:Here's the red flag that says a tech stock selloff could arrive soon, according to Citi

President Joe Biden on Saturday signed legislation to raise the U.S. debt ceiling through January 1, 2025. One question now revolves around the equity-market implications for an anticipated issuance of short-term Treasury debt that's expected to be massive.

-Frances Yue

Companies in focus

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(END) Dow Jones Newswires

June 06, 2023 16:58 ET (20:58 GMT)

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