Wall Street's main stock indexes struggled for direction on Thursday as investors favored rate-sensitive small-cap stocks over expensive megacaps after a softer-than-expected inflation reading bolstered hopes for monetary policy easing in September.
A Labor Department report showed U.S. consumer prices fell unexpectedly and that the annual increase was the smallest in a year, reinforcing views that the disinflation trend was back in play.
The data is a welcome sign for Federal Reserve policymakers looking for evidence that inflation is back on track to their 2% goal, leading traders to increase bets on a September rate cut.
The Russell 2000 (.RUT) spiked 2.1% to an over one-month high on expectations that interest-rate cuts would improve conditions for small- and mid-cap companies.
"There is a realization we are about to have a much stronger earnings quarter, and if we have a strong GDP print in a few weeks, the Fed will likely signal in July that they are going to hold course. A 3% CPI print is still well above their target," said Scott Helfstein, head of investment strategy at Global X.
"We would prefer to have stronger earnings and economic data than an earlier cut."
Bets of a September cut spiked to 88%, from a 70% chance before the data was released.
Meanwhile, megacap stocks including Apple (AAPL.O), Microsoft (MSFT.O), Alphabet (GOOGL.O) and Nvidia (NVDA.O) fell between 0.5% and 0.7%, after rising briefly in premarket trading after the data.
S&P 500 Real Estate (.SPLRCR) jumped 2.4%, topping sectoral gainers, while Communication Services (.SPLRCL) was the worst hit.
The S&P 500 and the Nasdaq scaled fresh record highs when markets opened, in range-bound trading.
Federal Reserve Chair Jerome Powell on Wednesday raised expectations for policy easing in September, but reiterated that such a decision would be data-dependent.
Among headlining stocks, Delta Air Lines (DAL.N) slumped 8.2%, on track for its biggest one-day fall since mid-January, after forecasting lower-than-expected profits in the current quarter.
United Airlines Holdings (UAL.O), American Airlines Group (AAL.O), Spirit Airlines (SAVE.N), Alaska Air Group (ALK.N) and JetBlue Airways (JBLU.O) fell between 4% and 6%.
Hopes for interest rates to be lowered, continued economic resilience and exuberance around artificial intelligence-linked stocks have kept Wall Street's main indexes at or near record highs this year.
Investors will also scrutinize the Producer Price Index reading for insights into the inflation trajectory, along with second-quarter earnings from big banks, both due on Friday.
At 9:48 a.m. ET, the Dow Jones Industrial Average (.DJI) was down 9.47 points, or 0.02%, at 39,711.89, the S&P 500 (.SPX) was up 2.36 points, or 0.04%, at 5,636.27, and the Nasdaq Composite (.IXIC) was down 7.70 points, or 0.04%, at 18,639.74.
PepsiCo (PEP.O) shed 1.4% after the soda and snacks maker missed expectations for second-quarter revenue.
Conagra Brands (CAG.N) fell 4.1% after the packaged foods maker forecast annual revenue and profit below estimates, while Citigroup (C.N) slipped 2% after U.S. bank regulators fined the lender $136 million.
Advancing issues outnumbered decliners by a 5.98-to-1 ratio on the NYSE, and by a 4.06-to-1 ratio on the Nasdaq.
The S&P index recorded 33 new 52-week highs and one new low, while the Nasdaq recorded 79 new highs and 13 new lows.
