Markets Extend Gains as Traders Eye CPI and China Trade Talks

U.S. equity markets climbed modestly higher Tuesday as investors remained focused on two key near-term catalysts: Wednesday’s inflation report and progress in U.S.-China trade talks. The day’s session reflected a cautiously optimistic tone, with broad-based strength across most asset classes and sectors, risk-on leadership from small caps and cyclicals, and a pullback in defensive assets like gold and bonds. While the headlines remained light, underlying positioning suggested that traders are bracing for favorable news on both tariffs and inflation.

The S&P 500 rose for the third consecutive session, gaining 32.93 points (+0.55%) to close at 6,038.81. That places the index just 1.7% below its all-time high from February. The Nasdaq Composite led major benchmarks with a 123.75-point advance (+0.63%) to 19,714.99, lifted by strength in tech and semiconductors. The Dow Jones Industrial Average rose 105.11 points (+0.25%) to 42,866.87, while the broad-based Russell 3000 added 0.54%. Small caps, represented by the Russell 2000, continued their recent strong performance with a gain of 0.56%.

Commodities and Bonds React to Global Headlines

Commodities traded mixed. Gold slipped $5.40 (-0.16%) to $3,349.50/oz as safe-haven demand faded ahead of the CPI release. Oil prices reversed earlier gains: WTI fell 0.5% to $64.98/barrel and Brent slid 0.3% to $66.87, despite early strength tied to lingering geopolitical tensions and upbeat expectations from China trade talks. The Energy Information Administration also forecast a slowdown in U.S. production into 2026, though it sees oil prices gradually stabilizing near current levels.

In fixed income, U.S. Treasury yields were little changed on the long end while the 2-year dipped slightly after a soft $58 billion auction of 3-year notes. The 10-year yield settled at 4.47%, down 2 basis points, ahead of a key $39 billion reopening auction Wednesday. Traders also absorbed dovish signals from the U.K., where soft jobs data fueled expectations for a Bank of England rate cut by September.

Top Stories Driving Sentiment

The dominant themes of the day were anticipation and positioning. Markets traded in relatively tight ranges ahead of tomorrow morning’s May Consumer Price Index (CPI) report, where consensus expects headline inflation to rise 0.2% month-over-month and 2.5% year-over-year, with core CPI up 0.3% MoM and 2.9% YoY. Analysts from Goldman Sachs and BofA noted that while May may show only a modest rebound, base effects and tariff pass-throughs are likely to lift inflation readings in the coming months.

Meanwhile, traders kept a close watch on the second day of U.S.-China trade negotiations in London. Commerce Secretary Howard Lutnick said talks were “going really, really well,” fueling hopes that tensions could ease further. Bloomberg and Reuters reported that discussions could extend into Wednesday, depending on progress. The improving tone on trade supported cyclicals and export-sensitive names.

President Trump also made headlines during the session, suggesting to Israeli Prime Minister Netanyahu that he sees a path to a nuclear deal with Iran and opposes military action “at this time.” This contributed to a midday pullback in defense stocks, though markets quickly rebounded.

Sector and Style Performance

Energy led the S&P 500 sectors with a gain of 1.74%, extending a multi-day surge. Communication services (+1.24%) and consumer discretionary (+1.18%) followed, helped by gains in streaming, media, and retail. Health care also rallied 1.14%, continuing its quiet leadership trend. Technology added 0.51% as semiconductors recovered recent losses.

On the defensive side, utilities (+0.20%) and consumer staples (+0.16%) lagged, while financials (+0.11%) posted a muted gain despite firmer rates. The only decliner was industrials (-0.45%), weighed down by a 4% drop in GE Aerospace. Investors may also have rotated out of defense names on Iran-related de-escalation headlines.

Real estate (XLRE +0.88%) and materials (XLB +0.60%) performed well, aided by stable yields and continued strength in housing-related equities. The semiconductors (SMH +1.96%) and oil services (OIH +3.52%) subsectors were especially strong, while software (IGV -0.23%) and social media (SOCL -0.47%) saw modest pullbacks.

Style and Market Cap Rotation

Market internals showed a clear risk-on skew. Small-cap value (SLYV +1.03%) outperformed across the board, followed by small-cap core (SPSM +0.68%) and large-cap value (SPYV +0.58%). Large-cap growth (SPYG +0.50%) kept pace, but mid-cap growth (MDYG -0.42%) was the day’s lone negative style cohort, suggesting continued aversion to speculative names with limited earnings visibility.

Growth and value both participated, but value edged out slightly, reflecting strength in energy, financials, and real estate. The high-beta factor and semiconductor complex were once again leading subgroups.

Corporate and Economic Highlights

Among individual stocks, Tesla jumped 4% amid renewed excitement around its robotaxi initiative in Austin, Texas, and a positive mention from President Trump. J.M. Smucker plunged over 15% after a large impairment charge tied to its Hostess acquisition and disappointing FY26 guidance, pressuring the consumer staples space.

The only notable economic release was the NFIB Small Business Optimism Index, which surprised to the upside at 98.8 (vs. April’s 95.8), providing another data point suggesting resilience in U.S. business sentiment. Meanwhile, internals remained healthy with NYSE advancers outpacing decliners 2-to-1 and a nearly 7-to-4 advantage on the Nasdaq.

Looking Ahead: CPI and Trade Talks in Focus

All eyes now turn to the May CPI report, scheduled for release at 8:30 a.m. ET Wednesday. Given last year’s unusually soft prints, base effects are expected to lift year-over-year readings even if monthly changes are mild. Traders will also watch for any signs of early tariff pass-through in categories like apparel, recreation, and consumer electronics.

In parallel, markets are bracing for updates from the U.S.-China trade talks in London, which could extend into another day. Any headlines around tariff rollbacks or digital trade agreements could spark outsized moves, especially in cyclicals and tech.

The Treasury market will also be in focus with the $39 billion 10-year note reopening at 1:00 p.m. ET, while crude inventories and the Treasury Budget will round out the economic calendar.

Conclusion

Tuesday’s action reflected a market in wait-and-see mode, but with a clear bullish bias. Equity indexes extended their gains, market breadth was solid, and cyclicals continued to lead. As long as CPI doesn’t surprise to the upside and trade talks avoid derailment, the market appears positioned to continue its steady grind higher. With volatility low and risk appetite high, bulls are betting that macro headwinds are finally giving way to more durable tailwinds.