NEW YORK — U.S. stock markets surged on Wednesday, fueled by optimistic news regarding inflation in the United States. Strong earnings reports from major banks like Wells Fargo significantly contributed to this upward momentum, marking the best day for the markets in two months.

The S&P 500 climbed by 1.8%, while the Dow Jones Industrial Average saw an increase of 703 points, or 1.7%. The Nasdaq composite experienced a notable rise of 2.5%.

In the bond market, Treasury yields eased following the latest report, which outlined how much more families had to spend in December for basic necessities such as eggs, gas, housing, and other living costs. This report revealed that overall inflation increased to 2.9%, up from 2.7% in November.

Despite the concern that comes with rising inflation, the details within the report were more promising. When excluding food and energy prices—which are known for their volatility—core inflation moderated to 3.2% in December. Economists had anticipated that this figure would remain steady at 3.3% for a fourth consecutive month, according to FactSet.

The Federal Reserve tends to focus more on this core inflation number rather than the overall inflation rate. This news was particularly refreshing amidst concerns that the progress in lowering inflation had stalled and that reaching the Fed’s 2% target could prove difficult.

Market participants are not expecting this recent data to sway the Federal Reserve into reducing interest rates at their imminent meeting later this month, as they have cut rates at three consecutive meetings since September. However, economists suggest that if subsequent data continues to show a reduction in inflation pressures, the door for potential rate cuts later in the year—possibly as soon as March—could open.

“Perhaps the most significant takeaway is that the markets are likely to experience swings in the coming weeks as investors search for a narrative that allows them to feel secure for an extended period,” said Seema Shah, chief global strategist at Principal Asset Management.

Recently, Wall Street has been fluctuating as traders adjust their forecasts regarding the Fed’s interest rate strategy for 2025. Further rate cuts could provide a lift to the U.S. economy and drive up investment prices; however, this might ignite inflationary pressures as well.

Last year, traders were quite optimistic about potential rate cuts, which propelled stock prices to numerous all-time highs, but those expectations have moderated recently. The Fed has indicated it may pursue only two rate cuts this year instead of the previously expected four, and some market participants have even speculated about possible future rate hikes.

The latest update has quelled near-term rate hike speculation, causing Treasury yields to drop as investors became increasingly optimistic about potential future cuts. The yield on the 10-year Treasury plummeted to 4.65% from 4.79% late on Tuesday, marking a significant drop after months of rising since it was under 3.65% in September.

Likewise, the two-year Treasury yield, which is more sensitive to anticipated changes by the Fed, decreased to 4.26% from 4.37%.

On Wall Street, bank stocks were among the top performers after a slew of strong profit reports for the last quarter of 2024 that exceeded analysts’ expectations. Wells Fargo rallied 6.7%, Citigroup increased by 6.5%, and Goldman Sachs gained 6%. They are among the first major U.S. firms to release their quarterly results, drawing extra attention from investors.

Typically, when Treasury yields rise and bond interest payments increase, it exerts downward pressure on stock prices by diverting investors from stocks to bonds. To counter this, stock prices generally need to either decrease or corporate profits must grow significantly.

Shares in companies that stand to benefit from lower interest rates were also prominently featured in the market’s gains. For instance, Builders FirstSource, a supplier of construction materials, saw a 4.7% increase due to the expected boost in housing-related stocks from eased mortgage rates.

Overall, the S&P 500 went up by 107 points to 5,949.91, the Dow Jones Industrial Average climbed 703.27 points to 43,221.55, and the Nasdaq composite grew by 466.84 points, closing at 19,511.23.

The favorable inflation news in the United States also positively influenced stock indexes around the globe, relieving some pressure from the global bond market. In the UK, the FTSE 100 jumped 1.2%. British markets have been under strain due to rising bond yields, amid worries about a sluggish economy and national finances.

European indexes experienced upticks as well, with France rising by 0.7% and Germany by 1.5%. In Asia, trading was more muted, having closed before the release of U.S. inflation data. South Korea’s Kospi remained relatively flat following the detention of the impeached President Yoon Suk Yeol in connection with his controversial martial law declaration last month.