NEW YORK — U.S. stocks are rallying Wednesday after Wall Street and financial markets worldwide got a shot of adrenaline from an encouraging update on U.S. inflation. Strong profit reports from the biggest U.S. banks are also helping to launch indexes toward their best day in two months.

The S&P 500 was 1.5% higher in early trading. The Dow Jones Industrial Average was up 652 points, or 1.5%, as of 9:35 a.m. Eastern time, and the Nasdaq composite was 1.7% higher.

Treasury yields also eased sharply in the bond market following the update on how much more U.S. households had to pay in December for eggs, gasoline, housing and other costs of living. The report said overall inflation accelerated to 2.9% from 2.7% in November.

But the numbers were more encouraging underneath the surface. After ignoring prices for food and energy, which can zigzag sharply from month to month, underlying inflation trends slowed to 3.2% in December. Economists were looking for it to remain at 3.3% for a fourth straight month, according to FactSet.

The Federal Reserve pays more attention to that underlying number than the overall figure, and it’s particularly welcome following worries that improvements in inflation have halted and that it will be tough to get all the way down to the Fed’s 2% target.

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Traders Believe Wednesday’s Data Will Cause Feds to Cut Interest Rates

Few traders expect Wednesday’s data to convince the Fed to cut its main interest rate at its meeting later this month, as it’s done at three straight meetings since September. But economists and analysts say it could open the door back up to cuts later in the year, perhaps even in March if more data comes in to show that upward pressure on inflation is abating.

“Perhaps the key takeaway is that markets are likely to be whipsawed over the next few data releases as investors seek a narrative that they can be comfortable with for more than just a few days at a time,” said Seema Shah, chief global strategist at Principal Asset Management.

Wall Street has been lurching down and up for weeks as traders try to handicap what the Fed will do with interest rates in 2025. A further easing would give the U.S. economy a boost by making it cheaper to get loans and by goosing prices for investments. But it could also give inflation more fuel.

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In the bond market, Treasury yields eased on growing hopes for coming cuts. The yield on the 10-year Treasury dropped back to 4.65% from 4.79% late Tuesday, which is a notable move for the bond market. It had largely been screaming higher since September, when it was below 3.65%.

The two-year Treasury yield, which more closely tracks expectations for the Fed’s upcoming actions, fell to 4.26% from 4.37%.

On Wall Street, bank stocks helped lead the way after several reported stronger profits for the last three months of 2024 than analysts expected.

Bank’s Stocks Jump

Wells Fargo jumped 4.2%, Citigroup rallied 4.3% and Goldman Sachs gained 4.6%, for example. They’re among the first big U.S. companies to report their results for the end of 2024, and even more focus may be on them than usual.

When Treasury yields are climbing and bonds are paying more in interest, it cranks up the pressure on stock prices by peeling investors away from stocks and into bonds. To make up for it, stock prices typically either have to fall or corporate profits have to rise more strongly.

The encouraging U.S. inflation data also helped to perk up stock indexes abroad by lowering the pressure on the global bond market.

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The FTSE 100 in London rose 0.8%, for example. U.K. markets have been under pressure because of a jump in bond yields amid worries about the country’s finances.

Indexes also rose 0.9% in France and 1.6% in Germany. They were more subdued in Asia, where trading closed before the release of the U.S. inflation data.

South Korea’s Kospi was nearly unchanged after law enforcement officials detained impeached President Yoon Suk Yeol on Wednesday in connection with his failed declaration of martial law last month.