In a surge of optimism, U.S. stocks rallied to new record levels on Wednesday as hopes grew that inflation was moving in a favorable direction. The S&P 500 jumped 1.2% to surpass its previous all-time high set in March, while the Nasdaq composite added 1.4% to its own record achieved a day earlier. The Dow Jones Industrial Average also rose 0.9% to beat its recent high.

The market enthusiasm was partly fueled by declining Treasury yields, which alleviated some pressure on stocks. Traders were buoyed by a report showing a slowdown in inflation, which heightened expectations for the Federal Reserve to consider interest rate cuts this year.

Certain stocks, referred to as meme stocks, such as GameStop, faced losses amidst the overall market gains.

Relief from the bond market was a significant factor in the surge of stock prices. Real estate stocks within the S&P 500 climbed 1.6% and utility stocks rose 1.3%, benefiting from lower interest rates. Homebuilders, including Lennar and D.R. Horton, experienced notable gains as investors anticipated easier mortgage rates resulting from potential cuts by the Fed.

Big Tech and other high-growth stocks rode the wave of expectations for lower rates, with Nvidia leading the charge, posting a 3.7% gain that significantly contributed to the upward movement of the S&P 500.

The market sentiment was boosted by a report showcasing a decrease in overall consumer prices in April, which were 3.4% higher compared to the previous year. While still a significant increase, it provided some relief in comparison to March's inflation rate of 3.5%. The slowdown was particularly welcomed after disappointing results from earlier consumer price index (CPI) reports this year, which had negatively impacted expectations for interest rate cuts.

The positive expectations for lower interest rates were further consolidated by a report showing a stall in spending growth at U.S. retailers in April, indicating a possible reduction in upward pressure on inflation. However, concerns were raised regarding the potential impact on U.S. consumer spending, particularly among lower-income households, which could have implications on the economy.

Despite these concerns, the U.S. stock market continued to rally towards record levels, driven in part by the belief that the Federal Reserve can strike a delicate balance between curbing high inflation and avoiding a recession through its interest rate policies.

In contrast, a discouraging report revealed that manufacturing in New York state was experiencing more contraction than expected.

In terms of individual stock performances, Petco Health + Wellness stood out by leading the market with an 18.9% jump after naming Glenn Murphy, the CEO of investment firm FIS Holdings, as its executive chairman. On the other hand, GameStop and AMC Entertainment faced a reversal in momentum following their remarkable starts to the week. GameStop fell 22.1%, although it still managed to more than double its value for the week, while AMC Entertainment fell 19.5% after announcing its plans to issue shares to pay off its debt.

Meanwhile, in the bond market, the yield on the 10-year Treasury eased to 4.35% from 4.45% on Tuesday, and the two-year yield, which reflects expectations for Fed action, decreased to 4.74% from 4.82%. Traders now anticipate a 93.3% probability of at least one interest rate cut by the Federal Reserve this year, according to data from CME Group. This figure saw an increase from 89.7% the day before.

Indexes in Asia showed a mixed performance, with stocks in Shanghai falling by 0.8% after China's central bank maintained unchanged lending rates, while stocks in Europe experienced gains.