By Ankika Biswas and Amruta Khandekar
(Reuters) -U.S. stocks were set to open subdued on the final day of an upbeat year which has seen the benchmark S&P 500 rally close to a record peak due to growing expectations the Federal Reserve will cut interest rates early next year.
The S&P is within a whisker of its all-time closing high reached in January 2022. If it ends above that level, it would confirm the index entered a bull market after it hit the bear market closing trough in October 2022.
The three main indexes were on track for both monthly and quarterly advances, setting them up for double-digit gains in 2023. They also eyed their ninth straight weekly gain, with the S&P set for its longest weekly winning streak since 2004.
The Dow Jones hit a record high on Thursday, while the Nasdaq is on track for its strongest yearly jump since 2003, sharply rebounding from a slump last year.
With the Fed's aggressive rate hikes cooling the U.S. labor market as well as pressuring the economy, investors have amplified their bets of rate cuts heading into 2024.
As per CME's FedWatch tool, the probability of policymakers cutting the Fed funds target rate by 25 basis points in March stood at 70.1%.
"Sentiment has changed dramatically over the last two months. The expectation now that the Fed is going to be cutting rates next year has put an additional bid underneath the market," said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest.
While the optimism could continue in the near term, Nolte pointed to risks of sticky inflation in 2024 that could force the Fed to keep interest rates elevated.
The year 2023 was marked by aggressive Fed rate hikes, which were finally halted in September, the U.S. banking crisis in March, an artificial intelligence stocks boom, the Israel-Hamas war, economic concerns that eventually bolstered the case for policy easing bets, among others.
The information technology is set to emerge as the top sectoral gainer in 2023, up 56.8%, benefiting from an AI exuberance and a surge in megacap stocks, while the defensive utilities sector was the worst hit with a 10.1% decline.
Nvidia and Meta Platforms were the top annual gainers on the S&P 500, eyeing around three-fold gains.
Investors are winding down for the holiday season, with markets staying shut on Monday, Jan. 1, on account of New Year's Day.
At 8:13 a.m. ET, Dow e-minis were down 6 points, or 0.02%, S&P 500 e-minis were down 2 points, or 0.04%, and Nasdaq 100 e-minis were down 10.5 points, or 0.06%.
Among corporate movers, Uber Technologies and Lyft lost 1.1% and 2.7%, respectively, in premarket trading, following a report that Nomura downgraded the ride-sharing platforms.