Lower rates tend to help high-growth and technology stocks in particular, and they were some of the market's leaders Monday.
Tesla added 5.9%, Nvidia rose 5.2% and Advanced Micro Device climbed 5.1% for some of the biggest gains in the S&P 500. Slightly more stocks in the index rose than fell.
Altogether, the S&P 500 slipped 2.99 points to 3,982.09. The Dow fell 112.96 to 33,517.65, and the Nasdaq rose 66.36 to 10,635.65.
Analysts, though, warn more bumpiness is almost surely on the way for the stock market. Even if inflation is slowing, the Fed has pledged to hike rates still further and then to hold them at a high level for a while to make sure the job is done on inflation.
Parts of the economy that do best when rates are low have already shown signs of sharp pain as the Federal Reserve has hiked its key overnight rate to a range of 4.25% to 4.50% from roughly zero a year ago.
Warnings are also coming for what look to be lackluster earnings reports from companies, which are contending with higher labor costs and other expenses that eat into their profits. Earnings reporting season is set to kick off on Friday, and this may mark the first year-over-year drop in earnings per share for S&P 500 companies since 2020.
"With 2022 behind us, investors are now primarily focused on the profit outlook for the coming year," strategists at Goldman Sachs wrote in a report.
U.S. stocks were mixed Monday at the start of a week with a few events that could shake markets, including updates on inflation and the health of corporate profits.
The S&P 500 dipped 0.1% after surrendering an early gain of 1.4% in its first trading after closing out its first winning week in the last five. The Dow Jones Industrial Average dipped nearly 113 points, or 0.3%, while the Nasdaq composite gained 0.6%.
More stocks rose than fell, and Wall Street's largely positive start to 2023 has come on hopes the Federal Reserve could ease up on its economy-shaking hikes to interest rates as inflation cools. Such rate increases have already slowed parts of the economy sharply, and the fear is more big hikes could cause a painful recession.
Treasury yields fell further Monday as traders adjust bets for what the Fed will do. They dropped Friday after data showed workers are winning weaker raises than in earlier months. While that's discouraging for workers whose pay is still failing to keep up with rising bills, it could ultimately mean less upward pressure on inflation.
The next big marker for the market will be Thursday's report on inflation at the consumer level. Economists expect it to show inflation slowed further to 6.5% last month from 7.1% in November.
The yield on the two-year Treasury, which tends to track expectations for Fed action, fell to 4.19% from 4.26% late Friday and more than 4.70% in November. The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, fell to 3.52% from 3.57% late Friday.
For the full year of 2023, they see zero growth for S&P 500 earnings per share. And that's if the economy avoids a recession. If a recession does hit, as many on Wall Street suspect, they say earnings could fall 11%. That's key because profits are one of the main levers that set stock prices.
Some retailers fell Monday after giving financial updates on sales and profitability that disappointed investors. Macy's dropped 7.7%, and Lululemon Athletica fell 9.3%.
Stock markets in Europe and Asia gained ground. A Chinese financial news outlet cited a top central bank official as saying that China's more than two-year crackdown on internet companies is nearly finished.
AP Business Writers Elaine Kurtenbach and Matt Ott contributed to this report.