Wall Street closes higher as softer inflation and a strong start to earnings season lift sentiment

US stocks closed higher on Wednesday after weaker-than-expected inflation data and another round of strong corporate earnings at the start of the second-quarter reporting season boosted investor confidence.

The three major US indexes ended the session with modest gains despite continued weakness in semiconductor stocks, while consumer retail and travel & leisure shares led the market higher.

Bank and technology stocks lead gains as PayPal jumps on takeover report

PayPal surged 17.2% after Reuters reported that Stripe and private equity firm Advent International had submitted a joint bid to acquire the company for $60.50 per share, representing a premium of about 28% over Tuesday's closing price.

Meanwhile, the US banking earnings season continued to deliver positive surprises, with both BlackRock and Morgan Stanley reporting quarterly results that exceeded market expectations.

BlackRock shares climbed 6.6%, while Morgan Stanley finished the session 0.4% higher.

"Everything coming out of the banks looks positive, and I wouldn't be surprised if we see another exceptional quarter," said Mike Dickson, Head of Research and Quantitative Strategies at Horizon Investments in Charlotte, North Carolina.

According to the latest LSEG data, analysts expect S&P 500 companies to post year-over-year earnings growth of 23.7% in the second quarter.

At the close:

The Dow Jones Industrial Average rose 150.91 points, or 0.29%, to 52,659.18.

The S&P 500 gained 28.83 points, or 0.38%, to finish at 7,572.42, while the Nasdaq Composite advanced 162.22 points, or 0.62%, to close at 26,269.23.

Among the 11 major S&P 500 sectors, communication services posted the strongest gains, while utilities were the weakest performer.

Softer inflation boosts optimism, but geopolitical risks remain

Markets also received support after the Producer Price Index (PPI) came in below expectations for a second consecutive day, as Federal Reserve Chair Kevin Warsh continued his second day of testimony before the Senate Banking Committee.

Combined with Tuesday's Consumer Price Index (CPI) report, the PPI data suggested inflation continued to ease last month, although it remained elevated due to the economic impact of the conflict involving the United States, Israel, and Iran. The data reduced pressure on the Federal Reserve to raise interest rates in the near term.

"My biggest concern before this week was that inflation would come in above 3.8%, but instead it slowed to 3.5%. That gives the Federal Reserve room to keep interest rates unchanged or even cut them later this year, which is positive news for markets," said Lauren Goodwin, Chief Market Strategist at Founders 100 ETF in Dallas.

According to CME FedWatch data, markets are now pricing in just a 10.2% probability of a 25-basis-point rate hike at the conclusion of the Federal Reserve's meeting later this month, down from 31% a week earlier.

Despite the encouraging inflation figures, analysts noted that the data reflected last month's conditions, when investors still believed a diplomatic resolution to the Middle East conflict was within reach.

That optimism has faded in recent days as renewed US-Iran airstrikes and growing tensions over control of the Strait of Hormuz have raised concerns that higher energy prices could reignite inflationary pressures.

Separately, Federal Reserve Governor Lisa Cook said she is "prepared to act" if inflation fails to continue moderating in the months ahead.

Market breadth remained positive, with advancing stocks outnumbering decliners by 1.5-to-1 on the New York Stock Exchange, where 269 stocks hit new 52-week highs and 124 reached new lows.

On the Nasdaq, 2,647 stocks advanced while 2,107 declined. Total trading volume across US exchanges reached 16.27 billion shares, compared with the 20-session average of 21.40 billion.