US stocks rally as Fed rate cut hopes offset Middle East turmoil

Wall Street rallied on Monday as prospects of the US Federal Reserve cutting interest rates as early as July offset uncertainty about escalating turmoil in the Middle East.

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All three major US stock indexes closed sharply higher. Consumer discretionary stocks led the sector gainers, with a solid boost from Tesla.

"The rally is a bit surprising," said Jay Hatfield, chief executive officer and portfolio manager at InfraCap in New York. "In a way, the US attack puts an end to the uncertainty of whether the US is going to attack."

"The market action is extremely bullish because this is the time frame in June when we're supposed to have a pullback," Mr. Hatfield added. "People do not want to sell in this market."

Fed Vice-Chair Michelle Bowman said on Monday "it is time to consider adjusting the policy rate," as risks to the job market outweigh inflationary concerns related to tariffs. Chicago Fed President Austan Goolsbee said that thus far, tariffs have had a more modest economic impact than expected.

Financial markets are pricing in at least two 25-basis-point rate cuts before year-end. The first cut is widely expected to happen in September.