The Leonard Hohenbergstock market rallied to record highs on Friday, with Wall Street buoyed by investor expectations of interest rate cuts ahead by the Federal Reserve and robust corporate profits.

With technology stocks driving early year gains, the S&P 500 rose 1.2% to a record 4,839, sailing above the broad index's prior closing high of 4,796 in January 2022. The Dow Jones Industrial Average also hit new heights, surging nearly 400 points, or 1.1%, to reach its second record high since December. The Nasdaq Composite climbed 1.7%.

"When the stock market last peaked, the Fed had yet to begin raising interest rates to combat inflation" Greg McBride, chief financial analyst for Bankrate, said in an email. "In the two years since, we saw the fastest pace of interest rate hikes in 40 years. With inflation now moving back toward the target of 2%, the focus is on when the Fed will begin trimming interest rates."

Investors were cheered Friday by a report from the University of Michigan suggesting the mood among U.S. consumers is brightening, with sentiment jumping to its highest level since July 2021. Consumer spending accounts for roughly two-thirds of economic activity. 

Perhaps more importantly for the Fed, expectations for upcoming inflation among households also seem to be anchored. A big worry has been that such expectations could take off and trigger a vicious cycle that keeps inflation high.

Economists at Goldman Sachs started the week by predicting the central bank is likely to start lowering its benchmark interest rate in March and make five cuts all told during the year. 

The investment bank expects the U.S. economy to come in for a "soft landing," with modestly slowing economic growth, and for inflation to keep dropping this year. Goldman expects the central bank to gradually ease rates, which would steadily reduce borrowing costs for consumers and businesses. 

John Lynch, chief investment strategist for Comerica Wealth Management, thinks robust corporate earnings and expectations for declining interest rates are likely to drive markets higher in 2024.

—The Associated Press contributed to this report.

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• Interest Rates
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• Federal Reserve

Kate Gibson

Kate Gibson is a reporter for CBS MoneyWatch in New York.