Markets posted modest gains this week, driven by solid earnings, cooling inflation, and a shift toward small-cap and cyclical stocks. The S&P 500 rose 0.9%, the Nasdaq gained 0.8%, and the Dow led with a 1.7% jump. All three major indexes hit record highs, boosted by optimism around possible Fed rate cuts.

The week opened with CPI which came in as expected for the month. The headline year-over-year reading was actually lower than expected. Meanwhile, Core inflation came in at 3.1% year-over-year. This strengthening bets on a 25-basis-point cut in September. However, a hotter-than-expected PPI reading midweek tempered those expectations slightly.

As of Friday, The CME Group’s Fed Watch tool shows an 85% probability of a 25-basis-point rate cut next month. The market had priced in a near certainty of one prior to the PPI results.

Small- and mid-cap indexes outperformed their large cap peers, signaling a renewed risk appetite for areas that could benefit the most from a more favorable interest rate environment.

Sector-wise, Health Care jumped 4.6%, and Consumer Discretionary rose 2.5%. Health Care benefited from the news that Warren Buffet’s Berkshire Hathaway took a significant investment in the struggling health giant after a regulatory filing was made public Thursday.