U.S. stocks were giving back most of their earlier gains on Thursday afternoon, with the Dow Jones Industrial Average up modestly after carving out a fresh record.

Optimism about the Federal Reserve’s interest-rate-cut projections delivered a day ago had been fueling a powerful rally.

How stocks are trading

  • The Dow Jones Industrial Average
    DJIA
    advanced 63 points, or 0.2%, to 37,156, after touching a record intraday high of 37,287.50.

  • The S&P 500
    SPX
    edged up 4 points, or 0.1%, to 4,711.

  • The Nasdaq Composite
    COMP
    shed 18 points, or 0.1%, to 14,711.

On Wednesday, the Dow rose 1.4% to a record close of 37,090, the S&P 500 increased 1.4% and the Nasdaq gained 1.4%.

What’s driving markets

U.S. stocks were hitting pause on a powerful advance sparked a day ago when the Fed suggested interest rates have likely peaked in this cycle and penciled in 75 basis points of rate cuts in 2024.

“We’ve certainly rallied quite a bit in the last few days,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “A pause is probably appropriate.”

Pavlik also said there appeared to be early signs of a rotation in asset allocations taking hold as the 10-year Treasury rate continued to drop.

The benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
fell another 9 basis points to 3.93% on Thursday, after surging to 5% in October.

The Russell 200 index
RUT
of small-cap stocks was up 2% Thursday, after outperforming the big three equity indexes a day before.

Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years

“I’m not at all concerned about the Santa Clause rally is going away,” Pavlik said.

Sid Vaidya, U.S. wealth chief investment strategist at TD Wealth, said the big surprise from Wednesday was that Fed Chair Jerome Powell didn’t push back, as expected, on market expectations of rate cuts next year.

But he also thinks optimism should be tempered, with the Fed indicating the first rate cut is likely to occur in the fall, while traders are expecting a pivot to cuts this spring.

“We are in between,” Vaidya said, offering a forecast for the first cut of the cycle to occur in the summer of 2024.

More global central bank decisions arrived early Thursday, with the Bank of England and European Central Bank leaving their interest rates unchanged at 5.25% and 4%, respectively.

The ECB also signaled it would halt its last remaining bond-buying scheme — the €1.7 trillion ($1.9 trillion) Pandemic Emergency Purchase Program — earlier than expected, in mid-2024.

The latest batch of U.S. economic data released Thursday was benign, showing initial jobless claims fell by 19,000 to 202,000 in the week ending Dec. 9, the lowest level since mid-October. Data also showed sales at U.S. retailers rose a solid 0.3% in November in a good start to the holiday shopping season, suggesting the economy might not be cooling off all that much.

Thursday’s earnings calendar includes reports from retailer Costco
COST,
-1.37%
and homebuilder Lennar
LEN,
+6.93%,
which will release results after the closing bell.

See: Dow scores its highest close in history. Here’s what that means in the big picture.

Companies in focus

Jamie Chisholm contributed.

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