The Dow Jones Industrial Average reached new heights on Tuesday, marking a significant milestone as the bull market expanded beyond the technology sector in anticipation of potential interest rate cuts. The Dow surged by 742.76 points, equivalent to a 1.85% increase, closing at 40,954.48. This surge led the 30-stock index to hit an all-time high, closing at a record level, and recording its best session since June 2023. The Russell 2000, which focuses on small-cap stocks, rose by more than 3%, achieving its fifth consecutive day of gains.

The S&P 500 also experienced a positive trend, adding 0.64% to close at 5,667.20. Meanwhile, the Nasdaq Composite ended the day with a modest increase of 0.2%, closing at 18,509.34, as technology stocks did not significantly contribute to Tuesday's rally.

Among the industrial stocks, Caterpillar saw a notable increase of more than 4%, making it the second-biggest gainer in the Dow, just behind UnitedHealth. UnitedHealth experienced a remarkable 6.5% rise following its better-than-expected second-quarter results.

Financial stocks, which had previously been lagging in the bull market, also saw gains. This was spurred by positive earnings reports from Bank of America and Morgan Stanley, which surpassed analyst expectations. Bank of America saw an impressive jump of more than 5%, while Morgan Stanley added nearly 1%.

The market rotation from megacap technology shares to small-cap and cyclical stocks began a week ago when June's consumer price index revealed the lowest inflation rate in three years. This data was interpreted as an indication that inflation is nearing the Federal Reserve’s 2% target, suggesting that the central bank might soon lower interest rates.

According to the CME FedWatch tool, traders now see a 100% probability that the Federal Reserve will reduce interest rates in September. A rate cut is expected to benefit small-cap and industrial stocks, which are more dependent on borrowing costs, rather than cash-rich, megacap technology stocks that have been buoyed by optimism surrounding artificial intelligence.

Over the past week, the Russell 2000 has surged by more than 11%, while the blue-chip Dow has gained more than 4%. In contrast, the Nasdaq has increased by only 0.4% during the same period.

Notably, Nvidia, a prominent AI stock, and Alphabet, the parent company of Google, both declined by more than 1% on Tuesday. This extended their losses over the past week as other sectors of the market experienced gains.

Ross Mayfield, an investment strategist at Baird, commented on this trend, stating, "There’s a lot of momentum behind this rotation trade from big-cap tech into small caps and into the average stock. It’s a rotation, but it’s much more about the upside in the more cyclical sectors in the market than a referendum on AI’s long-term potential."

Further supporting investors' optimism, retail sales data released on Tuesday showed that June sales remained unchanged, defying expectations for a decline. When excluding auto sales, June sales increased by 0.4%, surpassing the 0.1% consensus forecast collected by Dow Jones.

Quincy Krosby, chief global strategist at LPL Financial, highlighted the significance of this data, stating, "This data should be positive for markets. Investors prefer the launch of a Fed easing cycle to begin with a still solid economic backdrop."

The overall sentiment in the market is bolstered by the belief that the Federal Reserve has managed to achieve a so-called soft landing with the economy, where inflation is controlled without triggering a recession. This scenario is seen as favorable for continued market gains and a potential easing cycle by the Fed.

In summary, the recent performance of the Dow Jones Industrial Average and other indices reflects a broader market rally fueled by expectations of interest rate cuts and a shift from technology stocks to more cyclical and small-cap stocks. The strong performance of industrial and financial stocks, coupled with positive retail sales data, has reinforced investor confidence in the economic outlook and the potential for sustained market growth.