Once again, smaller firms rallied, with the Russell 2000 poised for its biggest five-day run since April 2020. Conversely, the megacap space that has powered the bull market came under pressure. An equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — largely beat the US equity gauge. That index is less sensitive to gains from the largest companies — providing a glimpse of hope that the rally will broaden out.

The resilience of the equity market has been underpinned by optimism the economy has withstood the worst of Fed tightening. In this regard, Tuesday's retail sales report was a "healthy" development, according to Bret Kenwell at eToro. It's better to see the Fed cutting rates on falling inflation than to see the central bank rushing to bolster a weakened economy, he noted.

"While we are not 'most preferred' on small caps, they are historically cheap on a relative basis, and could snap back quickly should interest rates fall and growth remain resilient," said Solita Marcelli, at UBS Global Wealth Management. 

The S&P 500 hovered near 5,650. The Dow Jones Industrial Average rose 1.5%. The Russell 2000 gained 2%. The Nasdaq 100 was little changed. Amazon.com Inc., which kicked off its Prime Day event, outperformed. UnitedHealth Group Inc. climbed on strong results. 

Traders also waded through financial earnings. Morgan Stanley dropped as results from its key wealth business fell short of estimates. Bank of America Corp. rose after saying net interest income would climb by the end of the year. Charles Schwab Corp. sank as new brokerage accounts missed estimates. 

Treasury 10-year yields fell three basis points to 4.20%. Gold hit a record high on bets the Fed will soon be able to pivot.

"Retail spending in June was expected to confirm signs of an economic slowdown, but instead has breathed new life into the argument that Fed officials don't need to worry about a sluggish real economy yet," said Mark Streiber at FHN Financial. 

U.S. retail sales, excluding the impact of a cyberattack on auto dealerships, rose in June by the most in three months, a sign consumers regained their footing at the end of the second quarter. Total retail sales were unchanged, restrained by a 2% slide in receipts at auto dealers. The figures aren't adjusted for inflation.

"This report doesn't negate expectations that the Fed will cut rates at its September meeting, unless of course inflation-related data releases indicate an uptick in prices," said Quincy Krosby at LPL Financial.

Fed Chair Jerome Powell said Monday that second-quarter economic data has provided policymakers greater confidence that inflation is heading down to the central bank's 2% goal, possibly paving the way for near-term interest-rate cuts.