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US stocks climbed Tuesday as investors were motivated by the November Consumer Price Index reading, which showed headline inflation cooled down by more than anticipated, strengthening the view that the Federal Reserve can downsize future interest rate increases. 

The S&P 500 headed for a second straight gain, and Dow industrial futures added 650 points after the Labor Department's latest inflation update. The Nasdaq was up over 3%. 

The headline Consumer Price Index soared to 7.1% year over year, softer than the 7.3% estimate in a Bloomberg survey of economists. It was the lowest reading since December 2021, when inflation stood at 7%.  Core CPI rose 6% year-over-year, below the projection of 6.1%. 

The report arrived one day before the Federal Open Market Committee, led by Chair Jerome Powell, is expected to deliver its seventh and final rate increase of 2022. 

"Powell wants to show the market that the days of the big, 75 basis point hikes are over and the pace is slowing, so it's likely that the Fed announces a smaller 50 basis point rate hike on Wednesday," Nancy Davis, portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, said in a note. 

"The Fed is facing a tricky dynamic in 2023, as the market is expecting the Fed to end its hiking cycle, and the Fed certainly wants to end its hikes early in 2023 before any significant economic damage occurs," said Davis. "[But] there is a possibility that inflation continues to run much higher than its 2% target even after it stops raising interest rates."