Wall Street extends rally on signs of ebbing Fed rate hikes

US stocks closed sharply higher on Tuesday as soft economic data hinted that the Fed’s aggressive policy is taking effect while falling benchmark Treasury yields boosted the rally’s momentum.

The Dow Jones Industrial Average rose 337.12 points or 1.07% to 31,836.74, the S&P 500 gained 61.77 points or 1.63% to 3,859.11 and the Nasdaq Composite added 246.50 points or 2.25% to 11,199.12.

All three major US stock indexes advanced for the third straight session with market-leading megacaps providing the most upside muscle. The S&P 500 has reclaimed about 8% from the trough of its Oct 12 close.

“There’s increasing discussion about a light at the end of the tunnel for Fed rate hikes,” said Bill Merz, head of capital market research at US Bank Wealth Management in Minneapolis. Merz nevertheless autioned that it wouldn’t be known for some time whether decades-high inflation was “decisively headed toward the Fed’s target”

“We’re seeing a bit of a reprieve in the US dollar and long-term bond yields have come down a little bit,” Merz added. “Those factors are combining to provide room for a bit of a rally.”

After the bell, Microsoft and Alphabet delivered weaker than expected quarterly results, sending their shares down about 7%. That helped push S&P 500 emini futures down almost 1%, suggesting traders expect the stock market to open deep in negative territory on Wednesday.

Yields of 10-year Treasuries pulled pack on hopes that the US Federal Reserve could begin easing its battle against inflation.

A mixed brew of earnings and downbeat forecasts – usually a negative for markets – have suggested the barrage of interest rate hikes from the Fed is beginning to be felt, raising expectations that the central bank could pull back on the size of rate hikes after its Nov. 1-2 policy meeting.

Data on Tuesday showed slowing home price growth and souring consumer confidence. Such signs of economic softness, ordinarily unsupportive of risk appetite, are evidence of abating Fed hawkishness.

The financial market is nearly evenly split on whether the central bank’s December rate increase will ease to 50 basis points after a string of 75 basis point hikes, according to CME’s FedWatch tool.

Among the 11 major sectors of the S&P 500, all but energy posted gains on the day with real estate enjoying the largest percentage gain.

Third-quarter reporting season is firing on all pistons with 129 of the companies in the S&P 500 having reported. Of those, 74% have beaten consensus expectations, according to Refinitiv.

Analysts have set the bar low; aggregate S&P 500 earnings growth is now seen landing at 3.3% year-on-year, down from 4.5% at the beginning of the month, per Refinitiv.

Coca-Cola Co rose 2.4% after the company upped its revenue and profit forecasts, banking on steady demand amid price increases. General Motors reaffirmed its outlook after posting solid earnings, sending its shares jumping 3.6%.

Advancing issues outnumbered declining ones on the NYSE by a 5.35-to-1 ratio; on Nasdaq, a 3.67-to-1 ratio favoured advancers.

The S&P 500 posted 14 new 52-week highs and one new lows; the Nasdaq Composite recorded 85 new highs and 120 new lows.

Volume on US exchanges was 11.89 billion shares compared with the 11.57 billion average over the last 20 trading days. – Oct 26, 2022

Subscribe and get top news delivered to your Inbox everyday for FREE