US stocks rose as corporate earnings continued to roll in and economic data came in better than expected. Treasuries trimmed earlier declines as traders priced in the possibility of further interest-rate hikes from the Federal Reserve.
Earnings set the tone for stocks, with solid reports from Moderna Inc. and PayPal Holdings Inc. lifting the Nasdaq 100 as much as 2.8% and pushing it to a level last seen in May. The S&P 500 also rose as much as 1.7%. Recent data eased concerns of a broader economic slowdown as growth in the US services sector unexpectedly strengthened to a three-month high in July.
“Now that we’re 70% through the earnings reporting season, we can clearly say that it’s not the earnings Armageddon that many had feared,” said Art Hogan, chief market strategist at B. Riley Wealth. “That’s important.”
The Treasury 10-year yield pushed toward 2.8% as swap markets showed traders pricing in a 50% chance for a three-quarter percentage point rate hike in September.
Treasuries had rallied last week after Chair Jerome Powell signaled that the pace of future increases may slow later this year, boosting the odds for cuts next year in market-implied measures. Several Fed leaders have since said the central bank is far from done with tightening and remains laser-focused on tamping down price gains that are the hottest in four decades.
“If there is a change in tone by Fed members, it is similar to a parent that is finally telling the kids that you’ve had enough candy, no more,” wrote Peter Boockvar, chief investment officer at Bleakley Financial Group. “For decades the Fed always gave the markets more candy, especially when the kids cried out for it. Now, the kids are going to have to do without as long as inflation is at the very unsatisfactory levels that it’s pacing at, even with an expected fall.”
Markets are also somewhat calmer as US-China tensions simmered after House Speaker Nancy Pelosi left Taiwan. Her visit had provoked an angry response from China, and markets were on the edge ahead of her arrival on Tuesday.
US stocks are roaring on Wednesday after a session with many twists and turns on the previous day. But equities trading doesn’t reflect the headwinds confronting the market, according to Goldman Sachs Group Inc. strategist Sharon Bell.
“There’s a little bit of complacency in there and markets are not fully taking into account the risks,” Bell said in an interview with Bloomberg TV.
Seeing riskier areas of the equity market reprice higher as some earnings estimates get slashed indicates that investors may be overly optimistic, said Emily Roland, co-chief investment strategist at John Hancock Investment Management.
“In this environment, we would rebalance into quality companies and sectors that have strong balance sheets and more durable profitability,” she said. “This is not the right time to emphasize cyclical areas or ones that have a greater need for capital.”
Roland considers tech stocks that meet certain profitability and return metrics “higher quality.” She would deemphasize consumer discretionary, financials, and industrials, she said.
Thin liquidity during the summer lull also tends to magnify small market moves, said April LaRusse, head of investment specialists at Insight Investments.
“Sometimes that can make it look more exciting than it probably really,” she said.
The Cboe VIX Index also shows price swings are usually prevalent in the summer and early autumn. August and September are historically the two worst months for the S&P 500 Index.
Oil fell after a brief rally as traders mulled the lack of relief for oil markets and a poor demand outlook. The dollar pared gains after jumping to its highest in a week.