Stocks roar back with S&P 500, Nasdaq 100 up over 2%

(Bloomberg)—U.S. stocks extended gains as investors assessed the outlook for earnings amid speculation disappointments may be already priced into markets.

The S&P 500 was up 2.6% shortly after 2 p.m.. The tech-heavy Nasdaq 100 was up 3%, with megacaps Apple Inc. and Alphabet Inc. bouncing back from Monday’s losses ahead of Netflix Inc.’s earnings due later today. Johnson & Johnson gained even as it lowered its earnings and revenue forecast for the year. 

With the potential for earnings disappointments baked into markets, any upside surprises may lead to outsized gains. Investors remain on high alert for signs that high inflation and monetary tightening are squeezing consumers and employment, with allocation to stocks plunging to levels last seen in October 2008, according to the latest Bank of America Corp.’s monthly fund manager survey.

“Earnings, so far, there’s been some caution and there’s been a little bit of dialing down of expectations, but I don’t think the worst-case scenarios are really in play anymore,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview. “We’ve heard from the big banks, we’ve heard from IBM, we’ve heard from Johnson & Johnson, we’ve heard from enough companies that have had a big enough footprint that if there is something at the macro level severely impacting these businesses, it would have shown up in a lot of these earnings.”

Also on the earnings front, Hasbro Inc., the largest US toy company, gained after earnings beat analyst estimates, while International Business Machines Corp. fell as the tech company lowered its forecasts for free cash flow. 

Subscribe to Crain’s for $3.25 a week

In other company news, Twitter Inc. shares gained as a Delaware judge allowed the social media company to fast-track its lawsuit against Elon Musk, with the trial set to take place in October.

The dollar fell against its Group-of-10 peers. Treasuries traded lower, with the 10-year yield rising back to 3%.

Meanwhile, the euro rose to its highest level in about two weeks after Bloomberg News reported the European Central Bank may consider raising interest rates on Thursday by double the quarter-point outlined previously to counter worsening inflation. 

Markets are pricing in about 38 basis points of tightening on Thursday, when the ECB is expected to raise rates for the first time in more than a decade. That reflects about a 50/50 chance of a 50-basis point increase. 

The ECB is under pressure to subdue inflation, but the potential for a Russian gas shutdown could plunge Europe into recession. The European Union is preparing to tell members to cut gas consumption “immediately” to preserve supplies for winter, according to a report. 

Elsewhere, oil rebounded, with West Texas Intermediate crude rising to $104 a barrel, while a rally in cryptocurrencies took Bitcoin out of a one-month-old trading range, up above $23,000. 

More market commentary:

  • “Stocks have been beaten down,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note. “That doesn’t mean we won’t see more downside for some stock markets around the world, especially given that earnings expectations are likely to be adjusted downward. But I believe we are far closer to the bottom than the top.”
  • “There is a growing feeling in the market that the gradual and cautious normalization process the ECB started at the end of 2021 has been the wrong decision and that to make up for that slow and late,” wrote Fawad Razaqzada, market analyst at City Index. “Indeed, even until its June meeting, the ECB was pre-committing to a 25-basis point hike in July. But with the broad weakening of the euro helping to import more inflation in the eurozone, the ECB could surprise with a 50 bp hike.”

High-quality journalism isn’t free. Please consider subscribing to Crain’s.