Markets have broad rally ahead of earnings reports

Wall Street kicked off the week with a broad stock market rally Monday as investors look ahead to a busy week of company earnings reports and grow more confident the Federal Reserve will turn the screws less aggressively in tightening the economy.

The S&P 500 rose 1.2%, led by tech companies. The gains more than made up for the benchmark index’s losses last week. The Dow Jones Industrial Average rose 0.8%, while the tech-heavy Nasdaq composite closed 2% higher. Small company stocks also rose, pushing the Russell 2000 index up 1.3%.

Markets have been churning for weeks with sharp swings in both directions. On one hand, they’ve benefited from hopes that the nation’s high inflation will continue to cool and allow the Federal Reserve to loosen up on its blizzard of interest rate increases. On the other hand, they’ve taken hits on worries about a possible recession because of rate increases already pushed through by the Fed.

Monday’s gains follow a strong Friday, when stocks rallied on comments from a Fed official seen as a signal that the central bank may raise rates by a quarter of a percentage point next week. That would be a downshift from last month’s half-point increase and from four earlier three-quarter-point increases.

Higher rates intentionally slow the economy by making it more expensive for businesses and households to borrow, and a step down would mean less added pressure. The Fed has already lifted its key overnight rate to a range of 4.25% to 4.5%, from virtually zero early last year, and traders are now betting the Fed will raise rates by just a quarter point on Feb. 1, according to CME Group.

The bigger question is how much further the Fed goes from there and how long policymakers will wait before cutting interest rates. Such cuts can act like steroids for markets, and Wall Street is hoping rate cuts will arrive in the back half of 2023. The Fed, meanwhile, has declared that it plans on holding rates high at least until 2024.

The yield on the two-year Treasury, which tends to track expectations for Fed movement, rose to 4.22% from 4.18% late Friday. The 10-year yield, which helps set rates for mortgages and other important loans, rose to 3.52% from 3.48%.

This year’s rally so far, with the S&P 500 up more than 4% to date, is largely a result of how pessimistic Wall Street become late last year, said Ryan Detrick, chief market strategist at Carson Group. With so many investors expecting further losses in 2023, “it was extremely lopsided,” he said, “and if you get any good news, you can get a bounce.”

“Have we had great news? No,” Detrick said. “But most of the inflation data is improving more than most people expected, which is opening the door for the Fed to take its foot off the pedal” and take it easier on rates.

More recently, concerns have also been rising on Wall Street about the strength of profits at companies because of the slowing economy and higher expenses. That’s key because profits are one of the main levers that set stock prices.

This upcoming week will see more than seven dozen companies in the S&P 500 report their results for the last three months of 2022, including some of the most influential.

Headliners include Microsoft today and Tesla on Wednesday.

Such big tech-oriented companies have already been announcing layoffs to cut expenses after acknowledging they misread the boom coming out of the covid-19 pandemic and grew too quickly.

Music app operator Spotify Technology SA said Monday, for example, it will cut 6% of its workforce, ultimately pushing shares of the company 2.1% higher.

Big Tech stocks carry particular weight on Wall Street because they’re some of the market’s most valuable. That means movements for their stock prices hold bigger sway over the S&P 500 and other indexes than smaller stocks.

Tech stocks in the S&P 500 overall rose 2.3% on Monday, with chipmaker Advanced Micro Devices Inc. leading the pack with a 9.2% gain.

Overall, the S&P 500 gained 47.20 points to 4,019.81. The Dow rose 254.07 points to close at 33,629.56, while the Nasdaq added 223.98 points, finishing at 11,364.41. The Russell 2000 rose 23.43 points to 1,890.77.

Meanwhile, another partisan battle in Washington about the nation’s debt ceiling may add pressure on markets. Wall Street has seen this argument many times already, but if the two parties can’t agree to allow the U.S. government to borrow more, economists say it could create chaos in markets and perhaps cause a recession on its own.

In Asian markets, Tokyo’s Nikkei 225 added 1.3% despite Japan’s finance minister saying the country faces an “unprecedentedly severe” financial situation after spending heavily to counter the pandemic and other troubles.