U.S. Stocks Rise as Dow Extends Rebound – The Wall Street Journal

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U.S. stocks rose Wednesday, extending the previous session’s rebound, as investors turned their focus to the banner start to corporate earnings season.

The S&P 500 climbed 0.7%, a day after the broad market gauge posted its biggest one-day gain since late March. The two-day advance is on course to unwind Monday’s steep drop and push the index back within about 1% of its record close. The Dow Jones Industrial Average rose 253 points, or 0.7%, and the Nasdaq Composite added 0.7%.

Earnings season has helped buoy sentiment. Through Tuesday, 85% of S&P 500 companies that had filed quarterly results topped analysts’ expectations, according to FactSet.

The market recently has been lurching from one fear to the next, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. Earnings season has given traders something positive on which to focus, he said. “It’s nice to see some stabilization.”

The renewed risk appetite gave a boost to small-cap stocks, which had fallen farther than their large-cap brethren lately. The Russell 2000 was up 1.3% on Wednesday, though it remains down about 2.8% this month.

Many money managers say they see few other places than stocks to deploy cash with yields on government and corporate bonds trading at depressed levels. Some remain concerned, though, that the Delta variant will take some steam out of the global economic rebound, and they expect a jittery stretch of trading heading into the peak summer vacation period.

The bond market went a little “nutso” after the Federal Reserve started talking about interest rate increases, said Nancy Davis, founder of Quadratic Capital Management, driving long-term government bond yields higher. While things have settled down since the 10-year hit 1.73% in March, she said this environment should have investors on guard.

There are some “stagflation”-like impulses in the economy right now, she said, between still-high unemployment, labor shortages, supply shortages and rising inflation. If that takes hold, it could cause problems for investors in both stocks and bonds, and especially the traditional 60/40 portfolio model.

“It’s a prudent time for investors to be thinking about what if stagflation happens,” she said.

Yields on government bonds are likely to rise back to those March highs, said Jonas Goltermann, senior markets economist at Capital Economics, but it will probably prompt investors to shift money back into stocks that benefit from the reopening of the economy.

“The outlook in an absolute sense is still pretty good,” he said. “This is a rebound from a big recession.”

Nonetheless, Mr. Goltermann added that “the past month [has] not been smooth sailing and it might take time to get back to something more calm.”

Chipotle Mexican Grill climbed 13% after reporting sales that blew past pre-pandemic levels. Coca-Cola added 1.4% after saying earnings this year would trump the beverage giant’s previous forecast.

Johnson & Johnson’s second-quarter revenue grew by 27%, and shares of the medical company added 0.4%. Harley-Davidson fell 7% even after the motorcycle-maker turned a profit in the second quarter.

Texas Instruments, Whirlpool and Equifax are scheduled to post results after markets close.

The yield on 10-year Treasury notes rose to 1.293% from 1.208% Tuesday. Yields move in the opposite direction to bond prices and have skidded in recent weeks in a sign of waning concerns about a prolonged overshoot in inflation.

“Consumers are going to remain at least moderately cautious because of the spread of Delta everywhere,” said Christopher Jeffery, head of inflation and rates strategy at Legal & General Investment Management. “It is really hard to think the U.K. template isn’t at least going to be partly followed in the U.S. and Europe,” he added, referring to a spike in cases in the U.K.

Still, Mr. Jeffery is upbeat about the outlook for stocks. “It is hard for us to get structurally negative on equities” given the strong start to earnings season, he said.

In overseas markets, the Stoxx Europe 600 jumped 1.6%, buoyed by shares of travel, leisure and retail companies. Japan’s Nikkei 225 rose 0.6%, and the Shanghai Composite Index added 0.7%.

Markets are expected to remain jittery heading into the peak summer vacation period.

Photo: Richard Drew/Associated Press

Write to Joe Wallace at Joe.Wallace@wsj.com and Paul Vigna at paul.vigna@wsj.com

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