This week’s Labor Department report could dictate whether U.S. stocks will continue a 2023 rally that has defied many investors’ expectations.
Photo: Jim Lo Scalzo/Zuma Press
All three major stock indexes extended their slow, steady climb Tuesday as investors awaited a Wednesday Labor Department report that will take the temperature of the U.S. economy.
Economists expect the data will show that inflation hasn’t tapered enough to reach the central bank’s target, raising the likelihood the Fed later this month will hike interest rates to a 22-year high.
The inflation results, coupled with the kickoff of corporate earnings season, could dictate whether U.S. stocks will continue a 2023 rally that has defied many investors’ expectations.
The Dow Jones Industrial Average on Tuesday led the market with a 0.9% gain, good for more than 310 points. The S&P 500 climbed about 0.7% while the tech-heavy Nasdaq rose 0.6%.
Stock indexes’ modest gains spread across big banks, aerospace companies and manufacturing conglomerates.
One of the day’s biggest winners was
Activision Blizzard,
which jumped 10% after a federal judge ruled
Microsoft
can close its $75 billion purchase of the Call of Duty developer. Microsoft shares, meanwhile, eked out a 0.2% gain after trading much of the day in the red.
Stocks have so far weathered mounting expectations that the Fed will continue raising interest rates to slow the economy—potentially making safer government bonds more appealing by comparison. The yield on a 2-year Treasury, a rough proxy of investors’ interest-rate expectations, edged up to 4.894% on Tuesday.
The Fed “created a lot of movement in the bond market, which is attractive,” said John Augustine, chief investment officer for Huntington National Bank. “We’re inclined to be a little bit more cautious now.”
In Augustine’s eyes, the potential threats to debtholders are twofold. If the Fed holds tight later this month—an outcome few investors anticipate—bond prices could rebound and send yields lower. Stronger-than-expected earnings and improved corporate outlooks, meanwhile, may entice investors back toward stocks.
Analysts expect second-quarter profits to drop 7.2% from the same period a year earlier, according to analysts polled by FactSet. That drop would result in a third-consecutive decline in quarterly earnings.
At the same time, however, strong hiring and low unemployment have made some investors more confident that the Fed can achieve a so-called soft landing, slowing inflation without sparking a recession.
“That will be a strong buffer for markets,” Adrian Helfert, chief investment officer of multiasset at Westwood Group.
Until then, Helfert said he is investing in assets that return money to shareholders sooner rather than later, including energy infrastructure. “Interest rates are high,” he said, “so that cash is worth more today.”
Energy stocks led the S&P 500, rising 3%, with major crude producers, fuelmakers, natural gas exporters and drilling companies all advancing on the back of higher oil prices. Benchmark U.S. crude rose 2.5%, to $74.83 a barrel, its highest close since May 1, according to Dow Jones Market Data.
After languishing for months, oil prices have risen recently as production cuts by Saudi Arabia and Russia appear to have taken hold. The fate of commodities-hungry China will likely determine whether the rally will continue, with investors parsing whether the country will stimulate an economy that has hit a wall in its postpandemic recovery.
“We’re basically all waiting on Beijing,” said Marko Papic, chief strategist at Clocktower Group. “If China stimulates and the U.S. has a soft landing, whoa.”
Write to David Uberti at david.uberti@wsj.com