Wall Street stocks rally as earnings season enters full swing – Financial Times

Wall Street stocks rallied on Tuesday, while the dollar weakened, as US earnings season entered full swing and investors assessed the future path of monetary policy.

The S&P 500 equity gauge added 1.8 per cent. The technology-heavy Nasdaq Composite rose 2 per cent, led higher by gains for mega-caps Amazon, Alphabet and Microsoft. Facebook-owner Meta rose more than 3 per cent in New York morning trading.

The broad rally came as investors continued to debate whether the possibility of recession would compel the US Federal Reserve to soften its monetary policy stance. After consumer price inflation in the world’s biggest economy hit a 40-year high of 9.1 per cent last month, the Fed is expected to raise its main interest rate by 0.75 percentage points next week, taking it to a range of 2.25 per cent to 2.5 per cent.

“There’s no clear direction set by the markets at the moment,” said Edward Parks, chief investment officer at Brooks Macdonald. “There’s a swing one day to recession risks that mean the Fed can’t tighten [further] and then it swings back to concerns about inflation and therefore central banks needing to fight harder.”

Global stocks have dropped almost 20 per cent this year, and the quarterly corporate earnings season has ignited concerns that those falls may have further to go.

“We are going to see big downgrades to earnings forecasts and there is no monetary policy support to help markets, so it is difficult to be optimistic,” said Luca Paolini, chief strategist at Pictet Asset Management.

US healthcare group Johnson & Johnson on Tuesday cut its full-year sales and profit forecasts because of the stronger dollar, which reduces the value of its overseas earnings. This came after Goldman Sachs warned that it would slow hiring.

Netflix, whose shares were up more than 3 per cent by late morning in New York, was due to report quarterly numbers after the closing bell. The streaming group’s shares tumbled in April when it revealed that its blistering subscriber growth had gone into reverse during the first three months of 2022.

Europe’s Stoxx 600 closed 1.4 per cent higher.

In currencies, an index measuring the US currency against six others weakened 0.8 per cent on Tuesday. The euro, which makes up a significant proportion of the dollar index, added 1 per cent to $1.025, having slumped to parity with the greenback last week for the first time in two decades.

Traders are bracing themselves this week for the European Central Bank to lift borrowing costs for the first time in more than a decade, with rate-setters now expected to discuss the possibility of a 0.5 percentage point increase, exceeding their own guidance in the face of record-high inflation.

The ECB has kept its main interest rate at less than zero to stimulate lending and spending since 2014 and has lagged behind the US Federal Reserve and the Bank of England in tightening monetary policy. The bloc’s current benchmark rate stands at minus 0.5 per cent.

“The fact is that the ECB is a long way behind the curve and they have a lot to do,” said Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson. “So it won’t seem unusual if they kick off with a 50 basis point rise.”

The yield on Germany’s policy-sensitive two-year government bond rose 0.12 percentage points to 0.63 per cent. The yield on the 10-year German Bund, a proxy for eurozone borrowing costs, rose 0.06 percentage points to 1.22 per cent. Bond yields rise as their prices fall.

The yield on Italy’s two-year bond added 0.11 percentage points to 1.51 per cent. US government bonds also came under pressure, with the benchmark 10-year Treasury yield adding 0.04 percentage points to just under 3 per cent.

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