Stocks continued their march higher Tuesday amid a solid batch of quarterly earnings from the financial sector and an encouraging report on the health of the American consumer.
Traders also continued to lock in bets that the central bank's rate-setting committee, the Federal Open Market Committee (FOMC), will hike interest rates by a quarter of a percentage point at the next Fed meeting.
On the economic front, U.S. retail sales for June rose just 0.2%, the Commerce Department said before Tuesday's opening bell. Economists were looking for retail sales to increase by 0.5% last month, but the reason for the shortfall wasn't all bad. The undershoot in retail sales was partly driven by lower spending at gasoline stations, as fuel prices have tumbled over the past year.
Furthermore, although retail sales showed softness in some categories, slower spending does help the Fed in its fight against inflation, experts say. Ultimately, the American consumer is holding up quite well.
"The economy is plodding along without overheating," says David Russell, vice president of market intelligence at TradeStation. "Americans have gotten relief at the gas pump, but also don’t have an excessive demand for consumer goods. This is modestly positive news for investors worried about the Fed needing to hike after July. Goldilocks marches on."
On the corporate earnings front, bank stocks were once again in focus, as both Bank of America (BAC) and Morgan Stanley (MS) exceeded Wall Street estimates.
"We delivered one of the strongest quarters and first half net income periods in the company's history,” said Bank of America CEO Brian Moynihan in a media release. "We continue to see a healthy U.S. economy that is growing at a slower pace, with a resilient job market."
The Federal Reserve has telegraphed that it intends to raise interest rates two more times before the end of 2023. That said, Chair Jerome Powell has always said that future policy moves will be data dependent. Tuesday's economic and earnings news could be taken as evidence that only one more rate hike will be necessary.
As for that first rate hike? Well, it's all but a done deal, at least according to the market. Interest rate traders assign a 97% probability to the FOMC raising the short-term federal funds rate by 25 basis points (0.25%) when it concludes its regularly scheduled two-day meeting on July 26.
At the closing bell, the blue-chip Dow Jones Industrial Average added 1.1% to finish at 34,951, while the broader S&P 500 gained 0.7% to end at 4,554. The tech-heavy Nasdaq Composite rose 0.8% to close at 14,353.
Time to buy bank stocks?
Banks are taking their turn on the earnings calendar and doing so in style. Upbeat profit reports from Bank of America and Morgan Stanley on Tuesday accelerated the momentum created by strong results from JPMorgan Chase (JPM) and Wells Fargo (WFC) last week.
On balance, the sector has been delivering good news. Net interest margins – or the difference between what banks pay for deposits and charge for loans – are expanding along with rising interest rates. (Banks haven't enjoyed this sort of boost to profitability from net interest margins in ages.) Balance sheets likewise remain strong.
The financial sector has been a huge market laggard this year, but encouraging bank earnings could lead to a positive shift in investor sentiment. That makes this a great time to check out the best financial stocks to buy now – especially given the sector's depressed valuations.
