U.S. stocks edged higher on Tuesday as investors gained confidence the Federal Reserve may be close to pausing its aggressive interest rate hikes, though caution remained amid geopolitical tensions in the Middle East.
The Dow Jones Industrial Average rose 210 points, or 0.8%, to 31,956 in midday trading. The S&P 500 climbed 1.1% while the tech-heavy Nasdaq Composite added 1.4%.
The gains came after two key Fed officials indicated the central bank may be nearing the end of its tightening cycle. Atlanta Fed President Raphael Bostic stated high interest rates are already slowing the economy and impacting prices. He expects rates to top out at 4.5% to 4.75% this year. San Francisco Fed President Mary Daly also said policy is starting to be restrictive and pausing rate hikes is reasonable soon.
Their comments lifted hopes the Fed may be ready to signal a pause in rate increases when it meets next week. Investors are optimistic this means an economic hard landing can be avoided.
“The market is running with the idea that the Fed may be close to declaring victory on inflation and thus we are likely nearer to the end than the beginning of Fed tightening,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.
Treasury yields tumbled on Tuesday, continuing their decline from 16-year highs last week. The benchmark 10-year Treasury yield fell to 4.63%, down from around 4.80% on Friday. Falling yields reduce borrowing costs and relieve pressure on stocks.
Oil prices also eased after surging over 4% on Monday amid worries over potential supply disruptions from conflict between Israel and Palestinians. Brent crude dropped 0.9% to $87.19 a barrel. West Texas Intermediate crude slipped 0.8% to $85.75 a barrel.
The pullback in yields and oil prices helped temper inflation concerns that have weighed on markets this year.
In stock news, PepsiCo jumped 1.2% after delivering strong third quarter earnings. The beverage and snack giant earned $1.97 per share, beating estimates by 31 cents. Revenue grew 8.8% to $21.97 billion, also topping projections. Pepsi raised its full year organic revenue growth forecast.
However, the International Monetary Fund warned inflation remains elevated and requires central banks to keep tightening monetary policy. Most regions have not brought inflation down to target levels, the IMF said.
Market Volatility Likely to Continue
The major indexes remain volatile as investors assess recession odds and the Fed’s rate path. Recent relief rallies have quickly reversed amid lingering uncertainties.
The S&P 500 is still down 18% year-to-date despite this week’s gains. The Nasdaq remains deep in bear market territory, down 29% in 2022.
Investors expect continued turbulence in the months ahead.
“Markets are likely going to remain choppy as they reconcile whether the Fed can orchestrate a soft landing,” said Commonwealth Financial Network chief investment officer Brad McMillan.
Geopolitical tensions add to the jittery mood. Israel and Hamas exchanged fire in the worst clashes in months. The conflict raises supply concerns in the Middle East.
Earnings Season Rolls On
Third quarter earnings season continues this week, giving investors insights into how companies are navigating high inflation and rising rates.
Netflix, Tesla, IBM, AT&T and American Express are among the big names reporting results. Their outlooks will help assess the economic climate.
According to FactSet, 73% of S&P 500 companies have reported earnings so far. Of those, 68% have topped analyst estimates. The blended earnings growth rate for the S&P 500 is 2.2%.
Fed Speakers in Focus
Investors will closely monitor appearances by several Fed officials on Tuesday for clues about rate policy.
Atlanta Fed President Raphael Bostic, San Francisco Fed President Mary Daly, New York Fed President John Williams, Chicago Fed President Charles Evans, and St. Louis Fed President James Bullard are all slated to make remarks.
Their comments will be parsed for any new signals about the policy path at next week’s FOMC meeting. The Fed is widely expected to lift rates by 75 basis points for the fourth straight time. But investors hope for indications of smaller hikes after that.