Stocks rallied for a second day on Thursday as Treasury yields fell sharply, signaling investors are betting the Federal Reserve could be done raising interest rates for the year after this week’s policy update.

The Dow Jones Industrial Average jumped 412 points, or 1.2%, trading near session highs in afternoon trading. The blue-chip index is up more than 580 points over two days, on track for its biggest weekly gain this year.

The S&P 500 climbed 1.5% while the tech-heavy Nasdaq Composite added 1.4%. All three major indexes are poised to snap three-month losing streaks.

The rally was broad-based, with all 11 S&P sectors in positive territory. Gains were led by rate-sensitive real estate and consumer discretionary stocks, both up over 2%. The move lower in Treasury yields is alleviating pressure on growth stocks.

The benchmark 10-year Treasury yield declined 11 basis points to around 4.68%, after topping 5% last month. The 2-year rate also fell to 4.95%. The slide comes after stronger-than-expected economic data reduced recession worries.

“There is a bit of a follow-through from yesterday, and then this morning, we got some of the productivity and unit labor cost numbers, and the unit labor cost numbers are actually negative,” said Megan Horneman, chief investment officer at Verdence Capital Advisors.

“That is adding to some of the relief that maybe we’re getting some of that sticky inflation under control that the Fed has been mentioning.”

The rally gained steam after the Fed on Wednesday kept rates unchanged for a second straight meeting. Markets are now pricing in just a 15% chance of a December hike, down from 40% a month ago. Traders cheered Fed Chair Jerome Powell’s comments suggesting the central bank could slow its aggressive pace of rate increases.

Still, risks remain as Powell noted policymakers are prepared to raise rates further if needed. “I think that there still is volatility we’ll see in inflation,” Horneman cautioned. “The one thing that concerns us is that inflation is extremely easy to reignite.”

Tech Stocks Lead Gains As Apple Set For Earnings

The tech-heavy Nasdaq was standout gainer, surging over 1.3% as Treasury yields declined. Tesla and Nvidia led a rally in megacap tech shares, while Apple climbed 2% ahead of its highly anticipated earnings report after the bell.

Investors are optimistic Apple can beat estimates, despite economic headwinds. The iPhone maker’s services and wearables business is expected to drive growth in the face of waning consumer demand. Apple warned it could see a $6 billion hit from supply chain woes and the strong dollar last quarter.

Other big tech firms reporting earnings later today include Amazon, Intel, Alphabet and Meta Platforms. Markets are watching tech bellwethers closely for signs of slowing growth amid rising recession odds.

Software firms Block, Dropbox and cloud computing company Nutanix also report results after the close.

VIX Fear Gauge Drops To One-Month Low As Bears Retreat

The Cboe Volatility Index, or VIX, fell to 16, its lowest level in nearly three weeks as equity markets staged a relief rally. The so-called fear gauge tracks investor expectations for market turbulence in the near-term.

The VIX spiked above 36 in October — its highest since 2009 — as stocks sold off on worries over aggressive Fed policy, rising corporate earnings risks and high inflation. But the fear gauge has fallen back since as investors welcomed the Fed’s policy pivot.

“Markets found enough in this week’s Federal Reserve meeting to suggest that there’s only a small chance of any additional interest rate hike,” said Jeff Cox, markets reporter at CNBC. “The odds for a December increase fell Thursday morning to 14.6%.”

Futures pricing indicates the Fed’s first rate cut could come as early as May 2023 if inflation continues to cool. Lower rates boost the appeal of equities, especially high-growth tech names.

Economic Data Alleviates Recession Fears

Fresh economic data released Thursday offered signs that Fed policy tightening is beginning to slow demand and ease price pressures.

Unit labor costs posted an unexpected 0.8% decline in the third quarter, signaling slowing wage growth. And weekly jobless claims ticked up to 217,000 last week, remaining relatively low historically but pointing to some cooling in the red-hot jobs market.

The readings follow positive inflation news earlier this month showing consumer and producer prices rose less than expected in September. Markets are hoping decades-high inflation has peaked, allowing the Fed to curb rate hikes.

Treasury yields extended their slide on the better-than-expected reports, while stock index futures added to gains. The data is fueling investor optimism that the Fed can achieve a soft landing for the economy.

Earnings Roundup: Roku Surges, Peloton Sinks

Corporate earnings painted a mixed picture Thursday, with streaming device maker Roku surging 30% while exercise equipment leader Peloton tumbled 7%.

Roku posted better-than-expected third quarter sales, driven by ad revenue growth. It also reported a narrower loss than anticipated.

But Peloton disappointed with a weak holiday quarter revenue outlook, pointing to persistent demand challenges. The company has struggled to sustain pandemic growth rates as consumers return to pre-COVID fitness habits.

Other earnings movers included Albemarle, Clorox and Etsy rising on upbeat results, while Sturm Ruger and Proto Labs fell short of estimates.

With over 75% of S&P 500 companies reporting, this earnings season has been better-than-feared amid recession worries. Nearly 80% have exceeded profit forecasts so far, per FactSet data. But guidance has been weak amid dimming economic projections.

Final Thoughts: Volatility To Remain Elevated

After declining in six out of the last seven months, stocks appear to be mounting a relief rally this week as yields retreat on hopes of a less hawkish Fed. But significant risks remain that could spark renewed market turbulence.

Supply chain bottlenecks, the war in Ukraine and China’s zero-COVID policy still threaten to disrupt economic activity and keep inflation elevated. Plus, corporate earnings are likely to face headwinds from waning consumer demand.

While the recent stock rebound is encouraging, volatility is likely to persist until inflation makes a decisive turn lower. Investors should brace for more market swings in both directions as the Fed continues quantitative tightening and uncertainty over the economy lingers.

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