The S&P 500 index and Dow industrials traded near records Wednesday as investors parsed the Federal Reserve’s latest Beige Book showing the U.S. economy is growing at a modest to moderate pace, but remains under pressure from inflation and labor shortages.
Upbeat corporate earnings also continue to fuel bullishness in stocks, with electric-vehicle maker Tesla Inc. TSLA, +0.18% due to report after the market closes.
On Tuesday, the Dow rose 199 points, or 0.56%, to 35457, the S&P 500 increased 33 points, or 0.74%, to 4520, and the Nasdaq Composite gained 107 points, or 0.71%, to 15129.
U.S. stock benchmarks near record territory, after the Dow touched an intraday record and the S&P 500 climbed above its closing record of 4,536.95 set last month.
The yield-sensitive Nasdaq Composite gave up earlier gains though, after attempting to advance for a sixth straight gain, pressured lower by the benchmark 10-year Treasury yield climbing above 1.6%, even as corporate earnings for the third quarter continue to delight investors.
“Obviously, this is an earnings rally and the rally is continuing,” said Peter Cardillo, chief market economist at Spartan Capital, in a phone interview. “By next week, we will be able to grade the season, which I think will probably be an ‘A’ because earnings are coming in better than expected.”
Good third quarter corporate earnings are helping investors overcome some doubts about the impact of the coronavirus delta variant, supply chain disruptions and the Federal Reserve’s likely move to start withdrawing some of its easy-money policies.
Fundstrat Global Advisors lifted its end-year S&P 500 forecast to 4,800 from 4,700. In a note to clients, strategists led by founder Tom Lee said they see a “strong risk-on environment” as under way, helped by a typically strong year-end seasonal pattern that follows October.
Investors were cooling slightly on technology stocks, but buying cyclical stocks seen benefitting from the ongoing economic recovery, with a rotation under way into healthcare XLV, +1.44%, consumer staples XLP, +0.58%, utilities XLU, +1.58% and real estate XLRE, +1.53%.
However, inflation concerns remain an issue. Fed governor Randal Quarles said he was beginning to focus more of his attention on inflation and that there are “significant upside risks” to the widely-shared view that price pressures will decline sharply next year, in a Wednesday speech to the 2021 Milken Institute Global Conference.
Quarles also said he will support a decision at the Fed’s meeting in two weeks to begin tapering the central bank’s $120 billion in monthly bond purchases of Treasurys and agency mortgage-backed securities. Fed Reserve Gov. Christopher Waller on Tuesday said the central bank should begin tapering its monthly purchases starting next month.
Giorgio Caputo, senior investment analyst at JO Hambro Capital Management, said that while the economy appears to be moving past its earlier “air pocket” tied to global coronavirus cases and severe supply-chain bottlenecks, that tapering of bond purchases by the Fed will be important.
“We are going to be going through the removal of $120 billion of monthly liquidity that’s been coming into markets,” he told MarketWatch. “That’s the mother of all buyback plans.”
“If there’s one thing to be mindful of, and respect, it’s the power of liquidity,” Caputo said.
In economic data, the Fed’s latest Beige Book survey of economic conditions released Wednesday pointed to a U.S. economy that still is growing at a solid pace, but labor shortages and supply-chain bottlenecks that have been restraining growth and triggering higher inflation.
“It’s becoming more of a fact that even Fed members are worried about inflation being more structural, as opposed to temporary, and you have rising commodity prices,” Cardillo said.
Barbara Kollmeyer contributed reporting to this article