Dow clings to gain as earnings season kicks off, with investors scaling back Fed rate-hike expectations

US stocks rose, but trimmed earlier gains, as investors focused on positive elements in the quarterly results of Goldman Sachs Group Inc. and Bank of America Corp. in an attempt to build upon upside momentum ahead of the Federal Reserve’s interest rate hike next week.

How stocks are trading
  • The Dow Jones Industrial Average DJIA
    was up 73 points, or 0.2%, at 31,360, after rising 356 points at its session high.

  • The S&P 500 SPX
    gained 20 points, or 0.5%, to trade at 3,883.

  • The Nasdaq Composite COMP
    rose 133 points, gold 1.2%, to 11,585.

On Friday, the Dow rose 658 points, or 2.2%, as it and the S&P 500 and the Nasdaq Composite trimmed weekly losses.

What’s driving markets

Shares of Goldman Sachs GS were among the Dow’s biggest gainers after the bank aired second-quarter results that provided bright spots.

Goldman shares were up 1.87% after the investment-banking giant posted a stronger-than-expected second-quarter profit, although earnings fell from the year-ago quarter. Bank of America BAC
shares were roughly unchanged after the bank fell short of Wall Street’s profit estimate, but revenue matched expectations and net interest income beat.

The first full week of the US second-quarter earnings season is getting under way, with IBM
set to deliver its figures after the closing bell.

Reports from other big banks, such as JPMorgan Chase JPM,
were not initially well-received last week. But the market mood brightened by Friday—and continued on Monday, after Federal Reserve officials talked down the prospects of a 100-basis point rate hike at next week’s policy meeting.

See also: Investors are obsessed with the size of Fed’s next rate hike. Here’s what they’re missing.

The chances of such a sharp tightening are now around 33%, compared with 80% last Wednesday, and a 75 basis point move to 2.25% to 2.50% is baked in. The dollar index DXY
eased from 20-year highs in response, falling 0.9% to 107.14.

Traders were watching to see if upside momentum would continue after a strong finish last week.

“Bullish momentum in equities has been elusive this year, but Thursday was conspicuous in that both the stock market and crude oil made multiweek or multi-month lows before reversing to close near their highs of the day, and then followed through to the upside on Friday,” Chris Larkin, managing director of trading at E-Trade from Morgan Stanley, said in emailed comments.

“Whether that momentum will carry into this week — or longer — remains to be seen. Though in the past, when the SPX has made similar pullbacks, it was higher one week later more time than not,” he said.

Read: Why the analyst who called summer stock-market bounce now sees more S&P 500 upside

The Fed, however, is unlikely to relent on its aggressive rate-hike pace, especially against a backdrop of a strong labor market and resilient corporate and consumer spending, he said. Longer term, “stagflation could be on the docket.”

Aside from earnings, it’s likely to be a quiet week for US macroeconomic catalysts, with the Fed now in the premeeting blackout period and investors possibly turning their attention elsewhere.

“We see the ECB (European Central Bank) raising rates by 0.25% this week amid high inflation and despite recession fears,” Wei Li, BlackRock Investment Institute’s global chief investment strategist, and others wrote in a note Monday.

“Both the ECB and Fed are now pandering to `the politics of inflation,’ or pressure to tame inflation. We think the ECB will pause its hiking first,” they said. “Why? The energy crisis means Europe’s growth is likely to stall soon. Higher rates and political turmoil may also send peripheral borrowing costs spiraling. All this leaves us favoring credit over stocks and neutral on euro area government bonds.”

Companies in focus
  • Shares of Dow component Boeing Co.
    BA
    rose 1.5% after the aerospace and defense giant said Delta Air Lines Inc.
    DAL
    would order 100 of its 737-10 jets as the air carrier modernizes its single-aisle fleet. Delta shares rose 5.4%.

  • Elon Musk filed a motion Friday opposing Twitter Inc.’s
    TWTR
    request to expedite a trial over his intention to terminate his $44 billion takeover. Twitter shares were up 1.8%.

How other assets are faring
  • Oil futures were higher with US crude futures CL
    adding 4.1% to trade back over $101 a barrel, benefiting from signs that US President Joe Biden had not secured an immediate increase in Saudi Arabian supply.

  • The 10-year Treasury yield BX:TMUBMUSD10Y
    pink 6 basis points to 2.99%. Yields and debt prices move opposite each other.

  • The ICE Dollar index DXY
    fell 0.8%, helping to inspire gains for gold GC00,
    which rose 0.4%.

  • BitcoinBTCUSD
    advanced 4.8% to 22,210.

  • In Europe, the Stoxx 600 XX:SXXP and FTSE 100 UK:UKX
    each finished up by 0.9%.

  • Asia markets got an added lift from signs the Chinese authorities will look to support the construction sector and ease monetary policy. Hong Kong’s Hang Seng HK:HSI
    finished 2.7% higher and the Shanghai Composite CN:SHCOMP
    closed up by 1.6%. Japan was shut for a holiday.

—Jamie Chisholm contributed to this article.

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