Bad Memories Fading in S&P 500 After 10% Rally From August Low

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  • The benchmark equity gauge is a few points from a flat 2015
  • Half the S&P 500 industries trading above Aug. 19 levels

Back to flat. Almost.

Two months after the first correction since 2011 broke a yearlong calm in U.S. equities, the Standard & Poor’s 500 Index is jumping again, climbing as much as 1.8 percent Thursday to bring its gain from its lowest close in August to 10 percent. The benchmark gauge for American equities now sits at a level last seen on Aug. 19 and is 7 points below its Dec. 31, 2014 closing price, making its performance year-to-date just about flat.

Slicing it differently: U.S shares have climbed back into the trading range they tumbled out of in August during a six-day selloff that wiped out $2 trillion in market value. Half of the S&P 500’s 10 major groups now are trading above their Aug. 19 closing levels, with energy stocks and consumer staples leading. While few investors are ready to sound the all clear, some see signs the worst is behind them, citing the market’s ability to go up even as corporate earnings fall flat.

“There’s no fear that we’re going into recession, and a huge slowdown doesn’t seem to be coming to fruition. Now we can look at a slow-growth yet positive-trending economy,” said Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates Inc. in Bethlehem, Pennsylvania. “The question is now how much will earnings increase. The market is betting there’s a better chance of that now than in the past couple months.”

The S&P 500 surged 1.7 percent to 2,052.51 at 4 p.m. in New York, sparked by a batch of better-than-estimated earnings from companies including McDonald’s Corp. and EBay Inc., bolstering optimism on the health of corporate America. Prospects that Europe will move to boost its economy provided a further lift as European Central Bank President Mario Draghi said policy makers will investigate fresh stimulus measures.

In addition to McDonald’s and EBay rising more than 8.1 percent, Dow Chemical Co. advanced 5.1 percent after its earnings topped forecasts, and Texas Instruments added 12 percent after better-than-estimated results.

After the market closed, Google parent Alphabet Inc. reported better-than-projected earnings amid stronger ad sales and while keeping expenses under control. The shares rallied 8.5 percent in late trading. Inc. jumped 10 percent after hours as its quarterly sales topped analysts’ estimates, thanks to its growing cloud-computing division and a boost from its July Prime Day promotion.

The rally is also an affirmation of sorts for Wall Street stock forecasters who clung to optimistic outlooks even as the S&P 500 slid more than 11 percent to 1,867.61 between Aug. 17 and Aug. 25. Getting to the median estimate of 21 strategists tracked by Bloomberg of 2,150 would’ve taken a 15 percent rally from August’s lows. Today it requires less than 5 percent.

John Stoltzfus of Oppenheimer & Co. remained unchanged on his year-end price target of 2,311 during the selloff. He’s now the most bullish out of 21 people surveyed. RBC Capital Markets’ Jonathan Golub, whose forecast is 2,100, said in an interview today that his target now has some “upside” again.

“It’s frankly happening more than I’d expected or hoped for and I may have not been bullish enough about the resiliency of this market,” Golub said by phone.

The S&P 500 is on track for its fourth consecutive week of gains, the first time its done so since December 2014. Meanwhile, this month is setting up to be the market’s best October since 2011’s nearly 11 percent increase.

Energy, technology and industrial stocks have led the post-selloff rally, with each group rising more than 12 percent since Aug. 25. Health-care is the only group of 10 that is lower now. The market has undergone a change in leadership, as the first seven months saw health-care and consumer discretionary stocks leading the charge with gains exceeding 11 percent, while energy sank 13 percent.

The S&P 500 is rebounding from its worst quarter in four years after the index entered its a correction, with the rout sparked by China’s unexpected devaluation of the yuan on Aug. 11. At the time, concern mounted that the slowdown in the world’s second-largest economy was worse than anticipated and would drag down global growth.

ECB, Earnings

Comments from the ECB’s Draghi are “definitely” supporting today’s gains, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, which manages about $1 trillion in assets. “That’s what’s really driving this rally and today’s risk-on environment. Earnings expectations were very, very low and it’s been easy to beat those expectations and that’s also been contributing to this rally.”

So powerful was the advance that stocks that fell on earnings news in early trading were surging by midday. Caterpillar Inc. lost as much as 2.7 percent after a premarket report showed sales fell the most in five years, only to erase the loss within the first 30 minutes of trading. The same was true for copper producer Freeport-McMoRan Inc., which also saw its earnings miss spur a 3.5 percent decline that was reversed within minutes of the market open.

Meanwhile, volatility across global markets is dissipating after whipsawing stocks, bonds and commodities for two months. The Bank of America Merrill Lynch Market Risk Index is at its lowest level since August, while the Chicago Board Options Exchange Volatility Index of U.S. equity turbulence recently posted the longest streak of daily declines since 2009. The gauge known as the VIX fell 13 percent Thursday to 14.45, the lowest since Aug. 18 and on track for the biggest monthly drop ever.

Rate Bets

Investors are looking to corporate America for clues on the strength of the economy. Of those companies that have reported earnings so far, 45 percent have topped sales estimates and 72 percent have beaten profit projections. Third-quarter earnings are projected to fall 6.7 percent, data compiled by Bloomberg show.

Mixed data in the U.S. and volatile financial markets kept the Federal Reserve from tightening last month and reduced expectations for an interest-rate increase this year. March is the first month for which traders are pricing in at least even odds of a liftoff. The probability of a boost before January is about 32 percent.

A report today showed sales of previously owned homes rose in September to the second-highest level since February 2007, while separate data showed the number of Americans filing for unemployment benefits hovers near the lowest in four decades.