U.S. Stocks Climb Amid Earnings, Optimism on Gradual Rate Hikes

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  • Netflix soars after reporting surge in subscriber growth
  • UnitedHealth, Goldman Sachs advance after posting results

U.S. stocks rose the most in two weeks, amid corporate earnings results and speculation that the economy is strong enough to cope with the gradual pace of monetary tightening indicated by policy makers.

Goldman Sachs Group Inc. advanced 1.6 percent after stronger bond-trading revenue propelled its better-than-estimated quarterly profit. Netflix Inc. surged 18 percent to a nine-month high after reporting a jump in subscribers. International Business Machines Corp. slipped the most since June after saying profit margins shrank for the fourth quarter in a row. An early rally lost some momentum as crude erased gains.

The S&P 500 Index climbed 0.6 percent to 2,139.08 at 10:50 a.m. in New York, rising from a one-month low. The Dow Jones Industrial Average increased 79.67 points, or 0.4 percent, to 18,165.67, trimming an earlier 0.8 percent jump as IBM’s dropped weighed. The Nasdaq Composite Index added 1 percent, boosted by Netflix’s strongest gain in more than a year.

“We’ve been selling off for the better part of a week at this point, and earnings have been good enough to get us into this bounce,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “There’s no real blow-ups yet. Seeing a big company like Netflix higher definitely helps sentiment.”

Earnings results today are being parsed for signs of corporate America’s vitality. UnitedHealth Group Inc. boosted its full-year profit forecast, sending its shares up the most in three years. Johnson & Johnson fell 2.3 percent to a three-month low, despite better-than-expected profits, as its blockbuster arthritis treatment Remicade will soon face increased competition. JPMorgan Chase & Co., Citigroup Inc. and Bank of America have already topped expectations, even as analysts forecast a 1.4 percent contraction in third-quarter profits for S&P 500 members.

Investors are also looking for confirmation that growth is steady enough to bear higher borrowing costs. Data Tuesday indicated that the cost of living in the U.S. rose at the fastest pace in five months, a sign inflation is getting closer to the Federal Reserve’s target. A separate report showed confidence among homebuilders cooled in October from an 11-month high, reflecting a pause in the market for single-family houses.

Policy makers, who have held off on interest-rate increases since December, might find more reason to build a case for a hike before year’s end amid firming inflation and a still-strong labor market. The odds of a December move are 63 percent, slipping from 66 percent yesterday, though up 10 percentage points from the end of last month.

While Fed Vice Chairman Stanley Fischer struck a hawkish note yesterday, saying he sees limits to how far the central bank can push to cut unemployment, Chair Janet Yellen has indicated that any interest-rate increases will be gradual, noting Oct. 14 that there are “plausible ways” that low borrowing costs could continue helping boost demand. Fischer didn’t comment on when he thought a hike should come, though he said the Fed was very close to meeting its goal of creating full employment with stable prices.

Tuesday’s gains trimmed the main U.S. equity benchmark’s third consecutive monthly decline, and its first October slide since 2012. The gauge closed Monday 2.9 percent from an all-time high reached in August.

“The fact that you have talk about rates normalization and the market not going down, that’s very powerful to me,” said Patrick Spencer, London-based vice chairman of equities at Robert W. Baird, which manages $151 billion. “The Fed will only raise rates if the economy is strong enough to absorb them and the implication for earnings is certainly better. In my mind, that means investors will start to transition to an earnings-driven environment from a stimulus-driven environment.”