Dow up nearly 250 points, helped by financial stocks, healthy economic data, despite rise in bond yields

What’s driving markets

Financial stocks got a boost Thursday after the country’s largest lenders passed the Fed’s annual stress tests, in which 23 banks proved they could withstand a hypothetical “severe” global recession and losses of up to $541 billion as well as a 40% decline in commercial real estate prices.

The Invesco KBW Regional Banking ETF KBWR jumped 2.1%, and the SPDR S&P Bank ETF KBE rose 2%.

“The U.S. banking sector has stabilized, helping avoid a full-blown credit crunch, but the shock represents another headwind for bank lending and broader U.S. activity, and risks have not fully dissipated for more vulnerable banks or the sector as a whole,” said James McCann, deputy chief economist at abrdn. “In particular, banks with large fixed income holdings, less sticky deposits, exposure to commercial real estate lending and poor geographic diversification remain at risk,” he said.

U.S. stocks were also helped by data showing the economy grew at a solid 2% annual rate in the first quarter of 2023, while the weekly jobless benefit claims dropped to four-week low, pointing to continued strength in the U.S. labor market.

Gross domestic product was revised up from a previously reported 1.3% growth rate, the Commerce Department said Thursday, undercutting widespread expectations that the U.S. economy is heading toward a recession. The U.S. economy is also expected to expand between 1% to 2% in the second quarter that ends on Friday, based on the most recent Wall Street forecasts.

Meanwhile, the number of Americans who applied for unemployment benefits last week fell to a one-month low of 239,000. New jobless claims declined by 26,000 from a revised 265,000 in the prior week.

Carol Schleif, chief investment officer at BMO Family Office, said Thursday’s stronger-than-expected GDP data is “further confirmation” that the U.S. economy is in stronger shape than many expected, and is supportive of the Federal Reserve’s “higher for longer policy” when it comes to interest rates.

At the same time, the modest downturn in initial and continuing jobless claims data confirms the strength of the labor market. “As long as the labor market remains strong, it will be difficult for the economy to slip into a recession,” Schleif said.

Earlier Federal Reserve Chair Jerome Powell, as well as his colleagues from Europe and Japan, each reinforced their willingness to combat inflation at the ECB annual forum in Sintra, Portugal on Wednesday. Powell reiterated the theme in Madrid, Spain on Thursday the risks of “overdoing” or “underdoing” rate hikes still are not in the balance yet.

See: Powell says risks of ‘overdoing’ or ‘underdoing’ rate hikes still aren’t in balance yet

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.882%
gained 18 basis points to trade at 4.899% on Thursday morning from 4.77% in the previous session.

Markets are now pricing in an 86.8% chance of a quarter-of-a-percentage-point rate hike on July 26, which would lift the fed funds rate target to between 5.25%-5.5%, according to the CME FedWatch Tool. They see a 26.8% chance of another move of that size in September, up from 16.4% a day ago.

Just two trading days remain in what’s been a robust first half for U.S. stocks. The S&P 500 has risen 14.4% this year, while the Dow industrials is up 2.8% and the tech-heavy Nasdaq Composite has jumped by 30% year to date, according to FactSet data.

“After a very strong rally in markets so far this year, the market is currently in a holding pattern, as jitters about the Fed’s next move are still prevalent,” Schleif of BMO Family Office said.

“The market is processing the recent strength in the economic data in both positive and negative ways, as solid economic data means that the economy is more resilient, but it also emboldens the Federal Reserve to keep raising interest rates.” This conundrum makes it more difficult for the stock market to break out of the upward trending trading range it has been in for the past few months, she added.

See: The Nasdaq-100 is headed for its best first half on record, but obstacles to further gains lie ahead.

Companies in focus

• Shares of major Wall Street banks rose on Thursday, with stocks of JPMorgan Chase & Co.
  JPM,
  +3.21%
  up 3.2% and Bank of America Corp
  BAC,
  +2.23%
  increased by 2.4%.

• Micron Technology shares
  MU,
  -4.23%
   lost 3% after the chip maker’s results came in better than anticipated.

• Rite Aid Corp.’s
  RAD,
  +5.81%
   stock rose 2% after the drugstore chain surprised investors with a narrower-than-expected loss for its fiscal first quarter and better-than-expected revenue.

• Overstock.com Inc.
  OSTK,
  +19.93%
   was up 18.6% after the company said it had acquired Bed Bath & Beyond’s brand and intellectual property.

• American Outdoor Brands Inc. 
  AOUT,
  +9.03%
  jumped 5.7% after the maker of outdoor products and accessories reported a surprise quarterly adjusted profit and said it sees long-term, positive trends for its business.

• Virgin Galactic Holdings Inc.’s 
  SPCE,
  -10.86%
   stock dropped 13.4% as the company was making its preparations for its first commercial spaceflight Thursday.