By Stephen Culp
NEW YORK (Reuters) - U.S. stocks closed sharply higher on Tuesday as soft economic data hinted that the Fed's aggressive policy is taking effect, while falling benchmark Treasury yields boosted the rally's momentum.
All three major U.S. stock indexes advanced for the third straight session, with market-leading megacaps providing the most upside muscle. The S&P 500 has reclaimed about 8% from the trough of its Oct. 12 close.
"There’s increasing discussion about a light at the end of the tunnel for Fed rate hikes," said Bill Merz, head of capital market research at U.S. Bank Wealth Management in Minneapolis. Merz also cautioned that it wouldn't be known for some time whether decades-high inflation was "decisively headed toward the Fed’s target."
"We’re seeing a bit of a reprieve in the dollar and long-term bond yields have come down a little bit," Merz added. "Those factors are combining to provide room for a bit of a rally."
After the bell, Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) delivered weaker than expected quarterly results, sending their shares down about 7%. That helped push S&P 500 emini futures down almost 1%, suggesting traders expect the stock market to open deep in negative territory on Wednesday.
Yields of 10-year Treasuries pulled pack on hopes that the Federal Reserve could begin easing its battle against inflation.
A mixed brew of earnings and downbeat forecasts, usually a negative for markets, have suggested the barrage of interest rate hikes from the Fed is beginning to be felt, raising expectations that the central bank could pull back on the size of rate hikes after its Nov. 1-2 policy meeting.
Data on Tuesday showed slowing home price growth and souring consumer confidence. Such signs of economic softness, ordinarily unsupportive of risk appetite, are evidence of abating Fed hawkishness.
The financial market is nearly evenly split on whether the central bank's December rate increase will ease to 50 basis points after a string of 75 basis point hikes, according to CME's FedWatch tool.
The Dow Jones Industrial Average rose 337.12 points, or 1.07%, to 31,836.74, the S&P 500 gained 61.77 points, or 1.63%, to 3,859.11 and the Nasdaq Composite added 246.50 points, or 2.25%, to 11,199.12.
Among the 11 major sectors of the S&P 500, all but energy posted gains on the day, with real estate enjoying the largest percentage gain.
Third-quarter reporting season is firing on all pistons, with 129 of the companies in the S&P 500 having reported. Of those, 74% have beaten consensus expectations, according to Refinitiv.
Analysts have set the bar low; aggregate S&P 500 earnings growth is now seen landing at 3.3% year-on-year, down from 4.5% at the beginning of the month, per Refinitiv.
Coca-Cola (NYSE:KO) Co rose 2.4% after the company upped its revenue and profit forecasts, banking on steady demand amid price increases.
General Motors (NYSE:GM) reaffirmed its outlook after posting solid earnings, sending its shares jumping 3.6%.
On the downside, aerospace company Raytheon Technologies (NYSE:RTX) Corp posted a near 5% annual revenue increase, but its shares slid 1.5% on the company's trimmed sales outlook.
Advancing issues outnumbered declining ones on the NYSE by a 5.35-to-1 ratio; on Nasdaq, a 3.67-to-1 ratio favored advancers.
The S&P 500 posted 14 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 85 new highs and 120 new lows.
Volume on U.S. exchanges was 11.89 billion shares, compared with the 11.57 billion average over the last 20 trading days.