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Market Snapshot: Stock market ends solidly higher as strong earnings support buying, despite rising Treasury yields

U.S. equity benchmarks finished decisively higher Tuesday, following choppy morning trading, as investors took comfort in corporate quarterly reports and awaited data later this week on inflation.

Market participants also kept a close eye on interest rates, with the yield on the 10-year Treasury note rising toward 2%.

What did stock indexes do?

The Dow Jones Industrial Average DJIA, +1.06% rose 371.65 points, or 1.1%, to close at 35,462.78, marking its best daily gain since Jan. 31.
The S&P 500 SPX, +0.84% added 37.67 points, or 0.8%, to end at 4,521.54, which represented its best day since Feb. 2.
The Nasdaq Composite COMP, +1.28% climbed 178.79 points, or 1.3%, to finish at 14,194.45.

On Monday, the Dow closed out the day with a gain of around a point, while the S&P 500 edged down 0.4% and the Nasdaq Composite shed 0.6%.

What drove markets?

Stocks rose Tuesday as investors cheered strong corporate earnings so far in the fourth quarter against their concerns over the prospect of potentially several rate increases by the Federal Reserve this year to tame inflation.

“You have solid earnings coming through,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments, who expects the Federal Reserve may raise its benchmark interest rate three or four times this year. That is less than what the market is pricing in and “nowhere near” more aggressive estimates for as many seven rate increases in 2022, she said by phone Tuesday.

Mostly positive corporate earnings have included a surprise profit from Harley-Davidson Inc. HOG that sent its shares soaring. The motorcycle maker’s stock jumped 15.5% Tuesday, according to FactSet data.

Investors may also be feeling a bit of relief on the geopolitical front, according to Fernandez.

French President Emmanuel Macron’s conversation Monday with Russian President Vladimir Putin seems to have quelled some of the anxieties surrounding Russia as it stations troops outside of Ukraine, “giving a little bit of a boost to the markets,” she said. There seems “a little less possibility of a large move by Russia.”

Read: Diplomatic shuttle: Macron in Kyiv after Putin talks

Rising bond yields have been the story of 2022 so far, and now the talk is how soon the yield on the 10-year Treasury note TMUBMUSD10Y, 1.963% may reach 2%. The 10-year Treasury yield rose 3.9 basis points Tuesday to 1.954%, marking the highest rate since July of 2019, according to Dow Jones Market Data.

Rising yields can be a negative for technology and other so-called growth stocks, whose valuations are based on expectations for rapidly growing profit and cash flows far into the future. As yields rise, the present value of that future cash falls.

Related: Buy the dip? Why the stock market’s bounce off January lows may prove premature

Meanwhile, strategists at UBS say they are sticking to their earnings forecasts for the year, and their S&P 500 price target of 5,100 by the end of the year.

“While there remains a risk that the Federal Reserve could tighten by more than markets expect — currently six hikes of 25 basis points each — this is not our base case. With demand remaining healthy, we advise investors to focus on winners from global growth. Against a backdrop of rising rates, we expect value sectors to outperform growth sectors,” said Mark Haefele, chief investment officer for global wealth management at UBS.

The January reading of the U.S. consumer-price index, due Thursday morning, is shaping up as the key piece of economic data for the week.

In economic data Tuesday, the U.S. international trade deficit widened in December by 1.8% to $80.7 billion, marking it the second largest monthly increase ever. Economists polled by The Wall Street Journal had forecast a $82.9 billion shortfall. The deficit jumped 27% in 2021 to a record $859 billion largely because a recovering economy gave Americans the means to buy more imports, though they also paid higher prices due to rising inflation.

The National Federation of Independent Business said its small-business optimism index slipped 1.8 percentage points in January to 97.1—an 11-month low. The NFIB said a net 61% of small businesses increased prices at the beginning of the new year, the highest percentage since 1974.

“We expect to see inflation within some of these macroeconomic numbers,” said Saira Malik, chief investment officer of Nuveen, by phone Tuesday. “As long as growth remains strong, and we can put out high, single-digit earnings growth this year, the market should be able to overcome Fed rate increases.”

Which companies were in focus?

The hurdles tech companies face in attempting to grow via deal making were underlined as Nvidia Corp. NVDA dropped its planned $40 billion acquisition of microchip designer Arm Holdings from Japanese investor SoftBank after regulatory opposition. Nvidia said it plans to take a $1.36 billion first-quarter charge. Shares of Nvidia reversed early weakness to rise 1.5%.
At-home fitness company Peloton Interactive Inc. PTON, +25.28% confirmed that co-founder John Foley will step down as chief executive and that it will implement a cost-cutting plan that will lead to 2,800 job cuts. Shares soared 25.3%.
Shares of Pfizer Inc. PFE, -2.84% fell 2.8% after the drugmaker topped Wall Street profit forecasts but missed on revenues.
Shares of Norwegian Cruise Line Holdings Ltd. NCLH, +3.64% rose 3.6% after the cruise operator confirmed that it expects to be profitable in the second half of 2022, but pushed back its timing to be cash flow positive as the omicron variant hurt bookings. 

How did other assets fare?

The ICE U.S. Dollar Index DXY, +0.21%, a measure of the currency against a basket of six major rivals, rose 0.2%.
West Texas Intermediate crude for March delivery CL.1, -1.58% CLH22, -1.58% settled 2.2% lower at $89.36 a barrel. Gold futures or April delivery GC00, +0.27% GCJ22, +0.27% rose 0.3% to settle at $1,827.90 an ounce—the highest most-active contract settlement since Jan. 26, FactSet data show.
Bitcoin BTCUSD, +0.62% was up 0.1%.
The Stoxx 600 Europe SXXP, +0.01% was virtually flat, while the FTSE 100 UKX, -0.08% edged down 0.1%.
The Shanghai Composite SHCOMP, +0.67% rose 0.7%, while the Hang Seng Index HSI, -1.02% fell 1% in Hong Kong and Japan’s Nikkei 225 NIK, +0.13% edged up 0.1%.

—Steve Goldstein contributed to this article.

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