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U.S. Stocks Rise as Optimism on Earnings Overshadows Fed

By Joseph Ciolli and Callie Bost
July 09, 2014 4:36 PM EDT 46 Comments

U.S. stocks rebounded from a two-day selloff as optimism over corporate earnings and jobs growth overshadowed central-bank concern that investors may be growing complacent about the economic outlook.

Alcoa (AA) Inc. jumped 5.7 percent to the highest in almost two years after kicking off earnings season with better-than-forecast results. American Airlines Group Inc. rallied 4.3 percent after raising its margin forecast. Facebook Inc. advanced 3.5 percent to pace gains among a gauge of technology shares. Bob Evans Farms Inc. slid 4.4 percent as quarterly revenue missed estimates.

The Standard & Poor’s 500 Index (SPX) rose 0.5 percent to 1,972.83 at 4 p.m. in New York after a 1.1 percent slide the two previous days. The Dow Jones Industrial Average (INDU) added 78.99 points, or 0.5 percent, to 16,985.61. About 5.4 billion shares changed hands on U.S. exchanges today, 8.3 percent below the three-month average.

“The market can go down, but it won’t stay down,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “The fact that the market is still questioning all these things that are going on is a very healthy sign. I still think the Fed is going to be more concerned about making absolutely sure that the U.S. economic recovery is under way and staying under way.”

Too Complacent

Equities initially turned lower after Federal Reserve meeting minutes showed some policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking. Officials are also debating the timing for the first increase in the main interest rate since 2006.

Fed officials expressed concern about low volatility in equity, currency and fixed-income markets, according to minutes of their June meeting, when policy makers trimmed monthly bond purchases to $35 billion. At the same time, “it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion,” according to the minutes.

The Chicago Board Options Exchange Volatility Index (VIX) finished last week at a seven-year low before rallying 16 percent the previous two days, the most since April. The gauge known as the VIX slipped 2.8 percent to 11.65 today.

The Fed meeting took place before a June payrolls report that showed job growth blew past expectations and the unemployment rate fell to the lowest level since before the financial crisis peaked six years ago, creating a firm foundation for a stronger U.S. economic expansion.

Continued Accommodation

“We saw a knee-jerk reaction down, but we usually get some short-term volatility after events like these,” Joe Bell, senior equity analyst at Cincinnati-based Schaeffer’s Investment Research Inc., said by phone. “I think people are continuing to see improvement in labor market conditions, especially on the heels of the most recent jobs report. A lot of people are viewing the fact that the Fed is going to continue to be accommodative to the economy.”

Fed Chair Janet Yellen said last month that accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth. She emphasized the need to put more Americans back to work and downplayed concerns about asset-price bubbles and incipient inflation.

Tech Selloff

U.S. equities retreated a second day yesterday amid growing investor concern that stocks have rallied too fast after benchmark indexes ended last week at all-time highs. Raymond James & Associates Inc. said stocks are vulnerable to losses and Citigroup Inc.’s chief U.S. equity strategist cited concerns for a “severe” pullback.

The S&P 500 has not had a drop of 10 percent in more than two years. The gauge trades at a valuation of 18 times reported earnings, the highest since 2011 when it was in the middle of a 19 percent slide, its biggest during the current five-year bull market.

Equity losses in the previous two days were concentrated in technology shares and small-caps with high valuations. Twitter Inc. (TWTR) and Pandora Media Inc., which trade at more than 150 times estimated earnings, plunged about more than 9 percent. Facebook Inc. and TripAdvisor Inc. sank at least 5.3 percent.

Facebook rose 3.5 percent to $64.97 today. The stock paced gains in the Nasdaq 100 Index of large technology shares, which had fallen for two straight days.

Earnings Forecast

More than 130 companies in the S&P 500 are scheduled to report quarterly results in the next two weeks, including Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs and Johnson & Johnson.

Profit at S&P 500 companies probably rose 5 percent in the three months through June, while sales gained 3 percent, estimates compiled by Bloomberg show. The forecasts are lower than they were at the start of April, when analysts predicted a 7.3 percent rise in earnings and 3.7 percent sales increase.

“We’re looking for continued economic growth, which will drive corporate earnings,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. “There’s still money on the sideline. As long as earnings keep going up and stocks are fairly valued, the market can keep going.”

All but one of the 10 main S&P 500 groups advanced today, with shares in makers of consumer-discretionary products adding 1.2 percent to pace gains. Utility stocks fell 0.2 percent.

Alcoa, American

Alcoa advanced 5.7 percent to $15.69 for its best day since March and the biggest gain in the S&P 500. The struggling U.S. aluminum producer, which is shifting its focus to manufacturing auto and aerospace components, reported better-than-forecast profit on the strength of its traditional aluminum smelting business.

American Airlines gained 4.3 percent to $41.99. The carrier said second-quarter pretax margins would exceed the company’s previous forecast. The company also said it sees strong global travel demand and no “material pockets of weakness.”

Reynolds American Inc. (RAI) rose 2.2 percent to $62.67. The U.K.’s Daily Mail speculated British American Tobacco Plc may purchase the rest of the cigarette producer. BAT holds about 42 percent of Reynolds, according to data compiled by Bloomberg.

Bob Evans Farms slid 4.4 percent to $47.57. The Columbus, Ohio-based operator of family restaurants reported quarterly revenue that failed to meet analyst estimates.

The Container Store Group plunged 8.4 percent to $24.80. The retailer of storage and organization products reported quarterly earnings that missed analysts’ estimates and said it’s “experiencing retail ‘funk.’”

Gigamon Inc. tumbled 32 percent to $12.29. The designer of networking products reported preliminary second-quarter revenue of as much as $35 million. That was lower than its earlier forecast of as much as $42 million, and missed analyst estimates of $40.3 million.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron, Jeff Sutherland

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