U.S. stocks jumped on Thursday, roaring back from a sharp sell-off on Wall Street that saw the S&P 500 and the Dow Jones Industrial Average suffer their worst drop in three months.
The S&P 500 rose 0.98%, while the blue-chip Dow gained 300.19 points, or 0.99%, boosted by Disney, Intel and American Express. The tech-heavy Nasdaq Composite climbed 0.5%.
All 11 S&P 500 sectors closed in the green amid the broad market rally. Financials and materials — cyclical sectors sensitive to an economic recovery — jumped 1.9% and 1.8%, respectively. Industrials and health care also led the strong gains.
The market suffered steep declines in the previous session, with the S&P 500 and the Dow posting their biggest one-day decline since October, as the speculative buying frenzy in heavily shorted stocks kept investors on edge. Some feared that hedge funds being squeezed could be forced to reduce their equity holdings to raise cash. Others called it a sign of a bubble forming in the market.
These stocks, including brick-and-mortar video game retailer GameStop (GME) and AMC Entertainment (AMC), dropped sharply Thursday after brokerage firms like Interactive Brokers and Robinhood took steps to restrict transactions in the heavily shorted names.
"The bullish backdrop for stocks is strong, intact and so much bigger than GME; and when the latter stops going up, the former will stop going down," Rich Ross, a technical analyst at Evercore ISI, said in a note.
GameStop, a red-hot target on the WallStreetBets Reddit chat room, fell 44% amid multiple trading halts, cutting its massive week-to-date gain to 197%. AMC Entertainment fell 56% after soaring a whopping 300% in the previous session. Bed Bath & Beyond slid 36%.
"The nonsense stocks continue to dominate a lot of the market conversation," Adam Crisafulli, founder of Vital Knowledge, said in a note Thursday. "Away from the land of make believe, the macro backdrop remains mostly the same, and mostly positive."
Shares of GameStop have soared more than 900% in January alone as newbie day traders keep pushing each other to pile into the shares and call options, creating a massive short squeeze in the name. The stock is still the most shorted name in the market with 120% of its float shares sold short, according to FactSet.
Trading volume exploded amid the retail buying spree in the previous session with 23.7 billion shares changing hands, marking the heaviest trading day since at least 2007. On Wednesday, U.S. equity option volumes hit a record 24.5 billion shares and 57.1 million contracts, according to Piper Sandler.
"This is not investing. This is not planning for one's retirement with a diversified portfolio," Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. "This is not prudent analysis of stocks... And these traders forget that buying a stock is buying a piece of a company, but instead they are just speculating on a stock symbol in the ultimate game of hot potato."
Shares of American Airlines surged 9.3% after the carrier posted better-than-feared quarterly results. Short covering also contributed to the gains as hedge funds and other short sellers rushed to buy shares to cut their losses. American Airlines is the most-shorted U.S. airline, according to FactSet.
Apple turned in its largest revenue on record at $111.4 billion in its fiscal first-quarter earnings report for fiscal 2021. Sales for every product category rose by double-digit percentage points. Shares of the tech giant, however, dipped 3.5%.
On the data front, gross domestic product increased at a 4.0% pace in the fourth quarter, slightly below the 4.3% expectation from economists surveyed by Dow Jones.
The number of first-time filers for unemployment benefits rose less than expected last week. Jobless claims totaled 847,000 for the week ended Jan. 23, the Labor Department reported Thursday. Economists polled by Dow Jones had expected first-time claims to total 875,000.
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.