U.S. equities rallied Thursday for the second day in a row even after the latest GDP showed a second-straight contraction, as investors bet the economic downturn would soon cause the Federal Reserve to end its aggressive hiking campaign.
The Dow Jones Industrial Average jumped 332.04 points, or 1%, to 32,529.63. The blue-chip index added more than 400 points in the previous session. The S&P 500 rose 1.2% to 4,072.43, and the Nasdaq Composite added nearly 1.1% to 12,162.59. All of the major averages are on pace for a winning week as well as their best month of 2022.
After a brief dip following the GDP report, investors shook off fears that the Federal Reserve's attempts to tame surging prices would push the economy into a recession. U.S. economic growth fell 0.9% in the second quarter, the Bureau of Economic Analysis reported Thursday. The Dow Jones estimate was for a gain of 0.3%. First-quarter GDP declined by 1.6%.
"While it is certainly on the negative side of the estimates, keep in mind that a 1% decrease is relatively small and supports the idea that any recessionary environment will be mild," Mike Loewengart, managing director of investment strategy for E-Trade, said of the GDP report.
"The Fed has been clear that controlling inflation is its top priority so it's unlikely it will change course due to another negative quarter, although today's report may seem contradictory to Powell's recession comments yesterday," he added. "The market has been rallying in July so don't be surprised to see the realities of the challenges that lie ahead set in for investors."
Many characterize a recession as having two back-to-back negative quarters of economic growth. It's more nuanced than that. The National Bureau of Economic Research, the official arbiter of recessions, considers several additional factors.
The moves follow a broad-based rally that came in the previous session after the Fed hiked interest rates by 0.75 percentage point for the second consecutive time to fight inflation, and investors bet on whether the central bank could halt surging prices without pushing the economy into a recession.
Max Wasserman, senior portfolio manager and founder of Miramar Capital, said Thursday's surge was a continuation of that rally.
"The attitude is basically that the Fed is saying we're near the end, and that the GDP number is telling people there is no compelling reason for the Fed to hit us with another 0.75 or 1 percentage point," he said. "The Fed may be still raising interest rates a little bit, but we know they're not going to keep raising at the same level."
Earnings season continues
Company earnings this week are part of the optimism, too, Wasserman added, saying "profit margins are being squeezed due to inflation… but the underlying businesses all seem to be pretty strong." That, combined with the belief that the Fed is "basically done with the aggressive tightening," is giving investors reason to breathe a sigh of relief.
Traders had a deluge of second-quarter company earnings to digest Thursday. Honeywell and Etsy both reported strong results that boosted their shares about 3.7% and 9.9%, respectively. Ford Motor climbed 6.1% after it beat profit and revenue estimates and raised its dividend.
On the flip side, shares of Meta Platforms dipped 5.2% on the back of disappointing quarterly numbers. Shares of Comcast slid 9.1% after reporting it failed to add broadband subscribers for first time ever.
Nearly 49% of S&P 500 companies have reported earnings. Of those, 71.14% have beaten estimates, FactSet data shows.
Investors are looking ahead to results from Apple, Amazon, Intel and Roku slated for after the bell.
In other news, solar stocks soared after Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.V., said they've reached a deal on climate spending. Residential solar installers Sunrun and Sunnova jumped nearly 30% and 28%, respectively. SunPower gained about 18.2%. The Invesco Solar ETF added 7.5%.
Spirit Airlines rose 5.6% following its announcement that it has agreed to be acquired by JetBlue, after a months-long bidding war.
Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC.