Dow up 450 points in final hour of trade as S&P 500, Nasdaq hit fresh 14-month highs despite hawkish Fed and ECB

What drove markets

U.S. stocks rallied on Thursday, shaking off weakness seen in the wake of the Federal Reserve’s policy meeting Wednesday.

The relentless advance brought the S&P 500 and the Nasdaq Composite to settle at their highest since April 2022, according to Dow Jones Market Data. The six consecutive sessions of gains for the S&P 500 also sent the gauge above its 4,400 level, one week after the large-cap index exited its the longest bear market since 1948.

The rally Thursday was particularly notable given the hawkish Federal Reserve decision released after the central bank’s two-day policy meeting on Wednesday. The Fed held its benchmark interest rate unchanged but signaled the monetary tightening cycle is not over and more rate hikes are still on the table this year.

See: The bulls finally control the stock market and the signs point higher

A day after Fed Chair Jerome Powell said the decision to leave rates steady was a continuation of the process of slowing down policy moves after aggressive rate hikes in the past 15 months, the European Central Bank lifted its key interest rate by a quarter of a percentage point.

See: ECB ‘not thinking of pausing’ as it delivers another rate hike, boosts eurozone inflation forecast

Phillip Toews, chief executive officer of Toews Asset Management, thinks Thursday’s stock-market advance is attributed to the recent bull-market momentum, which has overcome central banks’ hawkish policy outlook, as excitement about artificial intelligence sustained a rally in the technology sector, while those stocks left behind were starting to catch up to their peers.

“I don’t think ultimately the fundamentals [of megacap tech stocks] will justify their prices, but I think it’s a competition right now between those fundamentals and market momentum and cash coming into the markets. It looks like the latter is winning right now,” Toews told MarketWatch via phone on Thursday.

However, Toews said even though the momentum has the potential to send stocks higher in the short term, or over the next three or six months, the fundamentals of tech companies do not suggest “a great market.”

“So we will be skeptical over a longer duration of two to three years that you’re gonna get decent gains, so at some point along this way, we expect that there probably will be some kind of a follow-up downturn, and returns will be low,” he added.

See: How will AI affect stocks of semiconductor companies? Here are the 18 expected to grow their sales most quickly.

Professional money managers were trying to boost their returns ahead of the end of the quarter by increasing their exposure to stocks, said JJ Kinahan, CEO of IG North America, the parent of electronic brokerage tasty trade.

“I think money managers were underinvested so we might see more of them buying into stocks as we head toward the end of the quarter,” Kinahan said during a phone interview with MarketWatch.

Investors may also be responding to rising corporate earnings forecasts, as Wall Street warms to the notion that profits might improve in the second quarter, and during the quarters ahead.

“The reason the stock market has done so well other than the annual Russell realignment which helped a lot of small-cap stocks and of course the big AI buzz, is earnings are forecasted to increase for the next four quarters,” said Louis Navellier of Navellier and Associates.

In U.S. economic data, a weekly update on the number of Americans applying for jobless benefits showed the number of first-time applicants was unchanged at 262,000, according to data released on Thursday.

Retail sales, which offers some insights into the health of American consumers, came in stronger than expected in May, rising 0.3%, besting expectations for a drop of 0.2%. Sales also came in above forecast in April, when it rose by 0.4%.

Two regional gauges of U.S. manufacturing sentiment showed signs that they may be improving in June after a rough patch. The Philadelphia Fed’s manufacturing index slipped further to a reading of negative 13.7, from negative 10.4 in the prior month, but the New York Fed’s Empire State Index jumped to a reading of 6.6 in June from negative 31.8  in the prior month.

Finally, data released by the Fed showed U.S. industrial production declined by 0.2% in May after two straight months of gains.

Companies in focus

• Regional bank shares were higher on Thursday with the SPDR S&P Regional Banking ETF  climbing 1.9%. Shares of PacWest Bancorp. was up 1.4%, while Valley National Bancorp jumped 3.1%.
• Microsoft Corp. shares ended 3.2% higher for six consecutive days of gains and booked a record closing high as investors focused more on the tech giant’s artificial-intelligence roadmap instead of the stalled $69 billion acquisition of videogame publisher Activision Blizzard Inc.
• Cava Group Inc.  shares finished 99% higher above their initial-public-offering price of $22 per share as the Mediterranean fast-casual restaurant chain made its public market debut on the New York Stock Exchange Thursday morning.
• Kroger Co.  fell 2.7%, snapping a five-day win streak after the grocery chain reported fiscal first-quarter profit that topped expectations but net sales that came up a bit shy, and affirmed its full-year outlook.
• Lennar Corp. shares rose 4.4% after the homebuilder reported results that topped Wall Street expectations, and hiked its delivery forecast for the year.

—Jamie Chisholm contributed.