Dow closes 270 points higher as cyclical stocks lead, Nasdaq weakens as Treasury yields rise

US stocks ended higher on Thursday, with cyclical sectors such as financials, materials and industrials posting the strongest gains, while higher government bond yields weighed on the tech-heavy Nasdaq.

On Wednesday, the Dow Jones Industrial Average fell 74 points, or 0.22%, to 33,853, the S&P 500 fell 2 points, or 0.04%, to 4,377, and the Nasdaq Composite was up 36 points, or 0.27%, to 13,592.

What drove the markets?

Financial stocks got a boost on Thursday after the country’s biggest lenders passed the Fed’s annual stress tests, in which 23 banks proved they could withstand a hypothetical “severe” global recession that saw losses of up to $541 billion as well as a 40 percent decline. Decline in commercial real estate prices.

The Invesco KBW Regional Banking ETF

KBWR

rose 2.1%, and the SPDR S&P Bank ETF

KBE

increased by 1.7%.

Although stress test results following the collapse of Silicon Valley Bank and other US lenders earlier in the year were encouraging news, economists warned that risks to the stability of the banking sector remain.

“The US banking sector has stabilized and helped avoid a full-blown credit crunch, but the shock presents further headwinds for bank lending and broader US activity, and risks to more vulnerable banks or the sector as a whole not completely gone yet,” he told James McCann, deputy chief economist at abrdn. “In particular, banks with large holdings of fixed income securities, fewer tied deposits, exposure to commercial real estate loans and low geographic diversification remain at risk,” he said.

Meanwhile, the latest revised US first-quarter GDP figures helped boost the Dow, as did industrials, materials and small-cap stocks like those that make up the Russell 2000

FURROW

,

that was an increase of 1.1%.

The data showed that gross domestic product was revised up from a previously reported growth rate of 1.3%, the Commerce Department said on Thursday, undermining widespread expectations that the US economy is headed for a recession. According to the latest Wall Street forecasts, the US economy is also expected to grow between 1% and 2% in the second quarter ending Friday.

Another report showed that the number of Americans filing for unemployment benefits last week fell to a monthly low of 239,000. New jobless claims fell 26,000 from a revised 265,000 the previous week.

While cyclical stocks pushed the market higher, the Nasdaq weakened on a rise in Treasury yields fueled in part by GDP numbers, Eric Diton, president and chief executive officer of the Wealth Alliance, said during a phone interview with MarketWatch.

“Growth stocks are the most sensitive to higher yields,” Diton said. “This is really a follow-up to comments made by Jay Powell yesterday when he was discussing the need for aggressive tightening.”

Federal Reserve Chair Jerome Powell reiterated his willingness to fight inflation with more aggressive monetary policy this week at the ECB’s annual forum in Sintra, Portugal on Wednesday. Powell reiterated Thursday in Madrid, Spain, that the risks of “overdoing” or “underdoing” rate hikes are not yet hanging in the balance.

The yield on the 2-year government bond

TMUBMUSD02Y

rose 15.6 basis points to 4.876% from 4.720% on Wednesday.

See: Powell says the risks of an “excessive” or “too little” rate hike are still out of balance

Some analysts cautioned investors should over-understand market action on Thursday, as low trading volume ahead of the bank holiday weekend and quarter-end portfolio adjustments by money managers likely overshadowed other factors.

“I would be careful not to attribute too many of these moves to anything in particular,” said Michael Lebowitz, portfolio manager at RIA Advisors. “It’s a combination of illiquid markets and a quarter-end rebalancing.”

Investors also reacted to dovish comments from Atlanta Fed President Raphael Bostic, who broke with the Powell-led majority in the Fed by bucking the notion that the central bank should continue raising borrowing costs.

Nevertheless, the futures markets have begun to price in further rate hikes. According to the CME FedWatch tool, traders now see an 86.8% chance of a quarter point rate hike on July 26, which would raise the Fed Funds interest rate target to 5.25-5.5%.

Additionally, they are pricing in a 26.8% chance of another quarter point move in September, up from 16.4% the previous day.

Just one trading day remains in a robust first half for US equities. The S&P 500 is up 14.4% this year, while the Dow Industrials is up 2.8% and the tech-heavy Nasdaq Composite is up 30% year-to-date, according to FactSet data, on track for its best first half since 1986 is to Dow Jones market data.

See: The Nasdaq 100 is heading for its best first half on record, but further gains remain stumped.

Megacap tech stocks like Apple Inc. and Nvidia have accounted for more than 55% of gains in the S&P 500 so far this year, according to Dow Jones data. But since early June, the rally has extended as sectors like industrials and financials, which had lagged earlier in the year, bounced higher.

company in focus

• Shares of major Wall Street banks rose Thursday with shares of JPMorgan Chase & Co.
  

  JPM
  

  And Bank of America Corp
  

  B.A.C
  

  significantly higher at the end.

• Micron technology shares
  
  IN
  

  slumped after the chipmaker’s results came in better than expected.

• Rite Aid Corp
  

  WHEEL
  

  Shares rose after the drugstore chain surprised investors with a smaller-than-expected fiscal first quarter loss and better-than-expected sales.

• Overstock.com Inc.
  

  SHOPPING
  

  skyrocketed after the company announced it had acquired the Bed Bath & Beyond brand and intellectual property.

• American Outdoor Brands Inc.
  

  AUGUST
  

  soared after the outdoor products and accessories maker reported surprise adjusted quarterly profit and said it sees long-term, positive trends for its business.

• Virgin Galactic Holdings Inc
  

  SPCE
  

  The stock fell as the company began preparations for its first commercial space flight on Thursday.