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Indexes End with Strong Gains, Rebounding from Global Market Rout

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U.S. stocks ended sharply higher on Tuesday, with investors returning to the market after a dramatic sell-off. Recent comments by Federal Reserve officials eased worries about a U.S. recession. All major S&P 500 sectors saw significant gains. Federal Reserve policymakers dismissed the notion that weaker-than-expected July jobs data indicated an impending recession. However, they cautioned that the Fed might need to cut interest rates to avoid such an outcome. Nvidia (NVDA.O) was the biggest contributor to the gains in the S&P 500 and Nasdaq.

“The market had just gotten top heavy, but it did reprice a decent amount, particularly the Nasdaq, and people are coming back to the idea that with lower rates, it should provide support for stocks,” said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey. According to preliminary data, the S&P 500 (.SPX) gained 51.66 points, or 1.00%, to end at 5,237.99 points, while the Nasdaq Composite (.IXIC) gained 166.77 points, or 1.03%, to 16,366.86. The Dow Jones Industrial Average (.DJI) rose 284.86 points, or 0.74%, to 38,988.13.

Traders are now pricing in a 75% chance that the Fed will cut rates by 50 basis points at its next policy meeting in September, and a 25% chance of a 25 basis point reduction, according to the CME Group’s FedWatch Tool. Stocks had sold off after weak economic data raised concerns about a U.S. recession. These concerns were exacerbated as investors unwound yen-funded trades, which had been used to finance stock acquisitions for years, following a surprise Bank of Japan rate hike last week.

The next major Fed event is Chair Jerome Powell’s speech at Jackson Hole on August 22-24. Uber (UBER.N) shares rose sharply after the ride-sharing and food delivery provider exceeded Wall Street estimates for second-quarter revenue and core profit, driven by steady demand for its services. Caterpillar (CAT.N) also gained after surpassing analysts’ estimates for second-quarter profit, as higher prices on its larger excavators and other equipment offset moderating demand in North America.

Global Stock Traders Face Dip-Buying Dilemma After Crushing Selloff

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A massive selloff has unsettled global equity markets, leaving investors uncertain about buying stocks at lower prices. Concerns over the U.S. economy and disappointing tech earnings have cast a shadow over the outlook, potentially leading to further losses. Last week, the S&P 500 dropped nearly 6% from its July peak, while the tech-heavy Nasdaq Composite experienced its first 10% correction since early 2022. Markets in Europe and Asia also plummeted, with Japan’s Nikkei index losing almost 5%.

Investors now face a dilemma: whether to buy during this dip or hold off amid recession fears. Historically, the S&P 500 has fallen an average of 29% during recessions, according to Truist Advisory Services. Additionally, Warren Buffett’s Berkshire Hathaway reported selling half its stake in Apple and increasing its cash reserves, signaling caution.

Mark Travis, portfolio manager at Intrepid Capital, noted that investors are reassessing risks due to high valuations. Despite a strong year driven by AI technology and a resilient economy, the recent selloff has dampened risk appetite. Concerns that the Federal Reserve might be delaying interest rate cuts have led traders to move from high-valued stocks to safer investments like U.S. government bonds.

Some investors, however, view the selloff as a temporary setback and are considering buying opportunities. The S&P 500 and Nasdaq are still up around 12% year-to-date, with Nvidia showing significant gains despite recent declines. Economists found positives in the latest jobs report, and some tech companies, including Apple and Meta Platforms, delivered strong earnings.

Nevertheless, stock valuations remain high by historical standards, potentially leading to further selling. The S&P 500’s valuation has decreased slightly but remains above its long-term average. Market strategist Art Hogan highlighted the market’s tendency to overreact to economic normalization signs, potentially leading to profit-taking.

With limited major economic data releases until mid-August, markets may remain volatile. The Cboe Volatility Index, known as Wall Street’s fear gauge, reached its highest level since March 2023, indicating increased demand for options protection. Additionally, the yield on the benchmark 10-year U.S. Treasury dropped significantly, reflecting expectations of future rate cuts and investor caution.