NEW YORK (CNNfn) - U.S. stocks soared Tuesday, with the broad Standard & Poor's 500 index setting its first record high of the year, as investors, relieved that the Federal Reserve's latest interest-rate hike is over, poured money into stocks, betting that strong first-quarter corporate profits lie ahead.|
"It's a relief rally," said Charles Lemonides, chief investment officer at M&R Capital.
Typically, steeper borrowing costs hurt stocks by eating into company earnings. But analysts said stock prices already reflected the Fed's well-telegraphed move, aimed at keeping the white-hot economy from generating inflation.
And investors Tuesday found a lot to like in General Electric after one of the nation's largest and most diverse companies said its profit would beat Wall Street expectations.
"It was a precursor to a great earnings season," Michael Holland, chairman of Holland & Co., told CNN's Street Sweep. "I think the next few weeks are going to be better than anyone expects."
Steeper rates like the kind the Fed delivered generally mean higher bond yields, drawing equity investors into fixed-income securities. But the yield on the 30-year Treasury bond edged lower after the report, giving stock investors one more reason to buy.
And buy they did. The Dow Jones industrials jumped 227.10 points, or 2 percent to 10,907.34. The Nasdaq composite index, home to many technology firms, was down before the Fed news. But the gauge surged 101.68, or 2.2 percent, to 4,711.68.
"The theory is that with rate increases, it doesn't effect the 'new economy' stocks," said Ken Sheinberg, head of listed trading SG Cowen.
The broader S&P 500 rose 37.24, or 2.5 percent, to 1,493.87, a record.
Still, stock market breadth was mixed. Advancers on the New York Stock Exchange outpaced decliners 1,798 to 1,157. Trading volume topped 1 billion shares. But Nasdaq losers beat winners 2,510 to 1,767. More than 1.7 billion shares changed hands.
In currency markets, the dollar rose against the yen and euro.
More hikes expected
The action, which brings the federal funds rate to its highest point in nearly 5 years, gets one rate hike out of the way. But focus immediately shifted to early May, the Fed's next meeting, when many expect another rate hike.
Bill Meehan, senior market analyst at Cantor Fitzgerald & Co., said the Fed's statement accompanying the move indicates at least one more rate hike in May.
"What the Fed had to say may have been a little more bearish to the folks who thought this was would be the last rate hike," Meehan said.
The move also allowed the market to focus on corporate profits for the first three months of the year, which companies begin reporting next month.
The Dow's financial components, typically sensitive to higher rates, led the blue-chip index higher. American Express (AXP: Research, Estimates) jumped 3-7/8 to 145-7/8, J.P. Morgan (JPM: Research, Estimates) surged 5-9/16 to 129, and Citigroup (C: Research, Estimates) gained 1-7/8 to 58-1/16.
The gains came after the second investment bank in two days posted higher-than-expected profits. Goldman Sachs (GS: Research, Estimates) earned $1.76 a diluted share for the latest quarter, above Wall Street forecasts of $1.48 a share and the $1.12 a share the investment house earned a year earlier.
Lehman Brothers (LEH: Research Estimates), another big financial firm, Monday reported quarterly income of $541 million, or $3.69 a diluted share, strongly topping forecasts and nearly double year-earlier figures.
Goldman rose 4-13/16 to 118-1/4 and Lehman gained 1-15/16 to 89-3/4.
Another Dow component, General Electric (GE: Research, Estimates), rose 10-5/16 to 151-1/4 after the conglomerate said it sees its first-quarter profit outpacing Wall Street estimates, driven by growth in order rates and healthy operations around the world.
Also lifting the Dow, Philip Morris (MO: Research, Estimates) jumped 1/2 to 20-7/16. The gain came as the Supreme Court, in a 5-4 decision, ruled that the Food and Drug Administration has no authority to regulate tobacco as an addictive drug.
Some of the Nasdaq performers, down earlier in the session, turned around later.
Oracle (ORCL: Research, Estimates) surged 2-9/16 to 80-11/16. JDS Uniphase (JDSU: Research, Estimates) jumped 5-5/8 to 127.
Alan Skrainka, chief market strategist for Edward Jones, told CNNfn's Market Coverage that while the recent blue-chip rally may not have ended this year's correction, he thinks "old economy" stocks are a better investment than their "new economy" counterparts. (413K WAV or 413K AIFF).
But 3Com Corp. (COMS: Research, Estimates), up more than 68 percent in the last three months, fell 4-15/32 to 64-3/32 after reporting better-than-expected quarterly results and announcing a reorganization plan late Monday.
The computer network provider reported earnings outside of investment gains of $94 million, or 27 cents a diluted share, 2 cents above expectations. The company also said it was exiting its analog modem and local area network businesses, which will result in 1,000 job cuts.
Interstate Bakeries (IBC: Research, Estimates) fell 7/16 to 14-3/8. A Teamsters strike against the baking company is creating shortages of Wonder Bread, Twinkies and other products across parts of the Northeast.
Trade balance widens
In economic indicators, January's U.S. trade deficit widened to a record $28 billion, the Commerce Department said, well above economists' estimates of a $26.5 billion gap. The data, which show American consumers continue to spend on imports, had no apparent market effect.
Still, American consumers fuel two-thirds of the economy. And first-quarter gross domestic product already was expected to rise at a pace that Fed officials believe may generate inflation. So the data could give Fed officials one more reason to tighten credit in the months ahead.
But if Tuesday is any indication, the market won't care.