Markets: News  

By Isabel Wang and Joseph Adinolfi

U.S. stocks finished higher on Thursday, with the S&P 500 ending at the highest level since early December, as fourth-quarter gross domestic product came in slightly stronger than expected, boosting investor confidence that the economy could find a soft landing in 2023.

How stocks traded

The Dow Jones Industrial Average finished Wednesday's session up 10 points after falling roughly 400 points earlier in the session. All three averages were higher for the week, with the tech-heavy Nasdaq on track for its fourth straight weekly advance, which would be its longest such streak since August.

What drove markets

U.S. stock indexes ended higher Thursday, reversing earlier losses after a flurry of economic data, including a report on fourth-quarter U.S. gross domestic product (GDP), came in stronger than economists expected.

The large-cap index ended at its highest close since Dec. 2, 2022, according to FactSet data.

The economy grew at a robust 2.9% annual pace to close out 2022, according to the Bureau of Economic Analysis. The GDP report, an official scorecard for the economy, expanded at an above-normal rate for the second quarter in a row. It also increased by 3.2% in the third quarter following a pair of negative readings in the first half of 2022.

"Thursday's GDP report suggests that the economy is relatively strong even in the face of aggressive measures by the Federal Reserve to calm inflation," said Carol Schleif, chief investment officer at BMO Family Office, in emailed commentary.

Markets cheered the latest data as evidence that the U.S. economy might achieve a soft landing, rather than slumping into a recession. Hopes also have been building that lower inflation readings could result in less aggressive interest-rate hikes by the Federal Reserve.

But some strategists also worry economic data might not yet show the full effects of the restrictive policy.

"The economy continues to act like a forward moving ocean liner, but I do see the GDP report as kind of looking in the rearview mirror. The Fed hikes started about a year ago. They [rate hikes] take a year to 18 months to really take effect, so I think by the middle of the year we will see a market slowdown, and I would suspect a good chance of negative GDP by mid-year," said Chris Grisanti, chief equity strategist at MAI Capital Management in NYC.

See also:U.S. economy doesn't look as good as GDP suggests

Others also pointed to signs of weakness in the details of the data. Economists from Jefferies pointed out in a note to clients that the growth in domestic demand was just 0.8%, less than the prior quarter, after removing the contribution from trade and inventories.

"Bottom line, despite the acceleration in top line growth in the second half, demand is actually cooling under the surface," said Jefferies Economists Aneta Markowska and Thomas Simons in a Thursday note.

While investors heralded it as the latest sign that the U.S. economy is holding up well despite the Fed's aggressive interest-rate hikes, Grisanti suspects the economic slowdown will happen faster than investors are pricing in.

"The current situation is like a horror movie with two monsters. Monster No. 1 is the Federal Reserve's rate hikes," Grisanti told MarketWatch via phone. "The second monster is the economic slowdown," he said. "We think the economy will slow relatively quickly as winter moves into spring."

See:This recession indicator is close to the point of no return. But stocks historically rally if the Fed cuts and the economy still grows

Investors were also focused on the latest batch of corporate earnings released late Wednesday and before the bell on Thursday, which helped to brighten the outlook following disappointing results and guidance from Microsoft Corp. (MSFT) earlier in the week.

Tesla Inc. (TSLA) shares jumped Thursday as investors applauded an earnings beat and cheerful comments from chief executive Elon Musk. The electric-car maker delivered what it said were record sales and profit for the fourth quarter, though those numbers were not completely up to Wall Street's expectations. The company also said it was on track to deliver about 1.8 million vehicles this year.

See:Tesla stock soars as analysts say latest results may quiet the bears for now

More corporate earnings are expected on Thursday after the closing bell, with results due out from McDonald's (MCD), Intel (INTC), Visa (V), Dow (DOW), and Northrop Grumman (NOC) .

In aggregate, companies were reporting earnings 2.4% above expectations, according to data from Refinitiv. Earnings typically outperform Wall Street's generally conservative forecasts, however, and the outperformance seen so far this earnings season has been smaller than the long-term historical average.

In other economic data, the labor market also has been showing signs of strength despite more reports of layoffs in the technology, finance and media sectors, as the number of Americans filing for unemployment benefits fell to their lowest level since April.

Data from the Commerce Department showed U.S. new home sales rose for the third month in December, climbing 2.3% to a seasonally-adjusted rate of 616,000, from a revised 602,000 in the prior month.

Companies in focus

--Jamie Chisholm contributed to this article.

-Isabel Wang

(END) Dow Jones Newswires

January 26, 2023 16:28 ET (21:28 GMT)

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