published May 25th 2016, 3:29 pm, by Oliver Renick

(Bloomberg) —
U.S. stocks posted the strongest two-day rally in nearly three months, as signs of a stronger economy spurred speculation it can withstand higher interest rates.

Banks in the S&P 500 led Wednesday’s move, reaching their highest level since Jan. 6 amid bets that rising rates will boost profits. Bank of America Corp. and Citigroup Inc. rallied more than 1.6 percent. Energy producers followed oil higher, helped by a retreating dollar that also bolstered gains in raw-materials companies.

The S&P 500 increased 0.7 percent to 2,090.54 at 4 p.m. in New York, closing at a four-week high after its first back-to-back gains in two weeks. The Dow Jones Industrial Average rose 145.46 points, or 0.8 percent, to 17,851.51, its strongest two-day climb since March 2. The Nasdaq Composite Index added 0.7 percent, closing at the highest in a month. About 7 billion shares traded hands on U.S. exchanges, 4 percent below the three-month average.

“The market is coming around to the idea that a June or July hike isn’t such a bad thing,” Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments, said by phone. “There was a mini kind of taper tantrum when the probability of a rate hike jumped, but we’ve had decent housing data and while the data is still mixed, it’s not bad.”

Hawkish commentary from Federal Reserve officials on the back of last week’s policy-meeting minutes, along with improving economic figures, led to speculation the central bank may increase rates as early as June. Fed Chair Janet Yellen is scheduled to speak on Friday, with her comments following readings on durable goods orders, pending home sales, gross domestic product and consumer sentiment.

Traders are now pricing in a better than one-in-three chance of a June rate increase, from 4 percent at the start of last week. Bets for a July move have jumped to 55 percent from 19 percent.

Equities are breaking out of a torpor that’s left markets struggling for direction as investors sought more clarity on the Fed’s rate intentions. The S&P 500 had alternated between daily gains and losses in the prior seven sessions, while trading in a roughly 50-point range in May. A Goldman Sachs Group Inc. basket of most shorted stocks rose for a fourth day. The measure added 5.2 percent over the span, its best such move in five weeks.

After the main U.S. equity benchmark index surged 15 percent from a 22-month low in February, stocks ran out of steam in late April amid mixed earnings reports and signs of lukewarm growth. With the two-day rally this week, the S&P 500 has climbed back within 2 percent of the record it reached last year.

The CBOE Volatility Index fell 3.6 percent Wednesday to 13.90, continuing a retreat from a two-month high reached last Thursday. The measure of market turbulence known as the VIX is down 12 percent in two sessions.

HPE Spinoff

Hewlett Packard Enterprise Co. rose 6.8 percent Wednesday, trimming an earlier 14 percent jump, after saying it will spin off and merge its business-services division with Computer Sciences Corp. in a deal valued at $8.5 billion for HPE shareholders. Computer Sciences soared 42 percent, the most ever.

For a quick wrap of the analyst commentary on the deal, click here.

As the earnings season winds down, analysts have moderated their predictions for a decline in first-quarter profits to 7.2 percent, from 10 percent as recently as April. They forecast second-quarter income will slide 5.1 percent, worse than the 3.9 percent drop estimated a month ago. Earnings growth is expected to return in the third quarter with a 2.2 percent increase.

“Everything seems to show people should be more confident,” said John Plassard, a senior equity-sales trader at Mirabaud Securities in Geneva. “The housing data added to better employment and inflation figures, and it was the third set of data showing the Fed is ready to hike. If they hike, it means the economy is indeed doing better so it wouldn’t leave people disappointed.”

In today’s session, nine of the S&P 500’s 10 main industries rose, led by financial, energy and raw-materials shares. Financials capped the strongest two-day climb in six weeks and moved closer to wiping out 2016 losses that had reached almost 18 percent. Technology companies erased a year-to-date decline yesterday.

Energy, Materials

Raw-materials and energy producers paced gains in the benchmark, rising at least 1.1 percent. Monsanto Co. advanced 2.2 percent as Bayer AG said it’s confident it can overcome regulatory and financing risks related to its takeover bid for the seed company. Freeport-McMoRan Inc. rose 4.9 percent and LyondellBasel Industries Inc. added 2.8 percent as a Bloomberg index of commodities climbed 1.2 percent, the most in two weeks.

Energy companies rose to a three-week high as crude rallied for a second day to settle above $49 a barrel. A government report showed oil inventories and production declined, easing a glut. Transocean Ltd. soared 9.7 percent, the most in two months, while Southwestern Energy Co. and Chesapeake Energy Corp. gained more than 6.8 percent.

Wells Fargo & Co. and JPMorgan Chase & Co. gained at least 1.5 percent to give the biggest boost to the financial group. Citigroup and Bank of America both moved to their highest levels in four weeks. Goldman Sachs and Capital One Financial Corp. added 2.3 percent.

Gains in technology shares picked up in afternoon trading, following the group’s strongest one-day rally in almost three months yesterday. International Business Machines Corp. rose 2.3 percent for its best day since March 1. Apple Inc. extended a four-day climb to 5.8 percent, while Microsoft Corp.’s back-to-back increase was the strongest since Feb. 1.

Automakers Climb

Signs of optimism were evident in automakers’ shares, with General Motors Co. adding 1.9 percent amid its longest winning streak in a month. Ford Motor Co. increased 1.7 percent to a three-week high, while motorcycle maker Harley-Davidson Inc. rose 1.6 percent to climb for a fourth day.

Intuit Inc. weighed on the Nasdaq as the maker of financial software programs fell as much as 5.1 percent before closing down 2.1 percent amid investor worries about slowing new subscriber growth in QuickBooks Online. The shares were up 2.6 percent yesterday ahead of an earnings report in which the company raised its estimate for year-end profits.

Yahoo! Inc. dropped 5.2 percent, the steepest slide in more than four months. People familiar with the matter said AT&T Inc. made a bid for Yahoo and remains a contender to acquire the company’s core internet business. While Verizon Communications Inc. remains a favorite to acquire Yahoo, it didn’t submit one of the highest first-round bids, two of the people said.

–With assistance from Roxana Zega. To contact the reporter on this story: Oliver Renick in New York at orenick2@bloomberg.net To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net John Shipman, Namitha Jagadeesh

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