Stocks gain as investors take ‘bad news is good news’ approach

investmentnews.com:

Stocks rose for a fourth straight day as another batch of economic reports pointed to moderation, cementing bets the Federal Reserve is approaching the end of its interest-rate hikes.

The S&P 500 topped 4,500.Apple Inc. led gains in megacaps, while regional banks fell. Bloomberg News reported the Fed issued a slew of private warnings to lenders with assets between $100 billion and $250 billion in a bid to tighten supervision. In late trading, software company Salesforce Inc. climbed on a bullish outlook. Treasury yields edged lower. Swap contracts priced in less than a 50% chance of another quarter-point US rate increase this year.

“Investors are reacting with a ‘bad news is good news’ approach, betting that a slowing economy will lead to a less aggressive Federal Reserve,” said Mark Hackett, chief of investment research at Nationwide. “This has calmed investors, but adds an element of risk if the pendulum continues to swing, as an earnings recovery is critical for a continued strong market.”

The Citigroup Economic Surprise Index for the US extended its plunge below 50 — after topping 80 earlier this month — showing recent reports have trailed forecasts. Economists have “adjusted expectations to reality,” and upward surprises are becoming more difficult, Hackett noted.

The US economy made more limited progress in the second quarter than initially estimated while separate data showed employment growth is moderating. Gross domestic product rose at a 2.1% annualized pace, representing a markdown from the government’s previous estimate, as business investment in equipment and inventories were revised lower. In the first quarter, the economy expanded at a 2% rate.

“The reality of the current state of the economy is likely in