Dow scores longest winning streak in over 6 years as central-bank decisions, earnings loom

By Vivien Lou Chen and William Watts

The Dow Jones Industrial Average finished Monday with an 11th straight day of advances, as investors used the lack of a long-awaited recession to drive up equities ahead of a Federal Reserve rate decision and busy week of corporate earnings.

What happened

What drove the market

The Dow sits at its loftiest level since Feb. 9, 2022 -- reflecting a broadening of the rally that had been mainly powered by big technology stocks in recent months. The S&P 500, meanwhile, is 5% away from its record finish of 4,796.56 set on Jan. 3, 2022.

Analysts said the surge reflects hopes that cooling inflation will allow central banks to soon stop their rate-hike campaigns and that any economic downturn caused by the monetary tightening will not impact corporate profits too badly.

Key Words:Stock-market 'meltup' will continue as long as there's no sign of recession, says Steve Eisman of 'Big Short' fame

"You have a lot of people who have missed this rally and investors are afraid this thing might melt up further," said James Demmert, chief investment officer of New York City-based Main Street Research, which has roughly $2 billion in assets under management.

"The question is, 'Is this buying correct?' Investors should recognize that the indexes are vulnerable," Demmert said via phone. In addition, Monday's special rebalancing of the Nasdaq-100 should create "some volatility within larger tech names," particularly those which are seeing their weightings reduced.

Stocks had stumbled earlier this year amid problems at regional banks and a debt-ceiling standoff. Since June 1, coinciding with the resolution of the debt-ceiling showdown, the market has seen no big negative catalysts, Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, told MarketWatch in a phone interview.

Second-quarter earnings season is under way, but expectations have been set very low, according to Frederick. Investors are looking forward to prospects for an improving picture into next year. Barring any unforeseen exogenous events or a disturbing outlook warning from a major corporate player, stocks appear poised to continue pressing higher, with the S&P 500's all-time high potentially in sight before year-end, Frederick said.

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The coming week will have plenty for traders to consider, with the top three central banks delivering rate decisions and a slew of U.S. companies presenting their results.

Read: Stocks are making a run for record territory. Will the Fed end its rate hikes anyway? and Everyone thinks the Fed's rate hike this week will be the final one -- except the FedThe Federal Reserve is expected to raise borrowing costs by 25 basis points to a range of 5.25%-5.5% on Wednesday, and investors will be eager to hear whether that may be the last for the cycle. On Friday, the Bank of Japan should leave rates unchanged, but may say something about removing elements of its ultraloose policy.

On Thursday, the European Central Bank will deliver its decision. Another increase in borrowing costs is expected, but the ECB's hawkishness may be tempered after reports released on Monday showed that economic activity in the eurozone slumped to an eight-month low in July.

Earnings season remains in full swing, with several tech heavyweights due to report in the week ahead. Alphabet(GOOGL) and Microsoft (MSFT) will present their numbers on Tuesday, Meta (META) on Wednesday and Intel (INTC) on Thursday.

Earnings Preview: With Microsoft, Meta and Alphabet earnings hanging on AI, more investors are asking: 'How are you going to pay for that?'

"Equity investors are anticipating the end of interest-rate hikes after having seen inflation go down to 3%, and are wanting to get back into party mode," said Tim Courtney, chief investment officer of Exencial Wealth Advisors in Oklahoma City, Okla., which manages around $4 billion in assets.

"They are seeing cheaper capital ahead and eyeing multiples with lower interest rates" in mind, Courtney said via phone. "And that's probably where investors need to be a little skeptical and do their due diligence because it does feel an awful lot like the same kind of speculation and really high risk-taking we saw back in 2021. The market seems to be tilting back in the direction of a lot of investments we saw flourish, like tech startups and companies that don't have a clear path to profitability for years."

The U.S. economy grew in July at the slowest pace in five months, S&P surveys of purchasing managers showed. They pointed to weaker conditions later in the year.

The S&P flash U.S. services-sector index fell to 52.4 from 54.4 in the prior month. That's the lowest reading since February. Meanwhile, the S&P U.S. manufacturing sector index rose to 49.0 from 46.3. A reading above 50 indicates an expansion in activity, while a reading below that level signals contraction.

Companies in focus

-- Jamie Chisholm contributed.

-Vivien Lou Chen

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07-24-23 1626ET

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