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Why energy stocks could rally

After lagging the market this year, oil and gas stocks could rise on strong earnings growth. Paul R. La Monica explains why higher oil prices could boost the energy sector.

Posted: Oct 17, 2018 10:58 AM
Updated: Oct 17, 2018 11:03 AM

Corporate America is coming to Wall Street's rescue.

The Dow soared 500 points on Tuesday, recovering a chunk of last week's hefty losses, as investors cheered fat profits from major companies and relative calm in the bond market.

Tech stocks, the biggest losers during the market turmoil, raced back to life. The Nasdaq spiked 2.3%, while the S&P 500 advanced 1.7%.

"It's a bounce back after an overdone situation last week," said David Joy, chief market strategist at Ameriprise Financial.

Market sentiment was lifted by earnings beats from Goldman Sachs, Morgan Stanley and Johnson & Johnson. Adobe and UnitedHealth added to the good news by offering upbeat guidance for 2019.

Taken together, the corporate report cards underscore the ability of businesses to cash in on the strong US economy. And the results should ease fears about the US-China trade war.

"We're focusing back on fundamentals," said Dan Suzuki, portfolio strategist at Richard Bernstein Advisors. Suzuki called Tuesday's rally a "reflexive rebound."

Last week, the Dow, S&P 500 and Nasdaq all suffered their worst week since March. At one point, the Dow plummeted more than 1,000 points in just two trading days.

Despite Tuesday's advance, all three major indexes remain firmly in the red for the month.

One major source of investor nervousness has improved: bond yields. A sudden spike in 10-year Treasury rates above 3.25% spooked markets. The rapid climb in rates was driven by the strong economy, the surging federal deficit and concerns about a more aggressive Federal Reserve.

Investors feared higher borrowing costs that could slow growth and sudden competition for the stock market from boring bonds.

But Treasury rates, which move in the opposite direction of prices, eased late last week as investors poured cash into the safety of government bonds. Rates have stabilized at around 3.15%, relieving stock market bulls.

"That has reassured people that this is not the start of something much worse that could really sidetrack the market," said Bruce McCain, chief investment strategist at Key Private Bank.

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