ARNC Arconic Corporation

By Ellie Ismailidou and Sara Sjolin, MarketWatch

Bullard sticks to 1 rate increase until 2018; U.K. political developments boost optimism

U.S. stocks on Tuesday pulled back from intraday all-time highs but were still trading above their record closing highs, as a rise in oil prices and stronger-than-expected earnings from Alcoa Inc. bolstered sentiment.

The S&P 500 , which closed at a record for the first time in nearly 14 months, extended its rally, rising 16 points, or 0.7%, to 2,152. Materials shares were leading the gains, advancing 2%, boosted by a sharp rise in oil prices .

Three of the S&P's 10 sectors were in negative territory--utilities, consumer-staples and telecom, off 1.1%, 0.3% and 0.1% respectively. All three sectors traditionally are viewed as safety plays in times of market turmoil.

The Dow Jones Industrial Average added 92 points, or 0.6%, to 18,344, trading above its closing record set in May 2015 and briefly hitting an intraday record of 18,353.76. Goldman Sachs Group Inc.(GS) was adding more than 25 points to the blue-chip gauge, while Wal-Mart Stores Inc.(WMT) and Boeing Co.(BA) were laggards.

Meanwhile, the Nasdaq advanced 32 points, or 0.6%, and was trading in positive territory for the year, up 0.3% year to date.

A stronger-than-expected second-quarter report from Alcoa Inc. (AA)--viewed as the unofficial kickoff of the earnings season--also engendered optimism on Wall Street, as investors continued to bask in the glow of Friday's solid nonfarm payrolls report.

Markets in the U.S. and Europe were also encouraged on Monday by news that U.K. Home Secretary Theresa May will become the new British prime minister (http://www.marketwatch.com/story/andrea-leadsom-drops-bid-to-become-uks-next-prime-minister-2016-07-11-7103452), avoiding months of uncertainty over who would take over after David Cameron.

Read:BOE set to cut rates for the first time in 7 years on Brexit backlash (http://www.marketwatch.com/story/boe-set-to-cut-rates-for-the-first-time-in-7-years-on-brexit-backlash-2016-07-11)

That optimism continued on Tuesday, with European (http://www.marketwatch.com/story/european-stocks-extend-post-brexit-gains-2016-07-12) and Asian (http://www.marketwatch.com/story/nikkei-keeps-rolling-on-expectations-of-fresh-stimulus-2016-07-11) markets trading higher, oil rallying (http://www.marketwatch.com/story/oil-hovers-at-2-month-low-on-glut-worries-2016-07-12), while gold and the yen (http://www.marketwatch.com/story/stimulus-talk-sinks-japanese-yen-further-2016-07-12)--traditional havens--slipped.

"In this global record-low-interest-rate environment, where else will investors go?" said Mark Kepner, managing director of sales and trading at Themis Trading, adding that the U.S. equity market is where global investors are currently looking for yield.

"A Federal Reserve on hold combined with a great jobs number," according to Kepner, was the right mix of conditions for a stock rally to emerge. And despite frothy stock valuations (http://www.marketwatch.com/story/with-greater-highs-for-stocks-come-greater-risks-2016-07-11), "stocks actually look cheap relative to bonds," he said, as bond yields have tumbled to record lows and bond prices have spiked.

On Tuesday, St. Louis Fed President James Bullard stuck with his view of a single interest rate increase until 2018, despite the strong rebound in U.S. job growth in June.

Still, many strategists remained skeptical in the face of this strong rally. "An intraday high--just like age--is just a number," said Kim Forrest, senior portfolio manager at Fort Pitt Capital.

To gauge whether the rally is sustainable "there's only one element that can show whether stocks merit these valuations: earnings," Forrest said.

Alcoa's strong earnings--which reported adjusted earnings per share of 15 cents, beating forecasts of 9 cents a share (http://www.marketwatch.com/story/alcoa-shares-up-5-after-company-earnings-top-expectations-2016-07-11) (http://www.marketwatch.com/story/alcoa-shares-up-5-after-company-earnings-top-expectations-2016-07-11)--was an example of such a strong performance, but "we need to see more companies begin saying they expect to see revenue and earnings growth," Forrest said.

"There could be a few more [earnings] surprises during the week given the strength of the U.S. economy. The country's economic data proved to be a lot stronger for the last quarter as compared with the previous one," said Naeem Aslam, chief market analyst at ThinkForex, in a note.

Movers and shakers: Fastenal Co.(FAST) reported an unexpected drop in second-quarter profit, sending shares down 4.6%.

Later this week, major banks like J.P. Morgan Chase & Co.(JPM), Citigroup Inc.(C) and Wells Fargo & Co.(WFC) are slated to report.

Shares of Sage Therapeutics Inc. soared 35% after announcing positive phase 2 data for its treatment for patients with severe postpartum depression.

Seagate Technology PLC(STX) jumped 20.4% on Tuesday after the data storage company late Monday said it would cut 6,500 jobs globally, which is about 14% of its workforce.

U.S.-listed shares of Shire PLC(SHPG) rose 3.4% after U.S. health regulators approved its dry-eye treatment (http://www.marketwatch.com/story/shires-dry-eye-treatment-wins-fda-approval-2016-07-11), a potential blockbuster drug that is expected to go on sale in the third quarter.

AMC Entertainment Holding Inc.(AMC) gained 1.7% after the company said it plans on buying Odeon & UCI Cinemas Group from private-equity firm Terra Firma, a deal valued at GBP921 million (http://www.marketwatch.com/story/amc-agrees-to-buy-london-based-odeon-uci-in-deal-valued-at-921-million-pounds-2016-07-12) ($1.21 billion).

Economic news: Minneapolis Fed President Neel Kashkari hosts a town hall forum in Marquette, Mich., at 5:30 p.m. Eastern.

Cleveland Fed President Loretta Mester will talk about the economic outlook and monetary policy in Sydney, Australia, at 10:30 p.m. Eastern.

On the data front, a June reading on small-business optimism rose for a third straight month (http://www.marketwatch.com/story/small-business-optimism-rises-for-third-straight-monthly-gain-2016-07-12), but remained soft compared with its long-term average. And U.S. wholesale inventories inched higher in May as automobile stocks tumbled, suggesting inventory investment likely remained a drag on economic growth in the second quarter.

(END) Dow Jones Newswires

July 12, 2016 11:44 ET (15:44 GMT)

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