Nasdaq, S&P 500, Dow Jones rally again, extending post-Fed gains following GDP data

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The stock market finished notably higher on Thursday, adding to a Fed-inspired rally staged during the previous session. Defensive sectors provided leadership, with the S&P 500 rising more than 1%.

Following a volatile start to the session, investors settled into a bad-news-is-good-news trade prompted by the release of disappointing GDP data. The gains added to a substantial rally posted Wednesday in the wake of the Federal Reserve's latest policy announcement.

The Nasdaq (COMP.IND) ended +1.1%, the S&P 500 (SP500) finished +1.2% and the Dow (DJI) closed +1.0%.

The Dow Jones climbed 332.04 points to close at 32,529.63. The S&P 500 rose 48.82 points to end at 4,072.43. The Nasdaq concluded trading at 12,162.59, an advance of 130.17 points.

Rates priced in economic weakness and possibly a more dovish Fed. The 10-year Treasury yield (US10Y) retreated 5 basis point to 2.68% and the 2-year yield (US2Y) dropped 9 basis points to 2.89%.

Ten of 11 S&P sectors recorded gains on the day, with Real Estate and Utilities leading the advance. Both spaces outperform when interest rates are expected to decline.

Communication Services represented the lone segment to finish in the red, dragged down by Meta, which dropped after its earnings report as analysts fretted over ongoing challenges.

Looking at the economic data, preliminary Q2 GDP fell 0.9%, compared with expectations for a 0.5% drop. Two quarters of negative GDP is often used as a shorthand definition of a recession (although some argue the NBER as the final arbiter). Either way, the numbers point to a soft economy.

The weak GDP numbers actually helped equities, with some betting the figures would prompt the Fed to rein in tightening even further. Stocks surged Wednesday after Fed Chair Jerome Powell said that the fed funds rate was already in the range of neutral with the latest hike of 75 basis points.

"We think market rates have peaked," ING said. "Specifically, the 3.5% area reached by the 10yr Treasury yield in mid-June was most likely it."

ING added: "We argue that it’s not about the level per se. It’s about the cycle, and the fact that the influential 5yr area is now signaling a turn in the cycle. Specifically, the 5yr yield is no longer sitting above an interpolation between the 2yr and 10yr (and trading cheap), but is now trading rich."

Also adding to evidence of a weakening economy, weekly jobless claims remained elevated. The figure unexpectedly rose to 256K.

Among active issues, Etsy was among the top S&P gainers following solid results. Stanley Black and Decker is the big decliner as profit plunged 80%.