Stock Market Moves Higher as S&P 500, Nasdaq Rise

Last week, the Dow fell for an eighth week in a row, its longest stretch since 1932, while the S&P 500 and Nasdaq Composite notched seven weeks of losses. This week all three indexes were up 3.4% or more, based on Thursday’s close. The Dow led gains for the week, rising 4.4%, on track for its first gain since March.

This week’s rally has offered a reprieve from what has felt like a constant battering of portfolios.

Economic data this week has shown that Americans keep spending. U.S. consumers appear reluctant to let high gas prices and travel costs keep them from their Memorial Day weekend plans and are expected to keep powering the economy. Meanwhile, strong earnings results from companies such as Macy’s and

Dollar Tree

DLTR 0.69%

have added to investors’ optimism in recent sessions at a time when recession fears had been on the rise.

For months, worries about high inflation and the path of Federal Reserve rate increases have weighed on the market. Investors have grown concerned that interest rate hikes will tip the economy into a recession. Many of the extended rate-hiking cycles in recent decades have eventually led to downturns, according to Deutsche Bank.

Fears of that worst case scenario appeared to abate this week. Stocks kept rising after the Fed’s latest meeting minutes showed that central bank officials thought they would need to raise interest rates by a half-percentage point at each of the next two meetings. Major indexes built on those gains later in the week and then raced higher Friday.

Some investors also said stocks had fallen too far, too fast. A deep selloff has made valuations more attractive, encouraging some investors to wade in and buy the dip.

“People are loath to abandon a tactic, or strategy, that’s worked so well for them,” said

Steve Sosnick,

chief strategist at Interactive Brokers. “We’ve seen our clients resolutely buying.”

Nearly $21 billion flowed into global equity funds in the week through Wednesday, a BofA Global Research analysis of EPFR data show, the largest inflow in 10 weeks. The gains for the week have been broad-based, with all 11 of the S&P 500’s sectors rising.

On Friday, investors found good news in a fresh round of data. U.S. households boosted spending for a fourth straight month, though they dipped deeply into their savings to do so. The savings rate fell to the lowest in 14 years. Meanwhile, a closely watched U.S. inflation reading eased in April.

The fresh data, alongside some strong earnings, has pushed shares of retailers sharply higher. Dollar Tree,

Ulta Beauty

and

Ross Stores

were among the biggest winners in the S&P 500, gaining at least 20% apiece for the week.

Still, there has been a divergence in Americans’ behavior and how they feel about the economy, highlighting the uncertainty regarding the economy right now. The University of Michigan’s consumer sentiment index fell to the lowest level since August 2011. High inflation has been chipping away at Americans’ wallets and raising concerns about a recession, leading to low levels of confidence. 

The turmoil throughout the year and vigorous rally in recent days has left some investors wondering: Is the worst over?

“I can’t count the times that people have asked me: ‘Have I seen capitulation?’” Mr. Sosnick said.  

Few investors and strategists are willing to call a bottom to a selloff that has sent the S&P 500 falling around 15% for the year. Some traders said the recent gains seemed like a short-term rally during a broader decline.

“I think you’re going to see a lot of ‘buy the dip’ and ‘sell the rips,’” said

Stephen Solaka,

co-founder of Belmont Capital Management.

Few of the fundamental factors that have sent stocks falling this year have changed. The Federal Reserve is on pace to continue lifting interest rates. Meanwhile, Covid-19 lockdowns in China and the war in Ukraine have exacerbated supply-chain snarls.

“We are still of the opinion that we are seeing nothing but a short-term rally,” said

Florian Ielpo,

head of macro at Lombard Odier Investment Managers, noting that the firm’s flagship multiasset portfolio is holding about 60% cash. 

He said that recent bearish positioning among professional and individual investors suggests the current rebound could extend further, as sentiment is often considered a contrarian indicator. A May survey by BofA Global Research showed that cash levels among global fund managers had risen to their highest levels since the Sept. 11, 2001 attacks in the U.S.

For several weeks, investors have also been parsing earnings results, many of which have driven giant swings across the market. Shares of Dell Technologies jumped 15% after reporting a rise in profit and a decline in some operating expenses. Ulta climbed 10.2% Friday after the retailer raised its full-year sales and earnings guidance following better-than-expected first-quarter results. 

Shares of human resources cloud-software company Workday dropped 7.2% after it reported first-quarter adjusted earnings that came up short of expectations. 

Government bond yields have come off highs hit earlier in May. The yield on the benchmark 10-year U.S. Treasury note fell to 2.748%, from 2.756% Thursday. Yields and prices move in opposite directions.

Oil prices rose, with Brent crude, the international benchmark, gaining 6.1% to $119.43 a barrel this week, the best stretch in more than a month.

The dollar lost ground again. The WSJ Dollar Index, which measures the greenback against a basket of 16 currencies, edged down 0.1%, extending a recent stretch of losses amid concerns that the dollar has become expensive relative to its fundamentals.

Overseas, the pan-continental Stoxx Europe 600 added 1.4%. In Asia, Hong Kong’s Hang Seng rose 2.9%, led by shares of

Alibaba,

which jumped 12% after posting earnings that beat analyst expectations. Japan’s Nikkei 225 added 0.7%. The Shanghai Composite gained 0.2%.

Write to Gunjan Banerji at gunjan.banerji@wsj.com and Caitlin McCabe at caitlin.mccabe@wsj.com