Dow scores best day in seven weeks as U.S. stocks bounce back from losing week

What drove markets

Buyers jumped back in the fray on Monday after the S&P 500 posted its biggest weekly decline since March. The bullish run that had taken the Wall Street benchmark to 16-month highs came to a halt last week as concerns about elevated Treasury issuance pushed yields higher and investors parsed a mixed bag of corporate earnings.

Some investors eyed Monday’s bounce with caution. The upward move appeared to be in line with fluctuations often seen in the early stages of a market correction, James Demmert, chief investment officer at Main Street Research, told MarketWatch in a phone interview.

Demmert cautioned that the market remains technically overbought, while strong readings on investor bullishness in sentiment surveys and a subdued Cboe Volatility Index continue to “scream complacency.” Valuations, with the S&P 500 trading north of 19 times earnings, are also at levels that have accompanied recent setbacks.

He said he sees room for the S&P 500 to retreat 8% to 10% or so from its recent highs.

The lurch higher in yields — which last Thursday saw the 10-year Treasury
BX:TMUBMUSD10Y
rate touch almost 4.2% for the first time since November — left stocks looking relatively less attractive, according to some analysts.

“The difference between the expected earnings yield of the S&P 500 and the yield on the 10-year Treasury [note] has decreased to around 1%. We haven’t seen this level since the tech bubble burst in 2002. It’s important to remember that high valuations alone are not enough to cause issues, but the current yield environment suggests that things may be getting a bit expensive,” said Stephen Innes, managing partner at SPI Asset Management.

Investors “will monitor U.S. yields closely, as a rise could harm global stocks, particularly if this week’s U.S. CPI numbers exceed projections,” Innes added. The July consumer-price index report will be published on Thursday.

Need to Know: A summer risk burnout will keep pressure on the stock market, major bank says

Meanwhile, the second-quarter earnings season continued, with Tyson Foods
TSN,
-3.83%,
Paramount Global
PARA,
+2.94%,
and KKR
KKR,
+2.69%
among those reporting results on Monday.

With 84% of the companies in the S&P 500 having reported earnings for the second quarter, 79% of them have reported actual earnings per share above the mean EPS estimate, which is above the five-year average of 77% and above the 10-year average of 73%, according to FactSet.

However, earnings have not provided the market with as much support as some may have hoped for. John Butters, senior earnings analyst at FactSet, noted that companies that have reported positive earnings surprises have seen an average price decrease of 0.5% from two days before the earnings release through two days after — well below the five-year average price increase of 1% during this same window for companies reporting positive earnings surprises.

“If this is the final percentage for the quarter, it will mark the largest average negative price reaction to positive EPS surprises reported by S&P 500 companies for a quarter since [the second quarter of] 2011,” Butters said.

Related: U.S. companies are beating Wall Street’s earnings expectations at highest rate in nearly 2 years, but stocks don’t seem to care

Among S&P 500 companies, 34 will report results during the week ahead, according to FactSet, including Dow component Walt Disney Co.
DIS,
+0.61%
on Wednesday.

Preview: Earnings have beaten Wall Street estimates by more than usual in 2nd quarter, but 3rd quarter isn’t looking great

In an interview with the New York Times published on Monday, New York Fed President John Williams said it was an “open question” whether policy makers would need to deliver another rate increase.

See: Fed’s Williams is not in a rush to raise interest rates — or cut them

Last Saturday, Federal Reserve Gov. Michelle Bowman said the central bank will likely need to raise interest rates even higher to bring inflation down to tolerable levels.

Companies in focus

• Tesla Inc.
  TSLA,
  -0.95%
  shares finished down by 1% after the electric-vehicle maker disclosed that Zachary Kirkhorn had stepped down as chief financial officer.

• Campbell Soup Co.
  CPB,
  -1.79%
  said Monday it has agreed to acquire Sovos Brands Inc.
  SOVO,
  +25.19%,
  parent of pasta sauces and other foods sold under the brand names Rao’s, Michael Angelo’s and noosa, in a deal with an enterprise value of about $2.7 billion. Campbell will pay $23 per Sovos share in cash. Sovos’ stock closed Friday at $18.02. Shares of Campbell Soup ended down by 1.8%, while Sovos shares closed up by 25% at $22.55.

• Shares of Yellow Corp.
  YELL,
  -30.53%
  finished down by 30.5% after the trucking company filed for bankruptcy protection on Sunday. Unusually, the stock had rallied last week ahead of the expected announcement.

• Warren Buffett’s Berkshire Hathaway Inc.
  BRK.A,
  +3.43%

  BRK.B,
  +3.60%
   swung to a profit in the second quarter thanks to its investment portfolio and insurance holdings, the company said Saturday. Class A shares closed up by 3.4%.

Jamie Chisholm contributed.