Wall St edges higher as rally in banks offset hawkish Fed jitters By Reuters

By Sruthi Shankar and Johann M Cherian

(Reuters) -U.S. stock indexes ticked up on Thursday as bank shares rose after major lenders cleared the Federal Reserve’s annual stress test, while strong economic data stoked expectations of further interest rate hikes from the central bank.

Shares of Bank of America (NYSE:), JPMorgan Chase (NYSE:), Goldman Sachs (NYSE:) and Wells Fargo (NYSE:) rose between 2.5% and 3.3% after the Fed’s annual health check showed the banks have enough capital to weather a severe economic slump.

The banks index gained 2.1%, while the KBW Regional Banking index climbed 1.7%.

Investors also gravitated toward economically sensitive sectors after upbeat data eased worries of an imminent recession. The index of small-cap stocks rose 1%, while financial and material indexes led gains among the S&P 500 sectors.

Data showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, and the U.S. GDP increased at a 2.0% annualized rate in the first quarter, up from the 1.3% pace reported previously.

“Investors are saying the rest of the economy is a little bit more resilient than we had thought and so you see some money spreading out across the market,” said David Bianco, chief investment officer for Americas at DWS.

“But the prospects of the Fed still having work to do should cause a pause, with the equity market having rallied as strongly as it has, particularly in spaces that dominated that rally – tech and chip makers.”

The upbeat data along with hawkish comments from Fed Chair Jerome Powell on Wednesday fueled bets that the U.S. central bank will maintain its tight monetary policy for longer.

Traders were pricing in an 86.8% chance the Fed would hike interest rates by 25 basis points to 5.25%-5.50% range in its July meeting, according to CME Group’s (NASDAQ:) Fedwatch tool, up from 74.4% a week earlier.

The Personal Consumption Expenditure index (PCE), the Fed’s preferred inflation gauge, for May will be released on Friday. Economists polled by Reuters expect core rates to remain steady at 4.7%.

At 11:45 a.m. ET, the was up 206.99 points, or 0.61%, at 34,059.65, the S&P 500 was up 13.46 points, or 0.31%, at 4,390.32, and the was up 6.15 points, or 0.05%, at 13,597.90.

The tech-heavy Nasdaq, while under pressure from losses in megacaps Amazon (NASDAQ:) and Microsoft (NASDAQ:), was on track for its best first-half performance in 40 years with a near 30% gain.

Micron Technology (NASDAQ:) fell 3.5%, reversing early gains after the chipmaker beat estimates for third-quarter results.

Occidental Petroleum (NYSE:) edged up 0.7% after Berkshire Hathaway (NYSE:) Inc said it added more shares of the oil firm, boosting its stake to above 25%.

Sportswear maker Nike (NYSE:) inched up ahead of its fourth-quarter results after the bell.

Advancing issues outnumbered decliners by a 1.70-to-1 ratio on the NYSE and a 1.51-to-1 ratio on the Nasdaq.

The S&P index recorded 35 new 52-week highs and two new lows, while the Nasdaq recorded 67 new highs and 55 new lows.