US stock market: Dow, S&P gain with bank rally countering rate worries

US stock market: The Dow and the S&P 500 advanced on Thursday as bank shares rallied 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.

Stronger-than-expected economic data pushed Treasury yields higher and steered investors toward economically sensitive sectors as recession fears eased. But buyers shied away from some rate-sensitive growth sectors due to concerns the Fed would keep interest rates higher for longer.

After a health check showed that the biggest U.S. banks have enough capital to weather a severe economic slump the S&P 500 banks index (.SPXBK) closed up 2.6 per cent. The relief rally also helped advance the KBW Regional Banking index (.KRX) by 1.8 per cent.

Data showed an unexpected weekly decline in the number of Americans filing new claims for unemployment benefits, and the U.S. GDP increased at a 2.0 per cent annualized rate in the first quarter, up from the 1.3 per cent pace reported previously.

"The upside surprise economic data has pushed yields higher today and the move higher has put some downward pressure on technology and growth stock stocks while supporting value and cyclical parts of the market," said Mona Mahajan, senior investment strategist at St. Louis based Edward Jones.

The Dow Jones Industrial Average (.DJI) rose 269.76 points, or 0.8 per cent, to 34,122.42, the S&P 500 (.SPX) gained 19.58 points, or 0.45 per cent, to 4,396.44 and the Nasdaq Composite (.IXIC) dropped 0.42 points to 13,591.33.

The economically sensitive Russell 2000 (.RUT) index of small-cap stocks rose 1.2 per cent while the cyclical materials (.SPLRCM) index finished up 1.3 per cent and was the second strongest performer among the S&P 500's 11 sectors behind financials (.SPSY), which gained 1.7 per cent as banks rallied.

Economic strength fueled bets the U.S. central bank will maintain tight monetary policy for longer, a day after hawkish comments from Fed Chair Jerome Powell.

Traders were pricing in a roughly 86.8 per cent chance the Fed would hike interest rates by 25 basis points to the 5.25 per cent-5.50 per cent range at its July meeting, according to CME Group's Fedwatch tool, up from bets for 81.8 per cent probability a day earlier.

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

The tech-heavy Nasdaq was still on track for a gain of more than 29 per cent in the first half of the year, its biggest such gain in 40 years. On Thursday it managed to pare losses and close barely lower but was under pressure throughout the day from losses in megacaps including Amazon (AMZN.O), Meta Platform (META.O), Nvidia (NVDA.O) and Microsoft .

The Philadelphia semiconductor index (.SOX) managed a small 0.13 per cent gain but underpeformed during the session, with a 4 per cent decline in Micron Technology (MU.O) shares leading losses even though the chipmaker beat estimates for third-quarter results.

Occidental Petroleum (OXY.N) rose 1.8 per cent after Berkshire Hathaway Inc (BRKa.N) said it added more shares of the oil firm, boosting its stake to above 25 per cent.

Shares in sportswear maker Nike (NKE.N) closed up 0.3 per cent but then fell around 1 per cent after the bell, even though its financial report showed that it beat Wall Street estimates for quarterly revenue with buoyant demand for sneakers such as Air Jordan and LeBron 20.

Advancing issues outnumbered declining ones on the NYSE by a 1.93-to-1 ratio; on Nasdaq, a 1.48-to-1 ratio favored advancers.

The S&P 500 posted 44 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 90 new highs and 90 new lows.

On U.S. exchanges 9.65 billion shares changed hands compared with the 11.34 billion moving average for the last 20 sessions.