5 reasons why the stock market suddenly roared back

It has been a rip-your-face off rally in the stock market to kick off the final quarter of the year, much to the surprise of the bears who ruled the roost in September and third quarter.

At a 5% gain so far this week, the S&P 500 (^GSPC) had its best back-to-back days since April 2020 and the best two-day start to the fourth quarter going back to the first full year of the five-day trading week in 1953, according to data from Bespoke.

The research team at DataTrek offered up five solid reasons behind this week's buying momentum. Here are those reasons, with analysis from us at Yahoo Finance.

  • "Treasury yields have backed off their recent highs. Two-years are down to 4.10% from the 4.32% highs on September 26th. Ten years are at 3.64%, well off the September 27 high of 3.96%." That has put a bid under often leadership names in tech such as AMD, Amazon, and Apple.

  • "Lower Treasury yields have stabilized currency markets. The euro is almost back to par with the dollar at 0.9983. The British pound has rallied from its V-bottom low on September 26 at $1.07, back to $1.15." The U.S. dollar has eased off its recent highs this week, supporting share prices of multinationals such as Caterpillar and Microsoft.

  • "Tuesday's JOLTS report suggests U.S. labor markets are seeing their first real signs of cooling." U.S. manufacturing data earlier this week also showed an easing in economic activity and pricing pressure, spurring markets on the hopes the Fed would cool the pace of rate hikes sooner.

  • "U.S. Q3 corporate earnings season starts next week, and estimates have come down enough (-6.6% since June 30) that companies should be able to beat Street numbers by a few percent." Be careful with that one in light of recent dreadful financial warnings from FedEx, Nike, and Hasbro.

  • "The next Fed meeting is not until November 2, so markets can focus on earnings rather than monetary policy." Hawkish rhetoric from Fed members last week tanked the market, so less of their musings could bring further short-term relief to markets.

That being said, investors remain on high alert for the resumption of selling given the precarious state of global economies and inflation-fighting tones among central bankers.

The Federal Reserve remains the straw that stirs the drink in global markets as it continues a mission to stomp out inflation by aggressively hiking interest rates, which has set the pace for fellow central banks. That mission was reinforced in the past week by the tough-sounding commentary from various Fed officials including Fed Chair Jerome Powell and Vice Chair Lael Brainard.

People ride in the
People ride in the "Red Force" roller coaster during the inauguration of Ferrari Land, at PortAventura resort, south of Barcelona, Spain April 6, 2017. REUTERS/Albert Gea TPX IMAGES OF THE DAY

Wall Street is now bracing for a policy mistake from central bankers.

"We are increasingly worried about central banks making a policy error, and of new geopolitical tail risks," Marko Kolanovic, a top JPMorgan strategist, wrote in a new note to clients.

The hawkish tone from the Fed has rippled across an array of asset markets, from the surging U.S. dollar to rising mortgage rates that are nearing 7%.

And despite the strong start to October, the Dow Jones Industrial Average (^DJI), S&P 500, and Nasdaq Composite (^IXIC) remain mired in double-digit percentage declines for the year. Emerging markets remain under considerable pressure as well.

"Our core view for choppy markets, up in quality and defensive positioning over the next six to 12 months, remains intact," Truist co-chief investment officer Keith Lerner warned in a note to clients. "This global tightening cycle is set to weigh on economic growth well into 2023 given that monetary policy works with long and variable lags. Thus, even if the Federal Reserve (Fed) pivots or inflation softens in the fourth quarter, which may energize a risk-on rally, it likely does not change the downward trajectory of the economy and challenging market backdrop over the medium term."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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