S&P 500 has best day in three weeks

U.S. stocks surged in a broad-based rally as investors assessed the outlook for earnings and as speculation grew that markets may have come close to bottoming out.

The S&P 500 defied the late-day reversal that has been a cornerstone of this volatile market, closing near session highs in its biggest one-day gain since June 24 as all 11 industry groups advanced.

The tech-heavy Nasdaq 100 outperformed major benchmarks, ending 3.1% higher, with megacaps Apple and Alphabet bouncing back from Monday’s losses.

Stocks favored by short sellers were among the biggest gainers on the day, suggesting that bearish traders were forced to cover positions moving against them.

In extended trading, Netflix gained after reporting a second-quarter subscriber loss that was less than expected.

With the potential for earnings disappointments baked into markets, any upside surprises may lead to outsized gains.

Investors remain on high alert for signs that high inflation and monetary tightening are squeezing consumers and employment, with allocation to stocks plunging to levels last seen in October 2008 and exposure to cash surged to the highest since 2001, according to the latest Bank of America Corp.’s monthly fund manager survey.

“Earnings, so far, there’s been some caution and there’s been a little bit of dialing down of expectations, but I don’t think the worst-case scenarios are really in play anymore,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview.

“We’ve heard from the big banks, we’ve heard from IBM, we’ve heard from Johnson & Johnson, we’ve heard from enough companies that have had a big enough footprint that if there is something at the macro level severely impacting these businesses, it would have shown up in a lot of these earnings.”

On the earnings front, Hasbro, the largest U.S. toy company, gained after earnings beat analyst estimates, while International Business Machines Corp. fell as the tech company lowered its forecasts for free cash flow. Johnson & Johnson reversed early gains as it lowered its earnings and revenue forecast for the year.

In other company news, Twitter shares gained as a Delaware judge allowed the social media company to fast-track its lawsuit against Elon Musk, with the trial set to take place in October.

The dollar fell against all Group-of-10 peers except the yen. Treasuries traded lower, with the 10-year yield rising back above 3%.

Meanwhile, the euro rose to its highest level in about two weeks after Bloomberg News reported the European Central Bank may consider raising interest rates on Thursday by double the quarter-point outlined previously to counter worsening inflation.

Markets are pricing in about 38 basis points of tightening on Thursday, when the ECB is expected to raise rates for the first time in more than a decade.

That reflects about a 50/50 chance of a 50-basis point increase.

The ECB is under pressure to subdue inflation, but the potential for a Russian gas shutdown could plunge Europe into recession.

The European Union is preparing to tell members to cut gas consumption “immediately” to preserve supplies for winter, according to a report.

Gazprom PJSC was said to be poised to restart gas exports through the Nord Stream pipeline on Thursday at reduced capacity.

Elsewhere, oil rebounded, with West Texas Intermediate crude rising to $104 a barrel, while a rally in cryptocurrencies took Bitcoin out of a one-month-old trading range, up above $23,000.

“Stocks have been beaten down,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note.

“That doesn’t mean we won’t see more downside for some stock markets around the world, especially given that earnings expectations are likely to be adjusted downward. But I believe we are far closer to the bottom than the top.”