Financials pull stocks higher ahead of earnings

updated 5:55 p.m. ET July 13, 2009

NEW YORK - A turn of heart by a usually downbeat analyst yanked the stock market from its slumber.

Soaring financial shares propelled indexes to their biggest one-day gain in six weeks Monday after influential banking analyst Meredith Whitney raised her rating on Goldman Sachs Group Inc., which reports earnings on Tuesday. Whitney said also on CNBC that hard-hit Bank of America Corp. looks inexpensive given the assets on its books.

Her more upbeat tone helped lift the Dow Jones industrial average 185 points in relatively thin trading volume. It was the best performance for the blue chips since June 1 and follows a month of often directionless trading in which investors looked for any fresh sign that the economy was improving, not simply licking its wounds.

Traders saw the hopeful outlook on banks as a sign other industries could be in better shape than analysts had estimated. Hundreds of earnings reports from the April-June quarter are due this week. By the end of last week, major stock indicators had fallen 7 percent since mid-June as investors found little reason to push stocks higher and worried the rally had been overdone.

“The market basically took a big pause,” said David Kelly, chief market strategist at JPMorgan Funds. He said stocks had drifted too far and were due for a bounce. “Any sign that a normal economy might get re-established should push the market higher.”

Investors latched on to Whitney’s comments because she has for years offered one of the more pessimistic — and accurate — assessments of the banking business.

Goldman has long been considered the strongest bank in the recession, but Bank of America has been one of the hardest hit by loan losses. Any improvement in banks’ profits could shore up their financial position and free money for lending, which could have a positive ripple effect on other industries in need of financing.

Beyond Goldman, Bank of America, JPMorgan Chase & Co., and Citigroup Inc. are all scheduled to report second-quarter results this week. Banks have taken some of the biggest blows since the recession began in late 2007 as investment and loan losses mounted.

“There is a contingency of traders out there that believe the market can’t recover without financials,” said Randy Frederick, director of trading and derivatives at Charles Schwab.

The Dow rose 185.16, or 2.3 percent, to 8,331.68. The Standard & Poor’s 500 index jumped 21.92, or 2.5 percent, to 901.05, its first finish over the 900 mark since July 1. It was the S&P’s best day since June 1.

The Nasdaq composite index rose 37.18, or 2.1 percent, to 1,793.21 and also posted its best performance since the start of June.

Among financial stocks, Goldman rose $7.57, or 5.3 percent, to $149.44 and Bank of America rose $1.11, or 9.3 percent, to $12.99.

The KBW Bank Index, which tracks 24 of the nation’s largest banks, rose 6.5 percent.

The short-term buy call on Goldman from Whitney comes after the stock has risen 72 percent this year, but investors appeared to be looking past the fact that it had already had such a big advance.

Many analysts had been expecting the company would turn in strong profits for the second quarter. Goldman last month repaid the $10 billion it received last fall as part of the government’s $700 billion bank bailout program.

Banks have taken some of the biggest blows among U.S. companies since the recession began in late 2007 as investment and loan losses mounted.

Some financial stocks were still struggling, however. Commercial finance lender CIT Group Inc. said it is talking with regulators about ways to improve its short-term liquidity as recent losses may jeopardize its compliance with capital requirements. The stock fell 18 cents, or 11.8 percent, to $1.35.

Earnings reports will give investors a chance to see whether there was any meaningful economic improvement during the second quarter. Reports are expected from major companies in a range of industries this week, including Johnson & Johnson, International Business Machines Corp., and General Electric Co. and technology bellwethers Intel Corp. and Google Inc.

The S&P 500 index has fallen for four straight weeks as investors worried that a 40 percent rally from early March had been too quick.

The gains in stocks cooled demand for the safety of government debt, hurting prices and lifting yields. The yield on the benchmark 10-year Treasury note jumped to 3.35 percent from 3.30 percent late Friday.

The dollar was mostly lower against other major currencies, while gold prices rose.

Light, sweet crude fell 20 cents to settle $59.69 a barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies rose 12.33, or 2.6 percent, to 493.31.

Three stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 922 million Friday. The market’s moves can be skewed when fewer shares are changing hands.

Overseas, Britain’s FTSE 100 rose 1.8 percent, Germany’s DAX index gained 3.2 percent, and France’s CAC-40 rose 2.3 percent. Japan’s Nikkei stock average fell 2.6 percent.

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