Dow, S&P Gain as Bank Rally Offsets Hawkish Fed

The Dow and the S&P 500 rose 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. Buyers shied away from rate-sensitive growth sectors due to concerns that 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 gained. The relief rally also helped boost the KBW Regional Banking index.

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% annualized rate in the first quarter, up from the 1.3% 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 economically sensitive Russell 2000 index of small-cap stocks rose while the cyclical materials index was one of the strongest performers among the S&P 500's 11 sectors.

According to preliminary data, the S&P 500 gained 20.18 points, or 0.46%, to end at 4,397.04 points, while the Nasdaq Composite gained 0.25 points, or 0.00%, to 13,591.33. The Dow Jones Industrial Average rose 266.88 points, or 0.79%, to 34,119.54

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% chance the Fed would hike interest rates by 25 basis points to the 5.25%-5.50% range at its July meeting, according to CME Group's Fedwatch tool, up from bets for 81.8% 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%.

The tech-heavy Nasdaq was under pressure during the session from losses in megacaps including Amazon and Microsoft .

The Philadelphia semiconductor index underpeformed, lead by a decline in Micron Technology share even though the chipmaker beat estimates for third-quarter results.

Occidental Petroleum rose after Berkshire Hathaway Inc said it added more shares of the oil firm, boosting its stake to above 25%.

Shares in sportswear maker Nike made little progress during the session as it was due to report quarterly results after the bell.