US stocks rally as banks lead S&P 500 Index to eight-week high

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(Bloomberg) -- US stocks advanced for the first time in three days as bank shares rebounded amid Citigroup Inc.’s better-than-estimated results, touching off a rally that sent the Standard & Poor’s 500 Index to an eight-week high.

The mood toward bank stocks had an about-face since yesterday, lifting equity market sentiment as Citigroup’s 4.5 percent climb paced banks’ best gain in a month. Biotechnology shares continued a rebound from Tuesday’s selloff, while energy jumped without help from oil prices. Netflix Inc. slumped after its US subscriber growthmissed analysts’ forecasts, while Wal-Mart Stores Inc. fell again after its worst drop since 1988.

The S&P 500 Index gained 1.5 percent to 2,023.92 at 4 pm in New York, with the gauge closing at its highest since Aug. 20.

“The best way to describe the bank earnings is they didn’t rock the boat,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “Expectations around timing of the Fed action is really the prime driver of sentiment and the market right now. The Fed is the 800-pound gorilla.”

Equities are rebounding from their worst quarter in four years, with investor sentiment weaving from worries that a slowdown in China will spread, to reassurance that the Federal Reserve will be slow to raise interest rates until policy makers are more confident that overseas turbulence won’t derail U.S. growth and inflation will reach their 2 percent target. The S&P 500 is up 5.4 percent this month, and has rallied 8.4 percent from the low during an August selloff.

A report today showed consumer prices excluding food and fuel rose more than forecast in September, propelled by rising rents. Plunging energy expenses caused total costs to decrease by the most since January. Separate data showed the number of Americans submitting applications for jobless benefits unexpectedly declined to match the fewest in four decades, bringing the monthly average to its lowest level since December 1973.

A worse-than-forecast U.S. retail sales report yesterday compounded pessimism from disappointing data on China’s economy, sending the probability of the Federal Reserve raising interest rates by January to 39 percent, from 47 percent last week. March resumed as the first month for which traders are pricing in at least even odds of a liftoff, after those bets had been pushed to April before today’s data.

Fed Watch

Fed Bank of New York President William C. Dudley said today that he favors raising interest rates later this year if his forecast is met. Debate among policy makers has gone increasingly public in recent days, with cautious comments by Fed governors Lael Brainard and Daniel Tarullo that argued for patience on liftoff.

Earnings season is beginning to compete more aggressively against the Fed for investors’ attention. Analysts forecast profits for S&P 500 members dropped 7.2 percent in the third quarter. Disappointing results from JPMorgan Chase & Co. and Wal-Mart’s shock forecast that next year’s profit will slump dragged equities lower yesterday. General Electric Co. and Honeywell International Inc. are due to report results tomorrow.