Nasdaq books best January since 2001 as U.S. stocks post strong monthly gains ahead of Fed decision

• The Dow Jones Industrial Average climbed 368.95 points, or 1.1%, to end at 34,086.04.
• The S&P 500 gained 58.83 points, or 1.5%, to finish at 4,076.60.
• The Nasdaq Composite gained 190.74 points, or 1.7%, ending at 11,584.55.

The S&P 500 gained 6.2% this month, while the Dow booked a monthly gain of 2.8% and the Nasdaq jumped 10.7% in January, according to Dow Jones Market Data.

The Federal Open Market Committee kicked off its two-day meeting on Tuesday, with near universal expectations for a quarter percentage point interest-rate hike, with the uncertainty focused on the commentary to be delivered in the statement and the news conference with Chair Jerome Powell.

Melissa Brown, managing director of applied research at Qontigo, said the 25 basis point increase is baked in already, but what the policy makers say about what they will do for the rest of the year is what’s going to be important.

“That expectation of a rate cut later in the year has really been one of the driving forces behind the market strength,” Brown told MarketWatch via phone. “If they [Fed officials] say they’re not going to do that, that could be a negative for the market. On the other hand, if they confirm that they’re going to do that, I’m not sure that’ll have a big impact because it’s already built into market expectations.”

Traders now place a 54% probability that the central bank would pause rate increases by midyear after raising it to a range of 4.75% to 5%, according to the CME’s FedWatch tool.

Read: 4 ways Powell could tell markets the Fed isn’t ready to pivot

Investors have to weigh potential Fed moves along with the slew of fourth quarter earnings reports and 2023 outlooks from major businesses. Before the bell, Exxon Mobil Pfizer Caterpillar General Motors and McDonald’s reported earnings.

Meanwhile, Tuesday’s U.S. economic data calendar included the employment cost index (ECI) which showed a 1% increase for the fourth quarter, less than expected, and a 5.1% increase for 2022, up from 5.0%.

In other data, U.S. home prices fell for a fifth straight month in November, the S&P CoreLogic Case-Shiller 20-city price index showed Tuesday, while consumer confidence slipped in January.

“U.S. stocks are rallying after some standout earnings and economic data that suggests disinflation trends should remain in place for a while,” said Edward Moya, senior market analyst at Oanda. “Wall Street is slowly growing confident that this week’s Fed rate hike might end up being the last one in this tightening cycle.”

See: U.S. stock market hits the ‘January Indicator Trifecta,’ but can the rally last for the rest of 2023? 

• Shares of PayPal Holdings, Inc. finished 2.3% higher after the company on Tuesday announced plans to lay off 2,000 employees, or around 7% of its workforce.
• Exxon Mobil shares rose 2.2% after the oil giant’s fourth-quarter revenue fell short of estimates. 
• Pfizer gained 1.4%, after the drugmaker reported fourth-quarter profit that topped expectations but revenue and the full-year outlook missed.
• Caterpillar dropped 3.5% after the construction- and mining-equipment maker reported fourth-quarter profit that missed expectations. That’s its first earnings miss since 2020, as costs growth outpaced revenue growth, while revenue beat forecasts. 
• General Motors  jumped 8.4% after the auto maker easily topped expectations with its fourth-quarter results and issued an upbeat profit forecast.
• McDonald’s  shares slipped 1.3% after its earnings report. The fast food chain topped analysts’ top and bottom line expectations in its-fourth-quarter results, despite the impact of foreign currency pressures. 

— Steve Goldstein contributed reporting to this article.