Dow closes nearly 400 points higher as Wall Street bets on easing inflation, smaller rate hikes into year-end

Stocks rose Tuesday as Wall Street looked past tightening covid policies in China to instead focus on a host of strong earnings reports and the potential for smaller future rate hikes during a holiday-shortened trading week.

The Dow Jones Industrial Average closed 397.7 points, or 1.18%, higher at 34,098.03. The S&P 500 rose 1.36% to close at 4,003.63, its first close above the 4,000 level since September. The Nasdaq Composite also gained 1.36% to 11.174.41.

Mixed earnings results led to a few big stock moves – Best Buy popped 12.8% after the electronics retailer hiked its 2023 fiscal outlook and beat earnings expectations, while Abercrombie & Fitch and American Eagle Outfitters rose 21.4% and 18.2% respectively on their own earnings beats. On the flip side, Zoom fell 3.9% and Dollar Tree slipped 7.8% after reporting disappointing earnings and a lower-than-expected outlook, respectively.

Stocks were helped by easing bond yields as investor attention turned toward 2023.

China saw its first deaths in the mainland from Covid since May over the weekend. It prompted fears among investors that the country could bring back restrictions meant to slow virus spread, which would hurt business. Just a week ago the country began to ease some of its tight covid measures, on its way to a looser policy.

China reopening would be “extremely growth positive,” according to Seema Shah, chief global strategist at Principal Asset Management

“As ever though, investors should cautiously monitor developments as faithful execution of the reopening plan will be key to the investment outlook,” she said in a Tuesday note.

Investors also weighed comments from Federal Reserve leaders. On Monday, Cleveland Fed President Loretta Mester said recent inflation data is promising and that she’d support reduced interest rate hikes going forward. That could mean that the Fed gets to its terminal rate, between 4% and 5%, soon.

“That’s a huge weight off the shoulders of investors that have had absolutely nowhere to hide this year,” said Phil Camporeale, managing director and asset manager at JPMorgan Asset Management on CNBC’s “Squawk on the Street.”

Oil prices rose after Saudi Arabia said that OPEC+ would stick with the output cuts it previously announced.

Investors will be watching for earnings reports from HP Inc and Nordstrom after the bell, and economic reports on Wednesday including initial jobless claims and purchasing manager index numbers.

The stock market will be closed on Thursday for the Thanksgiving holiday and will close early on Friday.