Wall Street rises on softer inflation and strong bank earnings despite IBM plunge

Wall Street's major indexes advanced on Tuesday after weaker-than-expected US inflation data boosted hopes that the Federal Reserve may adopt a less hawkish stance on interest rates. Strong quarterly earnings from major US banks also provided additional support as the second-quarter earnings season got underway.

US consumer prices rose 3.5% year-over-year in June, below the 3.8% increase expected by economists surveyed by Reuters.

Following the data release, traders sharply reduced their expectations for near-term monetary tightening, with the probability of a 25-basis-point rate hike at the Federal Reserve's next meeting falling to 15% from 35% before the report.

Skyler Weinand, Chief Investment Officer at Regan Capital, said the data suggests that the inflation surge fueled by the conflict with Iran is beginning to ease. However, he cautioned that the improvement could prove temporary given the renewed escalation in recent days.

He added that softer inflation is likely to encourage the Federal Reserve to leave interest rates unchanged for now and reduce the likelihood of another rate hike. Nevertheless, he noted that Federal Reserve Chair Kevin Warsh has maintained a consistently hawkish tone since taking office.

In his prepared testimony before Congress, the first of two hearings this week, Warsh reaffirmed that returning inflation to the Federal Reserve's 2% target remains his top priority.

Strong bank earnings offset sharp IBM selloff

Corporate earnings took center stage as the second-quarter reporting season began.

IBM shares tumbled about 24% after the software and consulting company issued second-quarter revenue guidance that fell short of market expectations. If the stock closes down more than 22.9%, it would mark its largest one-day decline since the 1987 Black Monday crash.

The weakness spread across the software sector, with Oracle falling 1.7%, ServiceNow losing 5.6%, and Accenture declining 2.8%.

Meanwhile, strong earnings from major US banks helped lift the broader market. Goldman Sachs surged 6.5% after posting second-quarter earnings that beat analysts' estimates, supported by a rebound in dealmaking activity and heightened market volatility stemming from the Middle East conflict, which drove equity trading revenue to a record high.

JPMorgan Chase gained 1.8%, while Citigroup rose 1.5% after both banks reported higher second-quarter profits.

Bank of America added 1.4% after reporting earnings above expectations, while Wells Fargo slipped 0.3%.

The S&P 500 financial sector rose 0.3%, while nine of the index's eleven sectors traded higher.

Investors are closely watching corporate earnings for early signs of the strength of the US economy during what could prove to be a pivotal earnings season for extending the rally that has lifted the S&P 500 roughly 10% since the start of the year.

As of 9:52 a.m. ET, the Dow Jones Industrial Average was up 76.77 points, or 0.16%, at 52,580.94. The S&P 500 gained 23.46 points, or 0.32%, to 7,539.07, while the Nasdaq Composite advanced 155.24 points, or 0.60%, to 26,028.42.

The Nasdaq recovered part of Monday's 1.6% decline, while semiconductor stocks stabilized after heavy losses in the previous session, with the Philadelphia Semiconductor Index (SOX) rising 3.1%.

Geopolitical tensions remained firmly on investors' radar after the United States and Iran exchanged attacks in the Gulf, pushing oil futures to their highest levels in four weeks.

Market breadth was positive, with advancing stocks outnumbering decliners by a ratio of 2.31-to-1 on the New York Stock Exchange and 1.61-to-1 on the Nasdaq.