Recent S&P rally overdone?

U.S. stocks advanced after the Standard & Poor’s 500 Index (CME:SPU14) posted its biggest weekly loss in three months, on an increase in takeover activity and better-than-forecast earnings from Citigroup Inc.

Citigroup climbed 3.5% after also agreeing to pay $7 billion to settle a mortgage-bond probe. URS Corp. jumped 7.8& after Aecom Technology Corp. agreed to acquire the construction-management company for about $4 billion. AbbVie Inc. fell 0.8% after Shire Plc said it’s willing to recommend the U.S. company’s latest bid to its shareholders.

The S&P 500 added 0.6% to 1,978.38 at 9:51 a.m. in New York. The Dow Jones Industrial Average climbed 132.63 points, or 0.8%, to 17,076.44. The Russell 2000 Index jumped 0.8% after its worst weekly decline in more than two years. Trading in S&P 500 companies was 8% above the 30-day average for this time of day.

“Earnings generally are coming in pretty positively here and revenues are as well,” said Timothy Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC, in a phone interview. “It’s a very early stage in this earning’s season to declare victory, but the indications look good here. Citi’s numbers are very strong.”

The S&P 500 slid 0.9% last week amid signs of financial stress at a Portuguese bank and speculation that the recent rally is overdone. The benchmark gauge closed at an all-time high and the Dow topped 17,000 for the first time on July 3. The S&P 500 hasn’t had a drop of 10% in more than two years and the gauge trades at a valuation of 18 times reported earnings, the highest since 2010.

Earnings Season

JPMorgan Chase & Co., Goldman Sachs Group Inc., Yahoo! Inc. and Intel Corp. are among the 58 companies on the S&P 500 posting earnings this week. Profit by the gauge’s members increased 4.5% in the second quarter, and revenue rose 3.1%, according to estimates compiled by Bloomberg.

Citigroup jumped 3.5% to $48.64. The third-largest U.S. bank by assets agreed to pay $7 billion in fines and consumer relief to resolve government claims that it misled investors about the quality of mortgage-backed bonds sold before the 2008 financial crisis.

The bank said second-quarter profit tumbled 96% on $3.7 billion in costs tied to the settlement. Excluding items, profit was $1.24 a share. The average estimate of 25 analysts surveyed by Bloomberg was $1.05.

“The second-quarter earnings season in the U.S. is likely to be the next major driver of global markets,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., wrote in an e-mail to clients today. “With all the major U.S. banks reporting this week, the market will get the best view of the ‘self-sustaining’ U.S. economy that the Fed now sees.”

Fed Stimulus

Investors will also be watching statements from central banks and economic reports this week for clues to the strength of the global economy.

Federal Reserve Chair Janet Yellen is due to testify to U.S. lawmakers. Yellen will deliver her semi-annual monetary policy testimony to the Senate Banking Committee tomorrow and to the House Committee on Financial Services the following day.

Minutes of the Fed’s June meeting released last week showed officials have agreed they’ll end their asset-purchase program in October if the economy holds up. At the same time, the policy makers said the central bank should continue to support favorable financial conditions needed to sustain growth, according to the minutes.

Three rounds of Fed bond-buying have helped propel the S&P 500 higher by more than 190% during the current five-year bull market.

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