U.S. stocks pushed higher Tuesday afternoon, recovering much of the ground lost in the previous session when rising worries over the spread of the delta variant of the coronavirus that causes COVID-19 triggered a selloff that left major benchmarks at nearly one-month lows.

What are stock-market indexes doing?

The Dow Jones Industrial Average

jumped 624.17 points, or 1.8%, to 34,586.21.

The S&P 500

was up 76.30 points, or 1.8%, at 4,334.82.

The Nasdaq Composite

advanced 271.20 points to 14,546.19, a gain of 1.9%.

On Monday, the Dow tumbled 725.81 points, or 2.1%, to end at 33,962.04, suffering its biggest one-day loss since October. The S&P 500 dropped 1.6% and the Nasdaq Composite shed 1.1%, for their biggest declines since May.

What’s driving the market?

The bounce reflects ideas that Monday’s selloff was overdone, analysts said, though concerns over high valuations in the stock market persist.

“Markets have a way, particularly in the middle of the summer, to price in the worst-case scenario pretty quickly,” said Art Hogan, chief market strategist at B. Riley National, in a phone interview.

Stocks sank Monday in a move largely attributed to fears the spread of the delta variant in Asia in particular would slow down the global economic recovery and possibly lead to renewed restrictions on travel and activity as inflation continues to rise. The World Health Organization says cases and deaths are climbing globally after a period of decline, spurred by the highly contagious delta variant.

“Now we have to consider if the economic backdrop has changed,” said Steve Sosnick, chief strategist at Interactive Brokers, in an interview Tuesday. “The bond market is definitely not as gung ho on this,” he said, as it’s “expressing some fears that growth may not be as robust as we had expected.” 

See: Why a big drop in bond yields ‘freaks people out’ and sends stocks tumbling

Sosnick pointed to the recent drop in 10-year Treasury yields, which saw a big move lower Monday, saying that “really ought to give people some pause.” Investors have “baked a lot of growth” into the stock market, which has run up to records this year and hasn’t seen a 5% pull back in months, he said.

Although Sosnick doesn’t expect a repeat of broad economic lockdowns, he said he worries that “rolling Covid outbreaks” could lead to more “supply chain hiccups.”

The U.K this week reopened its economy in a move called “Freedom Day,” which kicked off with British Prime Minister Boris Johnson in quarantine after coming into contact with a government official who tested positive for Covid-19. The reopening comes as the Centers for Disease Control and Prevention in the U.S. is advising to avoid traveling to the U.K. due to Covid concerns, Sosnick said.

“There’s a lot of mixed messaging,” Sosnick said, at a time “I think U.S. investors have priced in a robust return to normal.”

Read: Why did the Dow tumble Monday? Economic growth is now a bigger worry than inflation.

The delta variant has led a surge in new coronavirus cases, particularly among the unvaccinated, but Monday’s selloff in the face of what is likely to be no more than a mild economic slowdown “was likely overplayed,” Hogan said.

That doesn’t mean stock-market bulls are out of the woods, he said. Equities have gone months without a pullback of at least 5%, valuations are stretched, leaving the market “priced for perfection” amid weak seasonals. Added together, it wouldn’t be a shock for stocks to suffer a 5% to 10% pullback, he said.

Other analysts see more foreboding developments.

“The word ‘stagflation,’ which was a theme in the late 1970s, is being bantered about again: a stagnant economy and inflation, an intractable combination of problems,” said Marshall Gittler, head of investment research at BDSwiss Holding Ltd., in a note.

The Tell: Why a bond rally could drive the 10-year Treasury yield lower still, even as inflation expectations become unmoored

Stock-market investors continue to track the Treasury market, where a rally in long-dated maturities has sent yields sharply lower, amplifying worries about the economic outlook. The yield on the 10-year note

was up 2.2 basis points at 1.216% in Tuesday afternoon trading, after falling Monday to its lowest since mid-February.

See: Bond rally puts a 1% 10-year Treasury yield back in sight

In economic data, U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.64 million in June, representing a 6.3% increase from the previous month’s downwardly-revised figure, the U.S. Census Bureau said. The pace of permitting for new housing units dipped again in June, however. Permitting for new homes occurred at a seasonally-adjusted annual rate of nearly 1.6 million, down 5% from May but 23% up from a year ago.

Meanwhile, the corporate earnings reporting season is forecast to see S&P 500 index company profit growth of nearly 70% for the second quarter from a year earlier as the economy recovers from the pandemic, but investors fear slowing earnings growth in the second half of the year.

Beyond the major U.S. stock benchmarks, corrections in small-cap equities are more common, said Francis Gannon, co-CIO of Royce Investment Partners, in a phone interview Tuesday. As for concerns about peak growth in the pandemic, “small-caps were probably feeling that a little bit sooner than the large-cap market,” he said. 

The Russell 2000 index
which rose to a peak in March, has fallen this month, said Gannon. The small-cap index was up more than 3% in Tuesday afternoon trading, but it was still down almost 5% for July, according to FactSet data.

Still, Royce, which invests in small-cap stocks, is getting a positive view of the economy from its portfolio. “All we keep hearing from many businesses is that demand remains quite strong,” said Gannon.

Which companies are in focus?

Shares of International Business Machines Corp.

rose 1.9% after the company late Monday reported revenue growth for a second consecutive quarter.

AMC Entertainment Holdings Inc.
the world’s largest movie-theater chain, is reopening two of the top-grossing theaters in the Los Angeles area, which have been closed for more than a year. Shares of the popular meme stock were up 15.8%.

Shares of Travelers Companies Inc.

rose 0.3% after it swung to a second-quarter profit that was well above expectations, fueled by strong growth in investment income and a drop in catastrophe losses.

Philip Morris International Inc.

shares were down 3.2% after the tobacco company topped earnings forecasts but missed on revenues.

Halliburton Co.

shares rose 3.8%, after the company reported stronger-than-expected profit for the second quarter.

What are other markets doing?

The ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, rose 0.1%.

Oil futures also bounced, with the U.S. benchmark

settling 1.5% higher at $67.42 a barrel. Gold futures

rose 0.1% to settle at $1,811.40 an ounce.

In European equities, the Stoxx Europe 600

and London’s FTSE 100

each rose 0.5%.

In Asia, the Shanghai Composite

edged down 0.1%, Hong Kong’s Hang Seng Index

fell 0.8% and Japan’s Nikkei 225

shed 1%.

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