U.S. stock market rallies on improved optimism in banking sector

The U.S. stock market gained broadly on Wednesday as a rebound in regional bank stocks increased optimism in the banking sector's health.

The Dow Jones Industrial Average finished at 33,420.77, adding 408.63 points or 1.24 percent. The S&P 500 concluded the trading session at 4,158.77, gaining 48.87 points or 1.19 percent. Meanwhile, the Nasdaq Composite rose by 157.51 points or 1.28 percent to close at 12,500.57. The gains were the biggest one-day percentage increases for all three benchmark indexes since May 5.

Shares of Tesla increased by 4.41 percent after its yearly shareholding meeting. In the meeting, the electric vehicle producer discussed two new mass-market models it would implement soon and confirmed that the deliveries of its highly-awaited Cybertruck pickup would begin this year.

Target and TJX Companies added 2.58 percent and 0.93 percent, respectively, after a volatile trading session. The two retailers earlier projected lower-than-expected profit for the current quarter. Gains in Target, TJX Companies and Tesla propped up the consumer discretionary sector by about two percent.

The KBW regional bank index — which tracks the performance of publicly traded national money centers, regional lenders and thrifts — posted a 7.28 percent gain for the day, the biggest daily percentage gain in over two years. The S&P 500 bank index also rose by 4.46 percent.

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Western Alliance Bancorp was one of the biggest gainers in the banking sector, posting a 10.19 percent increase to $34.81. The Phoenix-based lender previously reported growth in deposits by more than $2 billion from February 12 to May 12.

Peers Zions Bancorporation and PacWest Bancorp also rose by 12.08 percent and 21.66 percent, respectively.

"It is optimism over the debt ceiling. It is continued optimism the banking crisis is in the rear-view mirror. Every day we go without a new problem, the closer we get to maybe putting it behind us."

Rick Meckler, Partner at Cherry Lane Investments

Cherry Lane Investments partner Rick Meckler said the jump in regional bank stocks boosted optimism that the market could put the banking crisis "behind."

The banking crisis in the U.S. began in March when Silicon Valley Bank, Santa Clara-based regional lender that mostly catered to startups announced a sudden shutdown due to a liquidity issue. After that, several other regional banks collapsed because of a similar problem.

The liquidity problems experienced by some regional banks previously raised concerns about the stability of the U.S. banking sector, prompting financial authorities to open a new emergency lending program.

According to analysts, regional banks hold a vital role in the growth of small to midsize businesses, providing a third of the financing needed by these entities. An unstable banking sector may further increase difficulty in financing amid the monetary tightening campaign implemented by the Federal Reserve.

Positive note on debt ceiling talks

The upbeat outlook on the debt ceiling talks was another major "catalyst" for the stock market rally on Wednesday, according to Meckler. President Joe Biden and House Speaker Republican Kevin McCarthy reaffirmed their commitment to settle an agreement to raise the national debt ceiling on Wednesday.

The U.S. already hit its $31.4 trillion federal debt ceiling earlier this year and might default on its dues by June 1 if lawmakers did not strike a deal before that. A U.S. default would be "catastrophic" for the economy, affecting the country and global markets.

Analysts have compared the current situation with a debt ceiling crisis in 2011, in which the U.S. raised the debt limit three days before the deadline.

Republicans insist that Biden's administration slash public expenditures and limit spending growth before agreeing to raise the limit.

On the other hand, Democrats demand a separate discussion regarding the spending cuts. The administration also previously reasoned that limiting national spending would inhibit several federal programs.