U.S. stocks waver between gains and losses, but head for third week in the green

The S&P 500 is up 2.1% this week, and the small-cap Russell 2000
RUT
has advanced nearly 5%, according to FactSet data.

What’s driving market

U.S. stocks have come a long way in the last three weeks. During that time, the S&P 500 has gained roughly 9.5%, while the Nasdaq is up more than 11.5% and the Dow is up 7.5%, according to FactSet data.

Many on Wall Street have credited the advance to signs that the Federal Reserve could very well pull off a “soft landing” for the U.S. economy — one where inflation can be brought back to the Fed’s 2% target without triggering a deep economic downturn. Expectations that the central bank could cut interest rates as soon as March have also helped boost stocks, strategists say.

“The major reason for the recent rally is that Wall Street had convinced itself that the Federal Reserve is all done with hiking rates this cycle. In fact, investors now expect the Fed to start cutting rates in less than six months,” said Eddy Elfenbein, the manager of the CWS AdvisorShares Focused Equity ETF and blogger of Crossing Wall Street.

Stocks were little changed on Friday, mirroring trading activity from the prior session as market analysts said the market was seeing some consolidation as traders digested what has been a powerful rally.

“I think we’re seeing some consolidation here,” said Mark Grant, chief global strategist at Colliers Securities, during an interview with MarketWatch.

Friday morning was a mostly quiet session, although options tied to $2.4 trillion in stocks, exchange-traded funds and equity indexes were expiring, according to data compiled by Rocky Fishman, founder of Asym50, a provider of analytics about the U.S. options market.

Economic data released Friday showed construction of new homes rose 1.9% in October, as builders amped up new projects.

There’s also more earnings reports for investors to analyze, with shares of retailer Gap
GPS,
+30.80%
surging after the company said it didn’t have to discount as much during the third quarter as inventories fell.

Investors also heard from San Francisco Fed President Mary Daly, who said Friday that the central bank should wait and see how the economy develops given the high uncertainty surrounding the outlook for the U.S. economy.

See: Fed’s Daly says it makes sense to wait on interest-rate policy given all the uncertainty

Companies in focus

• Applied Materials Inc.
  AMAT,
  -5.11%
  stock dropped more than 7% in extended trading after a report that the chip maker is under a criminal investigation by the Justice Department for potential export violations. The news overshadowed a positive earnings report, as Applied Materials on Thursday afternoon reported quarterly results that topped analysts’ revenue and earnings estimates.

• Gap Inc.
  GPS,
  +30.80%
  jumped after the clothing retailer reported third-quarter results that beat expectations, as easing pressure to cut prices and a rare same-store sales gain from Old Navy offset mixed store performances and lingering holiday-season caution.