Markets float after latest bank failure

First Republic has been in the spotlight for nearly two months amid concerns that it is about to fall after the failures of Silicon Valley Bank and Signature Bank in March. The concern was that runs on smaller and medium-sized banks could bring down the economy, as the financial sector’s woes did during the 2008 crisis.

But analysts and economists have said they see big differences between then and now, including how the largest US banks feel less pressure this time around. In addition, several banks that have come under scrutiny for weakness recently have said their deposit levels have strengthened since late March.

Analysts said the difference between stock markets’ reactions to them and First Republic Bank, which plummeted 75% last week, indicates investors may see it as an isolated event rather than a problem with the deeper system.

Shares of JPMorgan Chase, which buys a large chunk of First Republic’s assets, rose 2.2%. It will get even bigger after the deal.

Still, many other questions linger over Wall Street that could shake things up. They include concerns about corporate earnings and the latest US government bickering over the country’s debt limit.

Above all is what the Federal Reserve will do with interest rates. At the next meeting, which concludes Wednesday, most traders expect the Fed to raise short-term interest rates by another quarter of a percentage point, to a range of 5 to 5.25% from near zero early last year.

The hope is that this will be the last increase for the time being, giving the economy and financial markets more breathing space.

The Fed has raised interest rates sharply in hopes of bringing high inflation under control. But high rates are a notoriously blunt tool that slow down the entire economy, increase the risk of a recession and hurt investment prices. Many investors are preparing for a recession that will hit later this year.

If banks limit their lending after the recent problems in their industry, even if there are no more bankruptcies, that in itself could act as interest rate hikes.

While the labor market has remained remarkably resilient, other parts of the economy have shown more weakness recently. Housing and manufacturing are among the hardest hit sectors.

A report on Monday from the Institute for Supply Management said manufacturing activity contracted again in April, though not as much as most economists had expected. Other reports this week will provide the latest updates on US services sectors and hiring across the economy.

One lever that has supported Wall Street in recent weeks has been a stream of companies reporting better-than-expected earnings for the first three months of the year.

Last week, just over half of S&P 500 companies reported higher-than-expected earnings, according to FactSet, nearly four in five. That has companies in the index on track to report a 3.7% decline from a year earlier.

That would mean a second consecutive quarter of falling earnings, something Wall Street calls an earnings recession. But it wouldn’t be as bad as the 6.7% drop analysts predicted a month ago.

ON Semiconductor rose 8.6% after stronger-than-expected earnings and sales for the final quarter. Norwegian Cruise Line climbed 8.6% after also beating expectations.

Big Tech companies have largely reported better-than-expected earnings, which has helped stabilize the market as their immense size gives them excessive leverage over indexes. Apple will follow up with its own report this week.

Those big companies are a big reason why the S&P 500 is up more than 8% this year, but according to Goldman Sachs strategists, it’s a worrying sign that the rest of the market isn’t keeping up. When the market breadth is this narrow, the stock market has historically delivered difficult returns in the short term.

Countering that, however, is also how well stocks tend to do once the Federal Reserve tends to stop rate hikes: an average return of 8% over three months, going back to 1984. Ultimately, the biggest downside risk to the market or the economy is indeed going into recession, said the strategists led by David Kostin.

In the bond market, government bond yields rose as Wall Street expectations for at least another rate hike stabilized. The yield on the 10-year Treasury rose to 3.56% from 3.43% late Friday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more based on expectations for Fed action, rose from 4.02% to 4.12%.

In markets abroad, many exchanges were closed due to holidays.

AP Business Writers Elaine Kurtenbach and Matt Ott contributed.