Stocks on Wall Street rebounded after two consecutive days of declines on Wednesday as sectors poised to benefit from a recovery in the world’s largest economy led markets higher.

The small-cap Russell 2000 index, sensitive to changes in the broader economy, outperformed its larger Wall Street peers, rising more than 2 per cent in New York. The technology-heavy Nasdaq Composite climbed 1.2 per cent while the blue-chip S&P 500 rose 0.9 per cent, with cyclical sectors such as basic materials, energy and financials among its leading sectors.

It marked a recovery from earlier in the day where concerns over weaker tech company earnings and global coronavirus cases had initially knocked stock markets.

“The market is wrestling with a lot of conflicting scenarios,” warned Toby Gibb, global head of investment directing for equities at Fidelity. “There are significant differences between countries in terms of vaccine rollouts and, of course, now we have these new variants [of the virus] to contend with.”

The Japanese cities of Osaka and Tokyo sought state-of-emergency decrees from the national government on Wednesday because of surging caseloads brought on by novel Covid-19 mutations.

India is being hit by a devastating second wave, now reporting about 260,000 coronavirus infections and 1,700 deaths a day, while the UK is monitoring the transmissibility of a variant first discovered in the south Asian nation.

In Europe, stock markets staged a partial recovery following the biggest daily dive this year for the region-wide Stoxx 600 benchmark on Tuesday. The continent’s fragile recovery was called into question earlier this week by a European Central Bank survey that indicated banks were tightening credit conditions.

Helping to send the Stoxx 600 index up 0.7 per cent on Wednesday was optimism about corporate earnings, which outweighed concerns about the spread of new coronavirus variants. In London the FTSE 100 closed up 0.5 per cent, while Frankfurt’s Xetra Dax climbed 0.4 per cent.

Lifting sentiment further were upbeat earnings results from the semiconductor equipment maker ASML, which raised its sales forecast for the year, and the Dutch brewer Heineken, which reported better than expected quarterly sales.

Investors should remain cautious about European equity markets after the Stoxx hit a record last week, said Shaniel Ramjee, senior investment manager in the multi-asset team at Pictet. “Signals about the market being overbought have been flashing red.”

The region’s larger exporters were set to benefit from the strong economic recovery under way in the US and easy access to cheap international funding, Ramjee said, but “in other parts of the market there is too much optimism” as Europe’s slow pace of Covid-19 vaccinations and new variants meant “the face-to-face service economy could lag, particularly if Europe misses a summer reopening”.

US government bonds were steady, with the yield on the benchmark 10-year Treasury note dipping 0.01 percentage points to 1.55 per cent.

The dollar, as measured against a basket of currencies, slid 0.1 per cent to hover at around its lowest point since early March. The euro was also little moved against the greenback at $1.20 ahead of the ECB’s latest monthly meeting on Thursday.