Investors Brush Off Italy Referendum Result

Gains in financial companies pushed U.S. stocks higher, while the euro recovered from early losses as investors largely brushed off Italian voters' rejection of constitutional reform.

The Dow Jones Industrial Average gained 78 points, or 0.4%, to 19251. The S&P 500 rose 0.4% and the Nasdaq Composite added 0.4%.

Shares of banks and other financial companies led the S&P 500, rising 1.1%. The financial sector has gained more than 14% since the U.S. election as investor bet that a Republican-led government would implement policies that would help banks profits, such as tax cuts and regulatory rollbacks.

Goldman Sachs Group and J.P. Morgan Chase & Co. were among the biggest gainers in the Dow industrials.

Monday's relative calm underscored how investors had widely anticipated the result of Sunday's referendum and subsequent resignation of Prime Minister Matteo Renzi, selling Italian equities, bonds and the euro in the weeks leading up to the vote.

"For the first time, the polls were clearly expecting that result," said Igor de Maack, fund manager at DNCA Investments. While many view the "no vote" as potentially negative for long-term Italian economic growth, the news "will not change the challenges of the eurozone or the challenges of Italy," he said.

The Stoxx Europe 600 rose 0.5%, despite steep losses in the Italian banking sector. Italian banks were badly hit on concerns that a period of political uncertainty could interfere with lenders' planned capital raising and bring an abrupt end to the government's efforts to clean up the banking sector.

So far this year, shares of Banca Monte dei Paschi di Siena are down roughly 85%, while Italian bank stocks as a group are down about 50% as they grapple with low profitability and soured loans.

That pain deepened Monday, with shares of Banco Popolare di Milano off 7.8% and UniCredit down 5.2%. Shares of Banca Monte dei Paschi di Siena declined 4% after initially failing to open, as investors grew concerned the vote could hurt its 5 billion euro recapitalization plan.

The mood was brighter in currency trading, with the euro last up 0.5% against the dollar at $1.0719 -- a marked recovery after falling to its lowest level since 2015 as the referendum results came in.

Some investors had sold the euro earlier, considering the larger-than-expected margin of victory for the "no" campaign a blow to Mr. Renzi's reformist pro-European government, while strengthening the populist and anti-euro 5 Star Movement, currently Italy's largest political opposition.

Still, the common currency quickly recovered, with many investors hopeful a caretaker government in Italy would calm concerns about political stability in the country and its ongoing efforts to restore the health of the banking sector.

"If you have no early elections and a good strong technocratic government put in place, the threat of exiting the euro recedes quite a lot, " said Mondher Bettaieb, head of corporate bonds at Vontobel Asset Management, who is holding onto his positions in Italian government bonds and credits.

"Stability will be the name of the game in Italy until 2018," he said, adding snap elections look increasingly unlikely.

Others simply expressed relief that the uncertainty around the result was out of the way, after shunning European equities for most of the year.

"What people thought would be a bad outcome for markets is turning positive for the third time this year," after Brexit and the election of Donald Trump, said Philippe Gijsels, chief strategist at BNP Paribas Fortis, noting many had been holding cash on the sidelines ahead of the vote.

"Looking at markets today, if you didn't know [the referendum results], you wouldn't notice it," he said, even though "longer term, this is not good news."

Many investors believe the next steps for Italy, including forming a government and amending electoral laws, could be more important than the vote itself.

Some relief for the euro may have also come from Austria's rejection of an anti-immigrant populist in its presidential election on Sunday, when center-left candidate Alexander Van der Bellen beat back a challenge from right-wing opponent Norbert Hofer in the country's runoff election.

In government bond markets, the yield on 10-year Italian debt rose as high as 2.063% early Monday before retreating slightly to 2.033%. Its spread over German debt had earlier widened to a two-year high -- an indication that fears about the integrity of the eurozone are on the rise, but still much below where they were during the euro crisis of 2010 to 2012.

Yields also rose on debt in Portugal, France and Germany on Monday. Many investors are betting the European Central Bank will expand its massive bond-purchase program at the bank's meeting on Thursday and take more targeted action later as needed if spreads widen.

The 10-year Treasury note yield rose to 2.428% from 2.390% as investors awaited comments from Federal Reserve officials later in the day.

John Brady, managing director at futures brokerage R.J. O'Brien, had a choice Sunday afternoon: Stay at home in front of the fire watching the Giants play the Steelers or head into the office to pull an all-nighter.

"I've worked 22 years and pulled two all-nighters." Both were this year--for Brexit and the US election. Yesterday's snow in Chicago encouraged him to stay home and monitor the situation from his iPad. "It feels like a typical Monday," said Mr. Brady.

--Aaron Kuriloff and Corrie Driebusch contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com and Riva Gold at riva.gold@wsj.com