After Another Sell Off, Investors Brace for CPI

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. First, an important note. U.S. markets are closed Monday, February 16th, in observance of the U.S. President's Day holiday. The Schwab Market Update podcast will return on Tuesday, February 17th. I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, February 13th. The second leg of this week's data table gets carved at 8.30 a.m. ET today, with January's Consumer Price Index, or CPI. The CPI comes as major indexes continue to struggle thanks to tech-related pressure, with a sell-first-then-assess-later theme developing, said Lizanne Saunders, Chief Investment Strategist at the Schwab Center for Financial Research, or SCIFR.

1:03Worries abound that AI substitution could hurt many businesses, including legal firms, financial companies, and the software industry. It began about a month ago when underperformance in software stocks shifted into a higher gear as headlines around AI being able to replicate incumbent business models began to proliferate, triggering a valuation reset within the space. That's now migrated from software to other parts of the market. The S &P 500 index is on pace for its second straight losing week, and the tech-heavy NASDAQ 100 on pace for its third. Turning back to data, CPI is expected to show 0.3 % monthly growth for both headline and core CPI, which excludes volatile food and energy prices.

1:54Annual core and headline growth are both seen at 2.5%, not much changed from the prior month. There's a chance CPI could be hotter than expected, a trend in recent Januaries. This could be a seasonal effect that statisticians need to iron out, but investors should be aware of the possibility. That's why a surprisingly strong CPI might be discounted to some extent. While the headline is important, the devil will be in the details, said Cooper Howard, Director of Fixed Income Research and Strategy at Skiffer. there are two diverging narratives forming around January inflation, one that it's very hot and the other that it's very cold.

2:36Heading into CPI and following Wednesday's solid January jobs report, chances of a Federal Reserve rate cut next month were 8 percent, according to the CME FedWatch tool, while chances of at least one rate cut by June were 65 percent. Treasury yields jumped Wednesday after the jobs data, but grew tempered heading into CPI as investors weighed January's solid jobs growth against steep downward revisions to 2024 and 2025 job gains. Outside of recession years, 2025 jobs growth of a cumulative 181 ,000 was the lowest since 2003 and represented about 15 ,000 new jobs added each month. Solid demand for a 30-year bond auction Thursday also helped yields settle down, with the 10-year note yield falling to 4.10 % Thursday for the first time since December 5th.

3:31Both the auction and yield dip suggest investors expect a cool CPI. The poor existing home sales report also played into pressure on yields. The opposite argument is that January's solid jobs and wage growth might have made CPI worse. Other threats are abundant, including tariffs, the weakening dollar, rising crude oil prices, and the market baking in more Fed rate cuts later this year. Until Thursday, this kept the Treasury yield curve trending steeper, with longer-term yields at a premium to short-term ones. While higher long-term yields can signal hopes of economic growth, it also keeps borrowing costs up for large purchases like homes and automobiles, possibly hurting demand.

4:19The bond market has been remarkably calm so far this year, despite all the global economic and political turbulence. While occasional bouts of volatility are likely, we expect the fixed income markets to remain a ballast for portfolios, and it seems likely that they deliver solid returns in 2026, said Kathy Jones, chief fixed income strategist at Skiffer, and Colin Martin, head of fixed income research and strategy at Skiffer. We continue to see a steeper yield curve as the dominant trend. In Data Thursday, initial weekly jobless claims slipped by 5 ,000 to 227 ,000, below Briefing.com's consensus of 230 ,000.

5:03Existing home sales declined 8.4 percent month-over-month in January to a seasonally adjusted annual rate of 3.91 million, under the consensus of 4.21 million. This followed another drop in weekly mortgage applications earlier this week. Turning to earnings results, applied materials and Arista Networks reported late Thursday, both offering updates on tech demand. For market direction as earnings season slows, investors might want to check daily advancers versus decliners. The advancers line dominated earlier this month as investors poured money into large-cap U.S. stocks. Some bigger fish evidently kept taking bites.

5:45but the S &P 500 index is now down three days in a row, so Friday's pre-holiday trade could be a portent of what's to come next week. The S &P 500 index remains firmly stuck in its near-term range between 6 ,500 and 7 ,000 and suffered a technical blow Thursday when it closed well below its 50-day moving average of 6 ,894. The 100-day moving average of near 6 ,811 is now just below current market levels. The index closed just two points above that on February 5th, but hasn't closed below it in almost a year. NVIDIA earnings later this month are the next big potential catalyst following CPI. Retail earnings season kicks off in earnest late next week with Walmart, and other big boxes are due the week after.

6:34However, the poor showing of December's retail sales report weighed on retail shares earlier this week, setting up lower expectations heading into the earnings prince. On Wall Street Thursday, major indexes slumped again as selling pressure accelerated into the close, a poor technical prognosis heading into Friday. Financial companies were hurt this week on ideas that AI could take over tax planning and other functions. The AI substitution theme is getting a lot of play, but it's also possible that bears were just looking for an escape route as the broader market and the Nasdaq kept bumping into resistance at record highs, unable to find traction.

7:16Also hurting the market is heightened scrutiny on the health of consumers given weak retail sales and rising loan delinquency problems, Schwab-Saunders said. Still, broad strength persists, with 60 % of S &P 500 stocks outperforming the index over the past month. The percentage of stocks trading above their 50-day moving average remained above 61 % late Thursday, despite the S &P 500 index plunge. Checking sectors, all four that finished green Thursday were traditionally defensive utilities, staples, real estate, and health care. Infotech collapsed 2.75 percent and is now down 4.26 percent for the year.

8:03Financials and consumer discretionary, both hurt recently by AI substitution and consumer concerns, are down 5 percent or more in 2026. In Individual Trading Thursday, McDonald's added 2.75 percent as the company topped earnings and revenue expectations. McDonald's also increased its dividend and posted global sales growth of 5.7 percent at stores open at least a year. In its release, McDonald's said its efforts to improve value and affordability helped improve traffic. Cisco plunged 12 percent Thursday, even though earnings and revenue narrowly surpassed analysts' estimates. Cisco's networking business sales rose 21 percent year-over-year, accelerating from 15 % growth in the first fiscal quarter, and the company raised guidance and its dividend.

8:52Investors might be focused on weaker gross margins related to rising memory costs. Applovin dropped nearly 20%. The company beat analysts' earnings and revenue estimates while guiding for better-than-expected first-quarter revenue. Two analysts lowered their price targets after the report, suggesting the company is struggling with competition from meta platforms. Baxter International toppled almost 16 percent on earnings that missed expectations and below consensus guidance. Every magnificent seven stock declined Thursday, extending a long soft streak. Amazon has dropped eight sessions in a row since earnings came in short of expectations.

9:33Anheuser-Busch InBev added 3.8 percent. Earnings results topped analyst forecasts, and the company maintained previous guidance. It said sporting events such as the Winter Olympics and Soccer's World Cup have the firm positioned well for 2026, Reuters reported. Homebuilders rose Thursday as treasury yields fell. Bitcoin gave back another 3 percent and remains near recent long-term lows as risk-off trading dominated the picture Thursday. Crypto-related stocks also fell. The Dow Jones Industrial Average dropped 669.42 points Thursday, or 1.34%, to 49 ,451.98. The S &P 500 Index gave back 108.71 points, or 1.57%, to 6 ,832.76.

10:26and the Nasdaq Composite fell 469.32 points, or 2.03%, to 22 ,597.15. This has been the Schwab Market Update podcast. To stay informed, visit schwab.com slash marketupdate or follow for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or review. It really helps new listeners find the show.

11:03For important disclosures, see the show notes and schwab.com slash marketupdatepodcast.