Auctions, Fed Speakers Next with Tech Setting Pace

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. I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, October 7th. Washington's stalemate hasn't dampened bullish sentiment, as chip stocks led the opening charge this week after wilting last Friday, drawing support from advanced microdevices' 25 % rally on news of a deal with OpenAI. It's been deal of the week lately in the AI space, one reason the PHLX Semiconductor Index made a new all-time high yesterday, up 3%. The S &P 500 Index is up five months straight and valuations are historically high, leading to concerns the market has become overbought.

0:58One background concern is sentiment, said Lizanne Saunders, Chief Investment Strategist at Schwab, noting frothiness and a low put-to-call ratio that sometimes can signal overconfidence. In contrast, however, she noted that only four of the Magnificent 7 are outperforming the S &P 500 index year-to-date, and even NVIDIA, the best performer in the Magnificent 7, is only 45th on the list of best-performing S &P 500 stocks this year. Another concern is the relative lack of hedging, as the SIBO volatility index, or VIX, remained below 17 yesterday. The historic average is around 20. This implies that investors aren't building much uncertainty into the near term, meaning a sudden negative catalyst could catch a large majority on one side of the ledger.

1:49VIX is in contango, meaning contracts further out into this year hold a premium. This could be a sign of bearish sentiment starting to develop, though VIX has been in contango for a while.

2:04A host of Fed speakers loom, highlighted by Fed Vice Chair for Supervision Michelle Bowman and Governor Stephen Myron later this morning and Fed Chairman Jerome Powell before Thursday's open. One thing to listen for is how policymakers intend to track the economy without key government data during the government shutdown. The shutdown wasn't resolved as of the time of this recording. For now, investors and the Fed may rely on private jobs data, like last week's ADP employment report, which traditionally haven't correlated well with the official government numbers. Also, some investment banks are doing their own calculations for jobs data, though it's unclear how much they correlate with numbers the government may have collected before the shutdown.

2:50As of late Monday, futures trading showed 95 % chances of a rate cut at the Fed's October 28th and 29th meeting, according to the CME FedWatch tool. We expect at least one more rate cut this year and possibly two if the labor market deteriorates more, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. That should pull short-term rates lower. Longer-term rates are likely range-bound. Treasury yields climb Monday ahead of key auctions this week and after an election in Japan. The Liberal Democratic Party elected Sanayi.

3:29The Liberal Democratic Party elected Sanayi Takeichi, likely paving the way for her to be prime minister. The election suggests an expansionary fiscal stance and a delay in the BOJ rate hike, said Michelle Gibley, director of international research at the Schwab Center for Financial Research, referring to the Bank of Japan. A delay in expected rate hikes there could conceivably help treasury prices here in the U.S., but some long-term Japanese yields rose Monday. If and when other developed market bond yields rise, they become more attractive relative to treasuries, so if the BOJ didn't hike as much as expected, or later than expected, the U.S.

4:11yield advantage over Japan might hold steady, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. The election also appeared to help the dollar versus the yen, and a rising dollar can sometimes be a headwind for U.S. stocks. Still, the dollar remains well off its 2025 highs. The Treasury auctions a basket of three-year notes later today, with results likely by the time the market closes. Tomorrow features a 10-year note auction. Rates are down from summer peaks, so the question is how that might affect demand. Auctions last month found interest, including from overseas buyers, but any lag might push yields up, perhaps hurting stocks.

4:56Minutes from the Fed's last meeting due tomorrow afternoon could be illuminating, putting investors in the room when policymakers decided to cut rates for the first time since December and shedding light on how they justified the move. Earnings season starts with big banks next week, and analysts expect S &P 500 third-quarter earnings growth of 8 percent, according to FactSet. That's down from 12 percent growth in the second quarter. Typically, the final earnings growth number outpaces early expectations, but much of the anticipated growth is in tech and utilities, both of which benefit from the AI spending spree.

5:36Constellation Brands reported late Monday and shares popped 2.6 percent in initial post-market trading as the beer and wine company beat analysts' earnings and revenue expectations. The firm has been struggling due partly to tariffs and thanks to general weak demand for alcohol. Sales fell 15 percent year-over-year in the latest quarter, but the company did reaffirm guidance. Most major U.S. indexes registered new record highs led by strength in consumer discretionary, including a 5 percent gain for Tesla. Infotech finished high on the scoreboard, too, as a deal between OpenAI and advanced microdevices sent the latter shares soaring and weighed on shares of NVIDIA and Broadcom.

6:19Both could be affected by the fresh competition. Though last week saw healthcare lead all sectors, the long Wall Street rally continues to see investors embrace more volatile areas, too. In terms of leadership at the baskets level, niche baskets like quantum and drones have been on fire, but so are classic retail trader favorites like memes, non-profitable tech, and heavily shorted stocks, said Schwab's Saunders. AI spending has risen dramatically this year as hyperscalers build new data center capacity. A slowdown would likely hit tech as well as other sectors like industrials and utilities that have benefited from the AI buying spree.

7:03The uptrend has been resilient, and the intermediate-term technicals remain bullish. But near-term, there are some indications that we're overbought, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. Checking individual stocks Monday, Fifth Third Bancorp fell 1.75 percent, and Comerica climbed nearly 14 percent, as Fifth Third agreed to buy CoAmerica for about$10.9 billion in stock, Bloomberg reported. The deal will create the ninth largest bank in the country. The easier regulatory climate under the current administration appears to be raising interest in banking deals.

7:44Tesla climbed after the company posted videos Sunday suggesting it may be ready to introduce a new car. Investors have been waiting for a lower-priced EV, and Tesla has also discussed a next-generation roadster vehicle, CNBC reported. Verizon fell 5%, dragging down other telecom stocks after announcing a PayPal veteran as its new CEO. Investors worried this might indicate the industry is tilting toward more promotions, potentially hurting profitability, MarketWatch reported. Verizon has trailed competition and user growth Yahoo Finance reported. And AppLovin dove 14 percent late Monday after Bloomberg reported that the Securities and Exchange Commission, or SEC, is probing the mobile advertising company over its data collection practices.

8:38The Dow Jones Industrial Average fell 63.31 points Monday, or 0.14%, to 46 ,694.97. The S &P 500 Index climbed to 24.49 points, or 0.36%, to 6 ,740.28. And the NASDAQ composite rallied 161.16 points, or 0.71%, to 22 ,941.67. This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash marketupdate or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

9:36For important disclosures, see the show notes and schwab.com slash market update podcast.