Chips on Edge: Mega-Caps Awaited After Rough Week

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.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Monday, July 20th. The Federal Reserve enters its pre-meeting quiet period in a market that's anything but peaceful. Last week's dramatic chip sell-off has Wall Street in defensive mode, and investors are sweating out rising Middle East tensions that raised oil back above$80 per barrel. Earnings accelerate this week, including a triple feature from Alphabet, Intel, and Tesla late Wednesday and Thursday. Other big names include General Motors, IBM, Texas Instruments, and ServiceNow. Of the 47 S &P 500 firms reporting through midday Friday, 95 % topped consensus on earnings per share and 76 % surpassed estimates for revenue.

1:07As far as growth, earnings were up 52.4 percent and revenue up 15.8 percent on average among S &P 500 companies reporting, but it's still very early. FACSAT expects earnings growth of 24.7 percent for S &P 500 companies. Second quarter results have been tracking exceptionally well, although it is early, said Nathan Peterson, Director of Derivatives Research and Strategy at the Schwab Center for Financial Research.

1:42Today's data calendar is thin but includes June leading indicators from the conference board at 10 a.m. Eastern Time. The May headline rose just 0.1 percent. It has not done a very good job of giving a heads up as to the direction for the economy, said Lizanne Saunders, chief investment strategist at the Schwab Center for Financial Research. It's kind of flashed recession for a few years now, but interestingly, it did just start to tick a little bit higher. So I'll be looking to see whether that improving trend has legs. And data Friday, June housing starts exceeded expectations, but building permits fell short.

2:23Preliminary July University of Michigan consumer sentiment improved more than expected at 54.4%. That topped the 50.7 % briefing.com consensus and June's 49.5%. Long-run inflation expectations stayed at 3.3%, a constructive feature. However, gas prices, a major component of sentiment, are up since early this month, meaning the final July report could reveal wrinkles. The economy can't be looked at without accounting for geopolitics, and crude's rally last week reflected rising gulf tensions that could keep investors on their toes. Both sides made new threats as the old week ended, and ship traffic through the Strait of Hormuz remained thin.

3:12Crude trades well below string highs, perhaps meaning investors expect the current upheaval to fade. An extended conflict would likely put crude in worse shape earlier in the war, as stockpiles are now very thin globally. Recent weakness in South Korean and Japanese stock markets partially reflect concerns for those oil importers, as the global crude market benchmark price climbed 4 % Friday and 14 % for the week. South Korea's struggles and reports of China's new AI capabilities also contributed to last week's chip weakness. South Korea's major index has become effectively a barometer for the AI trade due to the position memory chips have as a bottleneck in the AI supply chain, explosive growth in profits, large market cap of the companies domiciled there, and growth of leveraged single-stock ETFs, said Michelle Ghibli, Director of International Equity Research and Strategy at the Schwab Center for Financial Research.

4:15The chip sell-off might also reflect tremors ahead of reports from Alphabet and the other chip buyers. Some investors could be aiming for protection in case of hyperscaler plans to ease spending, though there's no evidence of that yet. Recent chip volatility appears to be more of a valuation and positioning's reset than the end of the AI infrastructure cycle. The next hurdle for chips is earnings from hyperscaler chip buyers, starting with Alphabet late Wednesday. Technically, we are oversold in the NASDAQ 100 and the PHLX Semiconductor Index, so it wouldn't surprise me to see some mean reversion at some point this week, especially if Alphabet announces strong or increased CapEx guidance, Peterson said.

5:05Treasury yields eased last week. The benchmark U.S. 10-year note fell three basis points to 4.54%, still above the psychological 4.5%. Short-term yields more exposed to Fed policy outdueled longer-term yields Friday. Last week's U.S. and European Consumer Price Index data eased inflation concerns slightly ahead of the European Central Bank's meeting this Thursday and the U.S. Fed's meeting a week from Wednesday. We expect the Fed to remain on hold for the next handful of meetings, but we acknowledge that the stickiness of inflation we're seeing raises the likelihood of a hike, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

5:50Inflation uncertainty could keep long-term yields elevated. Odds of a July rate hike were 14 percent by late Friday, according to the CME FedWatch tool, down from 34 % a week earlier. Chances of a hike by September were 60%. This week offers little in the way of potential rate-moving data. Major indexes wilted again in the smoky summer heat Friday, with the tech-heavy NASDAQ 100 once again suffering most and falling more than 1%. It descended below technical support at its 50-day moving average of$29 ,549. The rotation earlier in the week, the Saab Magnificent Seven and Cyclical Names gained ground versus chips flagged on Friday.

6:36Small caps fell along with their mega cap brethren. The S &P 500 Equal Weight Index, which easily outpaced the S &P 500 Index Thursday, struggled on Friday. Sector-wise, Friday was dismal. Only energy rose, and defensive sectors including real estate and health care were two of the next three names on the best of the worst list. Tech fell only 0.78%, an improvement from Thursday. The Magnificent Seven almost all retreated Friday except for Apple, which some investors apparently view as a potential port in the storm. Among individual movers Friday, Netflix fell 7 % after quarterly earnings per share slightly topped expectations, but revenue narrowly missed consensus and third-quarter guidance disappointed.

7:26Worries about engagement surged after Netflix said it would publish a popular engagement tracking release less often. The PHLX Semiconductor Index lost 1.63 % and entered bare territory, down more than 20 % from the late June peak Individual chip share losses narrowed from Thursday's heavy selling, with memory name SanDisk, the only major chip stock, down 4 % or more There were signs of dip buying, as stocks like Lumentum, SK Hynix, Western Digital and Arm Holdings advanced SpaceX retreated 5.4 % and stayed below its$135 initial public offering or IPO price. The latest drop came after the company aborted the launch of a Starship rocket.

8:16CEO Elon Musk said the next launch attempt could occur in the few days. And Intuitive Surgical dropped 14 % despite results copying consensus. The robotic surgical toolmaker sees worldwide da Vinci procedure growth up 13.5 % to 15.5 % this year, but appeared to disappoint by not raising its outlook.

8:42The Dow Jones Industrial Average slipped 406.55 points, or 0.77%, Friday, to 52 ,146.42. The S &P 500 index plunged 76.08 points, or 1.01%, to 7 ,457.69, and the NASDAQ composite cratered 361.70 points, or 1 .4%, to 24 ,520.24. For the week, the Dow Jones Industrial Average fell 0.93%, the S &P 500 Index dropped 1.55%, and the NASDAQ crumbled 2.9%. 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.

9:45Join us for another update tomorrow.

9:53For important disclosures, see the show notes and schwab.com slash market update podcast.