Earnings Season Ahead, Pulling Focus from War, Oil

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 Monday, April 13th. March was dominated by war news, while corporate headlines retreated. Starting today, companies muscle their way into headlines thanks to earnings season, which could provide a welcome distraction for war-weary market participants. Even so, Wall Street remains on edge following weekend talks between Iran and the U.S. The talks focused on passage through the Strait of Hormuz, which remained virtually blocked as of late Friday.

0:51Despite the heavy schedule of corporate reporting this week dominated by banks, the talks and their impact on oil prices, which fell 14 percent last week, still could exert an intense pull. Iran and the U.S. approached talks appearing to agree on very little, and the ceasefire expires next week. There's growing concern, both in Washington and among investors, that no matter how quickly the war ends, the economic fallout is likely to last for months, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. The strait is critical to the global supply chain. Many analysts have been saying that the implications of the closure of the strait are more dire for Asia, which relies on Middle East oil, and Europe, where liquefied natural gas is in a high demand, than they are for the United States.

1:41And that may be technically true, but oil is priced globally. There's not one price for oil headed to Asia and another price for oil headed to the United States.

1:55Back home, Goldman Sachs kicks off big bank earnings early today, followed by a host of large and small banks throughout the week. Tomorrow is a big morning with results expected from JPMorgan Chase, Wells Fargo, Citigroup, and BlackRock. Analysts expect a lot from banks this earnings season, but may want to focus on forward guidance and executives' comments in this uncertain economic environment. The war, private credit concerns, and economic growth worries spooked bank investors last quarter, sending the KBW Nasdaq bank index down roughly 11 % over the past two months. The actual results are almost secondary right now, said Alex Coffey, senior trading and derivative strategist at Schwab.

2:41What I want to hear is how bank CEOs are planning for a world where energy prices are driving costs higher while the job market is cooling. Their outlook and how much they're setting aside for potential loan losses will tell you far more than last quarter's numbers. Wall Street expects the S &P 500 financials sector to deliver 15.1 % euro-over-year earnings growth in the first quarter. Annual earnings growth was only 6 % during the same period a year ago. For many banks, trading revenues and net interest income, or NII, remain the core drivers of earnings, though there are concerns about NII flagging due to recent flattening in the yield curve.

3:22The bank's capital markets activity, including initial public offering trends, is also in focus. Trading revenue was already strong in the fourth quarter. JPMorgan Chase, for example, saw its equity trading revenue spike 40 % year-over-year, while Goldman Sachs' equity trading revenue surged 25 % year-over-year. Topping those figures could be challenging. As far as headwinds, bank investors will likely be focused on credit quality this earnings season amid concerns about inflation and the labor market. Speaking of inflation, Friday's March Consumer Price Index, or CPI, was the first government price data reflecting the war, and energy prices influenced the headline number in a big way.

4:06Headline CPI surged 0.9 % from a month earlier, above the swollen 0.7 % average estimate, and dramatically up from 0.3 % in February. However, core CPI, excluding food and energy, rose 0.2 % below the 0.3 % consensus, as shelter and food prices remained in check. Annual figures also rose less than analysts had expected. The rise in headline CPI was mostly attributable to higher energy prices, said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research. It was a hot report, but not as hot as expected. Annual headline CPI of 3.3 % was just below the 3.4 % consensus, while annual court CPI of 2.6 % compared with consensus of 2.7%.

4:58percent. Annual headline and core had been 2.4 percent and 2.5 percent in February. The headline figures for March reflected prices during the war after oil soared above$100 a barrel and U.S. gasoline prices climbed above$4 per gallon. Though an 18 percent monthly jump in gas prices sent headline CPI soaring even as core stayed in its lane, investors might not want to be sanguine. There's a lag between oil prices and core inflation, Howard said. The longer oil stays elevated, the greater the likelihood that it filters into core CPI. The March producer price index, or PPI, is due tomorrow before the open.

5:41The monthly headline PPI, which looks at wholesale prices, is seen up a sharp 1.2 percent, according to Briefing.com consensus. Core is seen at 0.4 percent. PPI is the main data this week, though the market might also check existing home sales for March due later this morning. As of late Friday, odds of a rate pause at this month's Fed meeting remained near 100%, which would make April the third straight meeting to keep the target range between 3.5 % and 3.75%. Chances of any rate cut this year stood near 23 % late Friday. Treasuries finished the old week at 4.32 % for the 10-year yield, down three basis points for the week and roughly the middle of the recent range.

6:29Yields rose after the relatively hot CPI data and as February factory orders topped consensus. The factory data growth was an extremely strong 1.2 % month-over-month stripping out transportation. However, there was bearish news Friday as well, with April preliminary consumer sentiment from the University of Michigan dropping to a record low of 47.6, well below the 52.0 briefing.com consensus. The 10-year yield is likely to stay between 4 % and 4.5%, noted Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. We're not seeing the outlook for yields to rise that much further from here, Martin said.

7:13We don't expect them to fall much further from here either, because the economic outlook is relatively stable given all the uncertainty. We think the Fed will probably be on hold for an extended period of time, several meetings. Maybe they'll cut one time by the end of this year. Maybe there'll be no cuts. The SIBO Volatility Index, or VIX, sometimes called the Fear Index, remains worth a close watch this week in line with the Iran situation. It fell to its lowest levels since the war began late last week, below the historic average of 20 and down from highs above 30 late last month. By the end of last week, around 44 % of S &P 500 stocks traded at or above their 50-day moving averages, well above the low of 18 % last month.

8:03Bullish investors would probably want to see that metric climb back toward the 60 % to 70 % level. That kind of broad move can indicate a healthy market. In my view, the reason investors have been eager to buy the dip is because S &P earnings per share growth forecasts have been moving higher over the past couple weeks, The AI secular growth story remains intact, and there is a tendency to compare the Iran war to Trump's Liberation Day tariffs or the Russian invasion of Ukraine, both of which resulted in a market recovery, said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research.

8:44The final pre-earnings season S &P 500 earnings outlook from FaxCat on Friday pegged earnings per share growth at 12.6%, down from the previous 13.2%, and the first estimate decline in some time. Nine sectors have seen earnings estimates fall from the end of last year. In trading Friday, major indexes had a mixed performance in relatively directionless trading, but finished the week much higher. It's possible that the March 30 low of 6 ,316 for the S &P 500 index turns out to be the bottom, but uncertainty is still elevated and it's probably prudent to hold some investment skepticism for now, Peterson said Friday.

9:28Aside from the Iran war, the indices achieved substantial technical healing this week. Eight of 11 S &P 500 sectors fell Friday, though none went off the proverbial cliff. Infotech led with gains of nearly 1%, followed by materials and discretionary. The relatively solid performance of tech, with its high-end market capitalizations, kept the Nasdaq composite in positive territory and prevented much retreat in the S &P 500 index. Individual stocks moving Friday included Taiwan Semiconductor Manufacturing, up 1%, after reporting a 35 % rise in first-quarter revenue that exceeded analysts' forecasts and likely reflected sustained demand from key customers like Apple and NVIDIA despite the war.

10:17CoreWeave rallied 11 % on a multi-year agreement with AI firm Anthropic, which will use CoreWeave's cloud platform to run workloads at production scale. Several other chip and chip-related firms climbed Friday following TSM's report as the news reinforced ideas that demand remains strong industry-wide. Shares of Marvell Technology, Super Microcomputer, Advanced Microdevices, Arm Holdings, and ASML were among the gainers. Money flowed back to semiconductor stocks during last week's market rebound, and the PHLX Semiconductor Index posted new all-time highs Friday. Money fled from software stocks on renewed AI disruption concerns.

11:02ServiceNow fell 8 % for the second straight day after getting downgraded to neutral from buy at UBS, which says it's no longer confident that ServiceNow is better positioned for the AI era relative to other application software names. Salesforce, another software firm, also got hit. And many consumer staples stocks like ConAgra, Walmart, and Costco sank Friday, which might reflect investors turning away from more defensive names, at least for now.

11:36The Dow Jones Industrial Average fell 269.23 points Friday, or 0.56%, to 47 ,916.57. The S &P 500 index slipped 7.77 points, or 0.11%, to 6 ,816.89. And the Nasdaq Composite gained 80.48 points, or 0.35%, to 22 ,902.89. For the week, the Dow Jones Industrial Average rose 3.04%, the S &P 500 added 3.56%, and the Nasdaq soared 4.68%. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash market update 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.

12:38Join us for another update tomorrow.

12:46For important disclosures, see the show notes and schwab.com slash market update podcast.