Fed Meeting, Mega Caps Loom With Stocks at Records

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 Tuesday, October 28th. While trade hopes and anticipation for rate cut helped drive Monday's strength, investors shouldn't discount the power of earnings. So far, they've been strong for both top and bottom lines, with about one-third of S &P firms reporting, but the real test comes this week. Alphabet, Microsoft, Apple, Meta Platforms, and Amazon report Wednesday and Thursday. More than 170 other S &P 500 companies also report between now and Friday, making this the busiest earnings week of the season. Still, the Magnificent Seven names carry far more weight in terms of potential impact beyond their own shares, and on Monday helped steer major indexes to new all-time highs once again.

1:09Expectations are high going into the quarter across the board, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. Mega caps appear poised to beat expectations given the flurry of deal headlines, but it matters by how much, along with guidance and capital expenditure plans. Positive earnings are likely built into share prices, so the main worry is that disappointments could interrupt the tech-fueled rally. Disappointments seem unlikely, but investors might want to prepare for possible bad news and the volatility that could follow. Cloud growth, AI spending, iPhone results, and fourth-quarter guidance are among many factors that could waylay the mega-cap rally.

1:53The market's biggest stocks trade near record valuations, potentially making them vulnerable if earnings fall short or guidance seems unenthusiastic. Things kick off with Microsoft, MetaPlatforms, and Alphabet after tomorrow's close. All are expected to report earnings growth of 7 to 11 percent. None of them delivered a negative earnings surprise since late 2022, but they don't always rally on earnings. Investors have gotten used to great news from these firms, so anything in their reports that looks less shiny often gets the market's attention and can lead to selling. Amazon, which along with Apple report late Thursday, generated conversation Monday after Reuters reported the company plans to lay off 30 ,000 corporate employees, a report not confirmed as of this recording by Amazon or other news sources.

2:49The report highlights possible job threats posed by AI. Before getting two mega caps, investors face earnings today from giants like United Health Group, United Parcel Service and Visa, providing perspective on regions of the market less exposed to the tech trade. Healthcare is the leading S &P 500 sector over the last month, up nearly 7%, perhaps a sign of some investors shifting exposure to more defensive areas from higher volatility tech and communications services.

3:24Turning to trade, Presidents Trump and Xi will meet Thursday in South Korea, with the two leaders expected to discuss issues ranging from soybeans to rare earth. Treasury Secretary Scott Besant said over the weekend that a framework of a deal has been reached and that the two parties would come away from the talks with a deal. Trade worries ignited the October 10th sell-off of almost 3 percent, and there's always a chance one side or the other might not be agreeable. Any negative headlines would likely disappoint Wall Street. That's especially true considering Trump threatened to raise tariffs on Chinese imports to 155 % on November 1st, quote, unless we make a deal, end quote.

4:08That threat appears over, according to Besant, but the two countries have long sparred over issues like fentanyl and export controls, and it's possible talks could get sidetracked even at this late date. U.S. and China trade developments or framework deal announcements have occurred three to four times this year, and stocks moved up on an incremental positive headline, Schwab's Peterson said. Stocks have continued to march higher on AI optimism and deal announcements. Risk appetite and bullish sentiment are in control for now, he added. The technical trend remains solid. Last week's September Consumer Price Index, or CPI, was relatively mild, but 3 % annual inflation remains stubbornly above the Fed's 2 % goal.

4:56That's the only government data shared, but there's other data in the mix today, including the S &P Case-Shiller August Home Price Index and October Consumer Confidence from the Conference Board. Consensus for consumer confidence due at 10 a.m. Eastern Time is 94.2, according to Briefing.com. That's the same as September and down from a recent peak above 98 back in July. The expectations part of the report, which measures the economic outlook of consumers, has been well below 80 for months, typically a sign of possible recession. One interesting metric in the absence of official jobs data could be the confidence report's measure of how difficult it is for consumers to get employment, which worsened to 7.8 in September from 11.1 in August.

5:46Inflation expectations are another key element. The outcome of the Fed meeting at 2 p.m. Eastern time tomorrow seems all but ensured after Friday's mild inflation data, though Fed Chairman Jerome Powell's remarks at the press conference after that could carry weight with investors. Wall Street's strength early yesterday on trade hope was broad-based, with about three stocks rising for each one declining. But by midday, it was more of a one-to-one situation, with the tech-heavy Nasdaq again leading the charge, while non-tech shares couldn't maintain the initial pace. Still, the S &P 500 appeared to gain strength as the session advanced, leaving the S &P 500 equal weight index, which gives the same weight to all companies rather than measuring by market cap in the dust.

6:34That's more evidence the current tide appears to be lifting the ocean liners, but not so much the sailboats. Communication services, infotech, and consumer discretionary, the three sectors most exposed to mega caps all rose 1.4 percent or more yesterday. No other sector rose as much as 0.5 percent, though only two sectors, materials and staples, finished lower. Qualcomm led the way with double-digit gains after it announced new chips that could help it diversify beyond smartphones and more into AI. This strategy, should it work, would put it more into competition with companies like NVIDIA. Treasuries had a mixed session after Monday's two-year and five-year Treasury note auctions.

7:21Demand was light for a$69 billion two-year offering, but firm for$70 billion in five-year notes, Briefing.com said. Short-term yields rose, while the 10-year yield ended unchanged at 4 % exactly, and the 30-year fell two basis points. Rates have traded in a narrow range recently ahead of the Fed decision. The PHLX Semiconductor Index climbed almost 3 % Monday. Improved industry sentiment after Intel's earnings last week had already supported the sector even before the recent positive trade progress. A deal with China that makes U.S. chip exports less difficult would likely be another tailwind.

8:03Stocks in the sector, like NVIDIA, advanced microdevices, and Intel all posted solid gains. Tesla jumped 4 % Monday, in part on hopes for a trade deal with China where Tesla makes and sells many of its vehicles. Shares of rare-earth companies fell on ideas that a trade agreement might make rare-earth materials from China more accessible for U.S. buyers. Keurig Dr. Pepper surged nearly 8 % Monday as quarterly results surpassed Wall Street's estimates and the company raised guidance. Investors appeared encouraged by a 1.5 % rise in U.S. coffee sales and a 10.5 % jump in international sales. Some of the so-called risk-off areas of the market slumped Monday after getting some love last week.

8:52Shares of companies like Philip Morris, Walmart, and Procter & Gamble lost ground as investors appeared more enamored with the tech side of the ledger.

9:04The Dow Jones Industrial Average climbed 337.47 points Monday, or 0.71%, to 47 ,544.59. The S &P 500 Index jumped 83.47 points, or 1.23%, to 6 ,875.16. And the NASDAQ Composite added 432.59 points or 1.86 % to 23 ,637.46. 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.

10:04For important disclosures, see the show notes and schwab.com slash market update podcast.