Fed, Mega Caps, China Dominate Action-Packed 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, October 27th. The outcome of this week's Federal Reserve meeting seems all but ensured after Friday's mild inflation data, while investors also brace for mega-cap earnings. Trade remains front and center, too, when Presidents Trump and Xi meet this Thursday. Apple, Microsoft, Apple, Meta Platforms and Amazon and other heavy hitters line up to report Wednesday and Thursday, but today looks light on earnings. Data remain hostage to the government shutdown, still in effect as of this recording. This Saturday, November 1st, could be a possible catalyst for change in shutdown dynamics, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab.

1:07That's when money for the food stamps program is projected run out and the enrollment period for the Affordable Care Act health insurance program begins. Though the Fed meeting would normally hog the spotlight, this week it arguably takes a back seat to mega cap earnings. Five of the magnificent seven report Wednesday and Thursday. This has been mostly an AI and tech-driven bull market, so what these firms say about their spending plans and AI demand likely will have a bigger market impact this week than what looks like a preordained Fed decision to cut rates. Expectations are very high for a full round of positive news related to the Fed, megacaps, and trade in days ahead, but the market enters the new week at all-time highs for most of the major indexes, with valuations historically elevated too.

1:59From a technical perspective, it's bullish to see the majors have fresh all-time highs, But the flip side of that is that market expectations are very high in regard to all three of those catalysts going into the week, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. I'm not suggesting that we set up for a sell on the news week, but given the setup, along with a relatively subdued 16 VIX, I think the potential for volatility is elevated. The SIBO Volatility Index, or VIX, fell below 17 late Friday after surging to nearly 29 last week, when sudden credit worries plagued the financial sector.

2:39Those fears subsided somewhat early last week when two of the banks whose loans came under scrutiny reported solid earnings. It's an open question whether these bankruptcies, along with some other bad loans by a couple of regional banks, were isolated incidents or the proverbial canaries in the coal mine, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. We think it's somewhere in between. According to Standard & Poor's, the trailing 12-month default rate for speculative-grade debt has been above 4 % for the past two years. It was 4.8 % as of August.

3:16Those default rates are up significantly from their lows of late 2020 through early 2023 and are more in line with historical averages. Though credit fears dissipated, the market buzzed over Friday's Consumer Price Index, or CPI. Headline inflation rose 3 % from a year earlier versus expectations of 3.1%. Prices rose 0.3 % month over month, below expectations for a 0.4 % increase. Core inflation, which excludes food and energy, rose 3 % in September, down from 3.1 % in August. It looks like a rate cut by the Fed next week is all but a sure thing, said Kathy Jones, Schwab's chief fixed-income strategist.

4:00As of late Friday, futures trading priced in a 97 % chance of a Fed rate cut when the Fed delivers its decision at 2 p.m. ET Wednesday, according to the CME FedWatch tool. CPI also reinforced expectations that the Fed will cut rates next week and again in December in response to a weakening labor market. However, it's far from certain with information at these elevated levels. For Fed policymakers, the ultimate nightmare would likely be having to readjust rates back up to fight inflation triggered in part by cutting too dramatically. This happened in the 1980s and has become a third rail for the central bank.

4:41Institutional memories are long.

4:46In other data Friday, final October consumer sentiment from the University of Michigan remained in dismal territory at 53.6%, down from an already weak 55.0 % earlier in the month. It's been near the bottom of historic charts for several months, and the final October reading was slightly below the briefing.com consensus. Year ahead and long-run inflation expectations in the sentiment report were 4.6 % and 3.9 % respectively unchanged from the preliminary figures. The S &P Global U.S. Preliminary Manufacturing PMI for October rose to 52.2%, up from the previous 52.0%. That keeps it in expansionary territory above 50%.

5:32As the shutdown persisted, federal workers missed another paycheck last week, and many federal agencies have stopped functioning, raising concerns about a possible slowdown. Fed Chairman Jerome Powell might be asked at his press conference Wednesday to address the potential impact on economic growth. Markets got a lift late last week when the White House announced that President Trump and China's President Xi will meet Thursday to discuss trade. The administration hinted that several deals with various countries could be coming down the pike, CNBC reported. Record highs Friday also reflected the relatively benign CPI and cemented the second winning week in a row for major indexes.

6:16The S &P 500 is up 15 % this year, and the Nasdaq is up 20%. Trading didn't seem affected by Trump's threat to shut down trade talks with Canada. The scrimmage began when Ontario ran an ad featuring former U.S. President Ronald Reagan voicing opposition to tariffs. Ontario paused the commercial late Friday. Treasuries backed off slightly from recent six-month highs Friday as the news flow buttressed risk-on trading. The 10-year yield finished at 4 % to down one basis point for the week. The mild CPI reading kept yield gains in check as yields moved the opposite of Treasuries. Sector gains Friday weren't as wide as might be expected for a market at fresh records, with four of 11 S &P 500 sectors in the red and healthcare and industrials barely higher.

7:11Energy was weakest, perhaps a sign of profit-taking after a strong week. Several major energy giants report at the end of this week. On top Friday were Infotech, which also led for the week as a whole, and communication services, followed by financials. Banks got a boost amid ideas that falling rates could raise demand for banking services. The PHLX Semiconductor Index rose another 2 % Friday, lifted by improved industry sentiment. Intel's earnings appeared positive for many moving pieces in the sector. Still, Intel gave back most early gains Friday to close up just 0.6%, despite beating Wall Street's earnings and revenue estimates.

7:55Guidance generally appeared solid. The chipmaker has undertaken a turnaround effort that has been bolstered recently by investments from both the U.S. government and chip giant NVIDIA. Continued declines in foundry business growth remained a challenge last quarter for Intel. Alphabet added 2.7 % Friday after Anthropic announced it plans to expand its use of Google Cloud technologies, dramatically increasing its compute resources. In addition, analysts at Stiefel raised their price target on Alphabet, saying advertising checks reveal third-quarter strength in that category. Ford accelerated 12 % Friday, following stronger-than-expected results, though the company lowered guidance due to a fire that affected supplies of aluminum.

8:41Decker's Outdoor plunged 15 % to end the week, despite earnings and revenue that topped estimates last quarter. investors appeared disappointed by guidance for fiscal year sales that missed Wall Street's expectations. Though some of the froth in meme and rare earth of stocks, as well as metals, had faded earlier last week, buying re-emerged in those areas Friday as risk on sentiment stormed back.

9:10The Dow Jones Industrial Average added 472.51 points Friday, or 1.01%, to 47 ,207.12. The S &P 500 Index gained 53.25 points, or 0.79%, to 6 ,791.69. and the NASDAQ Composite rose 263.07 points, or 1.15%, to 23 ,204.87. For the week, the Dow Jones Industrial Average rose 2.2%, the S &P 500 rose 1.92%, and the NASDAQ climbed 2.31%. 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.

10:11Join us for another update tomorrow.

10:19For important disclosures, see the show notes and schwab.com slash market update podcast.