Home Depot Gets Retail Results Started, Oil Eyed

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, May 19th. Earnings swing into gear the next three days, starting with Home Depot this morning, followed Wednesday and Thursday by two of the largest U.S. companies, NVIDIA and Walmart. Together, these and other reports could provide a combined picture of U.S. consumer demand, along with hyperscale enthusiasm for buying more chips and AI infrastructure. NVIDIA's earnings arrived just after the chip market took its worst two-day stumble since last October on Friday and Monday. The 6 % decline from Thursday's close is steep, though it came after chips rose nearly 70 % from March 30th through May 14th.

1:03The last time chips fell so much in two days, it ushered in a long period of consolidation that saw investors rotate out of tech and into sectors that had gone underappreciated. But it's too soon to say if the same thing might happen again. Hyperscalers have committed to spending about$700 billion this year, a boon for NVIDIA's business and for many other chip and chip infrastructure firms. Any sign of caution surfacing in NVIDIA's guidance might raise concerns, though NVIDIA has a track record of positive results and earnings calls. Not so positive the market is where Treasury yields trade. Last Friday, the 30-year yield crept within a handful of basis points of the 2023 cycle peak near 5.17%, and a move above that would likely ring alarms.

1:58The 10-year yield is at nearly 4.6 % and already above 4.5 % resistance. The cycle high was nearly 5 % in late 2023. Bond yields globally are on the rise, which hurts the outlook for stocks, noted Michelle Gibley, Director of International Equity Research and Strategy at the Schwab Center for Financial Research, or SCIFR. There appears to have been some hope that the Xi-Trump meeting would result in a diplomatic breakthrough to shorten the conflict in Iran. The longer the Strait of Hormuz is closed, inflation risks are rising and waking up bond yields. Inflation may be here to stay, either from the potential second-order impacts from higher energy prices or hotter economic growth.

2:44In the latest update on Iran, President Trump said late Monday he would postpone what he called an attack planned for Tuesday. He suggested the postponement came at the request of Gulf allies amid serious negotiations now taking place. The statement on social media appeared to lift Wall Street from its lows in the final 30 minutes of trading yesterday. U.S. crude gave back some gains but still finished higher. Home Depot gets the retail parade underway after what's been another disappointing quarter for the housing market. Home Depot and homebuilder shares slipped as mortgage rates remain stubbornly high and inflation takes a bite out of consumers' buying decisions.

3:28Last time, Home Depot reported, however, it topped analysts' earnings expectations for the first time in a year, despite what it called weak demand for home projects. And that was before the war began and oil prices spiked. The biggest retailer, Walmart, reports Thursday morning and, while also facing inflation pressure, might benefit from shoppers seeking lower prices. Walmart is a large seller of gasoline, so results should be taken in context as rising prices for that commodity might have padded quarterly growth. NVIDIA's results tomorrow afternoon, however, are likely to be a major deciding factor in where the market heads this week, barring new geopolitical tidings.

4:12Shares hit all-time highs last week as the stock, long lagging the broader chip sector, appeared to play catch-up. Analysts expect NVIDIA to post a beat and raise, exceeding Wall Street's expectations and increasing guidance. That's typically been the case with NVIDIA, but a year ago it stumbled due to sudden loss of chip sales in China. That's now back in the news after news reports that China hasn't formally approved NVIDIA's shipments of the company's lower-level H200 chips, suggesting no breakthrough from last week's talks between Presidents Trump and Xi. While the U.S. seems inclined to let NVIDIA sell its less advanced chips there, Beijing has pushed domestic companies not to buy U.S.

4:59chips. This has led to an impasse where NVIDIA declined to guide for any sales to the country, which once accounted for 13 % of its revenue. Volatility eased Monday after Friday's surge, a possible pick-me-up for equities. The SIBO Volatility Index, or VIX, never topped 20 even during last Friday's heavy stock market sell-off, possibly a sign that participants don't feel particularly worried about the path forward. VIX fell below 18 on Monday, even as the S &P 500 sank, possibly a sign that equity weakness could be limited. Data is light this week, though tomorrow afternoon's minutes from the Fed's last meeting stand out as a chance for investors to get insight on rate discussions.

5:47Major indexes mostly fell for the second straight Monday, led by tech again, as market participants appeared to consolidate positions ahead of NVIDIA's earnings. The infotech sector fell nearly 1%, but seven S &P 500 sectors rose, including a solid performance from financials. That's a keystone sector that can provide a sense of market direction, and it's up over the last week after falling more than 1.5 % in the last month. Rising long-term yields likely helped banks. In a switch from last week when tech stocks mostly tracked higher and the broader market slipped, the S &P 500 Equal Weight Index outpaced the S &P 500 Index Monday.

6:31The Equal Weight Index weighs all components the same rather than by market weight, making it less reflective of what mega cap stocks do. It rose 0.6 % Monday versus about a 0.1 % decline for the better known S &P 500. Still, the equal weight's tendency toward trailing the S &P 500 the last two months suggests a narrow rally that's vulnerable if the mega caps dive. Only 2 % of S &P 500 stocks are at 52-week highs, and only 5 % are at 4-week highs, said Lizanne Saunders, chief investment strategist at Skiffer on CNBC yesterday. We have seen this narrowness and a lot of really rapid-fire rotation and churn under the surface, and in the best-case scenario, that could persist at least in the near term.

7:22Stepping back, Schwab's experts said they're impressed by first-quarter earnings and there might be continued strength in the current quarter, barring a major macro shift. However, they noted that Magnificent Seven earnings continue to outgrow the other 493 S &P 500 companies by a wide margin. Risk is rising, even as the scoreboard looks good, the Schwab Center for Financial Research said in the latest Market Perspective report. Miss penalties are unusually severe and margins are near cycle highs, leaving less cushion if growth slows or costs re-accelerate, conditions that also increase rotation and mean reversion risk across sectors.

8:06Checking momentum, the S &P 500's Relative Strength Index, or RSI, backed off from last week's peaks near 77 to around 66 by late Monday, a sign of possible reluctance by participants to push the market higher. An RSI above 70 is considered to suggest overbought conditions. Checking individual movers Monday, Micron plunged nearly 6 % and was among the worst performers in a rough session for it and other memory stocks in the chip sector. Others hurt included SanDisk and Western Digital, both down around 5%. The selling might have been profit-taking from the recent rally, though there was news, too.

8:50Seagate, which fell 7 % yesterday, said it would take too long to build new factories to keep up with rising memory demand, Bloomberg reported. Lumentum sagged more than 8 % Monday, caught up in the overall AI struggles. Others falling included CoreWeave, Marvell Technology, and Oracle, as the PHLX Semiconductor Index descended 3 % on top of the 4 % loss it recorded Friday. The index, called the SOX, is still up nearly 59 % year-to-date Dominion Energy surged 9 % on news of a possible acquisition by NextEra Energy The possible all-stock deal comes amid increasing AI-related power demand and NextEra is the largest electric power and energy infrastructure provider in North America Crypto-related stocks slid as Bitcoin futures fell nearly 3 % to the lowest level since May 1st.

9:48This could reflect risk-off trading extended from Friday, and Bloomberg reported that cryptocurrencies, including Bitcoin, experienced almost$500 billion in liquidations of bullish bets during early trading in Asia Sunday night and into Monday morning. Baidu climbed to 2%. Revenue and profit fell from a year ago. and the ad business slowed, but results still surpassed Wall Street's estimates, and the Chinese search engine company reported a 49 % annual rise in core AI revenue. And software companies including ServiceNow, Adobe, and Salesforce posted strong gains Monday as earnings for many big companies in the sector approach.

10:31Bank of America reinstated ServiceNow with a buy rating, possibly helping it and other software names. The Dow Jones Industrial Average gained 159.95 points Monday, or 0.32%, to 49 ,686.12. The S &P 500 Index slipped 5.45 points, or 0.07%, to 7 ,403.05. And the Nasdaq Composite lost 134.41 points, or 0.51%, to 26 ,090.73. 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.

11:31Join us for another update tomorrow.

11:39For important disclosures, see the show notes and schwab.com slash market update podcast.