Inflation Data Looms With Stocks Near Highs

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 26th. With a strong first-quarter earnings season winding down and stocks sitting near all-time highs, investors will likely shift their focus back to the economy this week. Fresh data on home prices, consumer confidence, and inflation will arrive amid ongoing concerns that interest rates and bond yields could stay higher for longer. Investors will likely be looking ahead to April's Personal Consumption Expenditures Price Index report due Friday at 8.30 a.m. ET. The Fed's favorite inflation gauge will be key for investors.

0:55Last month's Consumer Price Index report showed inflation rising at a 3.8 % annual rate, well above the Fed's 2 % target. Another hotter-than-expected inflation report could lift bond yields further and challenge the stock market's recent rally. However, the shortened week of trading kicks off with the March S &P cotality case-shiller home price index due at 9 a.m. Eastern Time. The housing market remains under pressure from elevated mortgage rates, but home prices have shown surprising resilience so far this year despite affordability challenges. The home price index posted a 0.9 % annual gain in both January and February.

1:37Any further increase in home prices could complicate the Fed's fight against inflation. The Conference Board's May Consumer Confidence Report will take the spotlight at 10 a.m. Eastern Time today. Consumer confidence edged up last month despite rising energy prices amid the closure of the Strait of Hormuz. However, this month's figures may not be as rosy. On Friday, consumer sentiment, as measured by the University of Michigan's May survey of consumers, sank to a fresh record low due largely to inflation fears. Consumers' inflation expectations over the year ahead jumped to 4.8 percent, well above the 3.4 percent seen in February prior to the conflict in the Middle East.

2:20It wasn't all dour news on Friday, though. The Conference Board's leading economic index, or LEI, rose slightly in April after a steep decline in March. The LEI's 6 - and 12-month growth rates are still negative, however, signaling fragile economic conditions ahead, according to Justina Zabinska-Lamonica, a senior manager of business cycle indicators at the Conference Board. Consumers have been feeling the pinch of rising gas prices in particular of late. The average price of a gallon of gasoline nationwide hit a four-year high of$4.55 ahead of the Memorial Day weekend.

3:02Renewed inflation pressures tied partly to rising energy prices mean Kevin Warsh is stepping into the Federal Reserve chairman role at a difficult time. After being officially sworn in on Friday, Wors said that he hopes to lead a reform-oriented Fed and learn from past successes and mistakes. The former investment banker previously told the Senate at his confirmation hearing that he favors a less communicative Fed, a shift that could create more uncertainty for investors as they try to anticipate interest rate moves. While I'm not naive about the challenges we face, I believe these years can bring unmatched prosperity that will raise living standards for Americans from all walks of life, and the Fed has something to do with it, Warsh said in his first remarks as Fed chair.

3:53Amid swirling questions about Fed independence, President Trump also attempted to reassure market watchers at Warsh's swearing-in ceremony. Don't look at me, don't look at anybody. Just do your own thing and do a great job, he told the new Fed chair, emphasizing that he wants Walsh to be totally independent. However, investors hoping for rate cuts this year under Walsh were dealt another setback Friday. Just before Walsh's swearing-in ceremony, Fed Governor Christopher Waller, who until recently had advocated for lower rates, delivered hawkish remarks at an economic forum in Germany. Inflation is not headed in the right direction, he said, adding that a rate cut is no more likely in the future than a rate increase After Waller's comments, the futures market priced in roughly 68 % odds of at least one rate hike by year-end, according to the CME FedWatch tool Prior to the conflict in the Middle East, markets were anticipating a rate cut this year With inflation moving in the wrong direction, bond yields rising, and deficit concerns still present, Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, or SCIFR, warned that we could be in for a higher for longer era on Friday.

5:11I see way more factors that should keep yields elevated than should pull them lower anytime soon, he said in an episode on the On Investing podcast. To pull yields lower, I think we need to see growth start to meaningfully slow, and we just haven't really seen that yet. Lizanne Saunders, chief investment strategist at Skiffer, echoed Martin's concerns and noted that new Fed chairs also tend to be tested by markets. My guess is Warsh is going to find it very difficult to sing a really dovish tune, she said. Neither side of the Fed's dual mandate is suggesting easier monetary policy, even his favorite version of inflation, which is trimmed mean PCE.

5:55Despite concerns about higher rates, strong corporate earnings have continued to support stocks in recent weeks. All three major market indexes rose Friday, with the Dow Jones hitting a record high and the S &P 500 securing its longest stretch of weekly gains since 2023. With 94 % of S &P 500 companies having reported so far this earnings season, 84 % have topped bottom-line estimates, while 81 % have beaten top-line estimates, according to FactSet. The blended year-over-year earnings growth rate for the S &P 500 was also sitting at 28.4 % on Friday. If that holds, it will mark the strongest quarterly earnings growth seen since the fourth quarter of 2021.

6:41Earnings highlights today include AutoZone, Coca-Cola Euro-Pacific Partners, the cybersecurity firm Zscaler, and the Chilean chemical and mining giant Sociedad Camica y Minera S.A. Wednesday will feature earnings from several major tech companies, including the software giant Salesforce and the semiconductor company Marvell Technology, after the bell. The Bank of Nova Scotia and Bank of Montreal will also report their first quarter results before market open. Looking at individual market movers on Friday, shares of Dell Technologies surged 16.8 % after a wave of bullish analyst reports appeared to increase investors' confidence in Dell's enterprise AI infrastructure momentum ahead of the company's May 28 earnings report.

7:31HP Inc.'s stock also popped 15.3 % ahead of its May 27 earnings date after a strong report from competitor Lenovo boosted hopes for an AI-related revenue surge. Lenovo's Hong Kong-traded shares rose 19.8 % after the company reported an 84 % spike in AI-related revenue in the first quarter. The cosmetics giant Estee Lauder also saw its stock jump 11.9 % after confirming that its merger talks with the Spanish fashion and beauty company Puig ended. Meanwhile, shares of Take-Two Interactive sank 4.4 % after the gaming company posted weaker-than-expected guidance in its first quarter report on Thursday after the bell.

8:18Overall, 9 of 11 S &P 500 sectors ended Friday in the green. Healthcare, industrials, and utilities led the pack, while consumer staples and communication services lagged. Market breadth also continued to improve at the end of last week amid the earnings-driven rally in stocks. More than 56 % of S &P 500 stocks traded above their 200-day moving average on Friday, up from 41 % in late March. Meanwhile, 56.8 % of stocks traded above their 50-day moving average, up from a low of just 18 % in mid-March.

8:57The Dow Jones Industrial Average rose 294.04 points Friday, or 0.58%, to 50 ,579.70, a new all-time high. The S &P 500 index gained 27.75 points, or 0.37%, to 7 ,473.47, and the Nasdaq composite edged up 50.87 points, or 0.19%, to 26 ,343.97. For the week, the Dow Jones Industrial Average surged 2.13%, the S &P 500 gained 0.88%, and the Nasdaq rose 0.45%. 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.

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