Mega Caps Step to Plate, Fed Rate Cut Seen Likely

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 Wednesday, October 29th. Alphabet, Microsoft, and Meta Platforms line up this afternoon as the Federal Reserve appears prepared to cut rates for the second meeting in a row and trade talks with China approach. A rate cut at 2 p.m. Eastern Time is largely baked in, and futures trading suggests rates could continue falling despite stubborn inflation. The Fed will deliver its decision without help from government data during the D.C. shutdown, and little progress is expected on that front with President Trump in Asia. Like the Fed's decision, positive results for today's mega caps seem built in, but investors might want to prepare for volatility.

1:03Any shortfalls in cloud growth, AI spending, and iPhone sales could cause tremors. The biggest stocks have near-record valuations, potentially making them vulnerable if earnings fall short, or guidance seems tepid. AI is the main story, but that's closely wrapped up in the cloud business as major firms incorporate AI capabilities into their cloud offerings. That's causing most of the big spending, so capital expenditure guidance could give investors a better sense of semiconductor business trends that could affect shares of NVIDIA and other chip firms. Microsoft, Meta Platforms, and Alphabet are expected to report earnings growth of 7 % to 11%.

1:46Expected revenue growth is in the mid-teens to low 20s on a percentage basis for the three. None have delivered a negative earnings surprise since late 2022, but they don't always rally on earnings. Each faces questions on how much they can beat the average Wall Street earnings guess by and what percentage of beat the market considers good enough to keep supporting their stock prices. At times, including last quarter, even solid earnings beats by big tech firms weren't enough to excite the market. Another question is whether these companies can point to areas where they've been able to monetize AI or show real-world benefits to products or their business performance from the technology that justifies the spending.

2:37Investors whet their appetites this morning when a host of major firms report from outside the world of AI and cloud. They include industrial giants Boeing and Caterpillar, as well as Verizon and CVS Health. Analysts expect losses from Boeing, but about half as large as a year ago. Big news for Boeing rolled into the tarmac last week when the Federal Aviation Administration said it would allow the company to produce 737 MAX planes at a rate of 42 per month, up from the prior 38 limit, the New York Times reported. Data is sparse with the government closed, but Tuesday's October consumer confidence from the conference board of 94.6 was slightly above the briefing.com consensus of 94.2 and below September's 95.6.

3:27Expectations, which measures how consumers see the economic outlook, fell to 71.5 from 74.4 and has been below 80 for months, historically a sign of possible recession. Inflation expectations for the next 12 months rose to 5.9 percent from 5.8 percent. The report offered an enthusiastic view of the economy, but didn't seem to have much effect on Wall Street Tuesday. Today's data includes the weekly MBA Mortgage Applications Index, which fell 0.3 % a week ago. In earnings action, Visa and Booking Holdings both reported after their close Tuesday. Shares of booking initially jumped 4 % in post-market action after the travel technology company beat revenue and earnings consensus and raised guidance.

4:19Gross bookings grew 14 % year-over-year, the company said. Third quarter earnings season is shaping up as another testament to U.S. corporate resilience, said Kevin Gordon, head of macro research and strategy at Schwab. Tech's leadership continues to reflect multi-year AI and electrification investment waves. Industry-level growth suggests capital spending related to compute, data centers, and the power grid remains a tailwind, even as broader manufacturing is mixed. The outcome of the Fed meeting at 2 p.m. Eastern time today seems almost assured after Friday's mild inflation data, though Fed Chairman Jerome Powell's remarks at the press conference after that could carry weight.

5:02Futures trading works in several cuts after this anticipated one, including 91 % chances of a 25 basis point cut at the December meeting, according to the CME FedWatch tool. However, that's down from about 98 % a week ago. Odds of another cut in January or more of a 50-50 proposition at this point, futures trading suggests. Stocks cruised to new highs on Tuesday, lifted by mega-cap strength on the heels of a Wall Street Journal report saying Presidents Trump and Xi could emerge from their Thursday meeting with a plan to lower fentanyl-related tariffs on imports from China. Other topics on the discussion list include Chinese purchases of U.S.

5:44agriculture products, recent shipping fees, and export controls. It's unclear if a deal can be reached immediately or if the meeting will end with a move to implement changes over a longer period, the newspaper reported, but the idea the tariffs could lighten seemed to ignite investor enthusiasm. Trump slapped 20 % fentanyl-related tariffs on Chinese imports earlier this year. Treasuries moved little Tuesday ahead of today's Fed decision. A$44 billion auction of seven-year notes yesterday met weak demand, Briefing.com noted, meaning two of three major auctions this week were disappointing. Treasury yields, specifically short-term yields, could rise if the labor market holds up, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

6:35Treasury yields are priced for an aggressive pace of rate cuts, but they could rise if the Fed doesn't deliver the number of cuts the markets are expecting. That may catch investors off guard if the value of their holdings fell. We still see the 10-year Treasury yield holding near 4 % given still sticky inflation and budget concerns. On the sector side, Tuesday saw only three of 11 S &P sectors finish green, including Infotech and Consumer Discretionary. Without the sharp rise in tech, led by semiconductors as Nvidia surged, the S &P 500 index would likely have finished lower. The tech-heavy Nasdaq continues setting the upward pace, but market breadth remains healthy, with around 61 % of S &P 500 stocks trading above their 200-day moving averages.

7:25Defensive areas like utilities, staples, and real estate struggled Tuesday, and so did gold. This all could signal the risk-on move continues. From an individual stock standpoint, Nokia rose 23 % after CNBC reported that NVIDIA could take a$1 billion stake in the company. NVIDIA climbed 5 % to new all-time highs on news that it would partner with Oracle to build the U.S. Department of Energy's largest AI supercomputer for scientific discovery and with Uber on the company's next-generation robo-taxi and autonomous delivery fleets. Tesla climbed almost 2 % despite another month of weak European Union sales.

8:09September sales fell 18.6 % from a year earlier, according to the European Automobile Manufacturers Association. Hopes for a China trade deal have lifted shares near all-time highs this week. Microsoft climbed more than 2%. It will be a major shareholder of OpenAI Group PBC, the for-profit arm of OpenAI that's now a public benefit corporation, CNBC reported. As part of the announcement, Microsoft said OpenAI has agreed to purchase an incremental$250 billion of Azure services. Ant-UPS surged 8 % Tuesday. Earnings eclipsed analysts' estimates and forecast fourth-quarter revenue above expectations.

8:53It also highlighted progress in its turnaround plan, saying it's cut 34 ,000 jobs. So far, it's saved$2.2 billion.

9:07The Dow Jones Industrial Average added 161.78 points Tuesday, or 0.34%, to 47 ,706.37. The S &P 500 Index climbed 15.73 points, or 0.23%, to 6 ,890.89. And the NASDAQ composite finished up 190.04 points or 0.8 % at 23 ,827.49. 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. Join us for another update tomorrow.

10:05For important disclosures, see the show notes and schwab.com slash market update podcast.