Picking Up the Pieces: Earnings Next After Selloff

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. I'm Colette O 'Claire and here is Schwab's early look at the markets for Monday, October 13th. Last week ended with a shot across the bow for investors. Trade and geopolitical tensions reignited like deja vu from April after President Trump threatened a massive increase in tariffs on Chinese goods coming into the United States. Volatility jumped and stocks sold off. Bellicose words and deeds are nothing new between the U.S. and China, but relations had been relatively calm since mid-summer, and U.S.

0:52tariffs are far below the levels Trump threatened in April. Time will tell if the turbulence fades or remains an issue, and a lot depends on whether the two countries want to test each other or keep relations calm. Time will also tell if investors treat this setback as another buy-the-dip opportunity, as they have every other recent downturn. No threats have yet been implemented, but there would be mounting risks were truce not reached, including the possibility of squashed hope of U.S. soybean sales to China and risks to U.S. supply chains from China's restriction of rare earths, said Lizanne Saunders, chief investment strategist at Schwab.

1:33Even before Friday, there were indications things weren't well. China's clampdown on rare earth materials stirred attention earlier last week, as did its launch of an investigation into what it alleged were violations of the country's anti-monopoly law by Qualcomm. China also intensified its enforcement of import restrictions on U.S. chips last week, including products made by NVIDIA, Reuters reported. The trade flare-up followed a record rally in the Philadelphia Semiconductor Index, or SOX, that led some investors to worry about overbought conditions and possible market froth. Some froth evaporated Friday, though valuations remain historically high.

2:20The SIBO Volatility Index, or VIX, topped 21, its highest level since early August, after staying near 16 for months. The long-term average is about 20, and higher volatility often hints at restive stock markets. Tomorrow's big bank results could provide a better sense of how the broad economy is faring, something investors lack now thanks to the government shutdown that persisted at the time of this recording. This coming Wednesday and Thursday would normally bring September inflation data, but the shutdown puts that at risk. The Bureau of Labor Statistics is bringing staff back to get next week's inflation reports out, Bloomberg reported, perhaps not on schedule, but maybe in time for the October 28-29 Federal Reserve meeting.

3:08Investors still expect a rate cut then and another one in December, according to the CME FedWatch tool. Futures trading builds in 97 % chances of one rate cut and 94 % chances of two before year-end as of late Friday, but Fed policymakers operate in a partial vacuum. Jobless claims were another victim of the government's stalemate last week, though Goldman Sachs estimated that initial claims rose to 235 ,000 and continuing claims to 1.92 million. That initial number likely wouldn't raise red flags, but continuing claims remain near four-year highs if Goldman is correct, and the federal government started laying off workers Friday.

3:51There's concern these layoffs, besides the obvious pain they'd cause employees, could hurt U.S. personal spending and weigh on gross domestic product or GDP growth. There are some numbers on the way, even if the shutdown persists, as it did during the time of this recording. Investors can track sentiment, private job reports, and elements like mortgage applications and even earnings for clues. We're still getting Fed data and regional Fed data, Saunders said. Embedded in there is information on the inflation backdrop and on the employment backdrop. We're still getting the purchasing managers' indexes.

4:28There are prices paid components. There are employment components. Wednesday's Empire State Manufacturing Index and Thursday's Philadelphia Fed Index are two reports unaffected by the shutdown that may provide insight on economic trends. But Thursday's September retail sales report could be threatened. In Data Friday, the University of Michigan's preliminary October consumer sentiment reading edged down to 55.0 percent from 55.1 percent in September. Analysts had expected a headline of 54.5, according to Briefing.com, so the actual represented a slight beat, even if it remained near historic lows.

5:09Perhaps more importantly, one-year inflation expectations dipped to 4.6 % from 4.7 % in September, and long-run inflation expectations were unchanged at 3.7%. A New York Fed report earlier last week had shown inflation worries elevating. As banks step to the starting gate before tomorrow's open, investors will look for updates on trading trends, net interest income, lending demand, and competition from private credit. Anything executives say about the economy could generate headlines, especially in this uncertain time of tariffs and the shutdown. Other earnings ahead this week include pharma giant Johnson & Johnson on Tuesday and chip industry supplier ASML on Wednesday.

5:57United Airlines is another major report. ASML looks like it could be a critical report to monitor, considering its role in the U.S. and China's semiconductor standoff, Briefing.com noted Friday. And Taiwan's semiconductor manufacturing Thursday could have heavy implications for the same reason. Major indexes on Friday suffered their worst session since April's tariff scare. Defensive sectors, consumer staples and utilities managed to find some buyers Friday as stocks like PepsiCo, Campbell Soup, Walmart and Philip Morris were perceived as ports in the tariff storm, but everything else sold off.

6:37The worst performers were energy, consumer discretionary, and infotech, all of which have major exposure to trade with China and global economic tensions. The Philadelphia Semiconductor Index fell more than 4 percent as big names like Taiwan Semiconductor, Broadcom, and Micron dropped from recent highs. NVIDIA fell more than 2 percent, while bank shares lost ground amid concerns a trade war could hurt loan activity. From a technical standpoint, Friday's S &P 500 close below the 20-day moving average of 6 ,670 was the first since September 2nd. Though the 20-day has represented solid technical support since May, the S &P 500 also closed below it in early August.

7:23Both times, it quickly rebounded. The 50-day moving average is 6 ,525, and the last sub-50-day close was in late April. The index now hovers just above its 50-day moving average near 6 ,525. It hasn't closed below that moving average in five months. Multiple closes below either of these moving averages, if that happens, could convey a shift in near-term sentiment. For the intermediate term, the bullish uptrend is intact, said Nathan Peterson, Director of Derivatives Analysis at the Schwab Center for Financial Research. But if we start getting a couple closes below the 50-day simple moving average, this could shift the near-term outlook to cautious or bearish.

8:12Checking individual stocks, Qualcomm plunged 7 % Friday as China launched an investigation into the chip company for suspected violations of the country's anti-monopoly law, Barron's reported. Advanced microdevices sank 7.8 % on Friday, pulling back from a recent rally that had seen shares climb sharply on optimism over strong chip demand and a major multi-year partnership with OpenAI. Shares of other major chip stocks, including NVIDIA, Broadcom, Intel, were also under pressure due to the U.S.-China tensions centered around rare earths, which are a critical input for semiconductors. Domestic rare earth stocks, including MP materials, USA Rare Earth, and critical metals, all surged on the renewed trade war fears.

9:00The government recently took a stake in MP materials, and investors appear to be betting that more public investment could be on the way amid the U.S.-China trade tensions. After surging more than 20 % over the past month. Tesla retreated on Friday amid the rising U.S.-China trade tensions. The company relies on rare earths for its EV manufacturing. PepsiCo rose more than 3.71 % as investors looked to the consumer staples giant for safety after it reported strong earnings on Thursday, beating Wall Street's earnings and revenue expectations. Applied Digital popped more than 16.05 % after the data center company reported an 84 % year-over-year surge in revenue amid strong AI data center demand.

9:50The 10-year U.S. Treasury note yield fell sharply Friday, first following global yields lower and then reacting to the trade headlines. The dissent put it within shouting distance of last month's five-month low, just below 4%. percent. Crude oil initially stumbled Friday as a ceasefire in Gaza took hold, reducing the risk premium. Trade war concerns then sent it even lower, with front-month CME futures falling 4 % to close below$60 per barrel for the first time since early May. Crude is sensitive to concerns that tariffs could slow trade, leading to global economic damage. The Dow Jones Industrial Average plunged 878.82 points Friday, or 1.90%, to 45 ,479.60.

10:40The S &P 500 index plummeted 182.60 points, or 2.71%, to 6 ,552.51, and the Nasdaq Composite gave back 820.20 points, or 3.56%, to 22 ,204.43. For the week, the Dow Jones fell 2.73%, the S &P 500 index fell 2.43%, and the Nasdaq Composite dropped 2.53%. This has been the Schwab Market Update Podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or review. It really helps new listeners find the show. Join us for another update tomorrow.

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