Wall Street Eyes Earnings, Fed After Posting 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 Monday, April 20th. The new week starts with major U.S. indexes on a roll, up three weeks in a row thanks to improving Middle East news and a constructive start to earnings season. Markets got a major lift Friday when Iran announced it had opened the Strait of Hormuz to commercial traffic. Crude oil fell sharply on the news, though it remains about one-third higher than before the war and may not get back to those levels anytime soon. Investors wasted little time putting money back into risk assets on positive Iran developments, said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, Friday afternoon.

1:02Although there's still lingering uncertainty around Iran, oil prices, and the potential economic impact, it's as if markets have decided that the war is over and the oil price shock will be short-lived. President Trump and Iran's foreign minister both stated Friday that the strait is now open, though Trump declared that the U.S. blockade of Iran's ports would remain in place. Today's calendar is light, but later this week features earnings from key names like Tesla, American Express, and UnitedHealth Group, along with companies in the defense sector after the war raised weapons demand. There's not a ton of data ahead, however, and the Federal Reserve enters its quiet period ahead of the April 29th rate decision.

1:49The Fed is also in the news tomorrow as the Senate Banking Committee holds a confirmation hearing for Kevin Walsh, President Trump's nominee to succeed Powell. The timeline is very tight for confirming Walsh before Powell's term as chair ends on May 15th, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. We still have the issue of Senator Tom Tillis blocking any vote on Walsh until the criminal investigation of Powell is resolved. Tillis is fine with a confirmation hearing taking place, but he won't vote for confirmation until that investigation is over.

2:26Powell has said he'll stay on as temporary chairman if there's a delay past May 15th. Warsh has backed rate cuts based in part on what he sees is improving U.S. productivity that could keep inflation checked. Even if Warsh gets confirmed on time, though, he might not get his way. His ability to force interest rates lower is limited. The FOMC has 12 voting members, and right now Warsh does not appear to have many allies, Townsend said, referring to the rate-setting Federal Open Market Committee. There is nowhere near a majority of those members who seem inclined to lower rates anytime soon. As of late Friday, odds of a rate pause at the Fed's meeting this month stood at 99 percent, according to the CME FedWatch tool.

3:15Policymakers speaking last week sounded on the fence about rates, generally willing to wait before making any move. That said, hopes rose for at least one rate cut before the end of the year got a boost from Friday's Middle East news, rising to about 50 % from 30 % earlier in the week. Rates are likely to remain elevated even if the situation in the Middle East is quickly resolved, said Cooper Howard, Director of Fixed Income Research and Strategy at the Schwab Center for Financial Research. We expect the 10-year Treasury to remain range-bound in the near term, assuming the war in the Middle East doesn't escalate.

3:53Yields have moved up due to concerns that higher oil prices will translate into higher inflation. Even if the situation quickly resolves, it's likely that oil prices will stay higher than they were pre-war, thus supporting higher long-term yields. Tesla is the key earnings report to watch this week, with shares recently emerging from an eight-week losing streak. Auto deliveries missed market expectations last quarter, though EV demand may be on the rise thanks to higher oil prices. The company's robo-taxi and battery initiatives will likely be scrutinized when Tesla reports late Wednesday. Before that, the calendar is a little light in terms of data and earnings today, with the exception of a couple of steel industry company reports.

4:41S &P 500 earnings growth in the first quarter is seen at 13.2 percent, according to FactSet's updated estimate released Friday. However, that includes expected 45.1 percent growth in tech sector earnings, while eight sectors are expected to see quarterly earnings grow less than 4 percent from a year ago. Sectors with falling expectations this week versus a week earlier included industrials, consumer discretionary, health care and energy. The latest trends have been to the negative, said Lizanne Saunders, chief investment strategist at the Schwab Center for Financial Research in a podcast late last week.

5:19There has been a deterioration in near-term adjustments to earnings. The only sector for the first quarter that's seen an increase in estimates has been the tech sector. And that has largely been a function of a small handful of stocks, in particular Micron and NVIDIA, really accounting for a lot of that upgrade. That leaves 10 other sectors, Saunders added, all of which are no better than flat, and most of which are down in terms of estimates for the first quarter. With 10 % of S &P 500 companies reporting through Friday, 80 % posted a positive EPS surprise and 69 % reported a positive revenue surprise, according to Bloomberg.

6:02Quarterly revenue growth for S &P 500 companies that reported so far is average 13.2 % and earnings per share growth is up 32.1%, but it's still early to draw conclusions. Technically, the market appears to be near-term overbought. This means companies reporting earnings may have a high bar to satisfy investors. The sharp rally may also present investors with a lean towards sell on the news when companies report earnings in the coming weeks, Peterson said. A modest profit-taking pullback could occur due to detrimental Iran headlines, or there could be a post-earnings sell-off reaction to some key earnings reports.

6:43Recent winners such as ServiceNow, Tesla, Lamb Research and Vertiv report on Wednesday after the bell, for example. Market breadth, which improved notably earlier this month before stalling earlier this week and raising concerns about a narrow rally, surged Friday. The day ended with nearly 60 % of S &P 500 stocks trading above their 50-day moving averages, a respectable number historically, though well below peaks near 74 % earlier this year. I think we need to see a little more participation under the surface to feel some comfort that there is something lasting here, Saunders told CNBC late last week.

7:24There are still a lot of unanswered questions. I think this is an environment where you just want to go back to the disciplines of diversification across and within asset classes. This isn't the time to make big bets, Saunders added. Treasury yields fell with crude oil on Friday, but didn't test recent lows. The 10-year note yield dropped 6 basis points to 4.25%, down 7 basis points for the week. The near-term low is near 4.20%. Major indexes all climbed 1 % or more on Friday, and the Nasdaq Composite posted its longest win streak since 1992 at 13 straight sessions, the longest stretch since January of 1992.

8:09The Nasdaq, the Russell 2000 Small Cap Index, and S &P 500 Index all forged new record highs. Crude oil dropped 10.4 percent to$84.83 per barrel, the lowest close since March 5th. Nine of 11 S &P 500 sectors finished green Friday, highlighting the stronger breadth with consumer discretionary in the lead as airlines, automakers, home builders, hotels, restaurants, and casinos all saw the shares benefit from the drop in crude prices and associated slide-in yields. The Dow Jones transportation average climbed more than three percent. Other sectors performing well on Friday included industrials, real estate, infotech, and health care.

8:55Defensive utilities lost ground, as did energy. Dow and other chemical related stocks fell with oil as supply constraints appeared to ease. In individual trading Friday, Netflix dropped nearly 10 percent after beating earnings and revenue expectations, but disappointing with second quarter guidance, which fell short of consensus. Apple added 2.7 percent on a Reuters report that iPhone shipments in China jumped 20 percent in the first quarter, outperforming peers despite a four percent overall market decline driven by higher chip costs and supply chain disruptions. The PHLX Semiconductor Index closed at another new all-time high Friday, up 2.4 percent, helped by NVIDIA, Broadcom, ASML, and Taiwan Semiconductor Manufacturing.

9:45And Strategy climbed 11 percent, and other crypto-related stocks also gained Friday, as Bitcoin futures rallied 2.5 percent to above$77 ,000, the highest level since early February. The Dow Jones Industrial Average soared 868.71 points Friday, or 1.79%, to 49 ,447.43. The S &P 500 Index added 84.78 points, or 1.20%, to 7 ,126.06. and the Nasdaq Composite gained 365.77 points, or 1.52%, to 24 ,468.48. For the week, the Dow Jones Industrial Average climbed 3.19%, the S &P 500 Index rose 4.54%, and the Nasdaq gained 6.84%. 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.

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11:10For important disclosures, see the show notes and schwab.com slash market update podcast.