Warsh Prepares to Take Helm 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.

0:18First, an important note. U.S. markets are closed Monday, May 25th in observance of the U.S. Memorial Day holiday. The Schwab Market Update podcast will return on Tuesday, May 26th. I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, May 22nd. Kevin Warsh is expected to be sworn in as the new Federal Reserve Chairman today, and major indexes are on pace to finish with mild weekly gains after a wait-and-seed type of session Thursday. NVIDIA's strong earnings failed to ignite much of a fire under the tech sector or in its own shares, for that matter, which isn't unusual considering its past performance after results.

1:02The major indexes made an attempt at gains around midday Thursday, retreated, then advanced again in the late going to finish at a new record high for the Dow Jones Industrial Average. Wall Street remains on tenterhooks regarding the Middle East situation. Crude retreated slightly yesterday on headlines that a peace proposal might circulate soon, though details remained light. That was enough, though, to keep crude oil and Treasury yields under pressure Thursday, giving stocks some room to move up. Retail earnings continue next week, even though Walmart and some of the other biggest names are now in the books.

1:40Ones to watch include Best Buy, Dollar Tree, Costco, and Dick's Sporting Goods. Reporting season is pretty much over otherwise, and today is likely to bring the latest update on S &P 500 earnings progress from FactSet. Week-ago numbers were strong, with earnings growth averaging nearly 28 % and well above 80 % of firms beating analysts' estimates. More interesting in today's update might be how analysts expect second quarter and full year earnings to look. They've been on the rise, helping fuel the rally to record highs. Despite the sharp rally in major indexes, valuations remained below levels seen at the peak last fall.

2:24though the price-to-earnings, or P.E., ratio for the S &P 500 index is above 21. It's below the 22 and above seen then. This reflects rising earnings expectations until later this year, to some degree. There's little in the way of earnings on today's calendar, though big boxes continue opening their books next week. The main focus is final May consumer sentiment from the University of Michigan, due soon after the open. Consensus from Briefing.com is for a headline sentiment reading of 48.2 percent unchanged from the preliminary May report and near record lows. Any change in long-term inflation expectations, which fell slightly month-over-month in the preliminary report, might be noted.

3:11The Federal Reserve keeps a close eye on these as it tries to keep inflation expectations anchored, to borrow a favorite expression of outgoing Fed Chairman Jerome Powell. Futures trading now factors in a better than 50 percent chance of at least one hike this year, according to the CME FedWatch tool. A hike looks more likely than not by the January meeting, the futures market suggests. It's unclear if Warsh will have the opportunity to talk when he's sworn in. Treasury yields stayed on relatively good behavior Thursday, finishing below 4.6 percent for the 10-year note, though up one basis point for the day.

3:52Performance varied across the curve, with shorter notes more exposed to near-term Fed policy rising moderately and longer-term yields barely budging. The premium of the 10-year to the 2-year yield is now 50 basis points, and the average 30-year mortgage is up to 6.7 percent. Going forward, we believe yields will remain elevated due to higher oil prices and inflation expectations, the Fed likely being on hold for the time being, and an elevated term premium, said Cooper Howard, Director of Fixed Income Research at the Schwab Center for Financial Research, or SCIFR. In data Thursday, April housing starts and building permits fell 2.8 percent and increased 5.8 percent month-over-month respectively to seasonally adjusted annual rates of 1.46 million and 1.44 million.

4:45Though starts fell, they did beat consensus views, and permits, a leading indicator, rose well above expectations, possibly worth noting for the housing sector that continues to struggle with mortgage rates at 10-month highs. One thing burdening housing and the rest of the economy is high energy costs, and this weekend is a keystone for that. Gasoline now costs more than $4.50 a gallon across the U.S., the highest heading into Memorial Day weekend since 2022. The weekend is significant because it historically represents the start of U.S. driving season, extending to Labor Day in early September.

5:27Travel is typically busy on Memorial Day weekend, but recent inflation data pointed to much higher airfares, meaning investors might want to look travel data when they return from the holiday next Tuesday. Any lag in air travel, there's no sign of one yet, might suggest consumers pulling back in the face of rising prices. Gas prices haven't slowed economic growth this quarter, according to the Atlanta Fed. On Thursday, its GDP Now measure rose to 4.3 percent for second quarter gross domestic product growth, though that's something that can change rapidly depending on data. Additionally, most analysts model far lower second-quarter GDP growth below 2 % on an annualized basis.

6:14Major indexes recovered from some of their early weakness Thursday in trading that had a risk-off element following midweek gains. Healthcare and utilities again went green, though discretionary took second among sectors as crude oil fell and consumer stocks did relatively well for the second straight day. Infotech finished up slightly, despite Nvidia's struggles. 7 of 11 S &P 500 sectors climbed, with staples finishing last as Walmart shares got bruised after earnings. It was the second straight quarter where Walmart struggled in the stock market following its earnings report. In individual trading Thursday, Walmart fell 7.3 percent despite solid quarterly results.

7:02Focus shifted to guidance of 72 to 74 cents for second quarter earnings below the 75 cents consensus. Second quarter sales guidance didn't change, but higher fuel costs appear to be hurting operating income. The company also announced a price rollback, which raises concerns about the revenue flow. Consumers at the lower end of the income spectrum appear to be showing stress from high prices across the economy, the company said. NVIDIA fell more than 1.7 percent Thursday, prolonging a trend where shares tend to roll over after strong earnings reports. The report didn't have much to dislike, but some investors might have wanted even more positive guidance on margins and second-quarter revenue.

7:48NVIDIA's gains this year remain well below many smaller chip companies as investors worry about competition and lack of any market in China. Even so, more than one analyst raised their price targets on NVIDIA shares. Arm Holdings, Lumentum, CoreWeave, SanDisk, and Western Digital were among the chip and AI leaders Thursday in a session that saw the Philadelphia Semiconductor Index rise 1 % despite NVIDIA's benching. Ironically, Arm's 16 % gains were mainly predicated on NVIDIA's strong results, which were positive for Arm's royalty outlook, according to Jeffries. BigBlue, otherwise known as IBM, surged more than 12 % after the U.S.

8:33government announced it's awarding$2 billion in grants to several companies in the quantum computing business, including IBM. Rigetti Computing, another quantum company affected, rose 30 percent Thursday. The government will receive a minority stake in each quantum company, the Wall Street Journal reported. Deere slid 5 percent after reporting earnings and revenue that topped analysts' estimates. Guidance was unchanged. Shares initially rose early Wednesday on the earnings beat, then fell as Deere still faces what it calls ongoing challenges within global agricultural markets. An outlook that bakes in continued softness in demand from large agricultural operations appeared responsible for the share decline.

9:20Intuit plunged 20 percent despite earnings-topping expectations and revenue-meeting expectations. The maker of TurboTax and QuickBooks also issued above consensus guidance. Intuit also plans to cut 17 % of its labor force, and analysts noted weaker performance in TurboTax. CoreWeave climbed more than 6%, lifted by solid earnings from NVIDIA, a key partner of the company. NVIDIA has an 11 % stake in CoreWeave. Shares of Japan's SoftBank rose 20 % amid AI enthusiasm after NVIDIA reported. Applied Digital rose 21 % after saying it's entered a long-term lease agreement with a U.S.-based hyperscaler.

10:09The Dow Jones Industrial Average added 276.31 points Thursday, or 0.55%, to 50 ,285.66, a new all-time high. The S &P 500 index gained 12.75 points, or 0.17%, to 7 ,445.72, and the NASDAQ composite edged up 22.73 points, or 0 .09%, to 26 ,293.09. 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.

11:09For important disclosures, see the show notes and schwab.com slash market update podcast.