Watching Iran and Oil, Investors Prep for Earnings

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 Thursday, July 9th. To investors, apparent chagrin, Middle East fighting resumed this week. It's an inopportune time from a Wall Street perspective, as earnings season is about to start, and that typically turns focus towards corporate health and away from volatile geopolitics. PepsiCo earnings this morning and Delta Airlines tomorrow set the stage for big bank earnings next Tuesday. President Trump's declaration early Wednesday that the ceasefire is over, accompanied by U.S. and Iranian strikes around the Persian Gulf, shifted attention back to an arena companies have no control over, raising concerns that rising oil and yields could hurt their businesses.

1:07Unless this flare-up is brief, discussion on earnings calls in coming weeks could again focus on the potential impact and distract from what appears to be solid corporate growth even away from the bustling chip business. President Trump made his ceasefire comments after Iran fired on ships sailing through the Strait of Hormuz and both countries exchanged fire in confrontations Wednesday. The Joint Maritime Information Center, a U.S. Navy-led coalition that works with merchant ships in the region, raised the maritime threat level from substantial to severe, according to the Marine Insight News Network.

1:46Though crude had been moving through the strait and resupplying world markets before this week, Iran has been firing on ships traversing the Oman side of the strait, part of an apparent effort to control shipping on the route between Iran and Oman. While President Trump said Wednesday he's not sure if the two companies can make peace, negotiations that halted this week for the funeral of Iran's former supreme leader hadn't been canceled as of late Wednesday, and Trump said he doesn't believe the war will start again, even while threatening new attacks. Despite the ceasefire's disruption and renewed Middle East hostilities, volatility stayed relatively in check Wednesday, suggesting market participants aren't convinced the war is back on in any long-term way.

2:34The SIBO Volatility Index, or VIX, initially climbed double digits yesterday morning to above 18, then fell over the course of the session to below 17. VIX never tested levels near 20 that typically mark dramatically higher uncertainty. A move in that direction might be notable if it happens. VIX remains the measure to watch in coming days. Besides war and the start of second quarter earnings, investors appear concerned about potential central bank rate hikes and possible choppiness this fall approaching the U.S. midterm election. If the futures market is right, those who think volatility is cheap now may not see it much cheaper.

3:16When the market appears weak, investors often purchase more options as a form of protection, raising implied volatility.

3:27Turning to monetary matters, minutes from the Federal Reserve's June meeting showed half of policymakers expecting at least one rate increase this year and six expecting at least two. Some thought a hike might be warranted as early as June, though none voted for one. The takeaway appeared to be that upside risks to price stability remained elevated, while downside risks to achieving maximum employment had moderated a bit, the minutes said. Next week brings more Fed headlines, as market participants await Tuesday's semi-annual congressional testimony by Warsh. This gives legislators a chance to probe Warsh live on television to glean his thoughts on future policy, though he's typically played public appearances close to the vest.

4:17One question Warsh may have to handle is related to inflation expectations, which rose to their highest level in almost three years last month, despite falling oil prices at the time, according to the latest New York Federal Reserve Consumer Survey. Typically, under former Fed Chairman Jerome Powell, inflation expectations were front and center. Powell often talked about the importance of keeping those worries in check, and Warsh, an inflation hawk in his previous Fed tenure, may have similar feelings. PepsiCo kicks off the unofficial start of earnings season this morning after beating expectations last time out, thanks in part to solid snack sales.

4:59At that time, the company also reiterated its full-year forecast, besided volatility and uncertainty related to the Iran situation. and now may face the same geopolitical risk as could Delta, which reports Friday. Airline stocks were among the hardest hit yesterday by resumption of Middle East hostilities and rising oil prices. For PepsiCo, snack sales remain in focus as investors wait to see if the lower prices instituted earlier this year kept consumers crunching. Delta might have benefited from the so-called K-shaped economy that generally kept spending solid among higher-income consumers. The airline industry hasn't lowered fares despite the recent drop in oil prices.

5:45Next week brings earnings from the largest U.S. banks, chip industry giants ASML and Taiwan Semiconductor Manufacturing, and June inflation data. Speaking of data, weekly mortgage applications declined 2.2 % from the prior week, according to Wednesday's MBA Mortgage Applications Index. Today features initial weekly jobless claims before the open, seen at 220 ,000 according to consensus from briefing.com. That's up slightly from 215 ,000 the prior week, but well within the long-term range. Existing home sales for June are due soon after the open today and also are seen sticking relatively close to recent numbers.

6:28The consensus is for a seasonally adjusted annual rate of 4.2 million, Briefing.com said, up from May's 4.17 million. The mortgage rates remain high. Recent housing data showed some leveling off of prices and a slight rise in available homes. Major indexes began Wednesday sharply lower, then diverged. The consumer, financial, and industrial-dominated Dow Jones Industrial Average plunged, but the tech-oriented NASDAQ came back to end positive. Presumption of hostilities appeared to take a bite out of the rotation trade away from tech and into a broader set of sectors. Whether it lasts beyond Wednesday could be determined by Middle East News.

7:15The AI infrastructure trade, chips, memory, optical, networking, power, cooling, etc. has gone through a significant correction ever since Micron reported earnings, noted Nathan Peterson, Director of Derivatives Research and Strategy at the Schwab Center for Financial Research. Micron is down around 30 % from last month's peaks, and the PHLX Semiconductor Index closed below its 50-day moving average Tuesday for the first time since early April. Some of Wednesday's comeback for chips could reflect short covering or bargain hunting after the dip. The PHLX Semiconductor Index added 2.2%. Treasury yields initially spiked Wednesday on rising oil prices.

8:00A 10-year note auction later in the day, however, was a bright spot, with firm demand seen as investors flocked to buy a yield near 4.58%. Treasury auctions face increasing competition from higher rates abroad and rising corporate debt issuance related to the AI build-out. Wednesday's auction strength might ease some concerns about yields having to move much higher to attract interest. Only two of 11 S &P 500 sectors climbed Wednesday, Energy and Infotech. Energy was propelled by rising oil prices, while tech seemed to find buyers interested in names possibly less exposed to oil-related geopolitics.

8:43Apple and NVIDIA, which both lagged the broader market earlier this summer as Middle East tensions eased, rose nearly 4 % and 1 % respectively. Sometimes the biggest names benefit from perceived safety when geopolitical stress flares, though no investment is truly safe. NVIDIA might also have enjoyed some strength from a report in the Information Wednesday that China would allow limited purchases of NVIDIA's H200 chip for top AI firms as a supply shortage there has become problematic. China had been urging companies to buy from domestic manufacturers and NVIDIA's market share in the country has effectively fallen to zero, Reuters reported.

9:29While mega-cap tech shares mainly kept their heads above water Wednesday, the same can't be said for the S &P 500 Equal Weight Index, which weighs all components equally rather than by market capitalization. It dropped about 1.2%, a reversal from Tuesday when it led the S &P 500 Index. The latter reflects the mega-caps more because it's weighted by market capitalization and tech generally performed well Wednesday at the expense of smaller firms. The economic data is still firm and EPS growth forecasts are still intact, but there is still a ton of uncertainty out there, Peterson said. Factors driving uncertainty other than Iran include Fed policy worries that hyperscalers could alter their capital spending projections, speculative excess as indicated by the velocity of margin balance growth, and possible intervention in the yen as that currency hit new multi-year lows versus the dollar.

10:32Sectors sliding most Wednesday included consumer discretionary, financials, and materials. Metals prices, including gold and silver, both fell on the war news, hurting mining company stocks. Technically, the S &P 500 index might find support at levels between 7 ,390 and 7 ,415 on any further slide, according to briefing.com. Below that, there's more support between 7 ,335 and 7 ,350. Among individual movers Wednesday, consumer-oriented stocks, including homebuilders, airlines, and clothing and home goods stores, generally backtracked Wednesday amid concerns about rising borrowing costs and higher energy prices.

11:19Chips and AI infrastructure names recovered some of their losses Wednesday in what might have been a technical move after the sector fell below its 50-day moving average. Weakness in cyclical areas of the market amid higher crude prices and rising yields might also have attracted money back towards chips and AI, a theme seen often when the war was at its height in April and May. Broadcom jumped more than 5 % after Broadcom and Apple signed a$30 billion chip deal. The deal means Broadcom will design and produce technology for Apple products. Airline stocks were among the worst performers, with both Delta and United Airlines down nearly 2 % as oil prices surged almost 5%.

12:06However, U.S. crude stayed relatively tame considering the headlines, back basically to where it was in late June at around$74 per barrel. Chinese cloud provider Alibaba climbed 11 percent after a market research firm said Alibaba had gained market share in China's full-stack AI market. Energy names were among the few stocks outside of the tech arena to rise Wednesday, including gains of around 5 percent for Baker Hughes and Valero Energy. And SpaceX fell nearly 1 % to close below its debut price in what so far has been a disappointing introduction to the Nasdaq 100.

12:53The Dow Jones Industrial Average crumbled 576.76 points or 1.09 percent Wednesday to 52 ,348.39. The S &P 500 index lost 21.14 points or 0.28 percent to 7 ,482.71 and the Nasdaq Composite rose 51.96 points or 0.20 percent to 25 ,870.65. 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.

13:52For important disclosures, see the show notes and schwab.com slash market update podcast.