After Messy Week of AI Selling, Key Earnings Loom

Keith Lansford (0:05)

Welcome 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 Keith Lansford, and here is Schwab's early look at the markets for Monday, October 19th. With data taking a back seat, focus turns squarely towards earnings ahead of reports this week from Netflix, IBM, Tesla, and Meta Platforms. It all comes after a rough ride on Wall Street Friday that saw volatility spike. Tech earnings loom at an auspicious time considering market conditions. By late Friday, the PHLX Semiconductor Index, or SOX, was down more than 15 percent in just over a week, testing lows last seen in mid-September. Concerns mounted all last week over rising debt levels for AI stocks as companies across the sector now face lofty interest costs. Data center builder CoreWeave became the face of that trade, falling another 12 percent Friday after a 15 percent drop Wednesday. Debt worries permeated well beyond one company, however. Oracle is another AI and cloud firm down dramatically over recent months for similar reasons. Shares fell more than 4 percent Friday. Other AI-related firms deep in the red Friday and much of last week included Lamb Research, Applied Materials, Advanced Micro Devices, and Micron. Worst hit on Friday included Super Microcomputer, Snowflake, Sandisk, and Arm Holdings. Tech shares began wobbling earlier this month on reports of lower than expected revenue from OpenAI, selling worsen last week as inflation data triggered debt worries and media reported advances in cheaper memory chip competition from China. Yarnings calendar could distract from the AI story, but not necessarily with today's light schedule. Things pick up tomorrow as GE Aerospace, 3M, General Motors, Netflix, and other companies less tied to AI post-results. With 10% of companies reporting, about 84% surpassed analysts' earnings consensus facts as said. It sees S&P 500 annual third quarter earnings growth of 29%. However, big banks reporting last week failed to impress market participants, judging by the stock market reaction. Regional banks pick up the baton this week.

Last week's US inflation data raised concerns across the market. Even so, Treasury yields retreated to 5.08% for the 10-year note by the end of the week, down 25 basis points in two days. This may not be a good thing, as it could reflect investors taking more defensive positions amid fears of economic lethargy. Typically, elevated inflation could push yields higher, said Cooper Howard, Director of Fixed Income Research and Strategy at the Schwab Center for Financial Research. However, concerns that the AI build-out could weigh on economic growth have prompted something of a flight-to-safety move. With markets balancing these competitive narratives, the potential economic impact of AI investment and persistent inflation, rate volatility is likely to continue. Defensiveness showed up beyond bonds last week as participants rotated into less AI-exposed sectors. Broadening breadth can be healthy, but it should be taken in context because tech growth is what pushed indexes to record highs recently. Without tech's robust participation, new index highs could be a challenge. Volatility came roaring back Friday and sent the SIBO Volatility Index or VIX above 20 for the first time since late July. Typically, 20 is seen as an important marker signaling uncertainty and bearishness. The broadening tech sell-off caused options traders to seek hedges. As earnings roll out, it's clear again that investors have high expectations and companies that can't step over their lofty bars might get punished on Wall Street. Muted to negative stock price reactions to solid earnings results show that the bar is getting higher this reporting cycle for companies to deliver, said Alexandra Semenova, the Financial Insight Strategist at the Schwab Center for Financial Research. Investors are looking beyond headline beats to guidance. The next Federal Reserve rate decision comes a week from Wednesday, meaning the Fed enters its quiet period this week. Bloomberg's measure of Fed speak keeps getting more hawkish and is back to levels last seen in March of 2023 As of late Friday, however, chances of a Fed rate hike on October 28th fell to 17 percent from as high as 45 percent earlier in the week after the hot CPI report, according to the CME FedWatch tool. For the full year, the odds of at least one more rate hike remain near 85 percent. By the way of futures trade, it appears most participants expect the Fed to hold off this month and then come back in December to crank the handle again.

Housing dominates data early this week, notably tomorrow's September housing starts and building permits. Housing numbers recently have been almost all negative, hurt by high mortgage rates and prices that remain lofty due to low supplies. In Trading Friday, major indexes plunged. Damage was more contained in non-AI sectors with the S&P 500 equal weight index, which weighs all components equally, down about half as much as the S&P 500 index. The tech-focused NASDAQ composite suffered its worst week since June amid rotation out of AI, but the Dow Jones Industrial Average, with more exposure to energy, financials and staples, advanced last week. Six of 11 S&P 500 sectors avoided the Red Friday, despite a worse than 1% index drop. Energy led as crude edged up following Ukrainian strikes on Russian refineries and Iranian attacks on oil shipping. US crude bounced 2.6% Friday to $99 per barrel, about a one-month high. Other leading sectors Friday were mainly defensive, including utilities and staples. This continued to trend from earlier in the week and reinforced ideas that investors have embraced a more risk-off outlook. Some of this could be pre-earnings jitters, with InfoTech and communication services each down more than 2% ahead of this week's reports from Meta and IBM. Technically, there was bearish news as the S&P 500 closed Friday below the 50-day moving average of 7,707. This line has been a firm support point for almost three months, though it's been tested several times. The SPX hasn't traded regularly below the 50-day since July. You would probably take a few more closes beneath it to have a wider technical impact, but it's worth watching.