Chips on Edge: Mega-Caps Awaited After Rough Week

**Keith Landsford** (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 Landsford, and here is Schwab's early look at the markets for Monday, July 20th. The Federal Reserve enters its pre-meeting quiet period in a market that's anything but peaceful. Last week's dramatic chip sell-off has Wall Street in defensive mode, and investors are sweating out rising Middle East tensions that raised oil back above $80 per barrel. Earnings accelerate this week, including a triple feature from Alphabet, Intel and Tesla late Wednesday and Thursday. Other big names include General Motors, IBM, Texas Instruments and ServiceNow. Of the 47 S&P 500 firms reporting through midday Friday, 95% topped consensus on earnings per share and 76% surpassed estimates for revenue. As far as growth, earnings were up 52.4% and revenue up 15.8% on average among S&P 500 companies reporting, but it's still very early. Facts that expects earnings growth of 24.7% for S&P 500 companies. Second quarter results have been tracking exceptionally well, although it is early, said Nathan Peterson, Director of Derivatives Research and Strategy at the Schwab Center for Financial Research.
Today's data calendar is thin, but includes June leading indicators from the Conference Board at 10 a.m. Eastern time. The May headline rose just 0.1%.
It has not done a very good job of giving a heads up as to the direction for the economy, said Lizanne Saunders, Chief Investment Strategist at the Schwab Center for Financial Research. It's kind of flashed recession for a few years now, but interestingly, it did just start to tick a little bit higher. So I'll be looking to see whether that improving trend has legs. In Data Friday, June housing starts exceeded expectations, but building permits fell short. Preliminary July University of Michigan Consumer Sentiment improved more than expected at 54.4 percent. That topped the 50.7 percent briefing.com consensus and June's 49.5 percent. Long-run inflation expectations stayed at 3.3 percent, a constructive feature. However, gas prices, a major component of sentiment are up since early this month, meaning the final July report could reveal wrinkles. The economy can't be looked at without accounting for geopolitics, and crude's rally last week reflected rising Gulf tensions that could keep investors on their toes. Both sides made new threats as the old week ended, and ship traffic through the Strait of Hormuz remained thin. Crude trades well below string highs, perhaps meaning investors expect the current upheaval to fade. An extended conflict would likely put crude in worse shape earlier in the war, as stockpiles are now very thin globally. Recent weakness in South Korean and Japanese stock markets partially reflect concerns for those oil importers, as the global crude market benchmark price climbed 4% Friday and 14% for the week. South Korea's struggles and reports of China's new AI capabilities also contributed to last week's chip weakness. South Korea's major index has become effectively a barometer for the AI trade due to the position memory chips have as a bottleneck in the AI supply chain, explosive growth in profits, large market cap of the companies domiciled there, and growth of leveraged single-stock ETFs, said Michelle Gibley, Director of International Equity Research and Strategy at the Schwab Center for Financial Research. The chip sell-off might also reflect tremors ahead of reports from Alphabet and the other chip buyers. Some investors could be aiming for protection in case of hyperscalar plans to ease spending, though there's no evidence of that yet. Recent chip volatility appears to be more of evaluation and positionings reset than the end of the AI infrastructure cycle. The next hurdle for chips is earnings from hyperscalar chip buyers, starting with Alphabet late Wednesday. Technically, we are oversold in the Nasdaq 100 and the PHLX Semiconductor Index, so it wouldn't surprise me to see some mean reversion at some point this week, especially if Alphabet announces strong or increased CapEx guidance, Peterson said.
Treasure yields eased last week. The benchmark US 10-year note fell three basis points to 4.54 percent, still above the psychological 4.5 percent. Short-term yields were exposed to Fed policy outdualed longer-term yields Friday. Last week's US and European Consumer Price Index data eased inflation concerns slightly ahead of the European Central Bank's meeting this Thursday and the US. Fed's meeting a week from Wednesday. We expect the Fed to remain on hold for the next handful of meetings, but we acknowledge that the stickiness of inflation we're seeing raises the likelihood of a hike, said Colin Martin, Head of Fixed Income Research and Strategy at the Schwab Center for Financial Research. Inflation uncertainty could keep long-term yields elevated. Odds of a July rate hike were 14 percent by late Friday, according to the CME Fed Watch Tool, down from 34 percent a week earlier. Chances of a hike by September were 60 percent. This week offers little in the way of potential rate-moving data.