Warsh Prepares to Take Helm with Stocks Near Highs

**Collette Eau Claire** (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.
First, an important note. US markets are closed Monday, May 25th, in observance of the US. Memorial Day holiday. The Schwab Market Update Podcast will return on Tuesday, May 26th. I'm Collette Eau Claire, and here is Schwab's early look at the markets for Friday, May 22nd. Kevin Warsh has 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-see 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. The 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 piece 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. Ones to watch include Best Buy, Dollar Tree, CostCo, and Dick's Sporting Goods. Reporting season is pretty much over, otherwise, and today's 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 remain below levels seen at the peak last fall, though 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%, 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. The 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% 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% for the 10-year note, though up one basis point for the day. Performance 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%.
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 Skiffer. In data Thursday, April housing starts and building permits fell 2.8% and increased 5.8% month over month respectively to seasonally adjusted annual rates of 1.46 million and 1.44 million. Though 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 US, the highest heading into Memorial Day weekend since 2022
The weekend is significant because it historically represents the start of US driving season, extending to Labor Day in early September. Travel is typically busy on Memorial Day weekend, but recent inflation data pointed to much higher airfares, meaning investors might want to look at travel data when they return from the holiday next Tuesday. Any lag in air travel, there is 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% 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.