Schwab Market Update

Published as of: May 5, 2025, 9:22 a.m. ET

(Monday market open) Last week's data deluge coincided with nine straight winning days for the S&P 500 index (SPX), the longest in 20 years. Now, investors face a potential reality check from the Federal Reserve as its rate decision looms. Rates aren't expected to change Wednesday, but what Fed Chairman Jerome Powell says about future policy could affect Treasury yields and Wall Street sentiment. Stocks retreated overnight, threatening the win streak built mainly on trade optimism and decent earnings.

The Fed meeting accompanies a raft of U.S. Treasury auctions, with 3-year notes on the block today and 10-year notes Tuesday. Auctions took on new urgency the last few years as U.S. deficits rose. This puts the Fed in a tough place, though less so after Friday's mostly benign April jobs report. Chances of a June rate cut fell sharply as the data eased job market fears, pushing the timing of a likely first trim into July, according to the CME FedWatch Tool. "The market's pricing in between three and four cuts prior to the year-end, but that’s aggressive unless the labor market shows further signs of slowing," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research.

Earnings and data slow after the recent frantic pace, but Ford (F) and AI-centric Palantir (PLTR) report after the close with Advanced Micro Devices (AMD) and Walt Disney (DIS) on tap later this week. This follows blockbuster weekend news that legendary investor and longtime Berkshire Hathaway (BRK.B) CEO Warren Buffett plans to step down at the end of the year.

1. Earnings up, but so are valuations: With almost three-quarters of S&P 500 companies now reporting, 76% have beaten analysts' consensus on earnings per share and 62% have beaten on revenue, FactSet said Friday. Blended earnings growth—which includes companies that already reported and consensus for those yet to report—is 12.8% for the first quarter. That's well above expectations going in, but the recent rally of major indexes back to levels last seen on tariff "liberation day" a month ago after April's steep decline has still brought up valuations, a possible concern. The forward price-to-earnings ratio on the S&P 500 is back above 20, FactSet said, well above the 10-year average of 18.3. Second quarter S&P 500 earnings growth is now seen at 5.7%, down from 9.1% back on March 31, a sign that companies and analysts are getting more bearish about profits going into mid-year. In general, analysts remain bearish on the economy despite the recent rally in stocks, as tariff worries persist following a weekend of little progress and more tough talk yesterday from President Trump. Still, the White House expects to announce a trade deal this week, with roughly two months until its 90-day extension runs out.

2. Weak crude oil on trade, recession fears: Crude oil (/CL) sank to nearly four-year lows near $55 per barrel overnight when OPEC and its allies announced a larger-than-expected production hike for next month. This is mainly driven by Saudi Arabia, which can produce crude very cheaply and is reacting to other countries in OPEC exceeding their output quotas. The drop from above $80 earlier this year also reflects trade jitters and associated U.S. recession fears, as well as possible slower economic growth in China. But production also plays a role, even beyond OPEC's recent largesse. U.S. production remains at record highs, continuing a climb that began after the pandemic. Normally, crude oil prices below $60 would give U.S. drivers a break on their gasoline bills, but that hasn't been the case recently with many states making the annual and costly shift to less pollutive summer fuels. Also, even if gas cheapens, it won't necessarily provide an economic boost. Tariffs still threaten to raise prices for other products, with Microsoft (MSFT) last week announcing price hikes for its popular Xbox consoles and games. Any benefits consumers get from cheaper gas might be countered by higher prices for other items.

3. Buffett speaks out on tariffs as he names successor: Berkshire Hathaway fell 2.7% ahead of the open after Buffett's retirement news. Buffett also spoke out for free trade and against tariffs, saying "trade should not be a weapon," according to media reports, adding that protectionist policies are "a big mistake, in my view." The 94-year-old Buffett will hand the control yoke to Greg Abel, he said at Berkshire's shareholders meeting, where no major acquisitions were announced. The stock is up 19% year to date versus a 3% loss for the SPX. The company has $350 billion in cash and last paid a dividend in 1967. It's unclear if Abel, the new leader, will be more likely to seek acquisitions or distribute cash once he takes the reins.

- Netflix (NFLX) fell nearly 5%, Paramount (PARA) lost 1.5%, and Walt Disney (DIS) dropped 2.5% in pre-market trading after President Trump threatened to slap 100% tariffs on movies produced overseas. A major portion of U.S. movies are made overseas to take advantage of tax and other incentives, Barron's noted, and this could hurt profitability for studios. But the policy details aren't clear yet.

- Chevron (CVX) and Exxon Mobil (XOM) both fell more than 1% early Monday as crude oil prices sank.

- Tyson Foods (TSN) dropped 2.8%. The company's quarterly earnings beat Wall Street's estimates but revenue fell short. Sales of pork and prepared food fell year over year during the quarter.

- Microsoft dropped 0.75% in pre-market trading after a downgrade from Philip Securities, which cited the stock's recent price performance.

- Bitcoin (/BTC) and crypto-related stocks fell early Monday following last week's surge that accompanied a shift toward more "risk-on" trading. Coinbase (COIN) reports Thursday.

- The SPX is knocking on the door of possible technical resistance at the 200-day moving average of 5,745. Last week, the $DJI rose 3%, the SPX rose 2.92%, and the $COMP rose 3.42%. The small-cap Russell 2000^® (RUT) is up 16% from its April low. Stocks are "near-term overbought," Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, observed in Schwab's Weekly Trader's Outlook.

- The Cboe Volatility Index (VIX) is up more than 7% to above 24, historically high. Despite the recent rally back to levels last seen before tariff "liberation day," nerves appear frazzled. A higher VIX can imply choppiness ahead. The 50-day moving average of 5,582 could be important support for the SPX on further selling.

The Dow Jones Transportation Average ($DJT—candlesticks) is often seen as a barometer of the broader U.S. economy. It's up from the early April low, but unlike the S&P 500 index it hasn't returned to levels it saw before the April 2 tariff "liberation day." The delivery and airline industries got hurt badly by recession fears, and those concerns haven't gone away. This has kept transports lagging the SPX and well below their 200-day moving average (blue line).