Schwab Market Update

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U.S. equities revved higher into the close to finish mixed in the final session of a volatile week that saw some key retail sector earnings reports exacerbate inflation worries. The S&P 500 posted its seventh-straight weekly loss, and is on the cusp of bear territory, as Ross Stores joined a host of retailers, notably Dow member Walmart and Target, in missing earnings projections and lowering guidance. In other earnings news, Applied Materials and Deere & Company both posted results that disappointed the Street, due to supply chain challenges and inflation pressures, while Palo Alto Networks topped profit projections and raised its guidance on strong cybersecurity demand. The economic calendar was void of any major releases today and Treasuries moved higher to apply some downside pressure on yields. The U.S. dollar rebounded from yesterday's drop, crude oil prices were slightly higher, and gold was little changed. Most European markets finished in the green, and markets in Asia were broadly higher after China cut a key lending rate.

The Dow Jones Industrial Average gained 9 points to 31,262, the S&P 500 Index added nearly 1 point to 3,901, while the Nasdaq Composite fell 34 points (0.3%) to 11,355. In heavy volume, 5.1 billion shares of NYSE-listed stocks were traded, and 5.4 billion shares changed hands on the Nasdaq. WTI crude oil edged $0.39 higher to $110.28 per barrel. Elsewhere, the gold spot price was up $0.80 to $1,842.00 per ounce, and the Dollar Index gained 0.3% at 103.05. Markets were down for a seventh-straight week, as the DJIA shed 2.9%, the S&P 500 declined 3.1%, and the Nasdaq Composite dropped 3.8%.

Ross Stores Inc. (ROST $72) reported Q1 earnings-per-share (EPS) of $0.97, including a $0.06 per share benefit due to favorable timing of expenses that are expected to reverse in subsequent quarters, and versus the $1.00 FactSet estimate. Revenue declined 4.4% year-over-year (y/y) to $4.3 billion, south of the Street's forecast of $4.5 billion. The company said it is disappointed with its lower-than-expected Q1 results, as a stronger-than-planned start early in the period was followed by underperforming sales over the balance of the quarter. ROST noted that it faced comparisons to record levels of government stimulus and significant pent-up demand last year, while the external environment has proven extremely challenging as the war in Ukraine has exacerbated inflationary pressures on the consumer not seen in 40 years. The company lowered its full-year EPS and sales guidance. Shares tumbled over 20%.

Applied Materials Inc. (AMAT $106) posted adjusted fiscal Q2 EPS of $1.85, below the expected $1.90, with revenues rising 12.0% y/y to $6.3 billion, below the forecasted $6.4 billion. The semiconductor equipment maker said demand for its products and services has never been stronger, but it remains constrained by ongoing supply chain issues. AMAT said its priority is to work quickly and creatively to bring more industry capacity on line, while accelerating the technology inflections that it believes will enable it to outgrow the semiconductor market in the years ahead. The company issued Q3 guidance that came in below expectations. AMAT traded lower.  

Deere & Company (DE $313) reported fiscal Q2 earnings of $6.81 per share, including a negative impact from expenses related to the war in Ukraine and a gain on the previously held equity investment in the Deere-Hitachi joint venture, making it unclear if the figure is comparable to the $6.69 estimate. Equipment revenue rose 9.4% y/y to $12.0 billion, below the expected $13.2 billion. The company said demand continued to be strong, but supply-chain and inflationary pressures are impacting their costs and production, while affecting its customers' input costs. DE did raise its full-year outlook for net income, noting that it believes demand for farm equipment will continue benefitting from positive fundamentals in spite of availability concerns and inflationary pressures. Shares fell over 10%.

Palo Alto Networks Inc. (PANW $479) posted adjusted fiscal Q3 EPS of $1.79, above the expected $1.68, as revenues grew 29.0% y/y to $1.4 billion, roughly in line with expectations. The company said it saw strong top-line growth in Q3, capitalizing on the strong cybersecurity demand trends. PANW raised its full-year and Q4 guidance. Shares rallied.  

The markets remained choppy and the S&P 500 registered a seventh weekly drop as investors continued to grapple with the ultimate implications of persisting inflation pressures and expectations of an aggressive Fed monetary policy tightening campaign. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Doom and Gloom: When Will It End?, how bearish sentiment is becoming a contrarian support; but for now, aggressive Fed action, tightening financial conditions, and the liquidity drain may keep downward pressure on stocks. You can follow Liz Ann on Twitter: @LizAnnSonders

Read all our market commentary, including our latest article, Stock Market Volatility: Schwab's Quick Take, on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Treasury yields lower with economic calendar dormant

Treasuries gained ground and yields have been choppy this week following a recent spike as markets anticipate tighter Fed monetary policy amid the backdrop of persistent inflation and signs of slowing economic growth.

As the Fed launches a series of rate hikes to try to cool off inflation, check out Schwab's Chief Fixed Income Strategist Kathy Jones' latest article, Bond Market Reset: What's Next? in which she discusses how major central banks are hiking interest rates rapidly and shrinking their balance sheets in an effort to "normalize" policy. Kathy addresses the question hanging over the market, What is a normal policy rate? Be sure to follow Kathy on Twitter: @KathyJones. Amid this backdrop also check out the latest offering from Schwab's Director of Fixed Income Collin Martin and Director of Fixed Income Strategy Cooper Howard titled 8 Questions on the Bond Market and Rate Hikes.

The yield on the 2-year Treasury note fell 3 basis points (bps) to 2.57%, the yield on the 10-year note declined 6 bps to 2.79%, and the 30-year bond rate decreased 7 bps to 3.00%.

The economic calendar was void of any major releases today.

Europe rebounds, most markets end the week in the green

European equities were mostly higher, except Switzerland which ended flat, to cap off a volatile trading week. The volatility has been fueled by festering inflation concerns and softer-than-expected earnings and guidance from some key retailers out of the U.S. The rising inflation pressures have prompted monetary policy tightening and concerns about the implications have dampened conviction among the global markets. However, China announced overnight that its banks will reduce rates on 5-year loans to try to support the economy, diverging from the campaigns underway by central banks in the U.S. and U.K. The ongoing war in Ukraine has also exacerbated inflation and economic concerns. Bond yields in the Eurozone and the U.K. traded mostly higher and global rates have gained ground amid this backdrop. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his latest commentary, Hedging Stocks Against Rising Rates, noting how investors should consider hedging the possible risk of higher interest rates with the addition of short duration stocks, a potential way to manage risk while remaining invested in the markets. You can follow Jeff on Twitter: @JeffreyKleintop. The British pound ticked higher versus the U.S. dollar and the euro was lower. In economic news, German producer prices accelerated to a record high of 33.5% y/y for April, from 30.9% in March, and compared to the expected 31.3% gain. Additionally, U.K. retail sales came in a bit stronger than expected for April.

The U.K. FTSE 100 Index was up 1.2%, France's CAC-40 Index increased 0.2%, Germany's DAX Index rose 0.7%, Italy's FTSE MIB Index nudged 0.1% higher, and Spain's IBEX 35 Index gained 0.9%, while Switzerland's Swiss Market Index was little changed.

Asia broadly higher to close out the week, China banks cut a key lending rate

Stocks in Asia finished broadly higher to finish a volatile week that has seen a flurry of headwinds continue to drain conviction, notably persistent inflation concerns and recent disappointing earnings results from some of the world's largest retailers. Also, the markets have been bracing for most major central banks tightening monetary policy, led by the world's largest economy of the U.S. However, China has been diverging by offering monetary policy stimulus and today Chinese banks cut rates on 5-year loans by a record amount to try to boost the economy that has been hobbled by recently renewed COVID-related lockdowns. Schwab's Jeffrey Kleintop discusses in his latest article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output. In other economic news, Japan's national consumer price inflation in April accelerated solidly and core prices—excluding fresh food and energy—came in hotter than expected. South Korea's producer price inflation also accelerated for last month.

Japan's Nikkei 225 Index rose 1.3%, with the yen gaining ground to continue to recover from its tumble versus the U.S. dollar seen in March and April. China's Shanghai Composite Index advanced 1.6%, and the Hong Kong Hang Seng Index rallied 3.0%. Australia's S&P/ASX 200 Index was up 1.2%, India's S&P BSE Sensex 30 Index jumped 2.9%, and South Korea's Kospi Index traded 1.8% to the upside.

Stocks extend weekly string of losses

The S&P 500 Index fell for a seventh-straight week and threatened bear market territory with supply-chain, inflation, geopolitics, and monetary policy headwinds continuing to drain conviction in stocks. The skittishness in the markets was exacerbated by a host of disappointing earnings reports, headlined by Dow member Walmart Inc. (WMT $119) and Target Corporation (TGT $155), which began to put the finishing touches on Q1 earnings season. The reports appeared to foster concerns regarding the health of the all-important U.S. consumer and seemed to expose inventory challenges that retailers face amid a shift in consumption from goods to services. The earnings results overshadowed a stronger-than-expected April retail sales report, while the economic calendar also showed the housing market, which along with the stock market make up a large portion of household net worth, continued to struggle amid the backdrop of low supply, surging prices, and the recent spike in interest rates. Adding salt to the bulls' wounds, jobless claims continued to nudge higher and the Leading Economic Index unexpectedly fell and registered the second decline of the year.

Most sectors fell, led by Consumer Staples, Consumer Discretionary, Information Technology, Industrials, and Communications Services, while the Energy sector continued its decisive year-to-date outperformance as crude oil prices rose for a fourth-consecutive week. Treasuries were choppy and the yield curve flattened as the markets digested another dose of hawkish commentary from Fed Chairman Jerome Powell. The U.S. dollar slipped after last week hitting a 20-year high, and gold prices nudged higher.

Next week's economic calendar could determine if the stock markets can snap their string of losses as the earnings calendar will slow down but some results from the retail sector will continue to pour in. Some key reports that may garner scrutiny include timely May Manufacturing and Services PMIs from S&P Global, a preliminary April report on durable goods orders, new home sales for last month, jobless claims for the week ended May 21, the first revision (of two) of Q1 GDP, April personal income and spending statistics, and the final May University of Michigan Consumer Sentiment Index. However, the minutes from the Federal Open Market Committee's (FOMC) early May meeting that delivered the first 50-bp rate hike in over 20 years is likely to headline the docket, along with some more Fedspeak, including remarks from Chairman Powell.  

Next week's international economic calendar will be dominated by preliminary reports on Manufacturing and Services PMIs out of Australia, Japan, the Eurozone and the U.K. Other reports due out that deserve a mention include: Australia—retail sales. China—industrial profits. Japan—Tokyo consumer price inflation. Eurozone—German business sentiment.

Schwab's Liz Ann Sonders, along with Kathy Jones, and Jeffrey Kleintop discuss the volatile market action in our latest Schwab Market Perspective: Downshifting. They note how the markets have become more volatile as economic growth slows and investors worry that the Federal Reserve will overshoot in its effort to control inflation, potentially raising interest rates sharply enough to tip the economy into recession. If the Fed sticks to the plan its officials have been suggesting, it will be one of the most aggressive rate-hiking cycles in recent history. Meanwhile, international stocks outperformed U.S. stocks as yields climbed and investors sought out stocks with more immediate cash flows, which tend to be more prevalent overseas.

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