Opening Market Update

Published as of: May 17, 2024, 9:00 a.m. ET 

(Friday market open) Rising Treasury yields kept Wall Street subdued early Friday, but major indexes remain on pace for another weekly gain heading into Nvidia (NVDA) earnings next week. Today features two Federal Reserve speakers and Leading Indicators data but otherwise little in the way of key developments.

The 10-year Treasury note yield edged above 4.4% early Friday after falling briefly below 4.32% yesterday, and stocks remain closely linked to the yield climate. There's little data to back the selling in Treasuries, which could simply reflect ideas that this week's sharp rally got overdone. The yield remains well under last month's peaks above 4.7% but reclaimed most of the drop seen after this week's constructive Consumer Price Index (CPI) report. 

Hopes for a so-called U.S. economic "soft landing" surged this month thanks to cooling jobs and inflation data, but it would be a mistake to think the economy is out of the woods. Crude oil prices remain relatively high, inflation is far from tame, and the Federal Reserve shows no signs of cutting rates anytime soon. High U.S. rates could keep the dollar elevated as borrowing costs overseas begin declining, a tough climate for U.S. exporters.

"The CPI report was good news for what it didn’t say," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. "It’s a step in the right direction that inflation isn’t reaccelerating, but it remains elevated. We expect inflation to continue to move lower but at a bumpy pace. We expect one to two rate cuts this year depending on the data."

Futures based on the S&P 500^® index (SPX) rose 0.08% shortly before the close of overnight trading and futures based on the Nasdaq-100^® (NDX) climbed 0.14%. Futures based on the Dow Jones Industrial Average^® ($DJI) edged up 0.06%.

• The 10-year U.S. Treasury yield (TNX) rose two basis points to just below 4.4%.
• The U.S. Dollar Index ($DXY) climbed slightly to 104.74.
• The Cboe Volatility Index^® (VIX) dropped to new 2024 lows and recently traded at 12.29.
• WTI Crude Oil (/CL) edged up to $79.46 per barrel.
• Bitcoin (BTC) rose 1.5% to $66,267.

Leading indicators next: Today's data schedule is light, but April Leading Indicators from the Conference Board provide one reference point. Analysts expect a 0.3% drop from March, Briefing.com said. Leading indicators dropped 0.3% in March and have been falling steadily for two years almost without a break. Typically, a drop signals slower economic growth ahead, but post-pandemic fiscal stimulus and a solid jobs market might make this metric less predictive than in the past.

Chinese data earlier today showed industrial production up 6.7% in April from a year earlier, above analysts' average forecast of 5.5%, according to Trading Economics. Fresh strength in China's industrial economy could mean heftier demand for commodities like copper and crude oil and industrial products like steel. There were less sunny aspects, too. Retail sales and fixed asset investment fell short of analysts' expectations, suggesting the economy continues to face challenges. The People's Bank of China moved to support the country's sagging property market earlier today.

European stocks are basically unchanged on the week, and inflation data out this morning didn't conflict with growing ideas that the European Central Bank (ECB) might lower rates at its meeting next month. Eurozone consumer prices rose 0.6% month over month in April and 2.4% year over year, both in line with analysts' expectations. An ECB rate cut would likely underpin the U.S. dollar.

Week ahead: Next week is dominated by Nvidia earnings Wednesday afternoon. The chipmaker is the final mega cap to report, and so far this earnings season, mega caps have driven most of the S&P 500's earnings gains.

The last few quarters, Nvidia kept enthusiasm bubbling by guiding for much more revenue than analysts had expected. The question is how long the company can keep this kind of parabolic growth going, but strong cloud results from Microsoft (MSFT) and Amazon (AMZN) earlier this quarter suggest AI chip demand continues to climb. More on Nvidia next week.

From a data standpoint, next week has nothing on the week we just experienced. Instead, a couple of housing reports, Federal Open Market Committee (FOMC) minutes, and consumer sentiment loom. The final week of May, after Memorial Day, could have more impact with the government's second gross domestic product (GDP) estimate and the Fed's favored inflation metric, Personal Consumption Expenditures (PCE) prices.

"Economic data has been, on the margin, slightly weaker than expected (but not weak in an absolute sense)," said Liz Ann Sonders, chief investment strategist at Schwab.

Big boxes line up: Following Walmart (WMT) yesterday, Target (TGT), Lowe's (LOW), and Best Buy (BBY) are on the calendar before the end of the month and could provide further insight into consumer trends. Lowe's and Macy's (M) kick things off next Tuesday before Target on Wednesday. Premium home builder Toll Brothers (TOL) is another name to watch.

Walmart's earnings yesterday were notable for what the company said was higher-income shoppers looking for bargains at the discount retailer. That raises questions about high-end shopper demand in general and could mean challenges for Target, which often can be perceived as more upscale than rival Walmart.

It's also worth noting that in its earnings call, Walmart said improving revenue wasn't due to inflation. This could mean more customers coming into the store and buying more items, not just the same customers paying more for the same stuff. It's a trend worth checking when other big retailers report to see if it's limited to Walmart or widespread. Such a trend would be welcome for investors in the retail sector because organic growth is generally appreciated more than growth through pricing alone.

Applied Materials (AMAT) earnings beat expectations when it reported late Thursday, as did revenue. Additionally, guidance for the July quarter was in line with analysts' expectations for the semiconductor equipment firm. Even so, shares retreated in premarket trading, though not by a lot. It fit into a pattern this earnings season in which chip sector companies that haven't far outpaced expectations for quarterly performance and guidance were punished by investors. This may be worth noting next week when Nvidia reports.

For Applied Materials, this was the third quarter in a row where shares fell after earnings, but the stock has done quite well this year, up around 40% so far.

Stocks on the move:

• Alaska Air (ALK) rose nearly 2% in premarket trading after getting an upgrade from Wolfe Research, which cited a "favorable combination" of earnings upside and valuation.
• Cracker Barrel (CBRL) shares plummeted nearly 15% ahead of the open after the company cut its dividend and disappointed analysts with updated guidance. "The company expects its third and fourth quarter fiscal 2024 financial results will be below its previous expectations, primarily due to weaker than anticipated traffic," Cracker Barrel said in a press release.
• Reddit (RDDT) is up more than 10% early Friday after OpenAI said it will partner with Reddit to bring its content to ChatGPT.

Thursday in review: Major U.S. indexes had a setback yesterday following Wednesday's rally to all-time highs. The markets spent much of Thursday in the green before late selling emerged, possibly reflecting lack of conviction to push the rally further after stocks came so far, so fast.

Only one S&P 500 sector, consumer staples, finished with gains yesterday. That was mostly due to Walmart and its earnings beat. Energy, industrials, materials, and consumer discretionary, often thought of as "cyclical" sectors that do best in a strong economy, made up the lower part of Thursday's scorecard, perhaps hurt by signs of slower U.S. economic growth.

For the year, the SPX is up just over 11%, the Nasdaq Composite^® ($COMP) has gained 11.2%, the $DJI is up 5.6%, and the Russell 2000^® small-cap index (RUT) is up just 3.4%. If you watch charts, keep an eye on the $DJI, where Briefing.com notes a "mini-golden-cross event" setting up in which the 20-day moving average crosses above the 50-day moving average, traditionally a bullish development.

With several U.S. indexes setting new records this week, check this quick Schwab video for thoughts on how to trade in a market that's at or near all-time highs.

Early today, futures traders place 9% chances of a 25-basis point rate cut at the FOMC's June 11–12 meeting, rising to roughly 30% for the late-July meeting, based on the CME FedWatch Tool. Investors build in 68% chances of at least one rate cut by September.

Traders corner: Learn how active traders approach and track the market in this Schwab article designed for those thinking of trading more often. It features Schwab trading experts discussing their experiences, including possible pitfalls to avoid, along with links to helpful thinkorswim^® platform tools.

Ideas to mull as you trade or invest

Power of prices: When you hear about companies having less "pricing power," it can suggest they don't have the ability to raise prices much because consumers balk at price increases. At some point, and it may be around now in the U.S. economic and inflation cycle, companies risk losing sales when they raise prices. Sometimes you hear retail companies talk in their earnings about the "average ticket size" and "same-store sales." These are good ways to track traffic in and out of stores and how much customers buy when they do come in. Same-store sales refers to results from stores open at least a year. If one or both categories decline, it could be a sign of inflation's negative impact. This week's CPI data was just one report, but it too could be reflecting companies losing pricing power. Often, this means narrower margins ahead.

Talking technicals: This week's surge to new record highs for the major indexes is an "I told you so" moment for technicians. A couple weeks ago, the SPX dropped to just above a key technical support level at the 23.6% Fibonacci retracement of the October-through-March rally, near 4,990. That also put the index below its 50-day moving average, near 5,120 at the time. The SPX found buyers down there, scrambled back above the 50-day, and rallied to new highs. This move backed up what technicians said at the time about chances for a rally if 4,990 held and the index could close above its 50-day moving average for a few sessions.

When you're right… Sometimes technical patterns don't work out, most notably back in March 2020 when the market crashed through one "support" point during the first days of the pandemic. But at times like these, technical traders might take pride in looking back and seeing how things played out. As for what's next, it's hard to say with markets at all-time highs, but for the SPX, the old all-time closing high of 5,254 likely becomes an area of technical support. "These support levels also give you a reference point to exit trades, so if support doesn't hold up and the underlying pushes lower you can admit you are wrong and reassess at the next potential support level or technical set-up," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

May 20: Expected earnings from Palo Alto Networks (PANW) and Zoom (ZM).

May 21: Expected earnings from AutoZone (AZO), Lowe's (LOW), Macy's (M), and Toll Brothers (TOL).

May 22: Expected earnings from Target (TGT), Petco (WOOF), and Nvidia (NVDA).

May 23: April New Home Sales, and expected earnings from Medtronic (MDT), Ralph Lauren (RL), and Ross Stores (ROST).

May 24: April durable goods orders, University of Michigan Consumer Sentiment—final.