Schwab Market Update

Published as of: February 3, 2025, 9:15 a.m. ET

(Monday market open) Major indexes slumped and the dollar jumped in risk-off trading early Monday after the U.S. announced 25% tariffs on imports from Canada and Mexico and 10% tariffs on imports from China. The tariffs, larger than many analysts had expected, affect goods valued at about $1.3 trillion, representing close to 5% of U.S. gross domestic product (GDP). Tariffs could raise prices for U.S. consumers and sap demand for U.S. products overseas as retaliatory tariffs take effect, while U.S. companies that could see the most negative impact include automakers, agricultural firms, trucking and railroads, and semiconductor makers.

Under the new policy, the average U.S. tariff rate would rise to 10.7% from 3%. This could reduce U.S. GDP growth and raise core inflation by 0.7%, according to Federal Reserve modeling. As stocks retreated early today, Treasuries and the dollar saw "safe haven" bids, though no investment is safe. The dollar hit a two-week high, and continued strength there might add additional pain for U.S. multinational firms, as a strong dollar raises the cost of U.S. goods overseas. The counter effect is that a higher dollar lowers the cost of imported goods for U.S. consumers.

Though tariffs could steal the thunder, today brings the January ISM Manufacturing PMI^®, with consensus at 49.1, still below the 50 needed to show expansion. Also today, the Fed releases its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), providing insight on the loan climate. There was some concern about slower loan growth when big banks reported earnings last month. Palantir Technologies (PLTR) reports this afternoon, followed by Alphabet (GOOGL) tomorrow. Focus could be on capital spending after DeepSeek last week hinted at lower AI costs. Palantir said last time it reported that growth was accelerating, and it guided for fourth-quarter revenue of $767 million to $771 million.

1. Earnings, tariffs and volatility watch: With companies like Amazon (AMZN), Uber (UBER), Walt Disney (DIS), Alphabet, Palantir Technologies, and Arm Holdings (ARM) reporting this week, volatility could become a factor after backtracking most of last week from the DeepSeek-related high a week ago. "The recovery that stocks made following last Monday's AI scare speaks to the bullish bias in the price action," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "However, the technicals are a little iffy when looking at the Dow or the Russell 2000, which moved back below the 50-day simple moving average Friday. We're also going to get the monthly jobs report, which sent yields higher and stocks lower last time around, so I see the potential for higher volatility continuing." The Cboe Volatility Index (VIX) jumped nearly 20% early Monday, but stock market action was relatively orderly and major indexes were off their lowest overnight levels as the opening bell approached.
2. Breadth check: Though stocks ended on a sour note Friday, breadth improved late last week as 54% of S&P 500 stocks traded above their 50-day moving averages, up from 52% a week earlier. Wider breadth is typically a positive sign of investors embracing a broad range of stocks rather than just a handful. Rotation out of info tech continued last week into sectors like communication services, health care, consumer discretionary, and staples, while breadth surged in those sectors. Momentum in the SPX, however, slipped from a week ago, with the Relative Strength Index, or RSI, at 54 by late Friday after topping 60 in mid-January. Anything near 70 indicates overbought conditions. Momentum from here depends in part on the tariff reaction, but don't discount this week's heavy earnings schedule. The S&P 500^® index (SPX) rose 2.7% in January, but the tech-heavy Nasdaq Composite ($COMP) rose just 1.6%.
3. Equal weight outpaces: Tariff worries pulled down the SPX last week, but the S&P 500 Equal Weight Index (SPXEW), which weighs all shares equally to blunt the impact of mega caps, fell less. It's still not back to its late-November highs, however, meaning cyclical sectors that dominated the post-election rally haven't made a full recovery. Cyclical sectors like consumer discretionary, industrials, and materials often do best when investors are optimistic about the economy. Recent consumer confidence and sentiment data softened and inflation expectations rose, so investors might consider closely tracking this Friday's preliminary February sentiment data along with all the employment data on deck. Friday also brings the January nonfarm payrolls report; analysts expect January jobs growth of 150,000 to 175,000, a drop from December's surprisingly muscular 256,000 but close to the three-month average.

• Caterpillar (CAT), dropped 2.4% in pre-market action as investors worried about the possible impact of tariffs on the multinational construction, mining, and engineering equipment manufacturer.
• Bitcoin (/BTC) dropped nearly 3% as investors appeared to adopt a "risk-off" stance and moved into what they perceived as "safer" investments following the announcement of tariffs. Safe-haven buying appeared to take precedence, with the dollar and Treasuries climbing. The 10-year Treasury yield fell to 4.50% this morning, near its January lows.
• Coinbase (COIN) retreated 6.7%, hurt by the drop in bitcoin. Other crypto-related stocks also lost ground, including MicroStrategy (MSTR), down 7%.
• Nvidia (NVDA) fell 4% ahead of the open, Broadcom (AVGO) fell 3.5%, and Taiwan Semiconductor Manufacturing (TSM) fell 3.5% amid concerns that U.S. tariffs on goods from China might hurt demand for semiconductors. Most chip manufacturing is done overseas, making the industry vulnerable to the impact of trade wars.
• General Motors (GM) dropped 7.8%, Tesla (TSLA) slid 3%, and Ford (F) fell 4.7% as automaker shares got slammed by tariffs. The auto industry is among the most vulnerable to trade wars, with manufacturing and sales done across many borders. Many parts for U.S. automakers come from Canada and Mexico, and many U.S. automakers have large markets in those countries and in China.
• Constellation Brands (STZ), which distributes imported Mexican beer to the United States, fell 5.4%.
• Crude oil (/CL) jumped 2% to $74.04 per barrel on worries that imports from Canada might become more expensive due to tariffs.
   

Washington and bonds: In Schwab's latest WashingtonWise podcast, host Mike Townsend, managing director of legislative and regulatory affairs at Schwab, is joined by Collin Martin, director and fixed income strategist at Schwab, to delve into the complexities of the bond market and explore the recent volatility in yields, the Fed's balancing act with interest rates, and whether political pressures could influence monetary policy.

A six-month chart of the $DJI shows sharp gains from under 42,000 late last summer to around 45,000 in December. It fell sharply in January before clawing back toward 45,000, but the line between the December high and last week's high could be resistance.