Breadth Widens, Nvidia Borrows, Estimates Cool

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch," where we go deeper on important market developments and provide our unique perspective. This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Market breadth remains middle of the road, with 56% of S&P 500^® Index stocks now trading above their 50-day moving average, but that's well above mid-May lows below 45% during the heart of the chip rally, implying more stocks are now participating in a general upward move. "Over the past month, about a third of the S&P is now outperforming the index itself, and I think we could again see some broadening out," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, or SCFR. Backing that up, the S&P 500 Equal Weight Index (SPXEW) was back to outperforming the cap-weighted S&P 500 year-to-date late last week. On another technical note, the Relative Strength Index (RSI) for both the S&P 500 and the Nasdaq-100^® Index (NDX) were just below 53 and just above 55, respectively, at the end of last week, neither of which raises overbought concerns. For that to be the case, a reading above 70 would have to be in place, which was the case for the Nasdaq-100 earlier this month before its 4.4% pullback between June 2 and June 10.

It's likely no surprise to investors that so-called "hyperscalers" spending hundreds of billions of dollars this year on AI account for a huge share of total S&P 500 capital spending, at around 40%. At the same time, however, hyperscalers' net income as a share of S&P 500 net income, is only about 20%, and that spread has been widening. "That, I think it's part of the reason why there's some heightened sensitivity about how much longer this can go on at the pace we're seeing," Sonders said in last week's Schwab On Investing podcast. "I think this AI story is going to continue to be paramount in driving market performance, but we have seen a bit of a broadening out. One of the concerns was not just valuation, which has been an ongoing concern, but the circularity of financing in this AI sphere," meaning companies investing in each other as they build out AI. 

While the latest earnings season wraps up with a few more names trickling in, analysts are looking ahead to second quarter results, which start rolling in in about a month. S&P 500 earnings growth is seen at 21.9% year over year in the second quarter, down from 28.8% in the first quarter and 23.2% for the calendar year, FactSet said. And for calendar year 2027, analysts see 16.2% year-over-year growth even as comparisons to year-ago levels get tougher. This goes a long way toward explaining the current record highs in stocks, and earnings strength looks extended well beyond the usual tech and communication services sectors, judging from FactSet's updated estimates. Energy is expected to lead the earnings growth pack this year with 66% annual gains, not a major surprise for anyone who's filled their tank recently. Info tech earnings are expected to climb nearly 45%, but materials earnings gains of nearly 40% and consumer discretionary gains of 14% offer evidence that the earnings surge goes beyond simply war and AI-related metrics.

On Monday, Nvidia (NVDA) might have surprised investors by announcing its first corporate bond sale in five years. The sale raised $25 billion, according to Bloomberg. This follows earlier bond offerings this year from Meta (META) and Alphabet (GOOGL), both of which sought cash to drive their AI spending, which is expected to total $700 billion industry-wide this year. Though Oracle (ORCL) shares got punished last week for the company's plans to raise more money, Nvidia shares simply seemed to shrug off similar news. Nvidia decided to raise cash despite having $62.5 billion in cash and short-term investments and free cash flow of $49 billion in the first quarter of its fiscal 2027. With so much demand in the AI markets, investors don't seem ready to punish Nvidia for issuing debt rather than simply tapping its balance sheet. Nvidia holds its annual stockholders meeting early next week and will perhaps offer investors a chance to tune in for explanation of Nvidia's choice here.