Here is Schwab's early look at the markets for Monday, May 18.
After Friday's flop, markets brace for a loaded schedule of big-box earnings this week along with the final Magnificent Seven entry on Wednesday as Nvidia reports. It's also the week Kevin Warsh takes command at the Federal Reserve, where rate hikes are now baked into the market rather than cuts, reversing the scenario from earlier this year.
Wall Street starts the week licking its wounds after the high-flying tech sector took a dive Friday. Treasury yields and oil spiked, raising concerns about the rally's future and ending a six-week rally for the Nasdaq Composite.
The 10-year Treasury note yield jumped a dramatic 13 basis points to close above 4.6% for the first time in almost a year after President Trump's trip to China ended with no progress ending the Iran conflict. The tech-heavy Nasdaq 100 fell about 1.5%, and the 30-year yield topped 5%.
For the week, the 10-year yield climbed a ferocious 24 basis points, driven in part by several ugly inflation reports and the oil rally. Crude closed up more than 4% Friday to top $105 per barrel in the U.S. When Treasury yields rise, that typically slows the economy by raising borrowing costs. Shares of home builders and automakers like Tesla and Rivian slid Friday on ideas that consumers might pull back.
"Higher yields are not necessarily a bull market killer, because it depends on why they are going up—growth versus inflation--and the velocity of the move," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR. "However, breaking out to fresh cycle highs is significant. Perhaps higher yields are just providing traders enough of an excuse to take profits following a six-week surge in stocks."
Before Trump's meeting with China's President Xi, there was hope the two could propose a joint way of pressuring Iran into re-opening the Strait of Hormuz so oil could flow again. Though the two leaders agreed the strait should re-open, the language didn't go beyond that. It's unclear if China might be pursuing any back channels to get its ally and oil supplier Iran to make concessions, but if that's the case the two leaders didn't say so.
Crude is back above $100 per barrel and two U.S. inflation reports last week suggested high energy prices have started to worm their way into other products, as well. U.S. import and export prices also rose sharply, hurt by oil.
As of late Friday, the U.S. blockade on Iran continued, and the question is whether either the U.S. or Iran will give in first. Both economies are being hurt. Worries rose Friday that the conflict could flare up again as Trump said he's losing patience with Iran.
Turning to more domestic issues, today is the first day of Kevin Warsh's term as Federal Reserve chairman, and he takes over at an auspicious time with futures trading building in much higher chances of a rate hike at some point this year. The chance rose to nearly 50% on Friday, from 1% a month earlier, according to the CME FedWatch Tool. Futures trading puts odds of a hike at better than 50% by the January 2027 Fed meeting.
The first Fed meeting with Warsh will be in mid-June, and no rate move is expected. No rate cuts are forecast over the next year, per the futures market. That's opposite of the last Fed projections, which forecast one cut this year. The projections will be updated next month and become more crucial the longer the war, high oil, and lofty yields remain factors.
"We think they'll be on hold for several meetings," said Collin Martin, head of fixed income research and strategy, Schwab Center for Financial Research.
A shift toward rate hikes would be more likely if core inflation excluding food and energy prices continues to increase meaningfully, Martin added. Another factor that could lead to rate hikes is if the labor market starts to improve, perhaps leading to a lower unemployment rate.If geopolitics doesn't dominate discussion this week, focus might turn to a busy schedule of earnings.
Home Depot kicks it off tomorrow morning after what's been another disappointing quarter for the housing market. Home Depot shares have fallen sharply over the last three months, reflecting stubbornly high mortgages. High inflation and tariffs also dog the housing sector, as materials prices climb thanks to rising energy costs. Lowe's, a competitor of Home Depot, faces similar challenges and reports Wednesday.
The biggest retailer, Walmart, shares results Thursday morning and, while also facing inflation pressure, might benefit from shoppers seeking lower prices. Last week's April retail sales report seemed to suggest positive tidings for Walmart and other discount retailers like Ross Stores, which also reports Thursday. The data pointed to spending turning selective as households focus more on essentials and value.
Nvidia's results Wednesday afternoon might be the keystone this week, barring major developments in geopolitics. Shares hit all-time highs last week as the stock, long lagging the broader chip sector, appeared to play catch up.
Analysts expect Nvidia to deliver "a beat and a raise," meaning to exceed their expectations for the quarter and increase guidance. That's typically been the case with Nvidia, though it had a rare stumble in the year-ago quarter when it missed expectations due to getting locked out of China's chip market. This could make for easy comparisons versus a year ago, though any major jump in results needs to be taken in that context.
As of Friday, with more than 90% of S&P 500 companies reporting first quarter results, 84% had beaten analysts' expectations and earnings per share growth was 27.7% on a blended basis including companies already reporting and estimates for those to come FactSet said Friday.
Volatility surged 7% Friday as the Cboe Volatility Index (VIX) topped 19 at one point before pulling back slightly from intraday highs. Traditionally, 20 has been a key level to watch indicating heightened uncertainty. A move above 20 early this week might cause new caution among equity traders.
Data was light on Friday, but the Empire State Manufacturing Index for May leaped to 19.6 from 11.0 in April. Analysts had expected just 6.2, according to Briefing.com. The U.S. industrial economy, long a laggard, has shown signs of coming back to life in recent months.
Major indexes took their lumps Friday along with Treasuries (which move the opposite direction of their yields). While the Nasdaq Composite lost significant ground, small-caps were the hardest hit as the Russell 2000 Index fell 2.24%. Often, smaller companies are more vulnerable to higher rates, as they tend to rely on borrowing to a greater extent than their larger counterparts.
Ten of 11 S&P 500 sectors finished lower Friday, a 180 from earlier this week when almost all the sectors turned green. Only energy gained, thanks to rising oil, while cyclical sectors that depend on economic growth were among the worst performers. Materials fell most, almost 2.75%, as metals prices sagged under the weight of war and economic worries.
The PHLX Semiconductor Index went from victory to defeat as the week ended, falling a sharp 4%. That put it lower for the week, its first weekly decline since March. It's still up nearly 54% from the end of that month, however.
Among individual performers Friday chip and AI-related stocks fell after weeks of gains. Some of the names taking a tumble included Marvell Technology, Intel, Arm Holdings, and ASML. There wasn't any major sector-related news driving these and other names lower. Instead it appeared caution and risk-off trading ahead of the weekend amid uncertainty over yields and oil accounted for the selling. Many chip shares fell 6% or more.
Nvidia sank 4% Friday ahead of earnings this Wednesday and following recent record highs. Hopes for sales of its less advanced chips to China got a boost Thursday when Reuters reported the U.S. had cleared sales to 10 Chinese firms, but President Trump told reporters Friday that the topic of Nvidia's chips didn't arise in his conversations with President Xi.
ServiceNow rose 5% and other software stocks also climbed ahead of a busy schedule of earnings for the software group this week. Microsoft was another software gainer, up 3%.
The Dow Jones Industrial Average® ($DJI) crumbled 537.29 points Friday (-1.07%) to 49,526.17; the S&P 500 Index (SPX) dropped 92.74 points (-1.24%) to 7,408.50, and the Nasdaq Composite® ($COMP) eased 410.08 points (-1.54%) to 26,225.14.
For the week, the DJIA lost 0.17%, the SPX rose 0.13%, and the Nasdaq slipped 0.08%.