Schwab Market Update

Published as of: February 20, 2025, 9:25 a.m. ET

(Thursday market open) After two straight record high closes, Wall Street ran into a red rollback sign this morning as Walmart's (WMT) outlook appeared to disappoint investors and hurt the broader market. Shares of the giant retailer crumbled 7% ahead of the open, putting pressure on other consumer stocks as well.

Yesterday's record close for the S&P 500 index (SPX) came despite limited participation in this year's rally by the Magnificent Seven and the 10-year Treasury yield staying near 4.5%. "Yields are still somewhat in the driver's seat for equities," said Liz Ann Sonders, chief investment strategist at Schwab, adding that the correlation between yields and stocks remains inverse. Yields got an updated signal today from weekly initial jobless claims, which remained in their intermediate-term range at 219,000, up 2,000 from a week earlier and unlikely to have much influence on trading.

Data intensifies late next week with January's Personal Consumption Expenditures (PCE) price index data, the Federal Reserve's favored inflation metric. Minutes yesterday from the January Fed meeting showed no rate cut urgency from policy makers. "The steadiness of the market may reflect the push and pull effect of two forces," said Kathy Jones, chief fixed income strategist at Schwab. "On the one hand, tariffs are likely to push up prices and inflation in the short run. However, counter tariffs, layoffs of federal workers, and immigration reduction are likely to slow growth." The bond market and the Fed are caught in the middle, Jones added.

1. Walmart deeper dive: Walmart narrowly beat analysts' average $0.64 earnings per share estimate with a reading of $0.66, and revenue came in as Wall Street expected, up 4.1% year over year. It was the outlook where things got muddy. For the first quarter, Walmart expects earnings per share of between $0.57 and $0.58, well below the $0.64 FactSet consensus. It also issued lower-than-expected guidance for fiscal 2026. In its release, Walmart touted "another quarter of strong results." U.S. e-commerce sales grew 20%, and U.S. sales at stores open a year or more grew 4.6% as higher-income shoppers continued flocking to the discount retailer. Looking to the current quarter, Walmart noted a "headwind" from one less day versus a year earlier thanks to the leap year, and cited currency headwinds. It sees full-year net sales growth of around 3% to 4%, versus Wall Street expectations of around 4%. The company's CFO told CNBC that Walmart wouldn't be "immune" to tariffs on Mexico and Canada and said, "There's far from certainty in the geopolitical landscape." Walmart hosted a conference call this morning, and more detail on guidance is becoming available but shares remained sharply lower an hour before the open.
    
2. Gold miner costs eyed: This afternoon brings earnings results from Newmont (NEM), a large gold mining firm, as the yellow metal continues surging to record highs on an almost daily basis amid geopolitical and U.S. policy uncertainty. Newmont shares are up 20% year to date but remain well below last year's peak after its last round of earnings disappointed in late October. In general, gold mining stocks have climbed less than gold itself, Barron's recently pointed out, despite analysts having raised their earnings growth expectations for the group. Newmont's rising capital expenditures the last time it reported took some shine off results, so investors might want to closely watch costs when Newmont reports. Rallies in commodities like gold (/GC) and crude oil (/CL) are generally bullish for companies producing them, but if the cost of extraction rises, profits might have trouble keeping pace. Rising labor costs have been a challenge for miners.
    
3. Catalysts cloudy: With the price-to-earnings (P/E) ratio for the SPX historically high above 22 and investors plugging in expected double-digit U.S. earnings growth this year and next, there's a sense that U.S. stocks have worked in much of the positive news, limiting upside traction until new catalysts arrive. Fresh direction might come from this morning's January leading economic indicators data, which analysts expect to be flat after a 0.1% decline in December. Tomorrow's final February University of Michigan consumer sentiment data also could be scrutinized, with expectations low at 67.8, equal to the preliminary reading. Inflation expectations in the report are likely to be in focus after rising sharply earlier this month.

• Carvana (CVNA) plunged nearly 10% before the opening bell despite the online used car retailer's earnings and revenue topping Wall Street's estimates. The company also expects significant growth in 2025. However, investors appeared to home in on lower gross profit per vehicle and shrinking wholesale volumes in the most recent quarter, Bloomberg noted.
   
• Roku (ROKU) shares added 2% ahead of the open after Jefferies upgraded the streaming company to Hold from Underperform, citing outperformance in the latest quarter.
   
• Target (TGT) shares dropped 2.5%, hurt by Walmart's early weakness. Target reports March 4.
   
• Alibaba (BABA) shares soared nearly 11% ahead of the open after the Chinese e-commerce giant easily beat analysts' quarterly profit estimates and narrowly surpassed consensus on revenue. In its press release, the company highlighted 13% quarterly cloud growth and AI-related product revenue rising triple digits.
   
• Palantir (PLTR) fell 3.3% before the open after sinking more than 10% Wednesday. Shares fell after The Washington Post reported that the Trump administration wants cuts in defense spending of 8% each year for the next five years, possibly a blow to the company that provides software and technology services for defense agencies. Shares also fell on news that CEO Alex Karp had adopted a new stock trading plan. Palantir in a regulatory filing disclosed that Karp’s new plan will allow him to sell nearly 10 million shares of company stock in the next six months.
   
• Apple (AAPL) slipped slightly in pre-market trading after the company introduced its iPhone 16e yesterday, designed for more budget-conscious shoppers at $599 versus $799 for the iPhone 16. The phone, which includes Apple Intelligence, goes on sale February 28. Apple's iPhone sales fell nearly 1% year over year in its most recent quarter to $69.14 billion, with smartphones accounting for 55.6% of Apple's revenue. Goldman Sachs kept a Buy rating on the stock following the iPhone 16e news.
   
• Shake Shack (SHAK) jumped 10% as quarterly earnings results from the restaurant firm beat Wall Street's estimates.
   
• Wayfair (W) climbed 6% despite a wider-than-expected fourth quarter loss. Revenue beat analysts' expectations.
   
• The 10-year yield slipped three basis points to 4.50% following Fed minutes that showed policy makers unenthusiastic about near-term rate cuts. "Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate," the minutes said. The minutes also surprised investors by touching on the possibility of the Fed pausing its "quantitative tightening" policy in which it's been letting its balance sheet run down and removing liquidity from the markets.

Growth vs. value: Learn more about what sectors constitute "growth" and "value" and why the subsurface details may challenge pre-conceived notions of both in the latest analysis from Schwab's Sonders and Kevin Gordon, director, senior investment strategist. For instance, tech—typically thought of as "growth"—is the largest weight in S&P 500 Value.

Hedgers are starting to come back to the market, as put buying is accelerating and put skews are steepening (now in the 63rd percentile for 90-day options over a three-year period, with roughly 1.8 puts for every call), according to the Cboe SKEW Index (SKEW). SKEW measures the implied volatility of the out-of-the money puts versus the out-of-the money calls, so when it steepens, this indicates traders are willing to pay more for the puts on a relative basis. This could denote increasingly bearish sentiment, which is interesting considering the S&P 500 index just set an all-time-high.  The last two times the weekly SKEW was this high were the weeks of December 16 and January 20. The SPX generally lost ground from December 16 through year-end and also slipped between January 20 and the end of that month.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap next week.

February 21: January existing home sales and University of Michigan Consumer Sentiment—final.
February 22: Expected earnings from Berkshire Hathaway (BRK.B).
February 24: Expected earnings from Cleveland-Cliffs (CLF).
February 25: February Consumer Confidence and expected earnings from Home Depot (HD).
February 26: January new home sales and expected earnings from Nvidia (NVDA).
February 27: Fourth quarter GDP second estimate, January durable goods, January pending home sales, and expected earnings from Dell (DELL) and HP (HPQ).