MARK RIEPE: Welcome, everyone, to Schwab Market Talk, and thanks for your time today. It’s May 5^th, 2026. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice. My name is Mark Riepe, and I head up the Schwab Center for Financial Research, and I’ll be your moderator today.

We do these events monthly, and we’re going to start out by discussing some of the top themes that are on the minds of our strategists. We’ll be doing that for about 30 minutes, and then we’ll start taking live questions. If you would like to ask a question at any time, you can just type the question into the Q&A box on your screen, and then click Submit. For continuing education credits, live attendance qualifies for one hour of CFP and/or CIMA continuing education credit if you watch for a minimum of 50 minutes. That means you aren’t eligible for CE if you’ve watched for less than 50 minutes or if you watch the replay. To get CFP credit, please enter your CFP ID Number in the window that should be popping up on your screen right now. I see it on the right-hand side of my screen. And then Schwab will be submitting your credit to the CFP Board on your behalf. In case you don’t see it, don’t worry, you should be able to see that again towards the end of the webcast. For CIMA credit, you’ll have to submit that on your own. Approximately 50 minutes after the show start, the directions for how to submit that can be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, we’ve got one more option for people seeking proof of attendance. There’s a widget called the Certificate of Attendance, and that’s found at the bottom of your screen in the widget dock, and that will be available after 50 minutes of attendance.

Last thing, before we turn things over to our speakers, I wanted to call your attention to a couple things on the webcast console. In the top right-hand corner you’ll find a link to our Quarterly Investment Outlook for Advisors. And in the bottom right-hand corner, you’ll find links to additional resources, including a link to a client-approved chart on TIPS, and a recent article on digital currencies.

Our speakers today are Collin Martin, our Head of Fixed Income Research and Strategy; Liz Ann Sonders, our Chief Investment Strategist; Michelle Gibley, our Director of International Equity Research and Strategy; and Jim Ferraioli, our Director of Digital Currency Research and Strategy.

Collin, we are going to start out with you. So Fed expectations continue to shift. We had an interesting Fed meeting last week, with four dissents. It seems fair to say that maybe there’s rising uncertainty about the outlook for future Fed actions. What are you expecting right now, given where we’re at?

COLLIN MARTIN: Yeah, it’s a great place to start, Mark. We’re not expecting much right now. Our main view that we kind of shifted a little bit a few months ago after the conflict began, and we continue to expect the Fed to really do nothing for the next several meetings right now. And we kind of got that dose of uncertainty at the meeting last week, which was really interesting for a meeting that nothing really happened from a rate standpoint. The Fed held rates steady as expected. There were no updated economic projections or updated dot-plot, yet plenty of moving parts with the dissents and with Powell’s decision to stay on.

The dissents are a little bit nuanced. Even though there were four dissents in the statement, one dissent was for actually lower rates. That was Governor Miran, who has dissented at every single meeting, even when they’ve been cutting rates in favor even more rate cuts. And a friendly reminder that that’s the seat that Warsh will be replacing. He’s not replacing Powell as governor, he’s replacing Miran. The other dissents are really interesting, and that’s where the uncertainty comes into play, in that they dissented against the statement, and what they viewed as an easing bias. Because if we go back to since the Fed began easing back in September of 2024, there’s been a very similar language about the idea of additional changes or adjustments to policy. And I think they read that as signaling that the next move would be lower because that’s what it signaled since September of 2024, and they see the risks as much more two-sided. And that really comes down to inflation and the rise in oil prices that we’ve seen lately. If you look at the economic fundamentals, inflation is just still too high. It’s been above 2% for five years and counting. It’s unlikely to come down anytime soon given where the price of oil and gas is. So there probably shouldn’t be any discussion of rate cuts in the here and now. If we get some good news in the Middle East that can maybe bring the price of oil or gas down, maybe we’ll start talking about rate cuts maybe by the end of the year into early next year, but for now, wait and see. It’s going to be a little bit difficult for Kevin Warsh as he comes in. Now, we’re not sure what his views are, but if he is in favor to some degree of rate cuts, I think he’s going to have a hard time because there’s clearly a handful of both voting and non-voting members who think the Fed should do nothing, and see the risks as more two-sided right now.

MARK: Collin, you mentioned the Middle East, obviously a lot of uncertainty in the Middle East, and yet the treasury market has been trading in a relatively tight range since March. So do you see bonds moving out of that range anytime soon?

COLLIN: Not really, Mark. We think the 10-year treasury yield will probably stay in that 4% to 4-1/2% range. We’ve kind of held that view for the past few months, where sticky inflation, fiscal concerns, and the kind of themes and trends with global bond markets should all keep those yields elevated a little bit. But if we’re looking at what could drive them out of the range, we would want to look at what could pull them a little bit higher, what can pull them a little bit lower. We think to see lower yields right now, we would probably need to see a weakening labor market, slower economic growth, or I think more importantly, recession risks rising, and that’s really not our base case right now. So I think to get the 10-year treasury yield under 4%, we would like to see significantly slower growth and those risks rising. Again, not our base case.

I do think there’s probably more risks to slightly higher long-term yields right now versus slightly lower long-term yields, mainly due to the conflict and the price of oil. There’s no shortage of things that can direct where treasury yields go, but we’ve seen a pretty strong relationship over the past six to eight weeks with the price of oil and with 10-year treasury yields. And with the situation still very fluid, with no resolution in sight right now, and I’d say risks to maybe slightly higher oil prices that can pull long-term treasure yields up a little bit from here. We’re not expecting them to surge. I think that’s important. We’re not expecting the 10-year treasury yield to go to 6%, 7%, anything like that, but it did touch 5% back in 2023. So if we’re looking at risks, again, not our base case, but if it were to move a little bit higher, maybe we would see 40 to 50 basis points of additional upside. And given that risk, that’s why we’re a little bit more cautious about adding duration to portfolios right now, just because we do think yields can move modestly higher from here.

MARK: So thanks, Collin. Let’s talk a little bit about credit risk. During April, for example, I believe high-yield bank loan funds tended to be some of the better performers. Do you see that continuing?

COLLIN: We don’t think the magnitude of outperformance can continue. We saw really big tailwinds in April because we saw sell-off as March progressed. And if we look at the high-yield market, for example, spreads had risen by close to 50 basis points or so for the month, touched I think over 3.3% by late March, and have since come down pretty sharply. And now we’re back with spreads being very low. So if we look at what our outlook is going forward, it’s more about earning that spread as opposed to seeing spread compression, which can boost prices relative to treasuries and result in some excess returns. We’re neutral on investment-grade and high-yield corporate bonds, but that means we don’t suggest you take outsized risks there, but you can hold them for your clients if it fits their strategic allocations. We’re more focused on the yields they offer than the spreads they offer. So valuations are a little bit tight, but we’re generally okay with corporate fundamentals. I know Liz Ann will touch on this, but corporate profits remain relatively strong. We had a decent earning season. It looks like companies are in good shape to service those debts. So if you look at investment-grade corporates, the average yield of the Bloomberg Investment-Grade Corporate Bond Index is over 5%. The average yield of the Bloomberg High-Yield Corporate Bond Index is just over 7%. So we think those absolute yields are somewhat attractive, but the low spreads, meaning the lower risk compensation relative to treasuries, prevents us from being a little bit more optimistic about their excess return outlooks.

MARK: Collin, yields have been generally rising across the globe for the last few months. So how do you think about the role international bonds play in a portfolio right now?

COLLIN: Well, international bonds, they can play a number of roles. I mean, one thing is diversification. Especially if you’re looking at local currency bonds you get some movements you don’t necessarily see here in the domestic markets. If you look at the yield or income outlooks there, we have seen yields rise relatively sharply for global developed market bonds. If we look at the average yield of the Global Aggregate Index ex US dollar, it’s back over 3%, and it’s more than 15-year high was only 3.3% a few years ago before a lot of the central banks began cutting rates. So it’s actually pretty close to its recent peak. And if you compare that to the Ag, for example, the average yield of the US Ag is more than 100 basis points lower than its recent peak. So we’re seeing a little bit more value in global bonds right now, even though they offer slightly lower yields than what you can get in the US. We’re still a little bit more cautious though, because the direction of interest rates appears to be a little bit different when we look overseas versus in the US, because there appears to be more of a hiking bias or hiking potential with the European Central Bank or the Bank of England. If you look at implied probabilities for both of those central banks, it looks like we might get two to three rate hikes over the next 12 months, where we’re expecting the Fed to do nothing. And that’s because those central banks, they focus more on inflation, where here the Fed focuses on inflation and the labor market. So they’re more focused on the rise in oil prices and what that’s doing to the prices in their countries. So we do see more risk of, I think, upside in yields given the hiking bias. So yes, yields are a little bit more attractive, but we’re still a little bit cautious on an asset class in case yields continue to rise.

MARK: Thanks, Collin. Liz Ann, let’s bring you into the conversation here. You heard Collin talk a little bit about what’s going on at the Fed. What do you think about Fed policy from the standpoint of an equity investor, and how are you thinking about that in light of the assumed ascension here of Kevin Warsh to Chair?

LIZ ANN SONDERS: Yeah. So obviously, when we had, it was about a year and a half ago, the initial launch into an easing campaign, or attempt at an easing campaign by the Fed, that was based on weakening in the labor market. And we hadn’t had an inflation spike at that time, so that gave them the leeway to ease policy, but it was short-lived because it was really only cracks in the labor market. Labor market improved, so the Fed had to put itself in timeout mode. And then of course, the same thing happened last fall. They launched into another easing campaign, then they had to pull back. Now I think the circumstances are a bit different because inflation, as Collin mentioned, is still pretty comfortably above the Fed’s target. So that does not give them allowance to ease policy, and so far you continue to see resilience in the labor market. I think there’s two things to be mindful of.

I think any decision to lean toward cuts would be driven by what’s going on in the labor market, meaning you would need to see meaningful deterioration, I think, to justify rate cuts in this environment. Now, for a while, particularly in the beginning of the onset of the Iran war, you actually saw rate hikes start to get priced in. I think rate hikes would only get fully priced in if the inflation side of the Fed’s mandate really shot up from here. So I see the dual mandates as operating, one, in the case of the labor market relative to what the Fed will do or could do on the rate side, inflation dictating what the Fed does on... I mean, on the cutting side… inflation dictating what they do on the hiking side.

The other thing I’d say is, I think sometimes there’s this impression that as long as the Fed is easing or telegraphing some sort of easing, or if the market is pricing and easing, that that’s inevitably just good for the equity market. It’s the why that matters to the equity market. When cuts are being priced in because inflation is being reigned in, that’s a very positive backdrop for the equity market. If cuts are being priced in because growth is deteriorating and alongside that the labor market is deteriorating, that’s less good from an equity market standpoint. So don’t just focus on the what, but focus on the why.

MARK: Another factor here is, of course, the war in Iran. I guess at what point are we going to start to see more of an impact from the war on the US economy?

LIZ ANN: Well, we’re certainly seeing an impact already, Mark. Everybody faces it when they go fill up their cars. So you’ve got gas prices up around 4.50. And that is such a visceral thing for American consumers. It’s one way that they gauge the health of the entire economy is what it costs to fill up their cars. So this is top of mind. It helps to explain why a metric like consumer sentiment put out by University of Michigan on a monthly basis is at an all-time low right now. The questions that are asked as part of consumer sentiment tend to gear the index reading to what’s going on in inflation. And many people think of inflation as prices, not rate of change, and they often think of prices as sort of characterized by gas. You’re seeing it in diesel. That already is having ripple effects because so much of the goods that get transported in this country are done by truck, and so diesel has an impact there. The Strait of Hormuz also brings fertilizer through its routes. That obviously impacts crop production, so that can have a near-term effect, and to some degree already is on farmers. Longer term, it could continue to feed into food prices. So the first order effects, we’re already starting to see. Another example would be rising airfares and/or compression in the routes that the airlines are putting out there in order to save on those fuel costs. So you’ve got the first order effects to a large degree. The second order effects could continue to face us.

I get a sense that the real sticking point from an oil price standpoint, if there’s longevity to it, and I think longevity is the key here, is probably around 125 on Brent oil. That’s not my just thumb in the air guess, but the consensus that I’ve gleaned from people who are a lot more expert in this. So time is not on the side of the economy as long as the Strait of Hormuz remains closed.

MARK: So despite a lot of the sort of surface level bad news we’ve been seeing, the US stock market remains at an all-time high. So what have been the factors that have been providing the support for that move upward?

LIZ ANN: Well, a little bit of shorter-term market players maybe getting a little bored with focusing nonstop on the war, and every narrative change, and every swing in the price of oil, and every truth social post, and also having something else to pay attention to in the form of first quarter reporting season. And earnings have been incredibly strong. You’ve got a north of 80% beat rate, which is historically strong. You’re at about a 28% blended growth rate for the S&P 500. That’s about double where estimates were at the onset of reporting season. If you’re going to nitpick, though, there is concentration embedded in those much higher numbers, given that most of the increase has been concentrated in the technology and communication services space. Also a little bit in materials because of the boom happening in commodity prices, but largely concentrated in tech and communication services. And even within those sectors, there’s not a lot of breadth there. In fact, if you look at three stocks in particular, the three of the Magnificent 7 stocks, so Alphabet, Amazon, and Meta, and they span in communication services, and in the case of Amazon, consumer discretionary. And those three stocks alone account for about 70% of the dollar increase in earnings per share expected now for calendar year 2026. So we’ve talked a lot about concentration in the context of market performance-related concentration, but you are finding that embedded in the earnings story as well. So strong earnings, but be mindful of the fact that it’s very concentrated in some of these mega-cap AI-driven type names.

MARK: I told everyone we take questions after we’re done with all the speakers, but we’ve got a great question here that was just submitted that I think is on point here with earnings, Liz Ann. Do you expect this trend to continue in terms of these higher earnings?

LIZ ANN: Yeah, so profit margins are also plumbing near cycle highs, running at close to 12%. We had a little bit of pop higher than that a couple years ago, but trending higher, and it doesn’t look like they’re ebbing. And every quarter for many quarters now, there’s been concern about peaking profit margins, but that’s not the case. That ostensibly should allow not only a continued runway for strong earnings growth in the remaining part of this year, but it also is a good sign from a productivity standpoint, so that’s a broader economic story. But any diminution to profit margins, and that’s the thing to pay attention to as we continue reporting season and hear from companies, I think that that would represent a bit of a risk. But that profit margin story has been the underlying provider of that boost to overall earnings, and so far, so good.

MARK: Last question for you, Liz Ann, and then we’ll bring in Michelle. Tell me a little bit about the difference between sort of the story that’s being told if you just pay attention to stock market indexes versus kind of diving under the surface of the indexes. What makes that especially interesting right now?

LIZ ANN: Sure. So lots of ways to look at that. Some of it is via measurements of breadth, and there’s a lot of ways to do that right now. You’ve got the S&P with about 55% of stocks trading above 50-day moving average. And that’s not bad, but it’s not the kind of breadth thrusts that you would hope to see alongside a move to all-time highs. You also have only 5% of stocks within the S&P 500 that are trading at 52-week highs. It’s only 9% that are trading just at four-week highs. So not a lot of participation. It’s only about 12%, I think, of stocks over the past month within the S&P that have beaten the index itself. So a narrow move higher. It’s not the kind of market, again, that you like to see where you get these significant breadth thrusts, you know, 10-to-1 kind of days, the well-known wide breath thrust courtesy of my first boss in the business starting in the mid-80s. So I would like to see it broaden out a little more.

Another way to look at it is although the S&P at the index level avoided a correction this year, its maximum drawdown was 9% and change, the average member maximum drawdown within the S&P is negative 20%. And in the case of the NASDAQ, which did have an index level drawdown of correction territory minus 13%, the average member within the NASDAQ has had a 34% drawdown. Now, that kind of environment has happened in the past. It just points out that sometimes you get corrections that happen via a process of rotation, not the bottom falling out all at once. Clearly, that’s been the case so far this year.

MARK: Thanks, Liz Ann.

Michelle, you and your team, you’ve been publishing a different scenario analysis of the impact of the conflict in the Middle East. What’s your latest thinking right now in terms of the impact on international and economic earnings growth in light of, as Liz Ann was mentioning, some of the big increase in oil prices?

MICHELLE GIBLEY: Yeah, and as Liz Ann mentioned, it all goes back to the Straight. The longer the Straight is closed effectively, the bigger the global energy shock, the negative impact on GDP and upside to inflation. So we have four scenarios that we’ve been publishing. The last one was published on April 10^th. Things haven’t really changed much because the Straight is still effectively closed. So the four scenarios are upside case, a moderate and adverse case, and then a severe case. The moderate and adverse cases are still the most likely. Moderate case has a gradual normalization of energy supply and prices in the second quarter, and then that would have a moderate impact on growth and inflation. The adverse case is continued disruption resulting in normalization only as the second half progresses. And in that case, we have stagnation, potential in parts of Europe and Asia, Central banks in Europe likely raise rates, as Collin mentioned, and then a limited fiscal response. And then the severe case where there’s no normalization this year, it’s a low probability, but it’s not zero.

Generally, Europe and Asia are the most exposed as big energy importers. The US and Canada are least exposed as energy exporters. In terms of developed markets excluding the US, for that asset class to do well, we really need a quick end, and that doesn’t really appear likely at this point. If we think about a restart of energy production, kind of the best case, once it happens, it might happen in three different phases, and this would happen when risks in the water are cleared. So phase one is, you have all these ships in the Gulf that are kind of trapped right now, but they start moving and that reduces that floating inventory. And that might take about one to three weeks. And then you factor in the transit time, about two to three weeks to Asia, two weeks to Europe if there’s no disruption in the Red Sea, four weeks if there is disruption. And then phase two, you have empty ships arrive into the Gulf, and that kind of opens up new storage and production can restart. And there might be some overlap between phase one and phase two. Phase three is where you get kind of a restoration of curtailed production.

Regardless of whether the Straight is reopening or not, energy prices are going to take time to normalize. The IEA believes that 80% of oil production could normalize in two months, but that still leaves a lot that has yet… that will take longer. And then on the LNG side, production in Qatar could take several years to normalize. So these delays in returning to normal means higher energy prices in the meantime.

MARK: Michelle, really for at least the past couple years, I think, you’ve been highlighting the importance of increased defense spending on the part of European countries, and how that’s going to translate into further economic growth. Now we’ve got the situation in the Middle East. How does that factor into your analysis?

MICHELLE: Yeah, a year ago, last spring, Germany relaxed its debt break, and that really shifted their stance toward fiscal spending. Before they basically didn’t allow a fiscal deficit, and then they said, ‘Oh, maybe it’s a good idea that we try to boost spending to boost growth.’ And this looked to unleash about a trillion euros over the next 12 years, half on defense, half on infrastructure. And then we also had last year, starting with the US kind of indicating to Europe that it may be less willing to provide defense protection in the future. And we saw NATO last summer agree to more than double defense spending as a percent of GDP, going from 2% to 5% by 2032. And then outside of NATO, countries globally are also increasing defense spending. But despite this, the spending has been slow to unfold. The region also in Europe, they have that economic headwind of the war. And the spending has been slowed by some fiscal constraints, and delays in implementation, and capacity constraints.

If we look at the stocks of the defense primes, they’ve underperformed since the start of the war, that’s both in Europe and US. They may have run up and were expensively valued heading into the conflict, and they may have gotten ahead of revenue and earnings, which take time to be recognized. Defense spending may be a longer-term theme, but it may be at a slower pace than we expected last year, and provide less of an economic boost in the near-term.

MARK: I’m going to bring in... thanks, Michelle. We’re going to get to Jim here in a second, and talk a little bit about Bitcoin and some other cryptocurrencies. But last question from you, Michelle. We were talking just before we came on air about how the earnings have just been remarkable in the MSCI Emerging Markets Index despite the war. Tell me a little bit about what’s been driving that, and I guess more importantly, do you think that can continue?

MICHELLE: Yeah, earnings estimates for the EM Index have just really powered higher this year, and it’s really been driven by a concentrated number of companies in the tech space. And if we look at EM, there’s four countries that represent three-quarters of the market cap, China, Taiwan, South Korea, and India. China and India are primarily domestically-focused, and then Taiwan and South Korea are more export-driven and dominated by the tech sector. Overall, right now, earnings estimates for the EM Index are for a 47% increase this year. But if you look at the earnings at the aggregate level, they’ve risen, but earnings for most companies within the index have been revised down. So as of May 1^st, downward revisions have outpaced upward revisions by 10%. Those earnings growth for three chip companies basically in the tech sector is really powering the overall index higher. And the estimate right now is for the EM tech sector to grow earnings 159% this year. If we look at a couple of those memory chip companies in Korea, Samsung is expected to grow 400%, SK Hynix 300%, and their customers are switching to multi-year contracts, which may reduce the volatility of earnings. But I would just be careful when you hear this time is different. These companies are still very cyclical. They could see ups and down in demand and average selling prices of their chips. EM overall looks inexpensive, but it’s really based on these really high earnings expectations. And then if the earnings don’t materialize, of course, the stocks will look suddenly a lot more expensive. In the meantime, we have higher energy prices from the global supply shock, and that could create higher energy electricity prices to power the fabs, higher inflation, and weaker currencies. So given all these risks, we just don’t believe it’s time to overweight emerging markets.

MARK: Thanks, Michelle.

Jim Ferraioli, welcome. Bitcoin is up about 30% from its most recent low. Where is the buying pressure coming from to power that move upward?

JIM FERRAIOLI: Hey, Mark. So the buyers that have been stepping into Bitcoin since the low have primarily been in the spot markets. And so taking a step back from there, the Bitcoin bear market that started in October of last year initially found support around the $80,000 level in the fall and into early January. There were several rallies during that period that were largely driven in the derivatives market. Earlier this year, the market then fell further towards $60,000, where it has found a local bottom. At that point, you had a wipe out of open interest in the derivative space. And since then, the buyers have been primarily spot market buyers, so investors who are purchasing through exchange-traded products, publicly-traded stocks that acquire Bitcoin and other cryptocurrencies on their balance sheet, and then your traditional digital natives that invest in individual spot cryptocurrencies. And so when you think of a recovery, these are the kind of more traditional buyers that can support a more sustainable recovery than investors that are just adding exposure through derivatives. We’ve not seen a return to the market so much in the derivative space. There’s still more demand for puts relative to calls, so there’s hedging going on, and futures open interest remains at very low level. So we think this is a more quality type of buyer that’s emerged in the market right now. And so we think that that puts more of a sustainable recovery into play, at least from those levels we saw earlier this year.

MARK: So Jim, what have been some of the stories and narratives, if you will, that have been driving this increase?

JIM: So the biggest increase that’s come back into the market narrative recently has been the narrative institutional adoption. This really was the primary driving force of cryptocurrency prices over the past few years. In early 2024, you had the SEC approve spot ETPs for launching. And so leading into that Bitcoin halving cycle, you saw a large inflow into these products. After the bear market started in the fall, that narrative really quieted down, and that’s when a lot of the bear cases of cryptocurrencies came out, the criticisms that the industry is not very mature yet, the risks that the industry faces due to quantum computing. And so now that prices are recovering again, we’re seeing kind of a return to this narrative, been a recovery of this institutional narrative.

The one thing I like to point out here is first, the crypto market is a momentum-driven market, and narratives can be very powerful in momentum-driven markets. But we need to put this institutional adoption into perspective. The narrative of institutional adoption has been going on probably since before 2017. Early, before… you know, in 2015, you had publicly-traded on over-the-counter markets crypto trusts that you could purchase. In 2017 and 2018, you had the first exchange-traded funds that invested in futures linked to cryptocurrencies. In 2018, the CME actually launched futures on Bitcoin. So this institutional narrative has actually been around for quite some time. And these are products that have been primarily invested in by retail investors in the past.

And so while adding spot ETPs does make it easier to include it in your portfolio, along with kind of your traditional assets like stocks and bonds, again, we like to put this narrative in perspective, that there’s not going to be per se floodgates opening, where every investor is going to have exposure to cryptocurrencies. They’re not appropriate for all investors. Not all investors are interested in them, or necessarily feel they’re needed for their portfolio. And so again, we just like to put perspective on what is actually happening versus the narratives, while acknowledging that narratives can be very powerful in the crypto market.

MARK: Thanks, Jim. Last question for you, and then we’ll start going through the live questions. I’ve seen some pretty high-price targets for Bitcoin from some various Wall Street banks. Do you think those are realistic given the discussion of drivers that you just shared with us?

JIM: Yeah, they seem a bit optimistic to me. So first, the Bitcoin has had a nice run up off the lows, as we previously discussed. There’s some serious congestion levels that it’s running into here. First, you have your traditional moving averages. It’s made it past the 50-day and 100-day moving average, and the 200-day moving average is about $83,000 today. What I’d like to acknowledge, though, is that there are two measures of cost basis, which we can capture for Bitcoin. And as a reminder, all of this information that I’ve talked about, you can see it live and in real time on the blockchain. And so we know that for the average investor who has purchased Bitcoin, they have a cost basis of around $78,000. And then for investors who have purchased through an exchange-traded product, that cost basis is around $83,000. And so we think that it’s pretty natural for investors who maybe bought around these levels a year ago and then experienced a sharp drawdown to maybe sell. You tried it out, it kind of blew up in your face, and you’re comfortable with getting your money back for what you put in. And so that happens with other asset classes as well. It’s very common in equities. And so we think that there’s some congestion here.

Putting the kind of rosy price targets into perspective, when we look at recoveries of historical past bear markets, there’s two measures of cost of production for producing a Bitcoin. And we found that these actually tend to be levels of resistance for the next year or so. So Bitcoin bottomed in February, near $60,000, which is the cost of producing a Bitcoin for a data center that has the lowest energy costs and the most advanced semiconductors. The level for producing a Bitcoin for maybe your average miner that has less attractive energy costs and maybe a less modern fleet of semiconductors is $95,000 today. And so what we’ve seen historically is that these… you know, you might find a bottom near the production cost for the best miners out there, but on the upside, that level of production for the marginal or the average miner really access resistance. And to be clear, we’re not saying that this is a price target for Bitcoin. The relationship between Bitcoin prices and cost of production is a reflexive relationship. Whereas when miners are leaving the network, the cost of production actually falls, and as prices rise and miners rejoin the network, the cost of production actually rises.

The caveat to this is if there’s a strong recovery in Bitcoin prices from here… there’s currently a big bottleneck in computing power, given what we’re seeing in AI data centers, and Michelle was talking about this earlier. And so one of the common trends we’ve seen over the past few years is Bitcoin miners, not completely abandoning Bitcoin, but shifting to data center inference, which actually has more attractive economics. And so given that there is somewhere where they can put their computing power that provides a higher return, we think it’s more realistic that they’re likely to maybe focus on that than kind of chase Bitcoin prices here.

And so again, we think that’s a realistic way to put these rosy forecasts into perspective and more of a fundamental approach than thinking about what’s a fair price for paying for Bitcoin in the short term.

MARK: All right. Thank you. Thank you, Jim.

So we’ve got a lot of live questions here. Collin, let’s start with you. ‘Can Collin comment on what the view of the yield curve going forward would be if a Warsh Fed moves toward a scarce reserves model rather than an abundant reserve model and an excessive use of the Fed balance sheet to manage interest rates and liquidity?’ So a long question there, Collin. What do you think?

COLLIN: Yeah, there’s lots of moving parts there and it’s something that we’re strongly thinking about, knowing that Kevin Warsh has made pretty clear what his views are on the Fed’s balance sheet and that over time he would like to shrink it. So if we go back to his congressional hearing a few weeks ago, he talked about that, but he also acknowledged that what took 18 years to build can’t be undone in 18 minutes. So he acknowledged that any change would take a while, and he acknowledged that they would have to really communicate it pretty clearly. Because if you look at something like this in a vacuum, if the Fed were to just start shrinking its balance sheet, and if they did that by not reinvesting maturing proceeds to kind of maintain or flat-out selling of their securities, that could put pressure on long-term yields. If the Fed has been a buyer there, that means another buyer might need to step up, and you risk seeing higher long-term yields. That, if it happened, would likely result in a steeper yield curve, and it’s something that I think Warsh should be very cognizant of because I think it’s safe to assume that Warsh has a lot of similar views to the administration. Whether it’s President Trump or Treasury Secretary Bessent, they’ve talked about long-term yields, not just short-term yields. So a rise in long-term yields is something that wouldn’t be welcome.

So they would have to do it very carefully. They would have to do it in line with bank regulations. They would probably need to relax those a little bit, so that banks don’t need to hold as much money with the Fed. Because you mentioned the idea of scarce reserves, we’ve seen what that looks like. Back in the third quarter of 2019, arguably, reserves got a little bit scarce. We saw short-term yield spike a little bit, given that banks were looking for them, couldn’t find them, had to pay up for them. That would be a bad outlook, too.

So I think that there’s a lot of ways we can look at this, but I think Warsh has made it pretty clear that they will try to do it very carefully so as to not disrupt the markets.

MARK: All right. Thank you. Thank you, Collin.

Liz Ann, let’s give you the next one here. Let me find it here. ‘If companies know that earning surprises are positive, how many actually try to have those positive surprises?’

LIZ ANN: Probably most. If you wanted to just give a simple, blunt, honest answer, there is a trend for companies to be somewhat conservative. It’s not really that they’re gaming earning season and hoping for a jump in the stock, but that is maybe a sort of backdoor reason why companies might stay fairly conservative heading into reporting season. That said, the reward accruing to stocks of companies that have beaten has been running fairly narrow relative to the punishment accruing to companies of stocks, or to stocks of companies that have missed earnings. So it’s a big spread where you’ve seen a diminution in the benefits to the beats, but more of a punishment relative to the misses. So you’re not really getting rewarded for it as much as at times in the past.

MARK: Thank you. Thank you, Liz Ann.

Michelle, let’s get to you with this one. ‘In your opinion, is the oil disruption fully baked into earnings estimates?’

MICHELLE: I think some of it is, but most revisions really have been concentrated in the energy and tech sector. And we’ve got earning season now. Internationally, it’s a little bit later than it is in the US. So as we get further into earning season, we can see some downward revisions to the consumer-oriented companies and maybe the financial sector, because growth is likely to be slower.

I’d say analysts are really reluctant to stick their neck out, given no one really knows when and how fast the Straight can open. And in terms of investors, they seem more confident on the AI story and less confident maybe on what the impact to the economy is, because we still have uncertainties about that.

MARK: Thanks, Michelle.

Liz Ann, let’s go to you with this one. ‘What happened to the earnings broadening out narrative that we have been told about?’

LIZ ANN: Well, we are seeing it. Most sectors among the 11 S&P sectors have seen rising earnings estimates for the calendar year 2026, and also for first quarter 2026. But calendar year, it’s across the board. The problem is that it’s across sectors, but the biggest upsides in terms of forward estimates have been concentrated in some of these mega-cap stocks. So the weight that that applies to the overall increase in cap-weighted estimates is a bit concentrated, but it’s not like the rest of the market is significantly underperforming. And for what it’s worth, and by the way, I don’t think these estimates are necessarily going to be accurate, but we continue to have a widespread between the Magnificent 7 earnings and what’s often called the other 493 earnings growth rates. Based on consensus, by the fourth quarter, the other 493 estimates are higher than the Mag 7. Now, Mag 7 keeps beating to a large degree, so that’s not set in stone, but for what it’s worth, that’s where the estimates are right now.

MARK: Thanks, Liz Ann.

Collin, this one’s for you. ‘Do munis make sense at this time for clients in the 37% marginal tax bracket?’

COLLIN: Yeah, most likely they do. Every client of yours is going to be different, but that’s something we look at a lot. We compare the yields on munis relative to corporates and treasuries to kind of see how those after-tax yields stack up. And really when you look at the tax brackets, all in the 30s, when you look at it from an index level, munis tend to make more sense than corporates, and then the yield advantage tends to widen even more when you compare them to treasuries, because corporates tend to have higher yields than treasuries. When you get to kind of the mid 20% effective tax rate, that’s when you start to see that gap close a little bit. So most importantly, you always want to make sure you run the numbers, because again, every client is different, every state’s tax rates are different. So again, we look at it from a high level index standpoint, but for those top tax brackets, they tend to make a lot of sense.

One point I will make, when we do compare them to corporates, even though the yields are higher, generally speaking, on an after-tax basis, when you compare an index of munis relative to corporates, it’s usually with a lot higher credit quality too. The credit quality of the Bloomberg Municipal Bond Index is very high. About two-thirds of the index is rated double-A or triple-A, and that compares to the corporate index of which about 90% is single-A or triple-B. So it’s kind of a tale of two indexes, where very high quality with munis, more moderate quality with investment-grade corporates. And then for those high tax brackets, when you look at it on an after tax basis, munis can offer a pretty nice yield advantage.

MARK: Thank you, Collin.

Liz Ann, this one is for you. ‘Do you have any thoughts on the current state of the Buffet indicator defined as total market cap divided by GDP?’

LIZ ANN: I just pulled up a chart of it, and that’s why my glasses are on for those wondering why I look a little different than I did in the last few questions. So the Buffet model right now, which is total market cap of not... We’re not just talking about the S&P 500. It’s total market cap of all publicly-traded stocks in the US as a share of GDP, and it’s running at about 230% right now. To put that in historic context, back in late ‘99 or early 2000, at that time, it hit a record, and it was about 165%. So we’re well north of that. The recent move was a little bit of a tick down. So that is among many valuation indicators that suggest the market is expensive.

All that said, whether, Mark, we were talking about the Buffet model or the Fed model or Tobin’s Q or traditional forward PE or trailing PE or Schiller cyclically adjusted PE, you name it, valuation indicators don’t tell you anything about what the market is going to do, say, over the course of the next year. Mark, you’ve seen them. I have scattergrams for every variety of valuation indicator looking at the relationship between starting point of valuation and subsequent one-year performance for the market, and there’s really no correlation. If you extend out on a 10-year look forward, you do reconnect somewhat obviously, where lower starting valuations have led to better returns going forward, and vice versa. But I always want to end with that, valuation is a terrible market timing tool. If anything, it’s an indicator of sentiment.

The last thing I’d say on this is the one thing I do worry a little bit about is there’s so much exposure to the equity market. Households exposure to equities is an all-time high. If we were to have a more significant dislocation in the market, say, a bear market, and that’s not my base case by any means, I think that could feed into an economic problem because of the wealth effect characterized by an indicator like that.

MARK: Thank you, Liz Ann.

Jim, this one is for you. ‘How real is a quantum threat? And second question, ‘Do you have a forecast for Q-Day?’

JIM: So quantum threat has obviously been very discussed as Bitcoin sold off to $60,000, And it’s an important topic in the cryptocurrency and digital asset space. First, quantum risk has broad implications beyond just cryptocurrencies. It’s a risk to the broader economy. But the reason it’s really heightened for cryptocurrencies is because these blockchains are managed by small teams of developers, whereas every corporation in America has a dedicated cybersecurity team. There’s government resources that go towards these things. Encryption risk is our number one fundamental risk for cryptocurrencies. And historically throughout history, every single encryption has been cracked at some point.

So putting the quantum risk for Bitcoin and other cryptocurrencies into perspective, I don’t have a timeframe in mind, but it’s worth pointing out that almost every blockchain ecosystem is actively working on ways to protect their blockchains from emerging quantum risks. There have been some studies that came out earlier this year that suggested some of the earliest Bitcoin wallets could be at quantum risk, and these are wallets from 2010, 2011, 2012, as early as 2030, though there has been news that has come out and disproven that. A lot of the research that’s gone into quantum risk and its impact on blockchains has happened in simulative events, when in reality, the computing resources to hack the Bitcoin blockchain or other blockchains, there’s just not enough power for that yet. And so it’s theoretical problems that could manifest obviously into real problems in the future. And so while I don’t have a timeline on it, a lot of the academic research suggests it’s 2030 and later, but that’s of course been one of the narratives and debates lately, given that that’s not too far away.

Ultimately, there are teams focusing on making these different protocols quantum resistant, and when it comes time to it, I suspect that the developer teams will be able to pivot to a more secure type of environment through a network upgrade. Bitcoin has gone through several upgrades over its history. Other blockchains go through network upgrades even more often. And so there’s no reason to think that as quantum continues to grow, quantum protection won’t also continue to grow, and networks won’t upgrade themselves.

MARK: Thank you. Thank you, Jim.

So final question, which I normally ask everybody to kind of highlight the one thing they want viewers to take away from their comments today. So we’re going to ask that of everybody. But we also got a great registration question that was submitted asking what... let me find it here. ‘What risk do you think clients are structurally underprepared for right now?’ So we’ll ask that of everybody. So Collin, two questions. What’s the one thing you want people to take away, and what’s the one risk people are structurally underprepared for?

COLLIN: Sure. So let’s see, one thing to take away. You know, I talked about our Fed outlook. I didn’t really get too much into what our duration outlook is, and we still think investors should focus on intermediate-term maturities. Now, we acknowledge that reinvestment risk has declined a little bit if the Fed is on hold for an extended period of time, but the yield curve has also steepened a little bit. And if you look at the three-month 10-year, for example, you can get close to 75 basis points. That’s actual yield income advantage. So if you have clients who have a longer timeframe than three months and are looking into locking higher yields, you can actually get modestly higher yields as you move out the curve. So we still like intermediate-term.

What are investors not prepared for from a risk standpoint? Not that we’re expecting a big risk-off event, but we are still a little bit concerned with just the low level of credit spread. You can say that credit spreads are close to being priced to perfection. The average spread of the High-Yield Bond Index is near its all-time low. Now, I know there’s changed a lot. It’s much higher-rated than it was 10 and 20 years ago. There’s a lot of double-B-rated issuers. But when you look at the bank loan market, the high-yield market, there’s not many negative or bad outcomes that are being priced in there. And there is a lot of uncertainty out there right now, and if we do start to see a risk-off environment or if we saw what has been a strong corporate fundamentals environment, if we see that tide turn a little bit, we would probably see kind of a repricing in the credit markets. In our view, we don’t expect that right now. We’re neutral, but where spreads are right now, we would say they’re not priced for a negative outcome.

MARK: Thanks, Collin.

Liz Ann, what’s one thing you want people to take away, and what’s one risk people are under prepared for?

LIZ ANN: Well, I’m going to answer big picture in terms of a takeaway. I say this often. Increasingly, I’ve been getting questions just in general about the market, or what our recommendations are of the variety, but like, ‘Are you telling your investors to get in or get out?’ I get it at client events all the time, ‘Should I get out?’ ‘Should I get in?’ And in keeping with the theme that we’re very vocal about as a firm, and I have written about and spoken about quite a bit recently of gambling versus investing, I always say that neither get in nor get out, if it’s all or nothing, is an investing strategy. That’s just gambling, not just on one moment in time, but on two moments in time. And investing should always be a disciplined process over time. So that is my sort of soapbox mini speech there.

As far as risks, recession is certainly one of them. I don’t think that’s really priced into the market or expectations, but I would also pull a little bit on the thread of what Collin mentioned, because I think any meaningful disruption within the credit markets, I think would work very quickly into the equity market too. I think that would be a very direct feeder if that risk came to fruition. It would not be contained in the bond market.

MARK: Thank you. Thank you, Liz Ann.

Michelle, same two questions for you.

MICHELLE: The takeaway is that the flow of traffic through the Straight is really the fulcrum for our scenario analysis. And with little signs of resolution, we just don’t believe that now is a time to aggressively add risk. If the situation improves soon, emerging markets could outperform based on that really strong earnings growth and attractive valuations. But we suggest that investors keep EM as small portions of their portfolios, and be willing to tolerate volatility.

And then in terms of a structural risk, we’ve been writing about geopolitical fracturing, and that could result in less global interconnectedness due to the political pressures. And we’re seeing more of a priority on national security over efficiency. And so this duplication of manufacturing could result in lower margins, higher inflation and rates, lower valuations, and a lower dollar. And you can find that analysis that... we wrote an article in February under the Insights and Education part of Schwab, or you could just Google my name. And then I’m writing increasingly with Chris Ferrarone on our team, and he’ll be here next month to speak to everybody.

MARK: Thanks, Michelle.

So Jim, one takeaway, and one risk that people are under prepared for.

JIM: So one takeaway is that while cryptocurrency certainly is not appropriate for every investor, we think it’s important that advisors learn about it, understand it. There’s a good likelihood that at least one of your clients has exposure to cryptocurrencies. And so as this space grows, it’s important to be able to talk to them and understand how the asset class really works. Major financial institutions are meeting client demand by offering it. They’re also looking to use blockchain technologies to improve some business functionality. So it doesn’t look like it’s going away in the short-term, and so we think it makes sense to get educated about it.

The biggest risk. Recently, the SEC issued guidance looking at existing securities law to put a framework for how they classify digital assets. And the biggest risk would be that currently the market assumes the Clarity Act, which would put a lot of these recent changes into law, the market is assuming that that’s going to pass. And so a risk would be that if the act does not get signed into law, it now kind of reopens this gray area of where digital assets sit within a regulatory context on a more permanent basis.

MARK: Thank you. Thank you, Jim.

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Our next webcast will be on June 9^th. That will be our mid-year Outlook show. It will be 75 minutes instead of 60 minutes, and each of the speakers will also have slides. The speakers will be Liz Ann Sonders, Collin, Chris Ferrarone, as Michelle mentioned, and Mike Townsend. Until then, if you would like to learn more about Schwab’s insights, or for other information, please reach out to your Schwab representative. And have a nice day, everybody. Thank you.

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