MARK RIEPE: Welcome, everyone, to Schwab Market Talk, and thanks for your time today. It’s September 9^th, 2025. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m 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 on the minds of our strategists. We’ll do that for about 30 minutes or so, and then we’ll start taking live questions. If you want to ask a question, you can just type that into the Q&A box on your screen, and then click Submit, and you can do that at any time during today’s event. For continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA continuing education credit if you’ve watched for a minimum of 50 minutes. That means if you watch the replay, you aren’t eligible for CE credits. Let’s see. To get CFP credit, please enter your CFP ID Number in the window that should be popping up on your screen right now. In case you don’t see that, don’t worry. We will show it again towards the end of the webcast as well, and then Schwab will submit your credit on your behalf to the CFP Board. For CIMA credit, you’re going to have to submit that on your own. Approximately 50 minutes after the show started, the directions for how to submit it will be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, I want to call your attention to a couple of resources on the webcast console. In the top right-hand corner, you’ll find a link to the latest timely tactics video that provides practical tips for helping clients navigate a dynamic market. And then in the bottom right-hand corner, you’ll see a link to some additional resources, including our latest market commentary.

Our speakers today are Liz Ann Sonders, our Chief Investment Strategist; Kathy Jones, our Chief Fixed Income Strategist; Kevin Jones… or Kevin Gordon, excuse me, he’s a director, one of our senior investment strategists; and Michelle Gibley, our Director in our Global Equity Research area.

And Liz Ann, why don’t we start with you? The Jobs Report came out last week. What’s your take on it, and…

LIZ ANN SONDERS: Oh, I lost Mark there. Can you guys hear me?

MARK: Yeah. No, I just muted there for a second. Jobs Report came out… yeah, I went back here. Jobs Report came out last Friday, and then we got some revisions just this morning just before we went on the air. So what’s your take on it?

LIZ ANN: Sure. So it was a second month in a row of particularly weak Jobs Report, broadly. You had a weaker than expected payrolls number. You had further downward revisions to the prior two months, which is in keeping with what we saw when we got the July Jobs Report, which had those very big revisions to the prior months. With those revisions now, June was a negative payroll month, and that’s the first time since 2020. So that was a little bit of an attention grabber. You saw a little bit of an uptick in the unemployment rate. And about the only positive component of the Jobs Report was a little bit of an uptick in breadth, meaning the share of industries that were either on a net basis adding to or taking away jobs. But you’ve also had other corroborating data marks. You’ve had the JOLTS data, the Job Opening and Labor Turnover Survey, which does lag a month, but that shows a continued decline in job openings. You have also seen a pickup in layoff announcements. You can see that in the Challenger layoff announcement total as well. And Mark, to your point, what we got today at 10:00 AM were benchmark revisions, were the preliminary estimate of benchmark revisions. So this is something that through the quarterly census review, the BLS updates for the year up until March of this year. So the expectation… there was a range of expectations, somewhere in the negative 600 to negative 700 in terms of 700,000 payrolls to be estimated less relative to what was initially reported for the year through March of 2025. When that number came out this morning, it was 911. So to do that on a monthly basis, the year through March of 2025, what we knew up until 10:00 AM this morning was that you had job creation of about 147,000 jobs per month. That now gets knocked down to 71,000 per month by virtue of that revision down of 911,000. We’ll get the final read in the first quarter of next year, but that’s the preliminary read, and most of those downward revisions were in the services side of the economy. And given that services has been kind of the bastion of resiliency for the labor market, that was kind of an embedded piece of the analysis this morning that points toward a weaker labor market. And then you have corroborating evidence in things like the claims data too, where initial unemployment claims have started to tick a little bit higher, and continuing claims are near a cycle high. So it’s part of the reason why we believe the Fed has shifted their focus a bit more toward the labor market side of their dual mandate relative to the inflation side.

MARK: Yeah. No, speaking of inflation, I think we’ve got the CPI, August CPI should be coming out I think this Thursday. What do you expect to see from that? And I guess as a follow up, it’s been kind of stuck in that high 2% range. How much of that can you attribute to tariffs?

LIZ ANN: Yeah, so we’re not expected to see any kind of reprieve in the CPI data, but I think important to the second part of your question, Mark, is really diving into these numbers to get a sense of whether tariffs are having an impact on inflation. You don’t really pick that up by just looking at broad headline measures, or even core measures. One of the traditional subcategories within CPI that probably best captures the impact of tariffs would be looking at core goods. ex used autos. It’s not perfectly aligned with where tariffs have had the biggest impact, but it’s a way to get a sense of what we’re seeing either directly or indirectly from a tariff impact. And that is where we have seen acceleration, not necessarily to troubling levels in an absolute sense, but relative to, say, the trend in ‘23 and ‘24. That’s one way to look at where inflation is coming in now relative to where it was prior to Inauguration Day, Election Day, Liberation Day, whatever marker you want to use.

But also important is the demand side of things. So if you go into the next level down, industry level categories within CPI, those that are most directly impacted by tariffs, so toys and sporting goods and furniture and other leisure goods, appliances, you’re not only seeing really almost a parabolic shift higher in the inflation rate in those categories, but if you look at real sales in those categories, you kind of have a mirror image of that with a big decline down. So we are not just seeing the impact in tariffs on inflation, but we’re seeing already the demand destruction associated with that.

So I’ll go back to the beginning. I think what is important to do when looking at the inflation data, and we get both CPI and PPI this week, is to really have that fine-tooth comb to try to parse out the tariff impact relative to the components of, say, a measure like CPI that don’t have that direct tariff impact.

MARK: Thanks, Liz Ann. Last question for you, and then we’ll bring Kevin into the discussion. Given what you were just discussing on some of the other kind of negative headlines that periodically pop up, the stock market seems to, the US stock market just seems to take a lot of it in stride, and doesn’t seem overly concerned. Do you think that’s a sign of complacency, or are there other factors that investors are paying attention to?

LIZ ANN: Well, I know it’s an ‘or’ question that I’ll answer ‘yes’ to because I think it’s a combination of both. I think that there is some complacency when you look at a lot of traditional measures of investor sentiment. If you look at things like fund flows or the put-call ratio in the options market, if you look at the Volatility Index, they all suggest that there is a bit of complacency. That said, what is often considered to be sort of the mother’s milk of stock prices, from a fundamental connectivity standpoint, it’s earnings, and earnings have been a support under the market. So you’ve had now two quarters in a row, essentially the first half of the year, where when all was said and done after reporting season concluded, earnings growth was actually double what the estimate was heading in. And estimates have not… the analysts have not extrapolated that strong first half of the year into the second half of the year. So you could argue that the bar is yet again set low as we embark on soon the reporting season for the third quarter.

That said, we are starting to hear from companies that talk about margin pressure being a real thing in the second half of the year. They’re trying to figure out what exactly is the pricing strategy, especially for goods that have been impacted by tariffs. A lot of companies did a lot of front run importing in advance of tariffs taking a place. So they built inventories at a low cost or a pre-tariff basis, which has given them some wiggle room from a timing perspective on figuring out that pricing strategy. But many companies, especially in the retail space where in general profit margins are fairly narrow, have started to put more meat on the bones of passing on those higher prices. So the pass through to the consumer probably means that we don’t quite have the same kind of tailwind behind profit margins that we did in the first half of the year.

But the last thing I would say is I also think the move, particularly off the early April lows when we had that closing low on April 8^th after the announcement of the 90-day delay of the reciprocal tariffs is you have this very powerful cohort in the market right now, the retail trader, which is distinct from the individual investor that a lot of data suggests that they account for 20- to 25% of trading volume on a day-to-day basis. They’re still very much in that buy the dip FOMO mentality. You see it in where outperformance has been most robust. Kevin and I follow about 30 to 40 baskets of stocks, and since that April 8^th closing low, baskets like meme stocks, non-profitable tech, heavily shorted stocks, retail favorites are handily outperforming the S&P, which tells you that that cohort has been a big driver of performance, and in some cases specific to heavily shorted stocks doing well, they’ve actually forced repositioning on the part of speculators covering shorts, providing a boost to those types of stocks.

So I think it’s both a who are the key drivers of the market on a day-to-day basis, but also there’s been a little bit of fundamental underpinning. That said, I do think there is some complacency.

MARK: Thanks, Liz Ann. That’s a nice lead-in, actually, to the first question I had for you, Kevin. First of all, thanks for joining us. And you’ve been taking a look at sector performance so far this year. What are your takeaways?

KEVIN GORDON: Yeah, so, so far… and hi, everybody, and thanks, Mark. It’s great to be back with you. But so far, this year, communication services has been just the stalwart outperformer. And what I find really interesting is that even though it is kind of caught up in the big tech trade or tech adjacent trade in addition to information technology, also parts of consumer discretionary, but comm services, and frankly, the rest of the market, especially when you look at those heavier sectors that have more of a mega-cap bias, they’re actually not being pushed by just a handful of stocks. And I think that’s a really important distinction and aspect of this market right now because there’s a lot of concerns about concentration risk and top heaviness in the market. The fact that the 10 largest stocks in the S&P 500 are about 40% of that index’s market cap, that in and of itself would suggest that we have massive concentration risk. It might be suggestive that, at least on the surface, that only a couple of stocks are doing the heavy lifting.

But what I find really remarkable and frankly supportive right now of the broader market is that the equal-weighted versions of a lot of those sectors, communication services being the standout, they’ve continued to make new all-time highs as well. So it’s not just a couple of names doing all of the work for a particular sector or for the entire market. And I think that’s a really important note, especially because when you look at the relative lack of life or lack of leadership from what is thought of as classic or traditional defenses, whether it’s consumer staples… you know, Liz Ann mentioned all those baskets we track. There’s one that’s sort of the broader defensive basket of the bond proxies. None of those have really got up and running so far this year. Even when you’ve gone through some of these more stressful periods where there’s more concern about some of the labor data, whether it’s out this morning or whether it’s the past two Jobs Reports, there hasn’t been a suggestion from sector leadership that things are turning and that the market is expecting some material economic slowdown, at least in the near term.

And there’s a number of ways to look at that. One of my favorite ways to look at that is taking the equal-weighted version of consumer discretionary and measuring that against the equal-weighted version of consumer staples. And that pairing or that ratio continues to make new all-time highs, which is really just suggestive of the fact that the more cyclically oriented parts of the market, or of the economy, they continue to move higher at the expense of the defensives. And that’s typically not what you see when the market is starting to signal more of an issue, or more of a concern and raise the red flags.

So that in conjunction with what is the expectation now of the Fed to start cutting rates maybe more than once starting in September, that’s also been a benefit, all else equal, to the more cyclically oriented parts of the economy and the market, and specifically down the cap spectrum. So the fact that you’ve got breadth of the Russell 2000 holding up quite well, actually better than the S&P 500 over the past week, that is all part of that broader theme of the cyclical still telling a relatively positive market and economic story.

MARK: Kevin, in the past prior calls, we’ve talked about the impact of tariffs, as well as the impact of some of the reductions in labor supply caused by some of the immigration policies and some of the risks associated with that. Let’s turn that around, both of those things. What are some opportunities that are being created?

KEVIN: So on the labor side, it’s interesting because with all the data that Liz Ann was mentioning about the revisions, and the fact that we’ve had a string of Jobs Reports that have been quite negative over the past couple of months, we’re in a really interesting labor environment, where it’s almost this race to the bottom I like to think of it in terms of labor supply, but also labor demand. We’ve got both that are falling simultaneously at a pretty quick pace. And the way to kind of see how that’s playing out is the fact that we’re creating much fewer jobs on a month to month basis. The past three months have been quite weak. You’re sub 30,000 in terms of the average monthly payroll gain in the country, but you’ve seen a minor tick up in the unemployment rate, but the fact that the unemployment rate is still at 4.3% while we’re sub 30,000 on payrolls over the past three months, that sort of tells you the supply story right there, where we can create fewer jobs without having to see the unemployment rate move materially higher.

So what’s interesting is that in that environment, you’ve seen a lot of industries that have slowed down on hiring actually see their demand and their profit margins hold up relatively well. So the flip side of the weakening labor story would be that productivity has maybe improved or at least held together for a lot of industries so far. Again, to Liz Ann’s earlier point, that could be a function still of the padding and some of the cushion that a lot of companies had coming into the tariff, sort of the tariff dispute that we had earlier this year, and what we’ve been dealing with so far. So it’s a bit harder to extrapolate that, but I think that you have to sort of look to some of the optimism, I think, that’s still out there on the part of companies that have been able to deal with relatively elevated costs.

And even on the tariff front, there is a pretty strong correlation so far with year-to-date performance when you look at the companies that are larger, that have a larger weight, or the industries that have a larger weight in the market in terms of their market cap presence and their margins. So those that have had strong margins tend to have a larger concentration, or a larger weight in the market. So if they’re doing well because they can absorb a lot of that tariff pressure, it’s still the case that they’ve been outperforming and they have those high margins.

So both of those going together in this environment is sort of a direct way to sort of benefit and consistently find some kind of outperformance, or some kind of stabilization in this market because that sort of incorporates both the labor aspect, but also the higher tariff aspect as well.

MARK: Last question for you Kevin, and then we’ll bring Kathy into the discussion. Housing has been in a slump recently. What’s behind that, and do you see it continuing?

KEVIN: Yeah, so housing has been kind of in its own recession, its own mini recession for several years now, definitely for a good chunk of the post pandemic, you know, after the housing boom that we saw during the shutdown days. And we just wrote a report on this not too long ago, talking about, yes, when you look at housing sales, especially in the existing home market, which is the majority of the market, you could definitively say housing has been stuck in a recession, definitely out of sync with the broader economic cycle because when you look at housing sales being as low as they’ve been for the past several years, that typically would not coincide with an economy that continues to grow. But if you even extend that out and look at the residential spending component of GDP, which is essentially housing, that has really not grown for the past eight and a half years, even though inflation-adjusted GDP of course has grown considerably over that timeframe.

So housing has been out of sync for quite a while. It hasn’t provided or acted as that typical forward-looking component of the economy that you would typically rely on, and that has to do with a host of things. I think most of it is due to the supply crunch, and the really sort of dearth the supply of homes that we had in this country over the past few years, driven by a host of things. Obviously, the pandemic had accelerated a lot of those trends, but what that did was really inflate housing prices around the country and then that put significant downward pressure on affordability for a lot of buyers, particularly new home buyers. So the supply of existing homes, it’s starting to turn, it has crept increasingly higher this year, but it’s probably not yet at levels that would be consistent with what would be considered a really healthy market.

But I will say there are things that are coming into play, I think, that are more in favor for home buyers, potentially, where you do have that housing supply continuing to creep higher. Home prices are starting to roll over a little bit, and you do have relatively stable income growth, both on the nominal and the real side right now. All three of those have to continue to work together really well. So of course the labor market, a lot of that hinges a lot of the housing market’s recovery hinges on the labor market holding together. But directionally, we think that there is probably more optimism than pessimism because you have gone through probably that maximum worst point for the housing market in terms of affordability. It’s just from here, do things start to stabilize, which we are starting to see in terms of household affordability.

Unfortunately from a pricing standpoint, the shock that we went through over the past several years in terms of home prices, that probably takes a little bit just to get used to and to digest over time. So maybe time is the ultimate healer there, but as long as labor holds together where you have that aggregate income growth holding up and remaining relatively stable, that probably provides more support for housing moving forward.

MARK: Thanks, Kevin. Kathy, you’re up. Let’s talk a little bit about the Fed. They’re meeting next week. What do you expect to come out of that meeting? And as you start looking forward to 2026, what do you think the trends are going to be in terms of their interest rate decisions? And I am not seeing Kathy.

KATHY JONES: Are you hearing me now? Are you hearing me now, Mark?

MARKl Yeah, I can hear you. Yeah. Yep, go ahead.

KATHY: Okay. Alright. We are expecting a 25 basis point cut in rates at this meeting. That’s been pretty widely communicated already by Fed Chair Powell, and various other members of the Fed on the voting committee. So I don’t think the market has any doubts about that. And then we will also get the updated Summary of Economic Projections, which includes the dot-plot. And that’s probably a little bit more questionable where we’ll go from there because we know there’s a fairly wide dispersion at the Fed in terms of expectations for the direction of policy. But would say that we’re expecting the Fed, the projections to show more rate cuts than the last time around, but probably not as aggressive as what the market has built into it. Right now, the market has built in a fairly rapid decline in the Fed Funds Rate to just under 3%, or roughly around 3% by the end of 2026 or mid 2026. I think that’s probably not where the Fed will go with that. So the Summary of Economic Projections and dot-plot will obviously be interesting to see how the Fed’s thinking has evolved here.

And then the next piece of it will be the press conference. Fed Chair Powell probably will reaffirm the idea behind the rate cut. Even though inflation is elevated, the slowdown in economic growth and the deterioration in the labor market will be the primary drivers behind the Fed wanting to cut rates before inflation has come down. And then we’ll see what the bias is in terms of the press conference, but I think it will be fairly dovish to match up with the feeling in the market that the labor market is weak enough that the Fed needs to cut, and that inflation will fall on the downside.

But that’s the sticking point. The sticking point is that inflation is still high, and that’s going to be something the Fed is going to have to work through if they want to continue to cut rates.

MARK: Thanks, Kathy. Given that, can you talk a little bit about what shape do you see the yield curve becoming? Do you think that steepening, for example, is going to continue given your outlook?

KATHY: Yeah, the curve steepener has been the dominant trend this year. That was one of the forecasts we had in our outlook for this year is that we would see a steeper yield curve, largely because yes, the economy is slowing down due to various factors, but particularly due to the impact of tariffs, but you also see inflation stay elevated. So that is the main reason that the curve is steep, and will likely remain steep and steepen further.

But the other reason is that you have now a combination of sticky inflation, a weaker dollar, rising global yields, and fiscal policy concerns. You throw that all in, the term premium for longer term rates has been expanding, and we can continue to think that that will edge its way higher. So even if the whole curve shifts down, it’s not going to be even, it’s going to be more driven by the short end than the long end. So steeper curve, 2s, 10s, 5s, 30s. We think that that continues through this year and into 2026.

MARK: Alright, thanks, Kathy. Last question for you, and then we’ll bring in Michelle. As you think about strategies, what strategies look most attractive or what areas of the bond market looks most attractive, and are there any areas that are worth taking a second look in terms of perhaps avoiding?

KATHY: Yeah, we haven’t really changed our suggestion of keeping average duration, intermediate-term five to 10 years consistent with the Aggregate Bond Index. The idea being you get most of what the yield curve offers in terms of interest rates and income without taking on the added volatility risk at the longer end of the curve or the reinvestment risk at the shorter end of the curve. So we still like that five- to 10-year area for average duration. It doesn’t mean you don’t hold some longer term, some shorter term, just you average around the middle. And also staying up in credit quality. Credit spreads are extremely tight, and probably the outlook for credit is not a sharp deterioration, but not an improving trend from here. And that means that with spreads as tight as they are, there’s just not a lot of room to maneuver if we hit a bump in the road in terms of the economy.

And then we do like the muni market. Yunis have underperformed year-to-date. Part of that has been because issuance was very heavy when there was the debate around fiscal policy and some nervousness about whether the tax exemption for municipal bonds would be eliminated. That was a problem for the market. The issuers just rushed in and tried to get that in under the wire before a possible change in policy. That didn’t change, so now we’re seeing a little bit of a let up in issuance. So we think this is not a bad entry point for munis here. They’ve underperformed year-to-date. We have tax equivalent yields at the highest tax bracket in the 6-, 6-1/2% area for people in high tax brackets. We think that that’s pretty attractive, not looking for a big problem with defaults or any other credit quality concern. So I think from a tactical point of view, if you have clients that are looking at the municipal bond market, you can actually move out the curve and capture some nice tax-equivalent yields here.

MARK: Thanks, Kathy. Michelle, welcome to the webcast. All this discussion around tariffs and various trade deals, but I think this is right, Canada and Mexico and China, the biggest trading partners of the US, none of them have a trade deal. What’s the latest, and how is that going to play out, and do you see any of these existing court cases that are still being litigated, which are the ones to pay most attention to, and what could be the outcome?

MICHELLE GIBLEY: Yeah, thanks for having me. The effective US tariff rate as of September 4^th, according to the Yale Budget Lab is 17.4%. If we go back to the end of June, the average tariff rate was 10%, but the amount collected was below 10%, and that’s because of these products that were subject to non-USMCA tariff rates were still coming in at pre March levels. But that started to change in July, and so firms have been able to document attestations of being USMCA compliant, and that has cushioned the overall impact of tariffs. And now through July, 85% of goods from Canada and 86% of goods from Mexico are exempt from tariffs. We have reciprocal tariffs of 35% on Canadian goods and 25% of imports from Mexico that are on extension until the end of October. And so those are still evolving. There’s likely to be pressure by Mexico and Canada for relief from sectoral tariffs, particularly on autos, given the lower rates on autos in deals with EU and Japan. And I would note even for countries like EU and Japan, there’s still many details in those deals that have yet to be finalized.

For China, their reciprocal tariffs are on pause until November 10^th. So far it appears that China’s making out maybe better than expected in this new tariff regime. Counterintuitively, some businesses may find it’s better just to continue manufacturing in China. The tariff rate there is increased by 30 percentage points from the start of the year to 42% now. That’s roughly in line with the 40% transshipment rate for goods rerouted from other Asian countries before coming to the US, and it’s also below the 50% rate on Indian goods. And China supply chain depth and logistics efficiency are really second to none.

In terms of the legal challenges, those are ongoing, but tariffs are not going away. So after losing authority for emergency use of tariffs under IEEPA at the Federal Circuit of Appeals, the Trump administration has asked the Supreme Court to hear oral arguments starting in November, and that would set up for a possible decision by maybe the end of this year or early next year. If the administration loses the case at the Supreme Court, this could set up for maybe a chaotic period of time of refunds of tariffs collected via IEEPA authorization, but it’s not going to be the end of tariffs. The Trump administration has other tools to implement tariffs. It stated that it does have a Plan B, including Section 122 tariffs of up to 15% for 150 days, Section 338 tariffs of up to 50% after undergoing investigations, or 301 tariffs like those on China or sector specific tariffs.

So tariffs are still unresolved, and that’s likely to extend this trade uncertainty for businesses.

MARK: Thank you, Michelle. Last question, and then we’ll start taking some of the live questions that people have submitted. So thanks for sending those in. China’s stock market hitting, I think, a 10-year high. Do you think that’s sustainable, or do you think there are some risks there, and maybe it’s gotten ahead of it a little bit?

MICHELLE: Yeah, Chinese stocks seem to be diverging from the economic situation. There’s a lot of hopes about innovation, potential cuts to over capacity, and maybe some stimulus. But the real excitement has been around AI, and the internet leaders in China have accelerated their investment in cloud computing and AI. The three largest companies are announcing what could be a 60% increase in spending this year compared to last year, and the government is getting in on the action as well. Government-owned telecom companies are also increasing buildouts for data centers prompted by the government’s AI Plus initiative to achieve AI application penetration rates in certain industries of 70% by 2027. So we’re seeing, you know, the Shanghai Composite was up 8% last month. New brokerage accounts are being opened. Margin use is on the rise.

Now, that the MSCI China Index is trading at 12.8 times next 12-month earnings. But earnings are being revised down, so the gains in the stock market are all coming from valuation as valuation expands. So the government is worried about protecting against a bubble, and has started to step up warnings against maybe instituting curbs on speculation.

MARK: Thanks, Michelle. Alright, let’s start taking some live questions here.

Liz Ann, the first one is for you. Are there regional differences in economic changes due to the tariffs?

LIZ ANN: Oh, absolutely. It depends on, obviously, whether you’re talking at the state level or at the regional level what the bias is in terms of industries that dominate your economy. If you think about sort of the four quadrants of the United States, you’ve got the Midwest that has a lot of exposure to both manufacturing and agriculture. So depending on the products, you can see an impact there. If you look at the South, there’s also a big… agriculture is a big part of that economy. So depending on what the ag product is and what the tariffs, that could have that impact. You’ve got the West, interestingly, which has obviously a tremendous amount of tech exposure through Silicon Valley, etc., and there’s an impact there. But also, we have a pretty big business in the ports of California on the West Coast. So that is a relatively indirect impact, but something that needs to be considered. I guess from a quadrant perspective, the Northeast, which tends to have more dominance in areas like financial services, that would seem to be the least impacted. But in advance of formality around things like pharmaceutical sector tariffs, you do have exposure even in the Northeast to the pharma industry. So no one is immune to this, but I think the areas where manufacturing or agriculture are a big piece of this, they’re more directly impacted.

MARK: Thanks, Liz Ann.

Let’s see, Kevin, this one’s for you. ‘Utilities may be considered defensive. What do you make of the current turning away from utilities?’

KEVIN: Yeah, so utilities, you really have to look at how much that sector has pulled away from the other traditional defensives, being consumer staples and healthcare. It’s not just a year-to-date phenomenon, but this has actually been going on for the past couple of years, where it really has split. Its performance has been much different, its breadth has been much different, and better for both relative to the other two sectors. I think a lot of that has been driven by the sort of power generation demand that has been directly tied to things like data centers, and which is of course directly tied to everything AI.

So the turn recently, you know, there’s been… I mentioned sort of the equal-weighted sectors earlier, actually equal-weighted utilities has been under considerable pressure over the past week or so. A lot of that is probably just a little bit of a reversal in a momentum trade that has been very favorable for utilities so far this year. It is still one of the better performing sectors. It’s consistently been in the top performing sectors so far this year. So I wouldn’t look at it as any… the recent turn in performance, I wouldn’t look at it as anything sort of indicative of that sector just going out of favor completely in terms of the market because it has been tied pretty closely to things like tech and things like communication services because it has been under that AI wrapper.

MARK: Thanks, Kevin.

Kathy, this one is for you. ‘Do you think the 30-year, the US 30-year yield will break through 5% or go even higher?’

KATHY: Well, at this stage, if the Fed is cutting rates, and there’s no kind of financial crisis or issuance problem, it seems unlikely that it’s going to go through 5% in the near term. I wouldn’t rule it out in the long term. A lot depends on, you know, what… the factors that are currently driving or keeping those yields higher are still in play. And that is the fiscal policy concerns, the rise in global yields, the stickiness of inflation, and the rising term premium for uncertainty about policy. So I wouldn’t rule out a move back above 5% at some stage, but I don’t think it’s going to be in the near term because we have a situation now where the driving force in the market is the short end of the curve with the Fed cutting, expectations of slower growth. Those will all probably continue to pull down yields across the curve just short end faster than long end.

MARK: Thanks, Kathy.

Michelle, government spending in France, the UK, and Japan, for example, that’s been generating a lot of interest in their bond markets, particularly if the spending is too high. What’s been the impact on the stock market, and what’s been your outlook there?

MICHELLE: Yeah, investors want to see governments committing to reducing fiscal deficits and slow the growth in debt. And it’s not really very popular because reducing deficits means spending cuts or rate hikes. And so we’ve seen yesterday French Prime Minister Bayrou being voted out of office. Also over the weekend, Japanese Prime Minister Ishiba stepped down to avoid facing a no confidence motion he was likely to lose. And then on Friday in the UK, Prime Minister Starmer made a major reshuffle to his government, and resulted in half of his cabinet changing roles. So there’s this tug of war between voter pressure on politicians and investor pressure to reduce the deficits outside the US, and ultimately politicians are likely to have to comply with the bond market demands. The bond market is likely to win this tug of war.

So investors in stocks may want to consider international exposures that have lower weightings in banks because they tend to be more susceptible to those bond market valuation pressures, particularly in the UK, France, and Japan. And when investing in individual international companies may want to lean toward those that are more multinational in scope.

By the way, I had an article out on this yesterday as well, if you’re interested on more.

MARK: Fantastic. Thanks, Michelle.

Let’s see, Liz Ann, this one is for you. Austin Goolsby, he’s, I think, head of the Chicago Fed Branch, has highlighted that inflation is now moving higher in services. ‘What’s driving this acceleration and how concerned should we be that the Fed, and ultimately investors, may increasingly focus on this dynamic?’

LIZ ANN: So we have seen fluctuations in services inflation, but if you just separate out services relative to goods, services for quite a few years now, really since the onset of the major inflation problem in 2022, inflation has run hotter there, and in part due to the fairly large share of the broad services universe that is driven by shelter. It depends on what metric, whether you’re talking about CPI or PCE, what component of that is represented by traditional rental costs or owner’s equivalent rent in the case of CPI, and that’s been higher. But I think there is other nearer term issues at play here. We’re really starting to see the labor supply problem come into the mix. In fact, one of the data points we got out today within the NFIB release of small business optimism was that quality of labor is the number one concern right now, even higher than inflation or taxes, which many answer that thinking of tariffs as taxes. So you’ve got that labor supply issue that, all else equal, is putting upward pressure on that component of it. And you also have a lot of companies, many who are actually being fairly honest, and saying that even though they’re services providers, they have inputs into what their services are that are tariff-impacted, and that if they have the wherewithal to pass on higher prices on the services end of the spectrum to offset some of those increased costs. That has been happening more recently.

MARK: Thank you. Thank you, Liz Ann.

Kathy, this one is for you. ‘Why are we seeing higher inflows to short-term bonds when interest rates are headed down? Why shouldn’t investors just lock in current rates for longer?’

KATHY: Yeah, I think that there are probably a couple of reasons for it. I agree that because there’s reinvestment risk, if you’re staying really short, and say money market funds are very short term, you are going to risk reinvesting at lower and lower rates. So it’s a little bit of a puzzle that people are still moving into the very short end of the curve. However, I think there’s a couple of other things at work here. One is just the uncertainty factor. A lot of investors are kind of waiting to see how all of these policy issues play out, how the economy develops, what the Fed does, and they’re just not comfortable taking on duration risk yet because of the myriad of uncertainties that are out there. But I would agree that given the likelihood of more rate cuts, that it would make more sense to at least move out to the middle part of the curve to lock in some of these rates if you have a longer time horizon. But my guess is that people are trying to be either opportunistic and waiting for other opportunities or just nervous about where we’re going longer term, especially with respect to inflation, etc. So there’s some reluctance to move out very far.

MARK: Thanks. Thanks, Kathy.

This is for Kevin. ‘What are your opinions on S&P 500 equal weighting by sector, especially since the index is top heavy? Is this potentially a more nuanced solution compared to market-cap-weighted or equal-weighted company funds?’

KEVIN: Yeah, so especially in this environment, you know, I cited some statistics around market concentration earlier, it can make a lot of sense, especially if you are a little bit more averse to a lot of the volatility associated with some of the bigger companies. And especially when you look at this sector by sector, there’s four sectors where the two largest companies make up more than 50% of the sector’s market cap. So it’s the three mega-cap-oriented ones that we typically think of, tech, communication services, and consumer discretionary. And actually, the fourth one is energy. So energy is kind of the odd one out because you typically don’t lump it into the trade, you know, that’s associated with those other three sectors. But I think in those instances, or for the broader S&P 500, if that’s how somebody invests, it is a way to smooth out some of the bumps that are associated with those really large moves in those mega-caps.

And you have to keep in mind, too, that as those companies grow and become a larger portion of their respective sector, it’s not that they need to move a lot and have the stellar performance to have a significant impact on the sector. It’s just by virtue of their really large market caps that they do have an outsized impact. And we’re seeing that year-to-date. You know, none of the members in the Magnificent 7 are in the top 10 performers for the S&P 500 year-to-date. There are dozens that are outperforming the best performer. There are hundreds that are outperforming the worst performers. So I think it’s an important thing to keep in mind that just because they’re not the best performers doesn’t mean that they’re not going to have an outsized impact on the sector.

The other thing to keep in mind, though, over the medium- to long-term, if you do look at the equal-weighted S&P’s performance relative to the cap-weighted S&Ps, it has lagged considerably over the past decade-plus. So if you are taking a longer term approach and looking at how much those companies… you know, the flip argument of that, how much those companies have contributed to the gains for the market, that’s something to keep in mind. So it is definitely a volatility smoothing mechanism for a portfolio, but I think that it should be maybe an ‘and’ discussion, not necessarily an ‘or,’ just given the performance drop that can be… the performance missed that can be had when you go all equal weight versus the other way around.

MARK: Thanks, Kevin.

Liz Ann, this one is for you. ‘Liz Ann mentioned the undue influence of the retail/meme/FOMO investor. Are there any concerns about this kind of price manipulation across the broader market, or is this simply a matter of avoiding the Reddit stocks?’

LIZ ANN: So I don’t know that I would call it price manipulation. This is a cohort that arguably grew out of the pandemic. They tend to have very, very short trading time horizons. They tend to be day traders, they tend to skew younger, they tend to skew male, and yes, they do get a lot of their ideas on platforms, but that doesn’t mean price manipulation. It does suggest that some of the winning areas from a basket perspective are arguably down the quality spectrum when you think about not just the meme stocks, but the non-profitable tech, which have been another popular area. I think they continue to be driven into those types of names because of what they learned during the 2021 period of time coming out of the pandemic. But it’s more broadly a buy the dip mentality, a little bit, to some degree, in terms of focusing on heavily shorted stocks. You often hear the whole notion of ‘stick it to the man.’

I think from an individual investor perspective and how to navigate around that, what we’ve been saying is I wouldn’t lean in… to use trader lingo, I wouldn’t lean in to that lower quality set of characteristics around some of those baskets that have been working. I would lean more into higher quality because from a factor perspective, a lot of the value-oriented factors actually have been working pretty well, especially in the last few months. So you’re not hurt from a performance standpoint by not being in those ultra-low-quality areas. That said, I wouldn’t call the interest, the ongoing interest in them by the retail trader, manipulation. It’s just what they have learned since the pandemic era.

MARK: Thanks, Liz Ann.

Michelle, this one is for you. There was… ‘International stocks have been a standout performer in 2025. What are some of the potential derailers that you’re watching?’

MICHELLE: Yeah, I think this outperformance has come from three main factors. One is the potential for a new growth story in Europe starring Germany, attractive relative valuations in a weaker dollar. So the recent difficulty in passing fiscal deficits, or fiscal budgets in places like France is a risk, the idea of growth coming from fiscal expansion. Although Germany appears less at risk given its small relative deficit and lower debt to GDP. So they have room to spend, but so far this spending in Germany has been slow to evolve, and there’s a chance investors become impatient with the pace of spending. In terms of valuation, that’s still attractive, 15 times next 12 months earnings, close to the 10-year average, still well below the S&P 500 at 22 times.

And then in terms of the dollar, if we look at monetary policy just in isolation, more rate cuts for the US relative to the rest of the world could keep downward pressure on the dollar, which could boost returns for international stocks. And investors are likely underweight international, but we could see a countertrend rebound in the dollar, let’s say, if rate cut expectations become less than what the market is expecting for the Fed right now.

MARK: Liz Ann, this one is for you. ‘What’s Schwab’s assessment of recession risk?’

LIZ ANN: Rising. I guess that would be the short answer. Just yesterday, Mark, it was interesting, I was playing around on the NBER site. So that’s a National Bureau of Economic Research. They’re the official arbiters and daters of recessions. And there was a paper that one of their senior researchers put out, I think his name was Pascal Michaillat, back in July. And based on the algorithm that the NBER uses, not to define or date recessions, but it’s part of the broad amount of research that they look at, it’s an algorithm that looks at labor market data, and at that point, when this paper was released in July of this year, it showed a 71% probability that a recession was not only possible, but that it may… a 71% probability that it started in May of this year. So I’ll be interested to see, given that the benchmark revisions that we already talked about of 911,000 for the year through March, that was the largest ever downward revision in the history of that data, which I think goes back to 1980. So we’ll have to see if that algorithm shows even higher odds.

One thing I would remind people about recessions and how they’re dated, this is really important, you do get advanced warning, so to speak, from leading indicators. But the way that the NBER dates recessions as when they began, is they go back essentially to the aggregate peak in the data that they are tracking. Assuming from that peak you have deteriorated into what become obvious recession type conditions, the dating of when it started goes back to the aggregate peak in the data, which means at that moment in time, especially in advance of any revisions to things like labor market data, the data generally looked at that time pretty good. You could say that about December of 2007. If you looked at the initial prints of data in December of 2007, payroll data, consumption data, they looked pretty strong. Subsequent revisions, with the benefit of hindsight, we look back, and that was the start of the recession.

So it’s not out of the question that the analysis from the NBER about a recession possibly having already started, I think that could be valid. In other words, if we were to continue to descend into recession-type conditions, it could be the case that we find out as we’re having this webcast that the recession actually already began. We’re not seeing that in the data yet, but that’s the nature of how recessions are dated.

MARK: Thank you. Thank you, Liz Ann.

Kevin, ‘One thing you haven’t talked about is artificial intelligence, and what is its impact on the job market?’

KEVIN: Yeah, it’s interesting. The St. Louis Fed put out some data recently looking at… in a pretty big study, looking at just the AI exposure rate that exists for a number of industries across all US payrolls. And there’s not a… I wouldn’t call it a remarkably strong correlation, but there is a sort of upward sloping line, you know, when you have a higher AI exposure rate. And this is sort of tracking things like the use of LOMs and a lot of models, large language models, and how much they’re implemented, incorporated into browsers for certain industries. There is a positive correlation between a higher AI exposure rate and a higher jump in the unemployment rate for each sector. So it’s probably not terribly surprising, but I think it’s come under more focus recently because a lot of industries have been facing… as we’ve been talking about on this call, a lot of industries have been facing a lot higher cost pressures, whether it’s related to tariffs, whether it’s related to labor. So what a lot of companies have done, and we know this now from surveys that have come out, whether it’s from the regional banks, the regional Fed banks, or whether it’s from companies like ISM that have been surveying both manufacturers and services companies, their way to sort of mitigate those costs and to get around what has been a higher cost pressure environment has been employing AI and a lot more technology, not necessarily making that large capital investment that is hiring an individual. And that is disproportionately affecting the younger cohort, the age group of 16 to 24 year olds. Right now, in the US, that unemployment rate is at 10-1/2%, which relative to history is not at crisis levels, but you look at the momentum that it’s seen over the past couple of years, and it’s the only time that you’ve seen that kind of move to the upside without the rest of the economy being at a recession.

So you are starting to see little labor cycles happening in certain pockets of the labor market. Clearly, it hasn’t yet filtered up to the broader labor market because the broader unemployment rate is still low at 4.3%. But it’s starting to show up in certain industries, and I would say that I would pay a lot more attention now to the fact that the cohort that’s been affected most by the low hiring/low firing environment has been the younger cohort, but there’s another layer to that now in terms of AI and technology may be preventing them from getting more of the entry-level jobs that existed before a lot of this technology was rolled out.

MARK: Thanks, Kevin.

For everyone who has sort of had trouble getting logged in, we’ll be going a little bit longer. Normally, we’d stop at top of the hour. We’ll go a little bit longer so you can get the requisite number of minutes for the continuing education credits.

So Kathy, this one is for you. Let me see if I can find it. ’10-year yields have dropped over the past few weeks with the weaker macro data and more certainty around a September Fed rate cut. What kind of yield range do you expect on the 10-year over the next 12 months?’

KATHY: Yeah, I would think that the low end, if we continue to see soft data and Fed rate cuts, which I think is likely over the next six months or so, could see a test on the downside of around 3.80. Those were the lows from last year. But again, with the difficulty we have with the other side of the equation, with the term premium moving up, with inflation staying sticky, and fiscal policy being a negative, I don’t know that we can get much below… on a 10-year, much below that 3.80 area. On the upside, probably could bounce up back to 4-1/4 here, kind of have that broad range. But I think the general trend over the next six months should be lower. The question gets to be really about inflation and fiscal policy, rather than economic growth, which we think will be supportive of lower bond yields.

MARK: Thanks, Kathy.

Liz Ann, this one is for you. ‘There are differing opinions as to how much all of the spending on AI will translate into improved earnings. What is your view on this, and are you seeing yet in corporate earnings profitability gains directly tied to the investments companies are making in AI?’

LIZ ANN: So I’m going to assume the question isn’t about the hyperscalers and basically the picks and shovels embedded in companies like an Nvidia, because clearly there’s been a benefit there. But in terms of just in general companies’ adoption, there was a recent MIT study that came out that I think the number was 90- or 95% of companies have reported not yet seeing a return on investment in the AI spend. But then more recently, Morgan Stanley had a report out that someone put into my inbox about companies that are increasing adoption. Their estimate is that could accrue to the benefit, to the net benefit to S&P companies of about $900 billion, which would represent, I think it was 25- or 30% of the estimated pre-tax net income of the S&P in 2026. So you’ve got both the numerator and the denominator in a ratio like that being estimated at this point. So an assumption that we’ll continue to see some escalation in sort of quantifying the net benefit, but as of right now, it is, it’s not really being seen in either the earnings numbers or the productivity numbers.

MARK: Got it. Thank you. Thank you, Kathy… or excuse me, thank you, Liz Ann.

And then final question for… final question of the submitted questions I’ll send to you, Kathy. Let’s see. ‘For muni bond opportunities, do you think we should consider long maturity muni bonds, say, in the 2045 to 2055 range?’

KATHY: Yeah, I think there’s more… there’s better value at the long end of the curve in municipal bonds. So we’re seeing, when we look at, say, 30-year bonds, the MOB spread is much more in the normal range than, say, when we look at five-year or 10-year. So there’s some advantage to moving out the yield curve if you have an investor or client who is really looking for a long-term investment. So better valuation there. We usually like to suggest, say, bond ladders, where you have different maturity, so you have a little bit more optionality in terms of managing the portfolio. But definitely better valuations at the longer end of the curve in munis.

MARK: Thank you, Kathy.

So final question, what’s the one or two things each of you would like to highlight or be the key takeaway for listeners and viewers? Liz Ann, let’s start with you.

LIZ ANN: Yeah, from an economic perspective, I think the latest in the labor market data does suggest we want to put recession back on radar screens, and pay attention to the various leading indicators that flag that, especially in light of the big downward benchmark revision to payrolls. From a market perspective, there clearly has been less of a focus on some of these macro uncertainties and a driver in their retail trader of low quality segments of the market. And there, I think for individual investors, I would stay up in quality to the extent you take a factor approach, kind of go old school, and think the old acronym of GARP, growth at a reasonable price, and look for companies that have both those growth characteristics and those value characteristics to avoid that trap that can sometimes happen when you’ve got low quality bias to near-term leadership.

MARK: Thanks, Liz Ann. Kathy, you’re up next.

KATHY: Yeah. I would say returns year-to-date in fixed income have been positive, generally consistent with coupons. But the strongest performing sub-sector has been international. That’s entirely due to about the 9- or 10% drop in the dollar. So we actually think if you haven’t been allocated international developed market bonds, this may be an opportunity to continue to gain from what we expect to be some further softness in the dollar. But in general, looking for positive returns, we’re simply focused, though, on reducing volatility risk in the portfolio because we do expect that as we get into the next year, policy changes are still going to keep the markets on the back foot, to some extent, uncertainty. So we like, say, up in credit quality and intermediate-term duration.

MARK: Thanks, Kathy. Kevin?

KEVIN: Yes. I’ll tie economic and market together, thoughts together, in terms of the Fed if the expectation is that they’re going to start cutting again relatively soon here. There’s only a handful of instances in history when they’ve reengaged in a cutting cycle after taking a pause for more than six months. So arguably we’re going to add to that count here shortly. You could look at average performance for the S&P 500 12 months after the re-engagement or the restarting of that cutting cycle, and you could see that it is pretty strong, on average, positive, on average, more than 10%, approaching 12, actually. But there’s a huge range around that average, and I think that’s where the focus on the economic data driving the Fed’s decisions ultimately that has to be the main focus. Because in the best instance, in that 12-month period, the market was up more than… slightly more than 50% because economic conditions were pretty strong. In the worst instance, the economy actually went into a recession basically as the Fed started cutting, and it was in the early 1990s. So you have a huge range around that average. And I think that puts even more emphasis on what we’ve discussed in terms of labor market conditions, why the Fed is cutting, and what the reason is for that. So if it is because of weaker economic data and the labor market that is deteriorating faster, that probably wouldn’t be the most bullish setup for stocks in the near-term. Of course, after you get through the cutting cycle, through the recession, things do brighten from there, but I would consider that in terms of the economic picture and the context in which the Fed is cutting.

MARK: Alright, Michelle, we’ll give you the last word.

MICHELLE: Yeah, I think that in the near-term there is potential for pullback in international stocks. They’re up over 20% this year. And that could come from fiscal tightening that we’ve talked about earlier, or maybe a countertrend rally in the dollar.

But looking out intermediate-term, if international stocks keep outperforming, the three-year mark for outperformance, for the MSCI EMU Index, that’s the Eurozone, relative to the S&P 500 could be reached by the middle of October, and that could prompt more inflows into international stocks because investors tend to chase three-year performance records. So it might be a time to take a look if investors are underweight.

MARK: Thanks, Michelle.

And we are out of time. So Liz Ann, Kathy, Kevin, and Michelle, thanks for your time today. If you would like to revisit this webcast, we’ll send you a follow-up email a little bit later with the replay link. And to get credit, just as a reminder, you need to watch for 50 minutes of the live broadcast. Watching the replay doesn’t count. To get CFP credit, please make sure you entered your CFP ID Number in the Schwab… or excuse me, in the window that should be on your screen right now. And then Schwab will submit that credit request to the CFP Board on your behalf. For CIMA credit, you’ve got to submit that on your own. And directions for submitting it can be found in the CIMA widget that is at the bottom of the screen. And our next webcast is October 7^th. Our speakers will be Liz Ann, Kathy, and Michelle. Until then, if you’d like to learn more about Schwab’s insights or further information, please reach out to your Schwab representative. And thanks for your time today.

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