Here is Schwab's early look at the markets for Tuesday, July 14.
Earnings season unofficially begins today after the week started with a thud. Yesterday's oil-driven, risk-averse sell-off in semiconductors pushed the volatile chip sector down almost 5% and kept it in correction territory. The PHLX Semiconductor Index, or SOX, is down 15% from its late-June peak.
Focus now shifts to results from a host of the largest Wall Street banks, including JPMorgan Chase and Citigroup, due before the open. This comes as rate hike worries mount. "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term," said Fed Gov. Christopher Waller, in remarks Monday, Bloomberg reported. The FOMC is the Federal Open Market Committee.
Odds of a July rate hike surged to almost 59% late Monday from 30% earlier in the day, according to the CME FedWatch Tool. Odds of at least one hike by September rose to more than 75%. Waller's remarks and rising oil prices appeared to be the combined instigators of this move.
That intensifies the importance of today's 8:30 a.m. ET June Consumer Price Index (CPI) data, followed by Federal Reserve Chairman Kevin Warsh's 10 a.m. ET semi-annual testimony to Congress.
What Warsh says about inflation and the overall economy could shape today's trading, even beyond CPI and the bank results.
"Warsh’s debut testimony is a wildcard," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research (SCFR). "The Fed’s internal 'family fight' is over hiking vs. holding. With Warsh having committed to less communication, every word will get amplified."
Headline CPI is forecast to fall 0.1% month over month in June thanks to lower gas prices, while core CPI that strips out food and energy is expected to rise 0.2%, according to Wall Street analysts' consensus views. The key year-over-year core number is seen at a relatively benign 2.9%, still well above the Fed's 2% goal.
Sonders noted a divergence in CPI, with headline inflation seen falling but core inflation accelerating. One possible outcome to watch with today's data is for a "sticky" services CPI story, not oil-driven headline relief, Sonders said.
Earnings today include Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs, and Wells Fargo. Though their Wall Street businesses appeared to thrive last quarter, U.S. consumer credit and business loan demand might come under microscopes when banks report, along with net interest income trends.
Any shakiness in those metrics could give markets pause. Bank stocks also made solid gains in the second quarter, possibly building some anticipated earnings strength into prices.
In sum, it's a day when investors might want to keep their hands firmly on the wheel and brace for possible bumps, especially considering the uncertain Middle East situation.
The week began with chips rolling downhill again. The worst hit were memory firms, including South Korean newcomer SK Hynix, as Middle East conflict intensified. Crude oil surged more than 9% after President Trump re-imposed a blockade on oil from Iran following tit-for-tat weekend attacks. Indexes fell across the board, and the tech-heavy Nasdaq trailed the pack.
Taiwan Semiconductor Manufacturing fell less than rivals after the chip foundry company said quarterly revenue climbed 36% annually, including a 68% jump in June alone.
Other key earnings this week include Netflix and United Airlines. Analysts expect S&P 500 earnings growth of nearly 24% in the second quarter, FactSet said. Expectations remain high, so any major misses or failure to raise guidance could cause tech stocks, in particular, to skid.
Volatility surged 14% Monday after Friday's descent to six-month lows. Though the Cboe Volatility Index (VIX) calmed last week, there's a record spread between single-stock volatility and index volatility. A calm sea masked turbulence down below entering the week, but the rise in VIX to above 17 on Monday narrowed the gap and perhaps points to more choppiness ahead.
The main bearish driver Monday was crude oil and intensified weekend attacks in the Middle East. The Strait of Hormuz appeared mostly blocked, though Bloomberg reported some ships able to transit. In a Monday interview with Fox News, President Trump said the U.S. will take over the strait and be its "guardian." He also said the U.S. would impose a 20% fee on cargo going through the passage.
Treasury yields were another burden, closing Monday above 4.6% for the 10-year note, the highest since late May and not far below that month's peak. The 10-year yield is up more than 20 basis points from recent lows, partially reflecting pricey oil, which raises inflation and rate hike fears.
Despite index weakness, six of 11 S&P 500 sectors advanced Monday. Weakness in chips masked resilience in other tech stocks including software names like Microsoft and Salesforce. Energy led all sectors thanks to oil, but defensive areas like utilities and staples also moved up, as did financials ahead of bank earnings.
Among individual movers Monday, SK Hynix, tumbled sharply, about 15%, following a big pullback overnight in the South Korean market. South Korean stocks are flirting with bear market territory down nearly 20% from recent highs.
Other memory chip stocks including Micron and Sandisk fell 4.6% and 12.6%, respectively, keying off South Korean weakness.
Other chip and AI infrastructure stocks also dropped in Monday's risk-off trading, with shares of AppLovin down 13%, Marvell Technology down more than 7%, Arm Holdings off nearly 8%, and Oracle losing more than 6%. Sector leader Nvidia backed off from its recent rally and fell more than 3%.
Materials stocks felt pressure from gold and silver being down 2% and 3%, respectively, hit by the renewed Middle East tensions and concerns the Fed might keep rates high.
The Dow Jones Industrial Average® ($DJI) slipped 138.37 points (-0.26%) Monday to 52,498.64; the S&P 500 Index (SPX) fell 60.05 points (-0.79%) to 7,515.34, and the Nasdaq Composite® ($COMP) plunged 408.43 points (-1.55%) to 25,873.18.
