(Friday market open) The weekend approaches with most major U.S. stock indexes at or near record highs following Thursday's dramatic rally sparked by Nvidia's (NVDA) earnings. Tech shares came under slight pressure early Friday, but there's little in the way of catalysts to set the tone. Instead, focus could turn to Saturday, when the "Oracle of Omaha" Warren Buffett shares his thoughts as Berkshire Hathaway (BRK.B) reports.
Almost lost in the semiconductor excitement yesterday was a new February high for the benchmark 10-year Treasury note yield. It briefly surged above 4.35% after minutes from the last Federal Reserve meeting suggested little enthusiasm for near-term rate cuts.
"If the 'higher for longer' theme is back in vogue, higher yields are warranted over the short run," said Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. "We don’t expect a return to the recent peaks—we still think the peak in yields is behind us."
The 10-year yield hit a 16-year high of nearly 5% last fall. It dropped below 3.9% late last year when the Fed projected several 2024 rate cuts, but the entire rate complex has climbed since then thanks to solid U.S. economic data that delayed ideas of when rate trims might occur.
"The economy remains resilient, and January’s inflation readings should give officials pause," Martin said. "The timing of the first cut keeps being pushed back, with June being the meeting where the likelihood of a cut is being fully priced in. Despite the recent inflation surprises, rate hikes don’t appear to be on the table, and we still expect the next move to be a cut."
Futures based on the S&P 500® index (SPX) rose 0.11% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) were up 0.1%, and futures based on the Nasdaq-100® NDX climbed 0.06%.
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- The 10-year U.S. Treasury Yield (TNX) fell one basis point to 4.31%.
- The U.S. Dollar Index ($DXY) dropped to 103.79 and has been steadily heading lower since its mid-February peak, potentially a tailwind for stocks.
- The Cboe Volatility Index® (VIX) dropped to 14.04 after peaking above 16 earlier this week.
- WTI Crude Oil (/CL) slid 1.5% to $77.41 per barrel after U.S. Fed Governor Christopher Waller said interest rate cuts should be delayed at least a couple months.
Stocks in spotlight
Nvidia's (NVDA) blow-out earnings kept attention glued to the so-called Magnificent Seven. It could be time, however, to rethink which stocks that term encompasses and whether all the "members" deserve to stay in the starting lineup. Some might face time on the bench.
"The 'Mag7' may need to be reconstituted given Tesla (TSLA) is no longer in the largest seven; while performance dispersion is incredibly wide among the seven," said Liz Ann Sonders, chief investment strategist at Schwab. "Nvidia and Meta Platforms (META) are the number one and number two best performers year to date within the S&P 500, respectively; while Tesla is bringing up the rear at 498 and Apple (AAPL) is at 398 through Wednesday's close."
Info tech had been the worst performing S&P 500 sector since last week's surprisingly hot Consumer Price Index (CPI) report, with energy in first place. That relationship might be shifting thanks to Nvidia's results, Sonders added.
Weekend with Warren: While all the mega caps have now reported, another top 10 company by market capitalization opens its books tomorrow. Warren Buffett's Berkshire Hathaway reports Q4 results and releases its annual shareholder letter, the first since Buffett's business partner Charlie Munger died at age 99 late last year.
Despite that sad news, shares are up more than 14% this year, outpacing the SPX. Focus Saturday could be on the company's large insurance business, Barron's reported, as well as the 93-year-old Buffett's latest thoughts on the market, succession plans, and where the company might choose to park its large stash of cash.
Empowered: In other news, AT&T (T) believes yesterday's outage was "caused by the application and execution of an incorrect process" as it was expanding its network, and "not a cyber attack," the company told ABC News in a statement. According to preliminary information from two sources familiar with the situation, ABC said, the software update went wrong, and there was nothing "nefarious or malicious" about the incident.
Stocks on the move early Friday include:
- Shares of online used car retailer Carvana (CVNA) accelerated nearly 30% in premarket trading as the company offered stronger-than-expected earnings guidance and posted the first annual profit in its history. One key to the company's earnings report was improvement in gross profit per vehicle sold. Several analysts raised their ratings for the stock.
- Block (SQ) rose 16% ahead of the open despite earnings per share that missed the average Wall Street estimate. Guidance made the difference for shares as the financial technology company raised its outlook for 2024. The parent company of Square said it has successfully cut costs.
- Intuit (INTU) fell 1.1% despite beating Wall Street's average earnings per share (EPS) estimate and reporting revenues that met expectations. The issue appears to be the tax preparation software firm's fiscal Q3 EPS guidance, which came in below analysts' forecast.
What to watch
Week ahead: Next week brings key data including Personal Consumption Expenditure (PCE) prices and an updated government estimate on Q4 gross domestic product (GDP).
However, the corporate news flow slows as we approach March, with few consequential earnings reports scheduled beyond big box Lowe's (LOW) next Tuesday. The following week features Target (TGT), with retail earnings season more spread out than normal.
Lowe's follows a disappointing report from competitor Home Depot (HD) earlier this week. Last November, Lowe's trimmed its fiscal year sales outlook after Q3 revenue fell 13%. Like HD, Lowe's faces a slowing home improvement market as interest rates remain high and the bulk of pandemic-related demand is in the rearview mirror.
No jobs: Next Friday is the first day of March but doesn't feature February's Nonfarm Payrolls report. That's due the following Friday, March 8. Even without jobs, next week offers plenty to sink your teeth into. The highlight is likely next Friday's PCE data, which represents the Fed's favorite inflation meter. It's less shelter-focused than CPI, and shelter prices have been particularly sticky. Shelter is 36% of CPI. Conversely, housing's weight in PCE is just 18%.
"Based on the difference in weights alone, it's not out of line to expect a smaller bump relative to CPI (all else equal)," wrote Sonders and Schwab Senior Investment Strategist Kevin Gordon in a post this week. "That supports the argument that the Fed might not be as nervous over the January CPI stat. That said, however, a good chunk of the public watches CPI and uses it as the preferred inflation gauge, so it's tough to believe that the Fed will shun the index altogether."
For a refresher on how to interpret different inflation reports, check this handy Schwab video.
Give me shelter: One place where inflation keeps percolating is housing, whether you want to buy or rent. Thursday's January Existing Home Sales report showed the median single-family home price rising 5.1% to $383,500, the seventh consecutive month of increases. Tight inventory remains an issue, but sales rose more last month than analysts expected.
New Home Sales for January are due Monday, and prices there have been heading the opposite direction. The median price fell more than 13% in December as high mortgage rates keep demand in check. Analysts expect new home sales to rise slightly to a seasonally adjusted annual rate of 675,000, according to Trading Economics.
Thursday in review:
Nvidia's earnings sparked a 5% rally in the Philadelphia Semiconductor Index (SOX) and a 3% gain in the NDX, both of which ended at all-time highs. Consumer discretionary shares were also among the strongest sectors. The small-cap Russell 2000® Index (RUT) rose 1% and halted a three-day slide, but its gains trailed large-cap indexes. Volume was below average at the New York Stock Exchange (NYSE) but slightly above normal at the Nasdaq.
Nvidia had a "profound effect" at both the sector and index level, partly reflecting its market value, which is nearing $2 trillion, said Joe Mazzola, director of trading and education at Schwab. Nvidia is now the third largest company behind Microsoft (MSFT) and Apple.
External affairs: European stocks are on pace for a slightly higher close this week as European Central Bank (ECB) policymakers debate the pace of potential rate cuts. Most Asian markets finished the week higher despite fresh signs of weakness in China's struggling property market.
Eye on the Fed
Early today, futures trading pegged chances at 2.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 26% chance the funds rate will be lower than now after the Fed's May meeting. Chances rise to 67% by June.
Fed Vice Chairman Philip Jefferson said Thursday that if the economy evolves broadly as expected, "it will likely be appropriate to begin dialing back our policy restraint later this year," MarketWatch reported.
Ideas to mull as you trade or invest
Stale groceries? The week began with major merger news as Capital One (COF) announced plans to acquire Discover Financial Services (DFS) for $35.3 billion, and Walmart (WMT) said it's buying Vizio (VZIO). While acquisition plans can seem shiny at first glance, they can lose some luster if the process takes a while. That may be the case with Albertsons (ACI), shares of which briefly came under pressure Tuesday on news from Bloomberg that the Federal Trade Commission (FTC) and states could file an antitrust lawsuit against Kroger (KR) to prevent it from buying Albertsons. The grocery companies announced the $25 billion merger in late 2022 but it's drawn regulatory scrutiny amid charges it could reduce competition. Similar worries surfaced when Capital One announced its plans to buy Discover this week, as some analysts say that might narrow choices for credit card users and result in higher fees.
Warning sign: Crude oil's resilience remains a potential sticking point for stock market rallies. The commodity remains essential and continues finding buying interest on every pullback. It's been trading around the 200-day moving average for front-month /CL futures near $77.60 per barrel. Without any resolution to Middle East tensions, it could continue to pose a threat, especially to transport-related firms. Speaking of which, Uber (UBER) is being added to the Dow Jones Transportation Average ($DJT) this week, replacing JetBlue (JBLU). The change takes effect February 26 and is another feather in the cap for the company as ridership surges for Uber and its rival Lyft (LYFT). Uber just celebrated its first-ever profitable year by announcing it would buy back $7 billion worth of stock. Still, both firms could be vulnerable if gas prices keep rising, and we're heading into a time of seasonal strength for oil and some industry analysts warn that supplies might be tightening. U.S. crude and gasoline inventories are both about 2% below their five-year averages for this time of year.
Bond buyer? If you're thinking of investing in bonds, there's some things you should consider after a tough two years for the market. Bond investors are getting real returns, not just a hedge in their portfolios. Those greatly improved returns, however, come with challenges, like knowing where to get the best balance between returns and risk or how to maintain good returns in a volatile market. Learn more in the latest WashingtonWise podcast. There may be reasons to consider longer-term bonds now, said Schwab's Collin Martin in his latest post. "By focusing more on short-term bond investments, investors likely will face reinvestment risk once the Federal Reserve begins to cut interest rates, as it is widely expected to do this year," Martin said.
February 26: January New Home Sales and expected earnings from Domino's Pizza (DPZ) and Zoom Video (ZM).
February 27: Expected earnings from Dell (DELL) and eBay (EBAY).
February 28: Q4 GDP Second Estimate, January Retail Inventories, January Wholesale Inventories, and expected earnings from Baidu (BIDU).
February 29: January Personal Consumption Expenditure (PCE) prices, January Personal Spending, and January Personal Income.
March 1: February ISM Manufacturing PMI, January Construction Spending, and final February University of Michigan Consumer Sentiment.