Washington Washout: Stocks Dip on Fed, Trade Fears

(Monday market close) A perfect storm of bad news hit Wall Street Monday, pushing stocks down more than 2%, yields up, and the dollar to new three-year lows. Investors stepped back as China warned other countries not to team with the U.S. against it on trade, while the independence of Federal Reserve policy came under a microscope thanks to more tough talk from the White House. Combined with falling earnings estimates, the mood seemed bleak and recession fears took center stage.

"Recession probability is elevated and it's hard to imagine what could prevent it, other than a fuller backpedaling in tariff policy," said Liz Ann Sonders, chief investment strategist at Schwab.

Even if a recession can be avoided, Wall Street has grown far more conservative about the earnings outlook thanks in part to trade confusion. This is the 18th straight week of downward revisions to 2025 S&P 500 earnings estimates, to around 9% growth now from 15% shortly after last fall's election. "Direction of travel for estimates from here is likely still lower, perhaps significantly, alongside recession risks," Sonders added.

When earnings estimates fall and the S&P 500^® index (SPX) is valued at a relatively high level of 19 times forward earnings, as it was earlier today, either the price-to-earnings (P/E) ratio can rise or prices can come down to reflect lower anticipated S&P 500 profits. The market has chosen option two quite often lately. President Trump's comments last week about "terminating" Fed Chairman Jerome Powell then added to the market's gloom.

Trump raised the volume Monday, calling Powell a "loser" and demanding rate cuts. This played squarely into pressure on long-term Treasuries, another pain point for Wall Street. The benchmark U.S. 10-year Treasury note yield (TNX:CGI), which moves inversely to Treasuries, climbed to 4.41% today after dropping under 4.3% last week. It's below recent highs near 4.6%, but investors remain nervous about possible yield-related pressure on stocks. Lofty yields typically lead to rising borrowing costs for businesses and consumers.

"The irony of the effort to oust Powell is that it would probably send long-term yields higher as foreign investors intensify their exit from U.S. dollar assets—the exact opposite of what the president wants," said Kathy Jones, chief fixed income strategist at Schwab.

Jones added that the market's turbulence following Trump's comments about Powell is probably less about Powell himself or any replacement and more about "preserving some semblance of Fed independence." For an example of an economy lacking central bank independence, she added, "look no further than Turkey."

Turkey has a 46% benchmark interest rate and 38.1% annual inflation, according to Trading Economics. While no one expects those type of sky-high numbers here, Turkey's troubles partly reflect investors' lack of faith in the country's economic policies and ability to pay back debt. The central bank there has been criticized by experts in the past for being open to political interventions in its decision making, according to The Associated Press.

If Trump fired Powell, "the market reaction would likely be negative, as the independence of the Fed is highly valued," Jones said.

The U.S. dollar cratered to new three-year lows today and gold (/GC) hit record highs as investors fretted over the Fed situation. Powell hinted last week that the central bank remains hesitant about rate cuts despite a slowing U.S. economy. Inflation hasn't come down to levels the Fed is comfortable with, and tariff-related inflation isn't fully understood yet. Powell, who was first appointed by Trump in 2018 and re-appointed by President Biden, has about a year left in his term and says he plans to finish it. He also has said it's "not permitted under law" for Trump to fire him, but a White House official said last week Trump is studying possible ways to do so.

"Today's move is a microcosm of what's been happening over the past few weeks," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research. "Historically when equities sell off, Treasury yields move lower as investors seek the relative safety that Treasuries offer. However, that hasn't been the case lately. It indicates to us that there's a continued move away from U.S. based investments to diversify away from the uncertainty that tariffs have created."

Howard expects the Fed to continue to cut rates this year, "but the timing and pace will depend on the economic data and the outlook for the economy," he said. "The market's pricing in three to four cuts this year."

More pressure today came from a Reuters report that China's Huawei Technologies plans to begin mass shipments of its advanced 910C AI chip to Chinese customers as soon as next month. This news hit less than a week after Nvidia (NVDA) said it would write off large amounts of revenue expected from China due to new U.S. export licensing requirements that Nvidia's AI chips designed for that market don't meet. Huawei's announcement suggests that even if U.S. companies eventually get licenses, Chinese firms will have a vast head start.

Semiconductor shares continued sliding Monday after a slight turn upward a week ago from lows last seen in late 2023. The PHLX Semiconductor Index (SOX) is down 38% from last summer's all-time high. Some chip stocks losing ground besides Nvidia today included Broadcom (AVGO), Micron (MU), and Advanced Micro Devices (AMD).

Other technology firms including Super Micro Computer (SMCI), Oracle (ORCL), Salesforce (CRM), and Marvell Technology (MRVL) also fell today amid general risk-off sentiment.  But every S&P 500 sector was down, with consumer discretionary falling most thanks to trade-related weakness in Tesla (TSLA) and Amazon (AMZN). Volatility climbed double-digits, signaling chances for more dramatic moves ahead.

Tesla capsized nearly 6% Monday, a day before earnings. Though Tesla reports tomorrow afternoon, some of the drama came earlier this month when the EV maker reported a 13% year-over-year drop in first-quarter vehicle deliveries. It cited a changeover in Model Y lines at all four factories that led to the loss of four weeks of production, but said the Model Y ramp continues to go well. Long-time Tesla bull, analyst Dan Ives of Wedbush Securities, said over the weekend that Tesla CEO Elon Musk should step back from his government work and focus on the company.

Tuesday is a busy earnings day with reports expected from Lockheed Martin (LMT), Verizon (VZ), 3M (MMM), and Northrop Grumman (NOC). The defense contractors face pressure in their export markets as U.S. trade policy has some countries vowing to spend more of their security budgets buying homemade equipment. And Boeing (BA), which also reports this week, saw China return one of its airliners due to tariffs.

Eyes turn toward Treasury auctions after recent signs of weaker demand for U.S. assets that rattled markets. A 2-year Treasury note auction tomorrow kicks things off. Lack of demand for U.S. assets including Treasuries and the dollar upended markets earlier this month but recent auctions saw relatively solid buying interest.

Monday was sparse for earnings and data, but March leading indicators from the Conference Board fell 0.7%, compared with a 0.2% decrease the prior month and analysts' expectations for a 0.3% decline. The report's expectations index, which tracks consumers' short-term outlook for income, business, and labor market conditions, fell to 65.2, its lowest level in 12 years and below the threshold of 80 that usually signals a recession ahead, the Conference Board said.

Even with Trump's "reciprocal" tariffs delayed until July on most countries, possible effects showed up in recent data. South Korea's preliminary report on April trade showed exports to the U.S. falling 14.3% year over year. A weak dollar often helps earnings for multinational firms, but anger from countries facing U.S. tariffs, combined with China's recent slapping of stiff tariffs on U.S. goods, could blunt the weak dollar's impact.

Tuesday is a light day for data, though earnings could keep investors busy. As many analysts note, outlooks might be cloudy for many companies amid confusion over trade policy, while the market might discount positive first quarter results considering they date from before the worst trade turbulence.

Later this week, look for the Fed's Beige Book report on regional economic conditions, new home sales, and a final view of April consumer sentiment. Though Powell isn't on the schedule, other Fed speakers are out there, including Vice Chair Philip Jefferson tomorrow addressing the Fed's dual mandate of maximum sustainable employment and price stability.

The Dow Jones Industrial Average^®($DJI) fell 971.82 points (2.48%) to 38,170.41; the SPX dropped 124.50 points (2.36%) to 5,158.20, and the Nasdaq Composite^® ($COMP) sank 415.55 points (2.55%) to 15,870.90.

- Netflix (NFLX) rose 1.53% following its earnings report released late Thursday. The streaming company beat earnings per share estimates easily, but revenue was about as expected. It also guided for second quarter revenue and EPS above consensus views and kept full-year guidance.

- Bitcoin futures (/BTC) increased 2.68% and crypto-connected stock MicroStrategy (MSTR) added just 0.18% despite falling stocks and rising Treasury yields. The Wall Street Journal reported today that several crypto firms plan to apply for bank charters or licenses.

- Uber (UBER) fell 3% as the Federal Trade Commission (FTC) filed a lawsuit accusing the company of misleading customers and failing to provide an easy way to cancel Uber One subscriptions, Barron's reported.

- Nvidia dropped 4.5%, hurt like other semiconductor stocks by continued trade tensions between China and the U.S. Nvidia's CEO Jensen Huang met with Chinese leaders last week and the Japanese prime minister today, Barron's reported. The Huawei AI chip news also battered shares as the session advanced.

- All of the Magnificent Seven stocks finished lower as earnings approach for most of them starting with Tesla tomorrow and Alphabet (GOOGL) later this week. The rest, other than Nvidia, are due next week.

- Giant health insurers UnitedHealth (UNH) and Humana (HUM) tumbled 6.34% and 7%, respectively, with UNH suffering its worst two-day stretch in 27 years, according to Barron's. This comes after UNH cut its full-year outlook last week due to headwinds from Medicare Advantage plans, where care demand rose more than the company had expected in the first quarter. Humana reports next week.

- Kroger (KR) rose 1.53% and was the only S&P 500 component to make a new 52-week high today, according to Briefing.com, demonstrating the shift toward defensive names in sectors like staples.

- Capital One Financial (COF) rose 1.47% and Discover Financial Services (DFS) climbed 3.56% after two top U.S. banking regulators approved Capital One's $35.3 billion all-stock bid to buy Discover, Barron's reported.

- Chances of a May rate cut stood at 13% late today, down from 20% a week ago. June rate cut odds are 73%, down from 75% over the last week. Though recent inflation data showed progress, the Fed worries that tariffs could force prices higher. And there's no sign of any cracks in the labor market, but investors will closely watch Thursday's weekly initial jobless claims ahead of job openings and nonfarm payrolls data due next week.

Dividend discussion: In turbulent times like these, many investors preparing for retirement turn to dividend-paying stocks. In the latest Schwab OnInvesting podcast, Schwab's Sonders and Jones discuss the complexities of retirement investing, and the current state of the markets. They focus on volatility, investor confidence, and the impact of trade policy.

Turbulent market conditions can make anyone worried about their portfolio, and Schwab offers several perspectives that provide ideas to keep in mind at such times:

Market Volatility: What to Do During Turbulence
Bear Market: Now What?
Market Volatility in Retirement: Are You Prepared? 
Navigating the Markets: Tariffs and Trade

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

April 22: Expected earnings from 3M (MMM), Halliburton (HAL), Tesla (TSLA), Kimberly-Clark (KMB), Lockheed Martin (LMT), Northrop Grumman (NOC), and Verizon (VZ).
April 23: March new home sales and expected earnings from Boeing (BA), AT&T (T), Philip Morris (PM), IBM (IBM), and Texas Instruments (TXN).
April 24: March durable goods, March existing home sales, and expected earnings from American Airlines (AAL), PepsiCo (PEP), Merck (MRK), and Intel (INTC).
April 25: University of Michigan April Consumer Sentiment—final.
April 28: U.S. Treasury refinancing estimates and expected earnings from Waste Management (WM).