Here is Schwab's early look at the markets for Thursday, May 22:
As the long holiday weekend approaches, investors watched budget negotiations in Washington, D.C., and awaited a smattering of earnings and housing data, all with a wary eye on Treasury yields. The benchmark 10-year yield rose to nearly 4.6% yesterday, weighing on Wall Street amid surging worries about the U.S. debt.
Longer-term yields like the 30-year, which are particularly sensitive to the growing levels of debt in the budget being debated, reached eye-opening levels above 5% yesterday. Relatively light demand for a 20-year U.S. bond auction yesterday pushed stocks to their lowest levels of the day Wednesday afternoon, another signal of how attuned stocks are to Treasury yields right now.
"The budget discussion is fueling a lot of concern about deficits and debt levels rising over the long run," said Kathy Jones, chief fixed income strategist at Schwab "The current proposal being debated is expected to add anywhere from $3 trillion to $5 trillion to the accumulated debt over the next ten years. The market appears to be voting against this bill and would like to see more fiscal restraint."
Budget negotiations continue on Capitol Hill today as the House Speaker's deadline for a vote before Memorial Day weekend. If passed by the full House, the bill would go to the Senate and possibly face more changes.
As of late Wednesday, futures trading indicated a 5% chance of a rate cut in June, and 29% in July, according to the CME FedWatch tool. The mid-September meeting is the first where futures indicate a better than 50% chance of a cut.
Today's earnings aren't necessarily market moving and include Ralph Lauren, Autodesk, and Ross Stores. April existing home sales due shortly after the open are seen at an annually adjusted pace of 4.15 million, up from 4.02 million in March. Existing home sales fell nearly 6% in March, while prices rose.
Other numbers out today include U.S. manufacturing data from S&P Global, offering insight into a manufacturing economy that stands just above contractionary levels. The April reading of 50.2 was equal to March but missed analysts’ average estimate slightly and came in just above 50, the line between contraction and expansion. Analysts expect the preliminary May headline figure to remain in expansion, but just barely, for May at 50.3, according to Trading Economics.
Retail earnings out yesterday painted a mixed picture. Target fell following a disappointing report that saw quarterly sales at stores open a year or more fall 3.8%. Overall sales at the retailer fell nearly 3% in its latest quarter from a year ago and customers spent less per visit. The company also lowered guidance.
Lowe's, which also reported yesterday, kept its full-year forecast, beat analysts' earnings expectations, and just missed the average analyst revenue estimate. In its release, the company cited near-term uncertainty and housing market headwinds but said sales to professional remodelers—an important category—stayed strong.
Crude oil initially surged yesterday after CNN reported that U.S. intelligence has evidence that Israel might be preparing to strike Iranian nuclear facilities. But crude turned tail later in the day after U.S. stockpiles grew more than analysts had expected. It was the second week in a row of rising supplies in a season where demand is typically strong, which could point to economic softness.
The rest of this week is light on major data, but near-term catalysts could include any positive or negative trade-related developments, Nvidia's earnings next week, and Personal Consumption Expenditures (PCE) prices late next week. The coming week – shortened by Monday's U.S. holiday – also brings a second government estimate of U.S. first quarter gross domestic product (GDP) after the first estimate came in at an annually adjusted rate of -0.3%. The latest second quarter GDP growth estimate from the Atlanta Fed's GDPNow tool is 2.4%, with no updates scheduled until next week.
This weekend features a Sunday news item when Fed Chairman Jerome Powell delivers Baccalaureate remarks at Princeton University, his alma mater. The market is closed Monday for the holiday, but it's unlikely Powell would use this type of speech to make any policy predictions.
Through last Friday, 54% of companies providing guidance for the second quarter missed analysts' consensus., according to FactSet. Some of this pessimism may reflect margin worries for firms that decide to eat the cost of tariffs. Home Depot (HD) vowed not to raise prices, saying that it could potentially gain market share for itself and its suppliers by keeping prices steady as competitors raise them. It's a bit of a gamble, however, because without share gains, there's a chance profits could fall due to tariff costs.
Target, which reported earnings yesterday that disappointed Wall Street, said that prices could rise on some items due to tariffs but it's negotiating with vendors and taking other steps to minimize the impact, CNBC reported.
Stocks took a nosedive Wednesday as the 10-year yield soared double digits to close at 4.6%, a three-month high and just about 20 basis points below the January peak. The U.S. dollar index sank for the third straight day and fell below 100 hurt by the same deficit concerns stalking Treasuries. Ten of the 11 S&P sectors fell, with rate-senstive utilities, financials, and real estate among the worst hit. Only communication services rose, helped by gains at Alphabet as the search firm introduced new AI features.
Some of the same consumer-related names including entertainment companies, restaurants, ride sharing firms, and retailers crumbled Tuesday amid worries that rising borrowing costs could slow the economy.
"The Fed is not coming to the rescue," Schwab's Jones said. "There have been a lot of speeches and interviews from Fed officials over the past few weeks. Each has reiterated the view that policy is on hold for a while, so expectations for Fed rate cuts this year have declined."
Small-cap stocks, which are particularly dependent on strong domestic spending, took the biggest blow, with tech less damaged. A falling dollar could help sectors like tech that have heavy overseas exposure, though the current trade climate may not support that theory.
Volatility swung upward yesterday to above 20 for the Cboe Volatility Index, though that's near the historic average. A VIX at 20 or above could point to choppier trading in coming days.
From a technical angle, the drop below 5,900 in the S&P 500 index yesterday took the index below a key support level that had held up earlier this week. But buyers did appear to step in before the market neared the 200-day moving average of 5,767 that it last traded below before the U.S. and China announced milder tariffs on May 12. That level is likely to remain an important one on any further weakness. Many traders bought dips earlier this week and last, but there doesn't appear to be much appetite to buy on rallies, judging from the last few days of trading, especially with the dollar and Treasuries under pressure.
The Dow Jones Industrial Average® ($DJI) fell 816.80points Wednesday (-1.91%) to 41,860.44; the S&P 500 index (SPX) shed 95.85 points (-1.61%) to 5,844.61, and the Nasdaq Composite® ($COMP) lost 270.07 points (-1.41%) to 18,872.64.