After AI Plunge, Stocks Await Mega Cap Results
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here is Schwab's early look at the markets for Tuesday, January 28th. Monday's deep-seek AI news sent a shockwave through U.S. markets just before Microsoft and Meta Platforms, two of the biggest AI players, report earnings on Wednesday.

While tech capsized yesterday on worries that the Chinese AI startup could bring a cheaper model running on less advanced chips, the rest of the market held up relatively well. Four sectors rose and the Dow Jones Industrial Average finished higher even as the tech-heavy Nasdaq fell 3%.

MegaCaps already faced investor worries about their spending on AI and how it might affect future earnings. They're now under increased scrutiny amid ideas that an NVIDIA rival could do things cheaper with less energy after MegaCap firms already committed to investing hundreds of billions on expensive AI technology.

This week's earnings results from MegaCapTech, and perhaps more importantly, how they position their recently announced ramp-up on AI CapEx spending, will be subject to higher scrutiny from investors following claims from China's deep seek, said Nathan Peterson, Director of Derivatives Analysis at the Schwab Center for Financial Research.

The deep-seek impact on stocks might have been exacerbated by trader positioning. Much of the hedging placed ahead of recent inflation data had dissipated, with positive sentiment growing and valuation stretched versus historic norms. Market breadth, which had flagged earlier this month, was on the way back with five of 11 S&P sectors finishing last week above their respective 50-day moving averages.

Risk on quickly became risk off Monday as investors rushed into fixed income and the U.S. dollar, both of which are sometimes perceived as areas of safety, though no trade is truly safe. Many investors apparently were caught off balance, helping exacerbate the moves. Defensive positioning showed up in other ways. Apple, which had yielded its top market capitalization spot to Nvidia last week, found buyers Monday on its best day this month.

In past downturns, Apple and other mega caps sometimes rose on ideas that their large cash holdings and market share might protect them somewhat from market storms, though that's not guaranteed. Meta also rose, perhaps ironically, considering its recent announcement of more AI investment. Healthcare and consumer staples, traditionally defensive areas, gained Monday. Falling treasury yields likely helped the real estate sector.

Technically, the S&P 500 index appeared to find support Monday at its 50-day moving average of 5,981 and managed to close Monday near session highs above 6,000. That was still down 100 points from Friday. If the market keeps clawing back, one level to watch is 6,020, which roughly correlates with the early January high.

A close above that might suggest Monday's pullback could be more of a one- to two-day event, but earnings later this week are likely to have more influence. Data-wise, new home sales for December rose 3.6% monthly to a seasonally adjusted annual rate of 698,000 units, compared with the consensus of 680,000. Average and median sales prices rose 4.2% and 2.1% respectively from a year earlier.

Major firms reporting today include Starbucks, Boeing, General Motors, and Lockheed Martin. This combination provides a look at both consumer and industrial demand, though Boeing already announced it expects lower revenue than the Wall Street consensus due partly to last year's strike. It also reported commercial airplane deliveries down sharply on a sequential basis in the fourth quarter.

Futures trading builds in nearly 100% odds that the Fed pauses this week, but chances of a March cut rose slightly Monday to 31%, according to the CME FedWatch tool. The Bank of Canada is expected to lower rates Wednesday, according to consensus. The European Central Bank is expected to cut rates Thursday.

U.S. fourth-quarter gross domestic product, or GDP, is due Thursday, and the Fed's preferred inflation indicator, Personal Consumption Expenditures Price Index, or PCE, is Friday. Consumer confidence for January from the Conference Board comes out before that on Tuesday, and briefing.com consensus is 108.1, up from 104.7 in December.

The S&P 500 index fell 88.96 points Monday or 1.46% to 6,012.28. The Dow Jones Industrial Average gained 289.33 points or 0.65% to 44,713.58. And the Nasdaq Composite gave back 612.47 points or 3.07% to 19,341.83.

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