After Tariff Carnage, Market Awaits Earnings
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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 Monday, April 7th.

After last week featured the largest sell-off since the pandemic, with the broader U.S. market down 10% in just two days to 11-month lows, investors limp into Monday awaiting new tariff developments and anticipating first quarter earnings season. The sell-off in stocks following the tariff announcements is the largest drop since the throes of the pandemic, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

While first quarter earnings season unofficially starts Friday with the big banks, the focus and direction for stocks will be tied to any global trade developments. If nothing changes, or worse, if we get retaliation from other countries, stocks will likely remain under selling pressure. Of course, any positive developments and stocks will likely be poised for a sharp rebound given the current oversold status.

Tariffs are taxes on U.S. companies. Most firms are likely to pass along some of the costs to U.S. consumers, who then could lose spending power. Consumer spending is 70% of the economy, and a substantial dip likely means slower growth and possibly recession. Consumer spending already faltered slightly the first two months of the year, according to recent data.

There were news reports last week that Americans worried about tariffs might already be pulling back more. In the past, for instance, during the pandemic, lower-income consumers tended to dramatically cut spending. It's possible higher-income consumers might do so this time if they feel worried about the possible market impact on their retirement savings.

Earnings season unofficially kicks off this week with Delta Airlines due Wednesday. The airline industry had a tough quarter due to economic weakness and travelers beginning to boycott U.S. tourism. Some airlines already cut their guidance. Big bank earnings are on deck Friday and could provide insight on how the broader economy is reacting to the new trade policy, as well as executives thinking.

Earnings estimates are still pretty lofty for 2025, although they've come down and are still for about 10% growth, said Lizanne Saunders, chief investment strategist at Schwab. What's interesting about that is revenue estimates are somewhat subdued. What analysts have been banking on in keeping those earnings estimates relatively high is continued strong profit margins. And that's now being called into question, or at least it should be.

During earnings calls, analysts should try to get companies to put a little more meat on the bone in terms of tariffs' likely impact on profit margins, Saunders added. Other things to watch this week are Fed minutes on Wednesday and the March Consumer Price Index, or CPI, on Thursday. University of Michigan Preliminary Consumer Sentiment Data Friday could also be closely scrutinized for inflation expectations.

Stocks down the most on Friday included banks, tech firms, energy companies, and fast food retailers. Some areas that got sold off Thursday bounced back Friday, including apparel and cryptocurrencies. The apparel sector got a bounce Friday when President Trump said Vietnam has agreed to take its tariffs to zero.

But semiconductor stocks keep getting pounded, and the PHLX Semiconductor Index, or SOX, is down nearly 40% from last year's all-time high. The quick and dramatic plunge in chip stocks now rivals the type of move seen with intranet stocks in the early 2000s. There's widespread worry that in the current trade environment, hyperscaler chip buyers may pull back their purchases.

Those companies announced plans to spend hundreds of billions on AI chips earlier this year. The benchmark 10-year U.S. Treasury yield fell sharply Friday after China slapped reciprocal tariffs on U.S. goods, at one point down to near 3.8 percent, almost 100 basis points under the 2025 peak and the lowest level since last September.

The yield plunge appears to reflect investor flight to perceived safety and concerns a U.S. or even global recession could be looming. Treasuries also seem to be pricing in a more aggressive Fed, but Fed Chairman Jerome Powell said Friday the central bank sees tariffs as an inflation threat and that the Fed is well-positioned to wait for the full effect of trade policy to become clear.

The U.S. dollar index leveled out Friday after testing October lows Thursday. Still, it's down sharply from the 2025 peak, perhaps reflecting some international investors abandoning the U.S. currency that's long been seen as the foundation of global finance.

U.S. crude oil dropped more than 6% to below $63 per barrel Friday on recession worries. That's the lowest level since mid-2021, when the economy was still emerging from the pandemic and before Russia's invasion of Ukraine.

There's no real investment playbook in this unprecedented situation, but investors might want to look for companies with stable profit margins, more domestic exposure, lower volatility, and stability in dividend yields. They should also consider diversification outside the United States.

Volatility spiked Friday into what investors see as red-hot territory above 40 for the SIBO volatility index, or VIX. That's above the December and March peaks and takes VIX back to levels last seen back in early August when worries about a possible slowdown in the so-called yen carry trade caused volatility to zoom. A move above 30 suggests more equity weakness ahead.

Technical support levels for major indexes got trampled last week, as they often do in a major sell-off like this or the pandemic. Still, there are some positive embers glowing, especially when it comes to the Relative Strength Index, or RSI, a momentum tracker, which fell to 24 on Friday. That's well into what analysts consider oversold territory for the S&P 500 and the lowest the RSI has been since the COVID bottom.

The Nasdaq Composite, which fell into bear market territory down 20% from recent highs on Friday, also appears technically oversold in the near term. Naturally, tariff developments will probably steer the ship more than technical levels this week.

As of late Friday, there was a 40% chance of rates being lowered at the May Federal Open Market Committee meeting, according to the CME FedWatch tool. That rises to 98% for June, and the market builds in three to five rate cuts this year. Those were slightly up from midday after Powell spoke.

A solid March nonfarm payrolls report showing better-than-expected jobs growth of 228,000 and a slight uptick to 4.2% unemployment didn't have much of a market impact Friday as investors focused on trade policy.

The Dow Jones Industrial Average fell 2,231 points Friday, or 5.5%, to 38,314.86. The S&P 500 Index dropped 322.44 points, or 5.97%, to 5,074.08. And the Nasdaq Composite lost 962.82 points, or 5.82%, to 15,587.79.

The S&P 500 suffered combined losses of 10% on Thursday and Friday alone. Friday's close took the S&P 500 below its August low settlement to the weakest close since May 2nd. For the full week, the Dow Jones Industrial Average fell 7.86%, the S&P 500 lost 9.08%, and the Nasdaq Composite dropped 10.02%. This has been the Schwab Market Update Podcast.

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