Fed, Disney on Tap with Tariffs Nipping at Rally
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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 Wednesday, May 7th. Walt Disney reports this morning, and the Fed delivers its policy decision this afternoon. No fireworks are likely from the central bank, which isn't expected to cut rates.

The Fed meeting comes after Wall Street stumbled out of the starting gate this week, with all quiet on the trade front. In fact, things arguably got worse yesterday, with Treasury Secretary Scott Besson saying there have been no talks yet with China, though he told a House committee that talks are underway with 17 trading partners. Last Friday, the market rallied on hints from the administration that there had been some communications with China.

Stocks continue to be in a consolidation pullback, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. Because of the recent pull-forward fear-of-missing-out rally, we could be set up for a sell on the news once any type of trade development is announced.

Even if we had all the details of the anticipated trade deals, we still don't know what the economic impact will be, and the S&P is trading as if it's all clear once the deals are inked. The trade war could be on investors' minds as Disney steps onto Main Street today. The question is whether non-U.S. visitors are getting out of the mousetraps, avoiding this keystone U.S. company in retaliation for President Trump's aggressive tariff policy.

Disney earnings may show if worsening sentiment toward the U.S. has started to hit its theme park and cruise businesses amid a fall in visitor arrivals to the U.S. and global boycotts of American products, said Jeffrey Kleintop, chief global investment strategist at Schwab.

Looking more closely, Disney's streaming business often gets attention amid tough competition. Last time out, Disney disappointed by announcing a 1% drop in subscribers for Disney Plus, its streaming platform. It also said it expected another modest decline in subscribers for the quarter it reports today, CNBC reported. However, Disney Plus stayed profitable in the first quarter, and investors will see if that continued.

Competitor Netflix reported a 13% rise in revenue for its recent quarter. That's possibly a good sign for Disney's streaming business if it also caught the wave, but not good for Disney if it means Netflix gained share. The Fed meeting almost seems like an afterthought with no rate trim expected and no new economic or rate projections on tap, but it could provide a helpful read of Fed Chairman Jerome Powell's thinking after April's market turmoil.

As the Fed met yesterday, a $42 billion 10-year Treasury note auction saw strong buying interest. That followed decent demand for a three-year note auction Monday. The benchmark 10-year yield fell to 4.31% late Tuesday from as high as 4.36% Monday, the highest in several weeks. Fears of tariff-induced inflation and hefty Treasury supplies continue to support longer-term yields.

Odds of a rate cut today are near 3% according to the CME FedWatch tool. A reading that low typically means no chance. The Fed's June meeting, once viewed as a likely spot for a first rate cut since December, now looks more like another pause with chances of a trim just at 32%.

Investors see better than 75% chances of the Fed making a 25 basis point rate cut at its late July meeting and slicing a couple more times before the end of the year. China's April trade numbers that come out Thursday will be the first to reflect 145% U.S. tariffs.

China's trade report for April will probably show an initial hit from its escalating trade war with the U.S., Schwab's client top said. Shipping data suggests that a drop in shipments to the U.S. didn't occur until the final 10 days of the month, suggesting the full impact of tariffs may not show up until the May data is reported.

The Schwab Trading Activity Index, or STAX, plunged in April to its lowest reading in two years. Schwab clients were net sellers in every sector but energy. The heaviest selling was in infotech, consumer staples, and consumer discretionary. Clients shied away from individual stocks during April, even as the S&P 500 and Nasdaq Composite boomeranged double digits from the April lows.

In Trading Tuesday, stocks wilted on more tough trade talk from President Trump, this time aimed at Canada, and as most earnings moved into the rearview mirror. This could put focus back on geopolitics in coming weeks, especially once the Fed meeting ends. Retail sector earnings starting next week could be one distraction, however.

Investors appeared back in more of a defensive mode early this week, as utilities and consumer staples were two of the leading sectors Tuesday. Tech sagged ahead of results from advanced micro-devices and super-micro-computer. Super-micro shares plunged initially in post-market action after the company's earnings and revenue both missed Wall Street's consensus. Guidance also missed expectations.

Shares of Palantir fell double digits Tuesday despite solid earnings and guidance, perhaps a victim of its own success as investors appeared to take profit. Healthcare retreated after President Trump said he plans tariffs on pharmaceutical imports.

Technically, things look significantly better than they were in mid-April, but the rally has brought most of the major indexes within a couple percentage points of their respective 200-day simple moving averages, Schwab's Peterson said. So the near-term risk-reward is not great from a trading perspective.

The S&P 500 index appeared to find some support intraday Tuesday just above its 50-day moving average, now near 5,570. The S&P 500 climbed back above its 50-day moving average last week for the first time since late February, but has stayed below the 200-day moving average since early March for the most part. It's the longest stretch below that key level since late 2022.

For the second straight day Tuesday, major indexes lost steam into the close, a technically bearish trend.

The Dow Jones Industrial Average fell 389.83 points Tuesday or 0.95% to 40,829. The S&P 500 Index dropped 43.47 points or 0.77% to 5,606.91. And the NASDAQ Composite lost 154.58 points or 0.87% to 17,689.66.

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