Investors Await Details of Trade Discussions
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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, May 19th. Future tariff levels and the workings of any potential trade deals may return to the foreground this week as investors debate whether last week's stock market gains are sustainable.

Big box retail earnings also return in the coming days, along with home sales updates and treasury auctions.

Stocks rallied sharply last week, with the Dow Jones Industrial Average rising about 3.4% to end the week at 42,654.74. The S&P 500 up 5.3% to end at 5,958.38. And the Nasdaq Composite gaining about 7.2% to 19,211.10.

after the United States and China agreed to temporarily lower tariffs on imports from each other's countries while the two sides worked toward a more durable trade deal. Though the apparent thaw in U.S.-China relations helped buoy investors' spirits in recent sessions, investors and consumers remain wary of how the still-unsettled state of U.S. trade arrangements might affect markets and the economy.

Some tariff-linked inflation concerns resurfaced last week when Walmart indicated it would be raising prices. Competitor Target reports Wednesday this week, and investors will be looking for a similar announcement. Home Depot's results are due early tomorrow, and Lowe's follows Wednesday.

Consumers appear braced for more. On Friday, the University of Michigan's Preliminary Consumer Sentimental Report for May showed that inflation worries persist, though price gains have been moderating. Survey respondents said they expect prices to jump 7.3 percent over the next year, faster than the 6.5 percent rise they were expecting in April and the highest reading in decades.

However, the survey likely reflected the mood before President Trump lowered tariffs on products from China last week. The university's final sentiment report due later this month could show whether these policy changes have influenced people's perceptions of the economy.

Indeed, April inflation data released last week was fairly benign, and analysts expect gains in personal consumption expenditures or PCE prices, the Federal Reserve's favorite inflation metric, to have been mild when those numbers are released later this month. But those numbers are from the rearview mirror, and inflation could resurface in the coming months as tariffs bite.

Fed Chair Jerome Powell warned last Thursday the U.S. economy may be entering a new era of volatile inflation swings driven by supply shocks. Several Fed speakers are on deck to speak today and tomorrow, and investors may also want to keep an eye on any traffic reports from major U.S. Pacific ports in coming days. Incoming ships from China recently dropped to levels last seen during the pandemic.

Other details may not be far off. Bloomberg reported early Friday that the Trump administration would set tariff rates for U.S. trading partners over the next two to three weeks. As a reminder, the previously announced 90-day delay on the Trump administration's reciprocal tariffs expires in early July.

Also Friday, the U.S. government reported that the spring home building season is off to a rough start. Single-family housing starts dropped 2.1% last month to their lowest level in nine months, while the number of building permits issued fell 5.1%, and a potentially negative sign for the future. The supply of unsold new homes is also high, with high prices and interest rates posing a challenge to buyers.

There's more economic news in the hopper today as investors await the conference board's leaning economic index, which is due soon after the open. The consensus view is for the index to have declined 0.8% in April, according to Trading Economics, surpassing March's 0.7% drop. Though it feels like stocks have jumped off April's lows, it depends where you look.

The S&P Technology Select Sector Index is way ahead, up around 17% through late last week. The S&P 500 Equal Weight Index, which adjusts for the impact of heavily capitalized stocks by weighing all S&P stocks the same, was up around 8%.

The S&P Health Sector Select Index was laggard, though, having lost more than 6%, due in part to troubles at UnitedHealth and worries about the Trump administration's efforts to lower drug prices. Technically, the stock market looks a bit stretched, as the forward price-to-earnings, or P-E ratio, is back above 22 for the S&P 500 index. The 10-year average is close to 18%.

This suggests hopes for strong earnings growth later this year, but analysts have been lowering their earnings estimates for coming quarters. At its early April lows, the market had overshot in terms of discounting near-term economic weakness, said Lizanne Saunders, chief investment strategist at Schwab. But at these levels, it may soon overshoot in terms of discounting economic resilience. Tariff de-escalation has lowered recession odds, but not eliminated them.

Treasury yields climbed sharply earlier last week on hopes for stronger U.S. economic growth and falling rate cut odds. The benchmark 10-year Treasury note yield settled around 4.44% late Friday. The 2025 high for the 10-year yield is around 4.8%, but anything over 4.5% tends to stoke concerns about borrowing costs for consumers and businesses and the potential effects on economic growth.

Yields remain well above the low for the year of less than 4%, and tariff-related inflation concerns keep them on the front burner as the new week begins. The market's having a hard time because policy changes so rapidly, said Kathy Jones, chief fixed income strategist at Schwab. You do have to be kind of cautious about how you maneuver in a market like this because you can get caught on the wrong side very, very quickly.

Our longer-term perspective is that yields are likely to stay in a volatile range for the next few months, but begin to move lower later in the year as economic growth cools off, she added. The dominant trend, however, is likely to be further steepening of the yield curve.

We expect the Fed to cut rates twice this year, most likely starting in September. But 10-year yields may not fall as much as in other cycles due to lingering inflation pressure from tariffs and less demand from foreign investors, she said. This has been the Schwab Market Update podcast.

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