Home Depot Results, D.C. Budget Debate in Focus
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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, May 20th. Big boxes are back. Home Depot gets the truck rolling this morning with its earnings, followed by Lowe's and Target tomorrow.

Data is light today, but home sales updates and Treasury auctions come later this week. Investors also will monitor budget progress in Washington, D.C. after the weekend U.S. credit downgrade by Moody's Ratings.

The real test will come later this week when the full House will vote on the bill, said Michael Townsend, managing director of legislative and regulatory affairs at Schwab. There are still numerous issues that need to be resolved, and the massive bill is likely to change significantly before it hits the House floor for a vote late this week. Anything ultimately passing the House is likely to be changed by the Senate, Townsend added.

The Moody's downgrade of U.S. debt from AAA to AA1 based on rising debt and the costs of servicing it probably shouldn't be a surprise, but gave long-term yields a boost Monday as the 30-year yield topped 5% for the first time since late 2023. The downgrade isn't likely to dissuade investors from buying Treasuries as there just aren't a lot of alternatives, the Schwab Center for Financial Research said.

Moody's correctly points out that the size of the economy and the dollar's status are mitigating factors. More importantly, the U.S. has the capacity to service the debt. It just lacks a willingness to take the steps needed to reduce it. Trade tensions resurfaced early this week after Treasury Secretary Scott Besson warned that the U.S. will impose the high tariffs it threatened last month on countries that don't negotiate in good faith, Reuters reported.

The previously announced 90-day delay on the Trump administration's reciprocal tariffs ends in early July. There is still a high level of uncertainty surrounding tariffs and trade, and valuation is historically high, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

High market valuation doesn't suggest a near-term correction or valuation reset is imminent, but it's important to keep in mind since it does matter over the long haul. Federal Reserve Governor Adriana Kugler speaks tonight after Atlanta Fed President Rafael Bostic said he expects just one rate cut this year and that inflation isn't falling as fast as the Fed had hoped.

There are 17 Fed speeches and communications this week, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. We expect the theme will be patience. The market's pricing in roughly two cuts this year. He called Moody's credit downgrade of U.S. debt not a big surprise.

In data Monday, April leading indicators from the conference board declined 1% from a month ago, worse than the average analyst estimate of negative 0.7%. It had its largest one-month decline since March of 2023, and consumers' expectations have fallen each month since January. Home Depot reports after its previous quarter featured the first rise in year-over-year comparable store sales after eight straight declines.

Comparable sales refer to stores open a year or more. Still, the home improvement market has had a troubled few years, burdened by high interest rates and rising housing costs. The recent tariff turbulence also could mean rising commodity costs for home repair items, including lumber and metals. Comparable sales are expected to soften in the latest quarter, Bloomberg reported, citing analysts. Other earnings reports to watch later today include Palo Alto Networks and Toll Brothers.

Toll Brothers builds high-end homes and could give investors a sense of how luxury home demand is doing. With earnings season nearly over, S&P 500 companies are reporting blended earnings per share growth of 13.6% for the first quarter, Faxas said. Blended growth includes actual and projected data.

Of those reporting, 78% have beaten analysts' earnings estimates and 62% have topped revenue estimates. But earnings projections for the rest of the year continue to weaken. For the current quarter, analysts see earnings per share growth of 4.8%, FACSA said, down from 8.9% on March 31st. For the full year, they expect 9% earnings per share growth, down from 11.1% in March.

On the positive side, first quarter S&P gross margins rose from a year earlier, but 54% of companies that provided earnings per share guidance for the second quarter came in below what Wall Street analysts were thinking. Stocks initially edged lower Monday on the downgrade, perhaps reflecting some investors taking profit after the recent rally and seeing the news as a catalyst. But buyers showed up and the S&P 500 index didn't approach its 200-day moving average near 5,760.

Monday's resilience, which lifted the S&P 500 to a higher close for the sixth straight session, could indicate the dip buying trend isn't over.

Markets quickly rebounded from the downgrade, but the news is yet another symbol of elevated deficit and debt concerns, noted Lizanne Saunders, chief investment strategist at Schwab. She added that recent benign U.S. inflation data should not establish complacency as it was collected before the most significant impact of tariffs. Saunders thinks the Fed will stay away from policy changes through this summer, barring any rapid labor market deterioration.

Meanwhile, JPMorgan Chase CEO Jamie Dimon said yesterday at the company's investor meeting that the geopolitical risks remain high and tariff rates proposed by President Trump are pretty extreme, Barron's reported. He still sees a chance for stagflation, a scenario where inflation climbs even as economic growth slows.

Healthcare reversed recent weakness to top the sector scorecard yesterday as investors piled into recent soft performers like UnitedHealth Group and Humana. This might have reflected ideas that healthcare had become oversold and also followed insider buying at UnitedHealth.

About half of the S&P sector's rose yesterday, but the range of gains and losses was relatively narrow. Only energy really fell out of bed, hurt in part by hopes for progress in talks between Ukraine and Russia. Tech took a day off from its recent rally as investors pulled back in some popular names like Palantir and Nvidia. Apple also dropped as Bloomberg reported the company continues to struggle on AI, citing delays in the Siri upgrade.

Treasury yields pulled back yesterday from initial heights near 4.55% for the benchmark 10-year note, but remained just shy of 4.5%, up only three basis points. The mild move reinforced ideas that the Moody's downgrade may not end up being a huge deal for the Treasury market. The market basically took this in stride. Treasuries, which move the opposite direction of yields, might also have found support from the week-leading indicators data.

The Dow Jones Industrial Average rose 137.33 points Monday, or 0.32%, to 42,792.07. The S&P 500 Index added 5.22 points, or 0.09%, to 5,963.60. And the Nasdaq Composite climbed 4.36 points, or 0.02%, to 19,215.46.

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