Stocks on Losing Streak as Investors Await Nvidia
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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, February 26th.

AI chip giant Nvidia's earnings after the close arrive at an auspicious moment with tech stocks under pressure the last few days. Any sign of slowing demand for AI chips or hiccups with Nvidia's launch of the Blackwell chip might play into recent widespread worries about the entire semiconductor sector.

The tech-heavy Nasdaq retreated sharply over the last week as investors shied from what they perceived as expensive growth stocks amid concerns about tariffs, geopolitical tensions, sinking crude oil prices, and weak U.S. data. Some of the hardest-hit shares yesterday included Tesla, Roku, Snowflake, and Nvidia itself.

Semiconductors came under selling pressure Tuesday after Bloomberg reported the Trump administration is considering new export curbs on sales on chips to China. Separately, Tesla fell sharply after a report of a steep decline in January Tesla sales in Europe. Risk-off sentiment lifted Treasuries Tuesday as February consumer confidence came in well below expectations, sending yields to their lowest levels of the year.

The 10-year Treasury note yield fell 10 basis points to close at 4.30% yesterday, the weakest since December 11th. Investor sentiment ratings showed a rising tide of bearish views, and futures trading has started to build in higher chances of Federal Reserve rate cuts by mid-year, according to the CME FedWatch tool.

Rates are moving lower, largely due to growth concerns, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research. Expectations for inflation remain elevated, but concerns over tariffs and other policies coming out of Washington are weighing on sentiment and the outlook for the economy.

There hasn't been much economic data this week, but Fed speakers have been on the prowl and still say the central bank is unlikely to lower rates until there's more progress on inflation. The next update on that is Friday's January Personal Consumption Expenditures, or PCE, price index. Analysts expect it to show both headline and core PCE up 0.3% monthly in January, with cores stripping out volatile food and energy prices.

Annual PCE is expected to edge lower at 2.5% and 2.6% for headline and core PCE, respectively, compared with 2.6% and 2.8% in December. If the actual change comes in higher than expected, I wouldn't be surprised if yields move higher temporarily, Howard said.

Tuesday's headline consumer confidence reading of 98.3 was well below the 103.1 consensus and the largest decline since August of 2021. It followed weaker-than-expected consumer sentiment data last week. Deeper in the report, the Expectations Index fell to 72.9 from 82.2 in January. Readings below 80 can signal a recession ahead, according to Briefing.com, though obviously there's no guarantee.

And 12-month inflation expectations surged to 6% in February from 5.2% in January, likely related to tariff fears. Turning back to NVIDIA, worries abound that so-called hyperscaler demand for AI chips may be slowing, and that's accompanied by concerns over new restrictions on chip sales to China.

NVIDIA executives likely will get asked about both trends on the company's earnings call, as well as any possible competition from potentially cheaper AI applications like DeepSeek. Given the recent DeepSeek shock, I believe NVIDIA's quarter could be subject to higher investor scrutiny and potentially larger post-earnings move in the stock, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Other earnings to track today include lows after many retail shares had a solid Tuesday. The strength in retail followed Home Depot's results, slightly topping analyst estimates in a tough home improvement market, suffering from high rates that have curbed renovation enthusiasm.

Home Depot's earnings broke an eight-quarter string of falling year-over-year sales at stores open a year or more. But Walmart's disappointing outlook last week puts other big boxes in sharper focus. Lowe's is followed next week by Gap, Target, Costco, Best Buy, and Foot Locker. Salesforce is another key company reporting after today's close.

Homebuilders had a strong day Tuesday, helped by falling Treasury yields, but the S&P 500 index is now down four straight days. Weakness in the S&P 500 reflects falling mega-cap shares and overall tech softness, but the S&P 500 equal weight index finished fractionally higher yesterday, and five of 11 sectors, mostly defensive ones, gained. Consumer staples, real estate, and health care were the leaders.

As of late Tuesday, the CME FedWatch tool put rate pause odds near 95% for next month's Federal Open Market Committee meeting, but chances of a rate cut by the June meeting reached nearly 70%, up from around 50-50 a week ago.

Futures trading now bakes in about 75% odds of at least two rate cuts before the end of the year, taking the Fed's target range to the 3.5% to 4% area, down from 4.25% to 4.5% now.

The S&P 500 index slipped 28 points Tuesday, or 0.47%, to 5,955.25. The Dow Jones Industrial Average added 159.95 points, or 0.37%, to 43,621.16.

And the Nasdaq Composite dropped 260.54 points or 1.35% to 19,026.39 below its 100-day moving average and near its weakest levels of the year. This has been the Schwab Market Update Podcast.

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