Tariffs, Mega Cap Results, Jobs Data on the Docket
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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's Schwab's early look at the markets for Monday, February 3rd. This week is packed with economic reports, most importantly, Friday's U.S. employment data for January.

Analysts expect jobs growth of 150,000 to 175,000, a slowdown from December's surprisingly muscular 256,000, but close to the three-month average. Hourly earnings are seen up 3.8% year-over-year. If that's the case, it could be a sign that wage gains are normalizing, said Cathy Jones, chief fixed-income strategist at Schwab.

The 10-year Treasury note yield rallied Friday, and stocks backtracked as the market reacted to tariff threats. Earlier last week, yields fell in response to mostly benign data despite a rate pause by the Federal Reserve and Fed Chairman Jerome Powell's reticence about near-term cuts.

Tariffs are a wild card for now and could play into volatility this week. The CBOE volatility index rose Friday after President Trump threatened 25% tariffs against Canada and Mexico to begin February 1st. At the same time, Wall Street remains in the thick of earnings season, and more signs of solid corporate growth could help blunt the negative market impact of tariffs.

Palantir Technologies is expected to report this afternoon, followed by Alphabet Tuesday and Amazon Thursday. Other major reports to watch this week are from Advanced Microdevices, Uber, and Arm Holdings. So far, 35% of S&P 500 companies have reported earnings, with 78% beating analysts' consensus on earnings per share, but only 56% beating on revenue.

The blended fourth quarter year-over-year earnings growth rate, including companies that already reported and analysts' estimates for those ahead, is 13.2%, according to research firm Faxan. That estimate, issued Friday, was substantially above the 11.8% estimate a week earlier, helped by growth in net profit margins.

Rotation out of tech continued last week into sectors like communication services, health care, consumer discretionary, and staples, while breadth surged in those sectors. About 54% of S&P 500 stocks now trade above their respective moving averages, up from 52% a week ago, and twice as many S&P stocks advanced as declined last week.

The S&P 500 index lost ground last week after an attempt at record highs and was outpaced by the S&P 500 Equal Weight Index, which weighs all shares equally to blunt the impact of mega caps. The Equal Weight Index, which fell about half a percent last week versus around a one percent decline for the S&P 500, isn't back to late November highs, however, meaning cyclicals that dominated the post-election rally haven't made a full recovery.

Cyclical sectors like consumer discretionary, industrials, and materials often do best when investors are optimistic about the economy. Data to watch today include the January ISM Manufacturing Index, which analysts expect to come in at 49.5%, up from 49.3% in December. A 50% is needed to show expansion. Tuesday's Job Openings and Labor Turnover Survey, or JOLTS, for December is another key report.

As new data arrive, annualized 2.3% fourth-quarter gross domestic product or GDP growth, in-line inflation ratings, and strong personal income and spending numbers might hint the economy can stay healthy even without many rate cuts this year. And the deep-seek AI news from China, which put pressure on chip stocks, including NVIDIA last week, also suggested that software companies could have pathways to grow their AI offerings with less expense.

That might end up positive from an inflation perspective in the longer run, though it's too early to tell. Yields and inflation are still important to the markets, and while disinflationary trends may not be sufficient to prompt rate cuts from the Fed just yet, long-term Treasury yields have pulled back from early January highs, which is net bullish for stocks, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

In data Friday, the personal consumption expenditures, or PCE price index, rose 0.3% in December, in line with expectations. The core reading, which excludes food and energy, rose 0.2%, also as expected on Wall Street, while annual core growth was 2.8%. Although the year-over-year inflation is off-peak, the downward trend has stalled out recently, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research.

Though both PCE and core PCE met Wall Street's expectations, they both rose from November. Still, one nugget deeper in the data, which is closely watched by the Federal Reserve, suggested progress. The three-month annualized change dropped to 2.2 percent from 2.6 percent, which bodes well for the Fed, Howard said.

Chances of a March rate cut were near 16% late Friday per the CME FedWatch tool, down from above 30% earlier in the week before the Fed meeting.

The S&P 500 index dropped 30.64 points Friday or 0.50% to 6,040.53 and was down 1% for the week. The Dow Jones Industrial Average lost 337.47 points or 0.75% to 44,544.66 up 0.27% for the week.

and the Nasdaq Composite fell 54.31 points, or 0.28%, to 19,627.44, down 1.64% for the week. For the month, the S&P 500 index rose about 2.7%, while the benchmark 10-year Treasury yield barely changed from the end of December to finish the month at 4.57% after a six-basis point drop last week. The tech-heavy Nasdaq Composite rose just 1.6% in January.

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