Here is Schwab's early look at the markets for Monday, April 20.
The new week starts with major U.S. indexes on a roll, up three weeks in a row thanks to improving Middle East news and a constructive start to earnings season.
Markets got a major lift Friday when Iran announced it had opened the Strait of Hormuz to commercial traffic. Crude oil fell sharply on the news, though it remains about one-third higher than before the war and may not get back to those levels anytime soon.
"Investors wasted little time putting money back into risk assets on positive Iran developments," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR, Friday afternoon. "Although there's still lingering uncertainty around Iran, oil prices and the potential economic impact, it's as if markets have decided that the war is over and the oil price shock will be short-lived."
President Trump and Iran’s foreign minister both stated Friday that the strait is now open, though Trump declared that the U.S. blockade of Iran’s ports would remain in place.
Today's calendar is light, but later this week features earnings from key names like Tesla, American Express, and UnitedHealth Group, along with companies in the defense sector after the war raised weapons demand. There's not a ton of data ahead, however, and the Federal Reserve enters its "quiet period" ahead of the April 29 rate decision.
The Fed is also in the news tomorrow as the Senate Banking Committee holds a confirmation hearing for Kevin Warsh, President Trump's nominee to succeed Powell.
"The timeline is very tight for confirming Warsh before Powell's term as chair ends on May 15," said Michael Townsend, managing director of legislative and regulatory affairs at Schwab. "We still have the issue of Senator Thom Tillis blocking any vote on Warsh until the criminal investigation of Powell is resolved. Tillis is fine with the confirmation hearing taking place, but he won’t vote for confirmation until that investigation is over."
Powell has said he'll stay on as temporary chairman if there's a delay past May 15. Warsh has backed rate cuts, based in part on what he sees as improving U.S. productivity that could keep inflation checked.
Even if Warsh gets confirmed on time, though, he might not get his way. "His ability to force interest rates lower is limited—the FOMC has 12 voting members and right now Warsh does not appear to have many allies," Townsend said, referring to the rate-setting Federal Open Market Committee. "There is nowhere near a majority of those members who seem inclined to lower rates anytime soon."
As of late Friday, odds of a rate pause at the Fed's meeting this month stood at 99%, according to the CME FedWatch Tool. Policymakers speaking last week sounded on the fence about rates, generally willing to wait before making any move. That said, hopes rose for at least one rate cut before the end of the year got a boost from Friday's Middle East news, rising to about 50% from 30% earlier in the week.
"Rates are likely to remain elevated even if the situation in the Middle East is quickly resolved," said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research, or SCFR. "We expect the 10-year Treasury to remain range bound in the near-term assuming the war in the Middle East doesn’t escalate. Yields have moved up due to concerns that higher oil prices will translate to higher inflation. Even if the situation quickly resolves, it’s likely that oil prices will stay higher than they were pre-war, thus supporting higher longer-term yields."
Tesla is the key earnings report to watch this week, with shares recently emerging from an eight-week losing streak. Auto deliveries missed market expectations last quarter, though EV demand may be on the rise thanks to higher oil prices. The company's robo-taxi and battery initiatives will likely be scrutinized when Tesla reports late Wednesday.
Before that, the calendar is a little light in terms of data and earnings today with the exception of a couple of steel industry company reports.
S&P 500 earnings growth in the first quarter is seen at 13.2%, according to FactSet's updated estimate released Friday. However, that includes expected 45.1% growth in tech sector earnings, while eight sectors are expected to see quarterly earnings grow less than 4% from a year ago. Sectors with falling expectations this week versus a week earlier included industrials, consumer discretionary, health care, and energy.
"The latest trends have been to the negative," said Liz Ann Sonders, chief investment strategist at SCFR, in a podcast late last week. "There has been a deterioration in near-term adjustments to earnings. The only sector for first quarter that's seen an increase in estimates has been the tech sector. And that has largely been a function of a small handful of stocks--in particular Micron and Nvidia--really accounting for a lot of that upgrade."
"That leaves 10 other sectors," Sonders added, "all of which are no better than flat and most of which are down in terms of estimates for the first quarter."
With 10% of S&P 500 companies reporting through Friday, 80% posted a positive EPS surprise and 69% reported a positive revenue surprise, according to Bloomberg. Quarterly revenue growth for S&P 500 companies that reported so far has averaged 13.2% and EPS growth is up 32.1%, but it's still early to draw conclusions.
Technically, the market appears to be near-term overbought. This means companies reporting earnings may have a high bar to satisfy investors.
"The sharp rally may also present investors with a lean towards 'sell on the news' when companies report earnings in the coming weeks," Peterson said. "A modest 'profit-taking pullback' could occur due to detrimental Iran headlines, or there could be a post-earnings sell-off reaction to some key earnings reports - recent winners such as ServiceNow, Tesla, Lam Research and Vertiv report on Wednesday after the bell for example."
Market breadth, which improved notably earlier this month before stalling earlier this week and raising concerns about a narrow rally, surged Friday. The day ended with nearly 60% of S&P 500 stocks trading above their 50-day moving averages, a respectable number historically though well below peaks near 74% earlier this year.
"I think we need to see a little more participation under the surface to feel some comfort that there is something lasting here," Sonders told CNBC late last week. "There are still a lot of unanswered questions. I think this is an environment where you just want to go back to the disciplines of diversification across and within asset classes." This isn't the time to make big bets, Sonders added.
Treasury yields fell with crude oil on Friday but didn't test recent lows. The 10-year note yield dropped six basis points to 4.25%, down seven basis points for the week. The near-term low is near 4.20%.
Major indexes all climbed 1% or more Friday, and the Nasdaq Composite posted its longest win streak since 1992 at 13 straight sessions, the longest stretch since January 1992..
The Nasdaq, the Russell 2000 small-cap index and S&P 500 Index all forged new record highs. Crude oil dropped 10.4% to $84.83 per barrel, the lowest close since March 5.
Nine of 11 S&P 500 sectors finished green Friday, highlighting the stronger breadth, with consumer discretionary in the lead as airlines, auto makers, home builders, hotels, restaurants, and casinos saw their shares benefit from the drop in crude prices and associated slide in yields. The Dow Jones Transportation Average climbed more than 3%.
Other sectors performing well on Friday included industrials, real estate, info tech, and health care. Defensive utilities lost ground, as did energy. Dow and other chemical-related stocks fell with oil, as supply constraints appeared to ease.
In individual trading Friday, Netflix dropped nearly 10% after beating earnings and revenue expectations but disappointing with second quarter guidance, which fell short of consensus.
Apple added 2.7% on a Reuters report that iPhone shipments in China jumped 20% in the first quarter, outperforming peers despite a 4% overall market decline driven by higher chip costs and supply chain disruptions.
The PHLX Semiconductor Index closed at another new all-time high Friday, up 2.4%, helped by Nvidia, Broadcom, ASML, and Taiwan Semiconductor Manufacturing.
Strategy climbed 11% and other crypto-related stocks also gained Friday as bitcoin futures rallied 2.5% to above $77,000, the highest level since early February.
The Dow Jones Industrial Average® ($DJI) soared 868.71 points Friday (+1.79%) to 49,447.43; the S&P 500 Index (SPX) added 84.78 points (+1.20%) to 7,126.06, and the Nasdaq Composite® ($COMP) gained 365.77 points (+1.52%) to 24,468.48.
For the week, the DJIA climbed 3.19%, the SPX rose 4.54%, and the Nasdaq gained 6.84%.