Stocks Shake Off Tariffs on Rising Rate Cut Hopes

Here is the morning Schwab Market Update for Thursday, August 7. New tariffs hit imports from dozens of countries today and reached 100% on semiconductors, but the market took it in stride and stocks climbed early. The "cup half full" focus was on exemptions, including for chips made by companies with at least some U.S. production. Also, China posted better-than-expected import and export data last month despite tariff tensions, suggesting world trade isn't slumping.

Stocks also climbed on rate cut hopes. The latest batch of Federal Reserve speakers—including Neel Kashkari, the Minneapolis Fed president who's often considered a hawk—sounded more dovish. "Despite inflation pressure, tariffs and immigration policy are leading to slower job growth and consumer spending, which may prompt the Fed to cut interest rates soon," said Kathy Jones, chief fixed income strategist at Schwab. "We expect the Fed to put a higher priority on the faltering economy and slowdown in job growth than on the current level of inflation, on the assumption that slower growth will cap inflation."

Major indexes revived Wednesday after Tuesday's spill, but it wasn't a broad rally as five of 11 S&P 500 sectors lost ground and fewer than half of S&P 500 stocks rose. Apple (AAPL) enjoyed its best day since May yesterday with gains of more than 5% after it announced plans to invest another $100 billion in the U.S. on top of $500 billion it's already committed to. In other news today, weekly initial jobless claims rose 7,000 to 226,000, still relatively low, but continuing claims jumped to 1.974 million, a nearly four-year high and another hint that it's harder to find jobs.
     
Three things to watch

China trade deadline nears: It's deadline day on trade for more than 70 countries facing elevated U.S. import tariffs. Perhaps looming larger is the Trump administration's deadline Tuesday for China and the U.S. to come to terms. President Trump hasn't hinted if he plans a 90-day extension, an idea floated last week by his top economic advisers. "China is likely to get an extension," said my colleague Michelle Gibley, director of international research at the Schwab Center for Financial Research. "China appears to be making out better than expected in the new tariff regime, thus far. Counterintuitively, some businesses may find it better just to keep manufacturing in China." The tariff rate on Chinese goods has increased by 30 percentage points from the start of the year, to 42%, which is roughly in line with the 40% rate for goods re-routed from China through other Asian nations before coming to the U.S., as well as the 50% rate on Indian goods. "And China’s supply chain depth and logistics efficiency are second to none," Gibley added.

Payouts at stake thanks to tariffs: While companies seem to face two choices concerning higher tariff-related costs—either eat them or pass them along to customers—there's a third that involves investor returns. Specifically, some companies are chopping their dividends as costs mount. Whirlpool (WHR) became a high-profile company to do that last week, cutting its annual dividend almost in half. "As expected, the second quarter continued to be impacted by competitors stockpiling Asian imports into the U.S.," CEO Marc Bitzer said in the company's earnings release, adding that Whirlpool is focused on cost reduction, managing debt maturities, and strengthening its balance sheet. Shares fell double-digits the day of the dividend announcement. Last month, Dow (DOW) sliced its quarterly dividend in half, part of an effort to "maintain a balanced capital allocation framework" as the company navigates what it calls "recent trade and tariff uncertainties" along with a prolonged industry downturn. In addition to dividends, buybacks may also be vulnerable. Apple has been an aggressive buyer of its own shares but cut that spending earlier this year.

"Bad breadth" raises fears: One concerning trend is the recent slide in market breadth, a good measure of how widespread buying or selling is. The percentage of S&P 500 stocks trading above their 50-day moving averages has fallen steeply since late last month when it reached around 75%. It's now barely 50%. Generally, the market's health tends to look rosier when a wider number of stocks climb the ladder, not just a few heavily capitalized names. Recently, the top 10 names in the S&P 500 accounted for about 40% of the index's value, and Magnificent Seven stocks closed at a collective record high yesterday. "With a minor setback recently—driven by the weak jobs report—one key to watch moving forward will be the response in breadth," said Kevin Gordon, director, senior investment strategist at Schwab. "If the next leg higher is powered by the mega caps and dominated by the AI capex spend, the market could face more challenging conditions heading into the end of the year."

On the move 
Eli Lilly (LLY) plunged 7% this morning despite reporting quarterly results that topped Wall Street's expectations and raising guidance for 2025. The stumbling block was trial data on its GLP-1 obesity pill. The drug helped people lose up to 12% of their body weight, a little below expectations. The trial also had a high drop-out rate, but it was high for both patients on the pill and on a placebo. Shares of Lilly competitor Novo Nordisk (NVO), which competes with LLY in the weight loss business, bounced 8% this morning.

Taiwan Semiconductor Manufacturing (TSM) leaped 4.6% today as it won't be affected by Trump's tariffs on chips due to having U.S. plants.

Ralph Lauren (RL) climbed 2.6% early today after beating Wall Street's earnings and revenue expectations.

DoorDash (DASH) jumped 8% ahead of the open as the company topped analysts' quarterly earnings and revenue estimates.

DraftKings (DKNG) soared nearly 7% today after the online gaming firm's earnings exceeded expectations.

Airbnb (ABNB) slid 6.5% before the bell despite earnings and revenue surpassing Wall Street's views. Cautious guidance appeared to trip up shares.

Advanced Micro Devices (AMD) dove 6.4% yesterday as investors gave the chip firm's earnings report the cold shoulder. Annual data center growth of 14% didn't appear to inspire confidence despite solid guidance after competitor Nvidia (NVDA) announced 73% data center growth in its last quarter.

Super Micro Computer (SMCI) shares dove 18% yesterday after a drop in its margin and what analysts called disappointing guidance.

Fortinet (FTNT) plunged 21% early today as the cybersecurity firm updated its firewall refresh cycle and three analysts subsequently downgraded their rating on shares, Bloomberg reported.

Shopify (SHOP) soared 22% yesterday after earnings results blew past expectations despite tariffs. The company said it had factored potential tariff pressure into its outlook but it didn't materialize despite some merchants increasing their prices, Yahoo Finance reported.

Apple gained 5% Wednesday and another 3% this morning as the company announced its new U.S. investment. CEO Tim Cook attended a White House event yesterday tied to the announcement and investors responded with relief that Cook and Trump appear to be repairing their relationship, Barron's noted. Apple also said it's working with Samsung to launch new chipmaking technology.

Bitcoin (/BTC) rose nearly 1% and stocks related to crypto, including Strategy (MSTR) and Coinbase (COIN) rose 1% to 3% in the early going, but cryptocurrencies have been relatively directionless for nearly a month.

U.S. Treasury yields ticked higher today after a weak 10-year note auction yesterday. The coming hours feature several Treasury auctions.

Tesla (TSLA) rose 3.6% Wednesday as two of its EV competitors reported earnings that showed signs of struggle. Shares of Tesla are down 21% year to date.

Intel (INTC) fell nearly 3% this morning after Trump posted that its CEO should resign. This may have been a reference to U.S. Republican Sen. Tom Cotton questioning CEO Lip-Bu Tan's ties to Chinese companies, CNBC reported.

From a technical standpoint, yesterday looked solid on the charts as the S&P 500 index bounced off a support level at 6,300 and finished above its 20-day moving average, a long-term trend line now at 6,315 that's held most of the summer.

Chances of a Fed rate cut next month are 93%, according to the CME FedWatch Tool, up from 38% a week ago before the disappointing July jobs data.

More insights from Schwab
Turn, turn, turn for bonds: July's jobs report might have been a bond market turning point, said Schwab's Jones. "Since the beginning of the year, we've asked the question 'Which comes first—the slowdown from tariffs and immigration policy or the inflation?' At this point, the economy is confronting both, but the growth slowdown is the more important factor long term."

When bears prowl: Though stocks remain near all-time highs, it's always a good time to brush up on strategy. Learn more about what constitutes a bear market and how to invest at such times—counterintuitive as it may seem—in Schwab's latest guide.

The week ahead

August 8: Expected earnings from Under Armour (UA). 
August 11: Expected earnings from Barrick Mining (B) and AMC (AMC).
August 12: July CPI and expected earnings from Cardinal Health (CAH), Cava Group (CAVA), Circle Internet (CRCL) and CoreWeave (CRWV).   
August 13: Expected earnings from Cisco (CSCO).
August 14: July PPI and expected earnings from Deere (DE), JD.com (JD), Tapestry (TPR), and Applied Materials (AMAT).