Here is Schwab's early look at the markets for Monday, July 18:
Bastille Day dawns without many fireworks in what could be the last bit of calm before Tuesday's inflation data and big bank earnings. JPMorgan Chase, Wells Fargo, and Citigroup kick off bank reporting season tomorrow, followed Wednesday by Goldman Sachs, Bank of America, and Morgan Stanley.
Investors return from the weekend licking wounds after Friday's pullback and the worst week in a month on Wall Street. Stocks hit all-time highs at mid-week then lost ground as tariff threats mounted. A threat of 35% tariffs on Canada appeared to hurt sentiment Friday, and Chicago Fed President Austan Goolsbee, a voting member of the Federal Open Market Committee, told The Wall Street Journal that recent tariffs unveiled by President Trump could delay rate cuts by muddying the inflation outlook.
The June Consumer Price Index (CPI), due at 8:30 a.m. ET tomorrow, is seen rising 0.2% month over month for headline CPI and 0.3% for core CPI, which excludes volatile food and energy prices. Both were 0.2% in May. Though it's too soon to say if the expected core gain reflects tariffs, the types of goods and services that rise or fall could provide hints.
Recent CPI reports had benign headlines thanks in part to less growth in shelter costs, but saw upticks in items like building materials, hardware, computers, and automobiles. If those trends continued in June, it could point to an impact from tariffs.
"We're in kind of an equilibrium stage here, where inflation is not taking off to the upside, and it's made some improvement, but it's not really where it needs to be for the market to get really comfortable that we're heading to 2%, or the Fed to get comfortable," said Kathy Jones, chief fixed income strategist at Schwab.
Tariffs on copper – if they persist – will raise costs for industrial production and construction. And "tariffs on goods from Brazil will affect some imports, such as coffee, but also send the message that tariffs are a political as well as an economic tool, making policy less predictable," Jones said.
With bank earnings, investors tend to watch loan activity, consumer and business credit trends, and updates on investment banking and trading demand. Bank shares enter earnings season on a high note, and "the potential for a 'sell on the news' response is elevated given the set-up," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
Other major firms on tap this week include 3M, United Airlines, Netflix, and Johnson & Johnson. None of those are tomorrow, however. Others to watch are ASML (ASML), an important chip equipment supplier, and Taiwan Semiconductor.
FactSet's final earnings estimates before earnings season came out Friday, showing that analysts expect 4.8% second quarter S&P 500 earnings per share growth, down from above 13% in the first quarter. Revenue growth is seen at 4.2%.
This comes as the S&P 500 trades at a price-to-earnings (P/E) ratio of 22.3, historically high and well above the 10-year average near 18. Most of the projected earnings gains in the second quarter are courtesy of info tech and communication services sector stocks, with five sectors expected to see earnings decline from last year.
If early earnings disappoint and the market continues to trade at what's now a historically high price-to-earnings (P/E) ratio, it could call pricing into question, especially if analysts' estimates for third and fourth quarter earnings don't climb.
"For now, positive earnings growth is a support, whereas stretched valuations and growth-negative tariff policy are hindrances," said Kevin Gordon, director, senior investment strategist at Schwab.
In sector action Friday, only a couple areas gained. Energy rose amid solid crude prices amid increased Middle East tension and tariff concerns, while consumer discretionary got a boost from Tesla and Amazon. But the S&P 500 index suffered its first losing week in the last four, skidding Friday on tariff fears. President Trump said the higher tariffs on Canada reflect challenges including fentanyl and what he called "trade barriers," Bloomberg reported. The Canada move doesn't affect energy or some other products such as steel and aluminum.
The majority of S&P 500 stocks fell Friday and the equally-weighted S&P 500, which weighs all stocks the same rather than by market cap, did worse than the S&P 500. That's a sign that a few big stocks like Amazon, Tesla, and Nvidia kept index losses from being worse.
In corporate news, the Wall Street Journal reported late Friday that Kraft Heinz may split into two companies. Nvidia continued posting record highs most of last week, including Friday, and investors headed into the weekend awaiting news on CEO Jensen Huang's trip to China. U.S. chip export restrictions to China have cost Nvidia billions of dollars. Huang met with President Trump before jetting across the Pacific.
Technically, momentum has exhibited "some signs of exhaustion" and market seasonality is shifting from bullish to more a more bearish stance in the coming weeks, Schwab's Peterson said.
The 10-year Treasury note yield finished last week firmly, above 4.4%. That's up about 20 basis points from recent lows. Tariff-related inflation worries and solid Fed sentiment against a July rate cut both support yields.
"In the 10-year, the 4.4% level seems to be a magnet," Schwab's Jones said. "It is near the 50-day moving average and is in the middle of the range year to date. Until something changes – either the economy weakens and/or inflation falls – we would expect yields to stay near this level. Even if the Fed were to lower rates, long-term rates may not fall by much due to the potential inflationary impact of tariffs and the rising debt load. We continue to expect a steeper yield curve in the second half of the year."
Chances of a July rate cut were less than 5% late Friday and odds of at least one cut by September were 64%, down from close to 70% earlier last week, according to the CME FedWatch Tool.
The Fed's unwillingness to lower rates in the face of political pressure might be one reason stocks trade near record highs.
"I think part of the reason why the equity market is doing well is because the Fed isn't cutting here, that they don't have the justification for it, or they're not succumbing to political pressure to do so," said Liz Ann Sonders, chief investment strategist at Schwab.
The Dow Jones Industrial Average® ($DJI) dropped 279.13 points Friday (-0.63%) to 44,371.51; the S&P 500 index (SPX) gave back 20.71 points (-0.33%) to 6,259.75, and the Nasdaq Composite® ($COMP) fell 45.14 points (-0.22%) to 20,585.53.
For the week, the DJIA slid 1.02%, the S&P 500 fell 0.31%, and the Nasdaq dropped 0.08%.
