Schwab Clients Bullish, Rate Hike Odds High

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

One rule of thumb on Wall Street is that higher Treasury yields hurt small-cap stocks. Smaller companies can depend more on borrowing to finance growth, which means they might face higher costs when yields rise. These firms also typically have a more domestic focus than larger firms, making them vulnerable if U.S. consumers retreat on higher borrowing costs. The 30-year yield remains well above 5% and the 10-year yield is around 4.6%, both near long-term highs posted late last month. Still, the Russell 2000^® (RUT) small-cap index holds its own, up 21% year-to-date versus about 13% for the S&P 500^® Index and 18% for the Nasdaq-100^® (NDX). The resilience could reflect relatively solid economic growth so far this year, though that thesis got challenged by last week's jobs report. The weak report, however, initially helped lower yields, giving small caps another lift. The Russell 2000 includes many debt-laden companies with negative earnings, meaning the S&P 600 may be a better way to track performance.

After a busy week of data including a benign Consumer Price Index and a somewhat mixed Producer Price Index, chances of a Fed rate hike next month eased. However, odds of at least one hike by the end of the year remain near 63%, according to the CME FedWatch Tool. Recent remarks from Fed policymakers reinforced already evident divisions after last month's 9-3 vote in favor of a rate pause. The next major highlight is likely an expected speech from Fed Chairman Kevin Warsh at the Fed's annual Jackson Hole symposium the week after next. However, it's unclear how much Warsh will reveal then or any time he speaks, as he's made it clear he's not a fan of forward guidance. "We still don't have any insight into Warsh's thinking around how he wants to respond to economic developments (apart from AI); and as long as that's the case, influence will continue to shift towards the rest of the FOMC," said Kevin Gordon, head of macro research and strategy at SCFR. "Fed watchers will have to be more manual in tallying the hawks versus doves."

The Schwab Trading Activity Index™ (STAX) edged up to 59.80 in July from 59.12 in June, the highest reading since early 2022. Clients remained net buyers, with "dip buying" still a feature. Schwab clients tracked by STAX were net buyers by a two-to-one ratio, suggesting bullish sentiment remained firm, especially among self-directed traders. While major indices posted strong gains in July, those gains masked the fact that many stocks struggled. In response, Schwab clients were selective about where they put their money, buying stocks that had pulled back and taking profits in names that had already run up or no longer offered the most compelling opportunities. Popular names bought by Schwab clients included SpaceX (SPCX), Micron (MU), Intel (INTC), Oracle (ORCL), and Tesla (TSLA). Names net sold by Schwab clients included Apple, Advanced Micro Devices (AMD), Broadcom (AVGO), PayPal (PYPL), and Adobe (ADBE).

With bitcoin drifting sideways in a narrowing range since early June, trading volume in the spot market has hit the lowest level since October 2023, according to data from Glassnode. On the plus side, net inflows into spot exchange-traded products last week hit the highest level since April, though they remained well below the averages during the runup to new highs in October 2025. As of Friday, bitcoin had spent 89 straight days beneath the break-even point for recent buyers ($68,700), yet selling by that cohort has steadily lost steam since the sharp price drop that ended in early June. A sustained move above that breakeven level, which now sits near the 200-day moving average, would likely spark a test of higher resistance levels. Volatility is so compressed that any catalyst—bullish or bearish—is likely to spark a test of its recent range.

The tame July CPI suggests many companies aren't passing earlier wholesale price increases down to their customers. This could mean some companies are eating higher prices and possibly taking the margin hit. They could also be trying to drive more customer traffic and build market share to make up for rising costs. For instance, Cava Group (CAVA), a Mediterranean restaurant chain that reported strong earnings Wednesday, said sales at restaurants open a year or more rose 9% annually, helped in part by higher prices but also lifted by more than 5% growth in traffic. The company has absorbed much of the inflation in the economy, deliberately underpricing CPI in recent years, its CEO told CNBC Wednesday. Menu prices rose 1.5% early this year versus what was then 3.1% annual CPI.