Schwab Market Update

(Monday market open) Cracks developed early Monday after Moody's Ratings downgraded U.S. debt, trade worries resurfaced, and tech stocks retreated on worries that higher borrowing costs could damage risk appetite. Major indexes and the dollar fell sharply while Treasury yields and gold jumped, though the long-term effects of the downgrade on Treasury demand aren't certain.

Moody's—which cited U.S. fiscal deficits—joined other ratings agencies that long ago downgraded U.S. debt, so this isn't a new development. "But the signal is that the trend is in the wrong direction," said Kathy Jones, chief fixed income strategist at Schwab. "Will Congress pay attention?"

U.S. budget legislation was initially blocked in committee by fiscal conservatives Friday but passed late Sunday with those same representatives voting "present" in order to move the process along. "The real test will come later this week, when the full House will vote on the bill," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab. "There are still numerous issues that need to be resolved and the massive bill is likely to change significantly before it hits the House floor for a vote late this week."

1. Possible implications of a debt downgrade: The Moody's downgrade of U.S. debt from Aaa to Aa1 late Friday—which the ratings agency blamed on failure to reverse large fiscal deficits and the growing burden of interest costs as the debt grows—probably shouldn't be a surprise, but gave long-term yields a boost early Monday. The 30-year Treasury yield climbed above 5% for the first time since late 2023 and the 10-year yield topped 4.5%. However, the downgrade came well after the two other major rating services did the same years ago, and the long-term impact on Treasuries may not be dramatic. "It isn't likely to dissuade investors from buying Treasuries, as there just aren't a lot of alternatives," the Schwab Center for Financial Research said. "Moody's correctly points out that the size of the economy and the dollar's status are mitigating factors. More importantly, the U.S. has the capacity to service the debt. It just lacks a willingness to take the steps needed to reduce it." Along with the downgrade, the ratings agency changed the outlook to stable from negative.
    
2. Overseas demand for U.S. assets in demand as of March: Speaking of Treasuries, the latest Treasury International Capital (TIC) data showed that as of the end of March, inflows of foreign capital continued to grow. Monthly net inflows amounted to $254 billion that month, with investments in Treasury notes up while there was a slight drop in foreign holders of U.S. equities. That data lags, however, and is now six weeks old. Updated April data are worth monitoring, as some analysts blamed April's Treasury selling on lack of demand associated with overseas anger at U.S. tariffs. Recent dollar strength suggests U.S. assets still enjoy decent demand. Over the weekend, trade worries mounted as Treasury Secretary Scott Bessent said the U.S. will impose the high tariffs it threatened last month on countries that don't negotiate in "good faith," Reuters reported. Several Fed speakers are on deck to speak today and tomorrow after Atlanta Fed President Raphael Bostic said Friday he expects just one rate cut this year and that inflation isn't falling as fast as the Fed had hoped.
    
3. Retailer earnings ahead amid pricing questions: This week is light on data but features earnings from Home Depot (HD), Lowe's (LOW), and Target (TGT) after Walmart (WMT) raised inflation concerns last week by signaling higher prices ahead. The rest of the retail sector often follows Walmart's lead. Even before the downgrade, last Friday's April University of Michigan Consumer Sentiment report fell to the second-lowest level ever, though it's more important to watch what consumers do than what they say. The Walmart news reminded investors that inflation is still top of mind for companies, especially those in sectors like retail with narrow margins that don't have much room to "eat" the tariffs imposed on their businesses.

• Tech stocks that led the rally last week retreated in pre-market trading today amid the downgrade and trade uncertainty. Examples include Palantir (PLTR), down more than 4%, AppLovin (APP) down 3.7%, Super Micro Computer (SMCI), down 3.7%, and Nvidia (NVDA), down 2.7%. Nvidia announced over the weekend it's opening its AI server platform to rival chip makers, Barron's reported.
   
• UnitedHealth (UNH), one of the worst performers last week as it announced its CEO departing in a tough fundamental climate, bounced more than 5% early Monday despite not much fresh news. Shares may be getting a lift from media reports of insider buying. Health stocks in general moved up this morning in what Briefing.com called a "counter-cyclical" move reflecting dip buying.
   
• Tesla (TSLA) dropped 3.8% early Monday as traders looked ahead to a weekly sales data report from China after sales fell in Europe recently.
   
• JPMorgan Chase (JPM) fell nearly 1% in pre-market trading. The company is holding its investor day today and reiterated previous guidance for full-year net-interest income.
   
• Walmart slipped 1.7% in pre-market trading after President Trump said over the weekend that the retailer shouldn't raise prices. Walmart announced possible price hikes last week due to tariffs on overseas goods imports.
   
• Crypto-related shares Coinbase (COIN) and MicroStrategy (MSTR) both fell more than 2% ahead of the open as bitcoin (/BTC) and other cryptocurrencies dropped amid the return of risk-off sentiment.
   
• Technically, the market ended last week looking a bit stretched, as the forward price-to-earnings (P/E) ratio is back above 22 for the SPX. The 10-year average is close to 18. This builds in hopes for strong earnings growth later this year, but analysts have been lowering their earnings estimates for coming quarters.
   
• Technical support for the S&P 500 index (SPX) is likely near the 200-day moving average just below 5,760, a level it pushed through a week ago. It could be interesting to see if buyers return today if and when that level is approached, because the trend recently has been buying on dips.
   
• Market breadth improved last week, with 76% of S&P 500 stocks trading above their 50-day moving averages as of midday Friday. Sectors gaining the most in recent days are info tech, communication services, and consumer discretionary, which shows a Magnificent Seven influence.
   
• Odds of a near-term Fed rate cut look dim, with chances for a June trim under 9%, according to the CME FedWatch Tool. July rate cut odds are roughly 34%. The futures market projects the strongest likelihood of two 2025 rate cuts.

Trader's eye view: Every week, find out what traders might want to watch in terms of data, technical indicators, and sentiment in Schwab's Weekly Trader's Outlook. The report features several helpful charts on how major indexes are moving, and points out key fundamental and technical factors that might move markets.

The U.S. dollar index ($DXY—candlestick) often climbs when gold (/GC—purple line) dips, and that was the case last week as cooling trade tensions took gold down from recent record highs and helped lift the dollar. The dollar also got support from Fed Chairman Jerome Powell, who indicated the Fed is far from ready to consider rate cuts but remains well below its highs from earlier this year as tariff-related inflation remains a possibility. The dollar index seemed to find technical support this month after spending some time under 100 in April for the first time since mid-2023. It's now fallen to 100 or just below each of the last three years and bounced from there, though past performance offers no guarantees of what might happen next with the greenback.