Key Takeaways

Major indexes in the red again following end to five-week rally

Walmart, Home Depot shares head different directions after reporting earnings

Big day for mergers as Capital One says it plans to buy Discover Financial Services

(Tuesday market open) After the long weekend, investors return today staring down earnings from the nation’s biggest retailers and an update on the Federal Reserve’s rate path perspective. There’s also a mega-cap sighting Wednesday afternoon when semiconductor giant Nvidia (NVDA) shares its latest results.

Before that, big merger news flashed as Capital One (COF) said Monday it plans to acquire Discover Financial Services (DFS) for $35.3 billion in a deal involving two of the biggest U.S. credit card companies. It’s unclear if the deal can get past regulators, but if it does, it would add hundreds of millions of cardholders to Capital One.

It was a heavy weekend for mergers, with Walmart (WMT) announcing the purchase of Vizio (VZIO), basically meaning Walmart is going into the TV business. Walmart and Home Depot (HD) reported earnings today. Shares of Walmart ticked higher in premarket trading while Home Depot shares slumped.

Beyond those two, the major U.S. indexes stayed red early Tuesday in follow-through from Friday’s soft close that ended a five-week winning streak on Wall Street. U.S. consumer and wholesale inflation readings put the rally genie back in the bottle. Treasury yields fell this morning, but S&P 500 volatility jumped, possibly reflecting growing uncertainty.

Minutes from the January Federal Open Market Committee (FOMC) meeting tomorrow might feel a bit dated, reflecting opinions from before last week’s surprisingly hot consumer and producer price data. The two reports helped lift Treasury yields to two-month highs, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) coming in above expectations.

Lots of data loom between now and the March 19-20 FOMC meeting but hope for any rate cuts before June took a body blow last week.

“The PPI report reiterated that the path to 2% inflation is likely to be a long and bumpy road,” said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research, referring to the Fed’s 2% inflation goal. Core CPI grew 3.9% year-over-year in January, unchanged from December.

The sizzling inflation data sparked debate about progress on the price front and whether the economy might be overheating again.

For possible clues, consider monitoring the CME FedWatch Tool. So far, it shows no probability of any future rate hikes, but if concerns mount, some traders might lean that way. Another metric is Q1 Gross Domestic Product (GDP) estimates. The Atlanta Fed’s GDPNow tool was unchanged at 2.9% as of Friday, and down sharply from late January. Any rebound could indicate that GDP-related data remain resilient, possibly contributing to overheating fears.

With inflation and rates high on the list of worries, technology shares lost ground late last week and continue to look soft this morning. Tomorrow’s Nvidia results could help set the course in coming days (see more below).

Futures based on the SPX fell 0.35% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) dropped 0.35%, and futures based on the Nasdaq-100® (NDX) eased 0.9%.

Morning rush

The 10-year U.S. Treasury Yield (TNX) fell two basis points to 4.27%The U.S. Dollar Index ($DXY) inched down to 104.03.The Cboe Volatility Index® (VIX) jumped to 15.17, near recent peaks.WTI Crude Oil (/CL) slipped to $79 per barrel but remains near its February high.

Stocks in spotlight

Walmart earnings almost take a back seat today to the company’s purchase of Vizio. That said, the giant retailer did beat Wall Street’s earnings per share (EPS) and revenue growth expectations and forecast a fiscal 2025 revenue range that narrowly topped consensus views. Guidance for Q1 EPS was a bit below expectations, however. Walmart also raised its dividend 9%, which might be helping shares.

Quarterly highlights included 5.7% revenue growth, including a 4% U.S. comparable store sales increase, Walmart said. It expects revenue growth of 3% to 4% for fiscal 2025, with guidance assuming “a generally stable consumer.” Global eCommerce sales growth of 23% was a strong spot, and so was 33% growth in the advertising business.

Walmart said in a press release that the deal to buy Vizio for $11.50 per share in cash—around $2.3 billion—would bring its customers access to “innovative television and in-home entertainment and media experiences.” It would also allow brands to achieve greater impact from advertising spending with Walmart.

Turning from televisions to power tools and flooring, among other things, Home Depot shares took a 2% hit early Tuesday despite EPS that beat analysts’ expectations and a dividend increase. Q4 sales exceeded Wall Street’s thinking, but same-store sales fell 3.5%, possibly hurt by high mortgage rates that caused struggles in the housing market. “After three years of exceptional growth for our business, 2023 was a year of moderation,” CEO Ted Decker said.

Big-box earnings come toward the end of a Q4 reporting season in which profit growth is turning out better than many analysts had expected. Blended S&P 500 EPS growth is 3.2%, according to research firm FactSet, combining[HL1]  actual growth of reporting companies and expected growth for those yet to report. About 75% of S&P 500 companies have beaten average EPS estimates, while 65% reported a positive revenue surprise.

However, even with this type of EPS growth and Wall Street’s expectations for calendar year 2024 EPS gains of nearly 11%, the SPX has a historically high forward price-to-earnings (P/E) ratio of 20.4. That puts the onus on S&P 500 companies to keep delivering, or else the market could begin looking stretched if it doesn’t already to some.

“The bullish thesis still seems to be that the U.S. economy is stronger than expected, which will translate into higher corporate earnings, and by extension higher stock prices,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

“Also potentially contributing to earnings growth is the AI secular growth story, which is being validated by strong earnings reports from the technology sector. The bears would likely point to high valuation, economic uncertainty (stubborn inflation and an over-extended consumer), and the potential for a recession which is being underappreciated by investors.”

For tips on understanding P/E ratio, try this helpful Schwab video.

Stocks on the move early Tuesday include:

Walmart rose 2% and Home Depot fell 2% following earnings. It’s the start of a big period for retail reporting, with Target (TGT) and Lowe’s (LOW) expected a week from today.Medical device maker Medtronic (MDT) rose nearly 4% after coming in above Wall Street’s EPS and revenue expectations and issuing robust guidance. The company cited strong growth in its core spine, cardiac surgery, structural heart, and cardiac pacing businesses.

Back on Friday, communications services and transportation shares were among the market’s weakest performers, while energy companies gained behind strength in crude oil futures. The small-cap Russell 2000® Index (RUT) fell 1.4% Friday but still ended the week with a 1.1% climb, its second straight weekly advance.

For the full week, info tech and communication services were the worst-performing S&P 500 sectors, an unusual development that might suggest some investors shifting out of tech and into other parts of the market. Lofty mega-cap tech capitalizations exert huge weight, meaning continued weakness could drag major indexes even if sectors like materials, energy, and financials (last week’s leaders) advance.

What to watch

It’s a light week for data, with most of the fireworks on tap next week in the form of PCE prices data and an updated GDP estimate. Before that, investors will have to be content with FOMC Minutes due at 2 p.m. ET tomorrow. Those can be mined for thinking on the rate path as well as any discussion of when and whether to push the brakes on quantitative tightening (QT), a strategy the Fed instituted in 2022 as one of its measures to slow the economy.

Not everyone was closed yesterday. China, for one, saw major indexes get a boost after the Peoples’ Bank of China (PBoC) trimmed the five-year reference rate for banks, which helps determine interest rates for loans. The 25 basis-point cut appears designed to spark the country’s troubled property sector. However, only slight gains in the major indexes might indicate investors aren’t convinced this dose of medicine will cure the disease.

Eye on the Fed

Early today, futures trading pegged chances at 8.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 36% chance the funds rate will be lower than now after the Fed’s May meeting. Chances rise to nearly 80% by June.

CHART OF THE DAY: VOLATILE VOLATILITY. Since the end of 2023, the Cboe Volatility Index (VIX-candlesticks) has been in a pattern of higher highs and higher lows, usually evidence of technical strength. This three-month chart shows how a generally rising 10-year Treasury note yield (TNX-purple line) since early January correlates with this upward swing in VIX. Taken together, the two trends could spell more dramatic stock market swings in the weeks to come. Data source: Cboe.Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Chip time: Mega-cap semiconductor and AI giant Nvidia takes the stage Wednesday afternoon. And another top 10 stock in terms of market capitalization, Berkshire Hathaway (BRK.B), is expected to report later this month. Analysts expect Nvidia to report fiscal Q4 earnings per share of $4.53 and revenue of $20.24 billion, compared with $0.88 and $6.05 billion a year ago, according to consensus from Yahoo Finance. With that kind of annual growth possibly in the mix, guidance is likely to get a close look from investors. Nvidia has a tough battle to keep growing at that pace. “Investor expectations are lofty with the stock up over 40% year to date,” said Schwab’s Peterson. “I’m concerned this event could be a catalyst for profit taking in technology (especially in the AI and chip space), regardless of what they report, given how much tech has run this year.” Even with the stock up sharply since November, the wild card could be what it said then in a letter to shareholders. Executives noted that sales to China and other destinations “will decline significantly in the fourth quarter of fiscal 2024, though we believe the decline will be more than offset by strong growth in other regions.”

Holiday shopping: A strong holiday season is always critical for retailers, and earnings from big box stores this week and next could provide more insight on how things went for individual companies. Core retail sales during the 2023 holidays reached a record $964.4 billion, up 3.8% from 2022, according to the National Retail Federation (NRF). Retail sales for all of 2023 rose 3.6% to a record $5.13 trillion. “Consumer spending was remarkably resilient throughout 2023 and finished the year with a solid pace for the holiday season,” NRF Chief Economist Jack Kleinhenz said in a press release. “Although inflation has been the biggest concern for households, the price of goods eased notably and was helped by a healthy labor market, underscoring a successful holiday season for retailers.”

Confidence measure: Consumer sentiment finally is catching up with resilient U.S. economic data. Last week’s February Preliminary University of Michigan Sentiment report beat estimates and is up sharply from a year ago. That could be good news for the stock market, supporting broader breadth. Learn more on how it might play out from Schwab’s Liz Ann Sonders, Kathy Jones, and Jeffrey Kleintop (chief investment strategist, chief fixed income strategist, and chief global investment strategist) in the latest Schwab Market Perspective.

Calendar

February 21: Expected earnings from Nvidia (NVDA) and Fed minutes.

February 22: January Existing Home Sales, expected earnings from Wayfair (W) and Carvana (CVNA).

February 23: Expected earnings from Warner Brothers Discovery (WBD).

February 26: January New Home Sales and expected earnings from Domino’s Pizza (DPX) and Zoom Video (ZM).

February 27: and expected earnings from Dell (DELL) and eBay (EBAY).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.