I'm Colette Auclair, and here is Schwab's early look at the markets for Friday, February 21st.
Though stocks posted record highs earlier this week, the upward surge paused Thursday following a disappointing outlook from Walmart (WMT) and as investors appeared to take a more defensive approach. Today's final February University of Michigan consumer sentiment data could offer another clue in the inflation puzzle before key price data and Nvidia (NVDA) earnings next week.
Stocks are starting to look tired, with record highs this week coming on lower-than-average volume and small index gains. This could point toward consolidation and potential choppiness. However, market reaction to tariff threats and trade policy has been muted, with the S&P 500 index (SPX) up 1.5% since the Inauguration as of midday Thursday. And stocks finished well off their lows yesterday in what could be a sign of continued resilience.
Data today include the final February University of Michigan consumer sentiment just after the open, with expectations for a headline reading of 67.8. That's on the low side for recent reports, but equal to the preliminary reading.
Perhaps more important from a market perspective, especially yields, is what the report says about inflation. The preliminary reading held an unpleasant surprise as year-ahead inflation expectations jumped to 4.3% from January's 3.3%, the highest since November 2023. It was only the fifth time in 14 years there was such a sharp one-month increase, according to Briefing.com.
The Federal Reserve closely watches inflation expectations, which Fed Chairman Jerome Powell has said are "well anchored." Signs of the boat getting away might grab policy makers' attention, especially in the current environment where tariff fears have raised price worries.
"If a broad swath of consumers is expecting prices to go up because of tariffs, which is evident in the University of Michigan’s February sentiment update, then there is a bit less of a firm anchoring of inflation expectations," said Kevin Gordon, director, senior investment strategist at Schwab, referring to the preliminary sentiment data earlier this month.
The market pulled back yesterday after Walmart topped analysts' earnings estimates but shared a slower growth outlook. It sees full-year net sales growth of around 3% to 4%, versus Wall Street expectations of around 4%. The company's CFO told CNBC that Walmart wouldn't be "immune" to tariffs on Mexico and Canada and said, "There's far from certainty in the geopolitical landscape."
Data yesterday was sparse but included U.S. weekly initial jobless claims. They remained in their intermediate-term range at 219,000, up 2,000 from a week earlier. The claims readings have been remarkably steady lately, but there have been a handful of layoffs at large firms over the last month and government job cuts, which might show up as higher claims down the road.
Leading Economic Indicators from the Conference Board fell more than expected, down 0.3% in February, dragged down by average weekly hours and new orders. The Citi Economic Surprise Index continues to trend lower. It's now basically zero, meaning an equal number of positive and negative data surprises, after being mostly positive since last September. This is worth watching considering stocks remain near all-time highs.
By late Thursday, the CME FedWatch tool placed odds of a March rate pause near 98%, with chances for a rate cut rising to above 50% by the June meeting. Futures trading still bakes in one to two cuts this year. Treasury yields mostly sank Thursday amid the soft data, with the 10-year note yield finishing just under 4.5%, near the middle of its recent range. Several important Treasury auctions are ahead next week.
Walmart wasn't the only major stock losing ground Thursday. Two recent gainers, Meta Platforms (META) and Palantir (PLTR) fell sharply from record highs on heavy trading volume this week, and market breadth waned a bit as well. The number of S&P 500 stocks trading above their respective 50-day moving averages fell to 54% Thursday from 59% Wednesday, and decliners outnumbered advancers by two-to-one Thursday.
From a sector perspective, retailers weakened yesterday after Walmart reported, with names like Target (TGT), Amazon (AMZN), Costco (COST), and Home Depot (HD) dropping, possibly in sympathy with Walmart and on related worries about consumer demand.
Other consumer-related stocks also dropped, including Walt Disney (DIS), Tesla (TSLA), Airbnb (ABNB), Netflix (NFLX), and United Airlines (UAL). Generally, the weak outlook from Walmart seemed to indicate that perhaps consumers aren't as strong as Wall Street might have thought, though plenty of retail earnings are still ahead and Walmart's actual quarterly numbers looked solid.
Financial stocks also fell yesterday, especially some of the biggest banks that had mostly been rallying. This could speak to some sector rotation, as real estate, health care, and utilities – a more defensive group – continued to look strong. That extended a trend toward defensives that began earlier this week even when the overall SPX and Nasdaq Composite ($COMP) were hitting record highs.
Technically, the SPX likely faces resistance at 6,150 and enjoys support at 6,050, while the 50-day moving average of 6,073 held on Thursday and has been a support point in recent weeks. Volatility ticked higher Thursday and is up marginally from this month's lows, with futures trading building in more volatility over time.
The SPX dropped 26.63 points Thursday (-0.43%) to 6,117.52; the Dow Jones Industrial Average® ($DJI) lost 450.94 points (-1.01%) to 44,176.65; and the Nasdaq Composite® ($COMP) fell 93.89 points (-0.47%) to 19,962.36.
