Stocks Helped Early by Weak Oil, But Chips Down

Stocks Flat, Yields Up Awaiting Retailer Results

By Joe Mazzola

Major indexes flattened early to start a week featuring earnings from Walmart and minutes from the last Federal Reserve meeting. Oil, yields, and volatility rose, posing possible headwinds with no Iran resolution in sight. Investors also continue to mull Friday's surprise drop in July retail sales, which followed weak jobs data and could suggest consumer caution even as corporate results impress.

One intriguing nugget after the close is the Treasury International Capital report tracking overseas investment in U.S. assets. A weak report might lift yields. Lingering inflation and rising U.S. fiscal deficits continued to push yields up last week despite soft data. "We continue to see risks that Treasury yields could move higher from here," said Cooper Howard, director of fixed income research and strategy at the Schwab Center for Financial Research (SCFR).

On Friday, the S&P 500 Index fell after failing to retest Thursday's record highs, though it posted its third straight weekly gain. The cart gets rolling tomorrow on retail results with Home Depot (HD) before the open. "Big Orange" beat consensus last time, but shares trade below 2026 highs posted when investors anticipated Fed rate cuts. There's now a 64% chance of a hike by year-end, according to the CME FedWatch Tool.

Three things to watch

Earnings impress, with retailers, Nvidia ahead: With earnings season 90% done, results continue to impress from a market-broadening perspective. In other words, the gains weren't solely from tech giants but embraced every sector besides health care. Most sector earnings rose double-digits, and 87% beat analysts' bottom-line estimates. Though FactSet didn't release its usual weekly earnings estimate Friday, its most recent one penciled in annual growth above 50%. That's swollen by investment gains from a handful of hyperscalers, but excluding that, S&P 500 earnings growth neared 30%, the best performance since right after the pandemic. Earnings aren't over, of course, with retailers ahead. Also, Nvidia (NVDA)—an earnings bellwether—reports August 26. "At the beginning of July and the lead into earnings season, the consensus expectation for the S&P was 24%," noted Liz Ann Sonders, chief investment strategist at SCFR, in her Friday podcast. "And we're now running at 51% and change. We have never seen a parabolic ascent in earnings like we are seeing right now."
Checking under earnings hood and looking ahead: It's unprecedented to see this kind of earnings surge when the economy isn't emerging from recession. "It's obviously driven a lot by AI and the capital spending associated with that, and the feeders that has into sectors other than just technology and communication services," Sonders noted, including materials, utilities, energy, and industrials. "So that has allowed the improvement in earnings to be somewhat broad." One concern, Sonders added—and it may not be imminent—is that lofty numbers raise the expectations bar. Also, within a few quarters, earnings growth will be measured against the recent meteoric rise, making for tough comparisons. In addition, though earnings growth has been broad, the top 10 contributors represent 65% of the increase in S&P earnings, so concentration remains an issue. Despite Nvidia's report ahead, the recent jump to record highs for the S&P 500 Index mainly reflected a steady flow of hot earnings reports. Without that constant stimulus—and heading into a seasonally weak time of year—the market might need to look elsewhere for catalysts to keep the rally afloat.
Technicals carry mixed implications: Market breadth continued to improve last week, with 68% of S&P 500 stocks above the 50-day moving average and 73% above the 200-day as of Friday. Also, the Average Directional Index (ADX), which tracks trend strength, is above 20, indicating a stronger trend in place. However, the S&P 500's Relative Strength Index (RSI), which tracks momentum and overbought or oversold conditions, weakened slightly and showed a minor divergence with the rising index, a bearish sign. It's near 70, traditionally the level associated with overbought conditions and one that's posed a headwind on previous approaches the last four months. If the SPX retreats, first support could be near 7,755. Judging from options positioning, there's little appetite to hedge, with upside call buying and put selling continuing in tech names. "The intermediate-term uptrend is intact and the technicals are bullish, but on a very near-term basis, a modest pullback or digestion period wouldn't surprise at some point this week," said Nathan Peterson, director of derivatives research and strategy at SCFR, in his Weekly Trader's Outlook.

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