Though overnight strikes in the Strait of Hormuz kept the market on edge, chips kept gaining early today. PepsiCo’s earnings appeared to disappoint but jobless claims were subdued. Joe Mazzola, Head Trading & Derivatives Strategist at Charles Schwab, shares his insights.
Despite fresh overnight attacks by both sides in the Strait of Hormuz, stocks climbed early as investors appeared hopeful the renewed hostilities wouldn’t blossom into full-scale war. Chip stocks stayed on the comeback trail to lead the way, though crude oil and Treasury yields ticked higher in what could keep a lid on any serious rally.
PepsiCo (PEP) cracked open earnings season this morning with a report that appeared to disappoint investors at first sip. Delta Air Lines (DAL) checks in tomorrow after a solid quarter for its sector as the so-called “K-shaped” economy kept travelers paying up for higher service levels. Turbulence emerged for airline stocks yesterday, however, as oil prices rose, again putting margins in focus and perhaps shifting the conversation back to potential rising costs.
Major indexes mostly stumbled Wednesday amid Middle East fighting, though chips and mega-cap tech bucked the trend. President Trump told reporters overnight he isn’t sure if the war is fully back on, keeping investors on their toes. In data, weekly initial jobless claims fell to 215,000, a relatively subdued level.
“The economic data is still firm and EPS growth forecasts are still intact, but there is still a ton of uncertainty out there.”
Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR).
Factors driving uncertainty, other than Iran, include Fed policy, AI-related capital spending, high levels of U.S. margin debt, and a weak yen.
Three things to watch
Warsh steps into spotlight: Next week brings more Fed headlines with Tuesday’s semi-annual congressional testimony by new Fed Chairman Kevin Warsh. This gives legislators a chance to glean his thoughts on future policy, though he’s typically played it close to the vest. One topic Warsh may have to address is inflation expectations, which hit their highest level in almost three years last month despite falling oil prices at the time, according to the latest New York Federal Reserve consumer survey.
When inflation expectations surge, it can be self-reinforcing, and in the 1970s led to a historic “wage-price spiral” that ultimately got cured with punishing double-digit rates. Few forecast a repeat of that unpleasant era for the economy. However, even a hint of consumer inflation expectations becoming less “anchored,” to borrow one of former Chairman Jerome Powell’s favorite terms, might test the Fed’s mettle. As former St. Louis Fed President James Bullard told CNBC this week, the Fed seldom raises rates just once.
Excitement about AI, chips appears to persist: SK Hynix, a South Korean memory chipmaker, is expected to price its U.S. offering today and the listing is more than seven times oversubscribed, Bloomberg reported. It could be another sign that memory market and AI excitement persists, and it follows chip and AI infrastructure names rising Wednesday and again early today in what be technical short covering after the sector fell below its 50-day moving average.
Weakness in cyclical parts of the market may have helped chips, a theme seen often when the war was at its height in April and May. Meanwhile, Apple(AAPL) rose nearly 4% and Nvidia (NVDA) 1% on Wednesday. Both lagged the broader market earlier this summer as Middle East tensions eased. The Information reported Wednesday that China would allow limited purchases of Nvidia’s H200 chip for some AI firms due to a supply shortage.
China had been urging companies to buy from domestic manufacturers, and Nvidia’s market share in the country had effectively fallen to zero, Reuters reported.
Auction action acclaimed: Treasury yields initially spiked Wednesday on the Middle East news and rising oil prices. A 10-year note auction, however, saw firm demand as investors flocked to buy with a yield near 4.58%. Treasury auctions face mounting competition for investors thanks to rising rates abroad and heavy corporate debt issuance related to the AI build-out.
Wednesday’s auction might ease concerns about yields having to move higher to attract interest. Next week looks lighter on the auction front, and Tuesday’s Consumer Price Index (CPI) is the next potential catalyst for yield direction.
On the move
PepsiCo fell about 1% as earnings per share came in a penny shy of analysts’ estimates at $2.20 even as revenue slightly exceeded analysts’ thinking. U.S. food and beverage performance “moderated” with consumer budgets tightening due in part to rising gas prices, the company said.
Levi Strauss (LEVI) plunged almost 5% in early trading even though earnings beat analysts’ estimates and the company raised its full-year guidance and dividend. Guidance for third-quarter revenue growth of 4% to 5% fell short of 8% second quarter revenue growth, possibly disappointing investors. Demand has been healthy, CEO Michelle Gass told CNBC.
AstraZeneca (AZN) descended 8% ahead of the open after a heart disease drug candidate missed its primary endpoint in a Phase 3 clinical trial.
Salesforce (CRM) dropped 4% as KeyBanc downgraded shares to sector weight from overweight, saying it hasn’t heard strong feedback on AgentForce, the company’s autonomous AI platform.
IBM (IBM) sank 4% this morning after announcing updates to its agentic software development platform.
Broadcom (AVGO) jumped 5% Wednesday after Broadcom and Apple signed a $30 billion chip deal. The deal means Broadcom will design and produce technology for Apple products.
Delta slipped ahead of second quarter earnings, due early Friday. Analysts tracked by Schwab see earnings down almost 30% year over year to $1.48 per share, but revenue rising 5.2% to $17.5 billion.
The Cboe Volatility Index (VIX) initially climbed double-digits yesterday morning to above 18, then fell over the course of the session to below 17. VIX never tested levels near 20 that typically mark dramatically higher uncertainty. A move in that direction might be notable.
SpaceX (SPCX) fell nearly 1% to close below its debut price Wednesday in what so far has been a disappointing introduction to the Nasdaq-100® (NDX).
