TSMC's Caution, CoreWeave's Rebound, Schwab and the Banks, Lilly and Walmart Lead

Good evening. This is Trade and Ticker. Thursday, October fifteenth, twenty twenty-six. Your evening company deep dive after the close.

Four stories tonight, and they all come back to one question: where do investors put their money when the A-I trade gets shaky and interest rates may still be headed higher? First, Taiwan Semiconductor, the company that makes the most advanced chips in the world. It posted another record quarter, raised its outlook for the year, and still slipped, because it sounded careful about twenty twenty-seven. Second, CoreWeave, the heavily borrowed A-I cloud company. Its bonds and its default insurance flashed real stress again today, and then Nvidia's chief executive stepped in, and the stock bounced about six percent. Third, Charles Schwab and the banks, including P-N-C and U.S. Bancorp, with Interactive Brokers reporting after the bell. And fourth, the big rotation that carried the Dow up more than five hundred points, led by Eli Lilly, UnitedHealth, Walmart, and Home Depot. Let's get into it.

First, a quick look at the board. This was a comeback day, and a very uneven one. The Dow jumped about one-point-one percent, more than five hundred fifty points. The S-and-P five hundred rose about a third of a percent. The Nasdaq barely made it into the green, up less than a tenth of a percent, after being down more than one percent earlier in the session. That small gain kept the Nasdaq from a fourth straight loss. Small companies did better than the big tech names, with the Russell two thousand up almost one and a half percent. The Dow led, and tech lagged.

The groups tell the story. Eight of the eleven sectors in the S-and-P finished higher. Healthcare was the best, up almost two percent. Materials, consumer stocks, and financials were all up more than one percent. Technology fell about half a percent, and energy was the worst group, down about one and a half percent. The Philadelphia semiconductor index slipped almost one percent. That doesn't sound like much, but it was the seventh straight loss for the chip index. The VIX, Wall Street's fear gauge, eased back, down a little more than two percent, to about sixteen and a half.

Now the backdrop, because it explains a lot of what happened. This morning's producer price report was hot. Prices that businesses get paid jumped one-point-three percent in September, and six-point-three percent from a year ago. Those are the biggest gains since twenty twenty-two. That came one day after a hotter than expected consumer price report. Put those two reports together, and traders are leaning harder toward another rate hike from the Fed. By late in the day, the CME's FedWatch tool showed about a two in three chance that the Fed raises rates by its December meeting, up from a little over sixty percent on Wednesday.

And yet, bonds rallied. You might expect hot inflation to push yields up. Instead, investors bought Treasuries as a place to hide from the selling in tech. The ten-year yield fell about a tenth of a percentage point, to about five-point-oh-nine percent. The two-year yield fell too. Gold jumped about two percent, and the dollar was lower.

One portfolio manager, Jed Ellerbroek at Argent Capital Management, summed up the mood well. He said, quote, "The cost to finance everything, whether it be a new single-family house or a giant data center, is going up, and that has implications for lots of stuff in the stock market." He added, quote, "The best performing stocks today are the non-cyclical, defensive businesses." End quote. Keep that in mind, because it's the thread through all four of tonight's stories.

Oil was mixed. U.S. crude rose more than two and a half percent. Brent crude, the global benchmark, finished about flat, just under one hundred six dollars a barrel. Energy stocks didn't follow crude higher. Exxon and Chevron were each down more than one percent.

Now, our first deep dive: Taiwan Semiconductor.

If you own anything with a modern chip inside it, there's a good chance Taiwan Semiconductor made that chip. It builds processors for Nvidia, Apple, and a long list of other companies. It's the most valuable company in Asia. So when it reports, the whole chip world listens.

The numbers were excellent. Third-quarter net profit rose about sixty-nine percent from a year ago, to about twenty-three-point-six billion dollars. That beat what analysts expected, and it was the company's highest quarterly profit ever. It was the sixth straight record quarter. Revenue came in at about forty-six-point-seven billion dollars, above the company's own forecast.

The outlook was strong too. For the fourth quarter, Taiwan Semiconductor expects revenue of fifty-two-point-three to fifty-four-point-three billion dollars, another big step up. It now sees full-year revenue growing about forty-four percent, up from its earlier call of more than forty percent. It kept its spending plan for this year at sixty to sixty-four billion dollars. And it said demand for A-I chips is extremely robust and still far ahead of what it can supply. The company pointed to a new wave of A-I tools, the kind that can carry out tasks on their own, as a big driver of future demand for its chips.

So why did the stock fall? It came down to one careful sentence about next year. The company's chief executive said, quote, "Looking ahead, we continue to observe consumer and price-sensitive end-markets segments are being challenged due to the impact of rising component prices and macroeconomic uncertainties." He went on, quote, "As such, we are being prudent in our business planning going into twenty twenty-seven." End quote.

Here's what that means in plain words. The A-I side of the business is booming. But the chips that go into phones, laptops, and other everyday gadgets are a different story. Memory and other parts have gotten much more expensive, and when the parts cost more, device makers either raise prices or cut back. Either way, that can mean fewer chips ordered. Taiwan Semiconductor is telling investors not to assume every part of its business keeps racing ahead next year.

A portfolio manager at Allspring Global Investments, which owns the stock, put it this way. Quote, "The key risk is that T-S-M-C's caution translates into broader earnings downgrades across a value chain accustomed to sustained upward revisions, but for now, this looks like sensible expectation management rather than a change in the sector's long-term fundamentals." End quote. In other words, it may just be a company keeping expectations in check. But in a market this nervous, careful words get punished.

The U.S.-listed shares of Taiwan Semiconductor fell about one-point-eight percent, to about four hundred twenty-two dollars. In Taipei, the stock had already closed down about two percent before the results came out. Even with that drop, the Taipei shares are still up sharply this year.

There was also news on the factory front. The company said its second plant in Arizona has finished construction, and mass production is now set to start in the third quarter of twenty twenty-seven, ahead of schedule. Taiwan Semiconductor is making a massive investment in Arizona. Its chief executive also said the company has sent teams to Texas to evaluate building there, because big U.S. customers want more chips made in America.

Now zoom out to the whole chip group, because the pressure didn't start today. Overnight, South Korea's Kospi fell more than seven percent, and Samsung Electronics and S-K Hynix each fell sharply. Coming into today, the Philadelphia chip index had slid for six straight sessions, falling by double digits. Today the selling was much milder, but it still added a seventh straight down day. Nvidia fell about one-point-eight percent. Intel fell almost three percent. A-M-D fell one and a half percent, and Broadcom slipped about half a percent. Seagate fell more than three percent, and Western Digital fell about two percent.

There was one notable exception. Micron, the memory chipmaker, rose almost two percent, after falling sharply earlier in the week. It's a reminder that after a long losing streak, some buyers start looking for bargains, even while the group as a whole keeps sliding.

So here's the takeaway on Taiwan Semiconductor. The A-I demand story is intact, and the company says so loudly. What changed is the tone about everything else, and that came at a moment when investors were already looking for reasons to sell chips.

That brings us to our second deep dive: CoreWeave.

CoreWeave is what people on Wall Street call a neocloud. It buys huge numbers of Nvidia chips, puts them in data centers, and rents that computing power out to big tech companies and A-I labs. Its customers include Microsoft and Meta. To pay for all those chips, it has borrowed heavily, about fifty billion dollars in debt. And it's still losing money.

On Wednesday, CoreWeave's stock fell about fifteen and a half percent, as investors worried that higher rates will make that mountain of debt harder to carry. This morning, the selling kept going, and at one point the stock was down more than five percent again.

The bond market showed the stress even more clearly. Yields on CoreWeave's bonds climbed to around fifteen percent. That's the kind of yield investors usually demand from companies they think could be in trouble. When yields go up, prices go down, and some of CoreWeave's bonds are now trading below eighty cents on the dollar.

Then there are credit default swaps. Think of these as insurance against a company failing to pay back its debt. The price of that insurance on CoreWeave climbed to about ten cents a year for every dollar insured. An expert at S-and-P Global Market Intelligence said a level like that is generally viewed as a sign of distress. One trading desk at Evercore said the market is, quote, "basically saying no mas to A-I debt without operating cash flow support." End quote.

So what turned the stock around? Nvidia's chief executive, Jensen Huang. Speaking at an event in Stockholm, he said, quote, "CoreWeave's financial strength is improving every day. I'm optimistic. Their cost of capital is actually decreasing." End quote. He also said he doesn't see a need for Nvidia to backstop the company.

That matters because Nvidia isn't just a supplier here. Nvidia owns about ten percent of CoreWeave, making it the company's second-largest investor. Nvidia added to that investment earlier this year, and CoreWeave is also one of its big chip customers. So Nvidia has every reason to want investors calm, and some analysts pointed that out. But the words worked, at least for today. CoreWeave closed up almost six percent, at about sixty-nine dollars and seventy cents.

CoreWeave's own chief executive, Mike Intrator, had already pushed back in a memo to employees on Wednesday. He wrote, quote, "When you are building a new type of technology company there will be periods of time when the market misunderstands and acts irrationally." He added, quote, "We are confident in our backlog which more than supports all of our debt obligations." End quote. The backlog is the value of contracts customers have already signed.

The bounce spread to some of the other names that got hit. Oracle, which has borrowed heavily for its own A-I data centers, rose three percent after falling almost nine percent on Wednesday. Nebius, another neocloud, rose a little more than one percent. Microsoft gained about one percent.

But not everything recovered. Dell Technologies fell almost seven percent, and Hewlett Packard Enterprise fell about seven percent. Both had already dropped sharply on Wednesday after Barclays downgraded them, saying A-I demand from regular businesses isn't here yet.

And the worry hasn't gone away. Options traders placed a record number of bets against CoreWeave on Wednesday. A research firm, Gartner, warned this week that many of these newer cloud providers may not make it to the end of the decade if A-I revenue doesn't catch up with all the spending.

So here's how to think about CoreWeave. Nobody is arguing that the demand for computing power isn't real. The question is whether the cash shows up fast enough to pay for the borrowing, especially if the Fed keeps raising rates. Today, the biggest name in A-I chips vouched for it, and the stock bounced. Whether the bond market believes it is the thing to watch, because that's where the stress showed up first.

Now our third deep dive: Charles Schwab and the banks.

Schwab is one of the biggest brokerages in the country, with more than thirteen trillion dollars in client assets. On paper, it was a record quarter. Revenue rose seventeen percent, to about seven-point-two billion dollars. Adjusted earnings were a dollar sixty-nine a share, up from a dollar thirty-one a year ago, and that topped what analysts expected. Clients brought in about one hundred ninety billion dollars in new money, up thirty-eight percent from a year ago. Schwab opened about one-point-two million new brokerage accounts in the quarter, and it now has more than forty million active accounts. Trading revenue rose sixteen percent.

So why did the stock fall almost three percent, to about ninety-four dollars? Two reasons. First, revenue came in just a hair below forecasts. Second, the outlook. Schwab's chief financial officer said revenue growth for the full year, and the margin it earns on client cash, should land toward the low end of the ranges it gave in July. He also explained that loans have been growing faster than deposits, which means Schwab has been leaning more on other, more expensive ways to fund itself. For a company that earns a lot of money on client cash, that's the part investors focused on. Schwab shares are now down for the year.

P-N-C, the big regional bank based in Pittsburgh, had a solid quarter that didn't impress the market much. It earned four dollars and ninety-seven cents a share, or five dollars and nine cents on an adjusted basis, up from four dollars and thirty-five cents a year ago. Net interest income, the money it makes on loans minus what it pays on deposits, rose about fifteen percent from a year ago. Business lending was strong, with average commercial loans up four percent from the second quarter. But fee income fell six percent from a very busy second quarter, and total revenue came in a little below forecasts. The stock was down about three percent early, then closed down less than half a percent.

There was one detail in P-N-C's report that ties straight back to today's market. The bank's own economists now expect the Fed to raise rates two more times, in December and again in March, which would take the Fed's key rate to a range of four-and-a-quarter to four-and-a-half percent. And you could see higher rates on its balance sheet. A measure of paper losses on its bonds and hedges grew to about six-point-five billion dollars, from about four-point-one billion at the end of June, and the bank tied that to higher interest rates. That's what happens to bond portfolios when yields climb.

U.S. Bancorp had the best day of the group. It earned a dollar thirty-four a share, up about ten percent from a year ago, and revenue hit a record of almost eight billion dollars, up almost nine percent. Fee revenue rose about fifteen percent. The stock rose about two percent.

The rest of the banks had a good day too, and that fits the rotation story. The financial sector rose about one and four-tenths percent. Wells Fargo rose more than two percent. Goldman Sachs rose almost one and a half percent. And Bank of America rose about six-tenths of a percent after Baird upgraded it, a day after a record federal penalty and a trading miss knocked it down almost five percent.

Then, right after the close, Interactive Brokers reported. This is the electronic brokerage that a lot of active traders use. Revenue was about one-point-nine-one billion dollars, up sixteen percent from a year ago, and that beat forecasts. Adjusted earnings were sixty-seven cents a share, right around what analysts expected. The bigger headline was the dividend. Interactive Brokers raised its quarterly payout about seventy-one percent, to fifteen cents a share.

Under the surface, two things stood out. Customer accounts grew about thirty-five percent from a year ago, to about five-point-six million. And margin loans, the money customers borrow to buy stocks, jumped forty-seven percent, to about one hundred four billion dollars. That's a lot of borrowed money in the market at a time when investors are worried about borrowing everywhere else. Trading did cool off from a very busy second quarter, with daily trades down about eleven percent. In late trading, the stock was a little lower, after closing up more than two percent in the regular session.

So the picture on financials is this. Business is good. Lending is growing, clients are bringing in money, and fee income is rising for most of them. But the market is picky about outlooks right now, and higher rates cut both ways for these companies.

That brings us to our fourth deep dive: the rotation, led by Eli Lilly, UnitedHealth, Walmart, and Home Depot.

When investors get nervous about the high flyers, they don't always run to cash. Often they move into companies whose business doesn't swing as much with the economy. That's what happened today, and you could see it in the Dow.

Start with healthcare, the best sector on the day. Eli Lilly, the maker of the weight-loss drugs Zepbound and Mounjaro, rose about three and a half percent, to about one thousand two hundred fifty-two dollars. UnitedHealth, the giant health insurer, rose almost three percent, building on its strong earnings report earlier this week. Gilead Sciences rose about two and a half percent, and Amgen rose almost two percent. Healthcare has now been the best sector in the S-and-P two days running.

Not every drug stock joined in. Merck, which rallied almost four percent on Wednesday, gave back about one and a half percent today. Johnson and Johnson was a little lower. So this wasn't money blindly pouring into anything with a pharmacy label. It was concentrated in a handful of big names.

Next, Walmart. Deutsche Bank upgraded it to buy and raised its price target to one hundred thirty-six dollars, from one hundred thirteen. The analyst, Krisztina Katai, made a case that fits this moment almost perfectly. She wrote, quote, "The current inflationary environment should reinforce W-M-T's value proposition and support accelerated share gains." End quote. Put simply, when prices are rising, more shoppers trade down to Walmart, and Walmart picks up market share. She also pointed to Walmart's faster-growing businesses, like advertising and its online marketplace, which earn better profit margins than selling groceries. Walmart rose about one and a half percent.

Then there were the consumer and housing names. Home Depot rose more than four percent. Sherwin-Williams, the paint maker, rose almost four percent. Nike rose more than five percent. Those three were among the biggest gainers in the Dow, and they did a lot of the work in that five-hundred-point gain. Home Depot and Sherwin-Williams both depend on people fixing up and buying homes, so a drop in Treasury yields, which feeds into mortgage rates, is welcome news for them.

That's the key point about the Dow. It's built very differently from the Nasdaq. It's priced by share price rather than company size, and it has more healthcare, retail, and banking names. So on a day like today, when money leaves chips and goes into drugmakers and retailers, the Dow can jump while the Nasdaq barely moves.

A few other movers from today's session are worth knowing. Marsh McLennan, the insurance broker, rose more than four and a half percent after its earnings topped forecasts. ManpowerGroup, the staffing company, fell almost sixteen percent after its revenue came in below expectations, and it named a new chief executive. Penske Automotive rose almost nine percent after agreeing to be taken private. Rocket Lab fell more than six and a half percent after delaying the first launch of its new Neutron rocket to next year. And the farm chemical maker F-M-C plunged about thirty percent after sharply cutting its forecast for the third quarter.

So here's what to take from the rotation. Investors aren't leaving the stock market. They're moving around inside it. They're trimming the most crowded A-I trades, and buying companies that sell medicine, groceries, and home repair supplies, the things people buy whether the economy is hot or not. Whether that lasts depends on rates, and on whether the A-I selling finally runs out of steam.

Now, a few more reports came out after the close.

J.B. Hunt, the trucking and logistics company, reported a quarter where business was busy but costs were the problem. Revenue jumped twenty percent, to about three-point-seven billion dollars, and that beat forecasts. Earnings were a dollar eighty-two a share, up about three percent from a year ago. But operating income rose only about two percent, because higher costs for drivers, insurance, medical claims, and outside carriers ate into its profit margin. The stock closed up more than one percent in the regular session, then fell about four percent in late trading.

Alcoa, the aluminum maker, rose about two percent in late trading after its adjusted earnings came in well ahead of forecasts, even though revenue fell short.

And Varonis Systems, a data security company, rose more than two percent in late trading after agreeing to be acquired by Proofpoint in an all-cash deal.

Here's what to watch into tomorrow.

First, more bank earnings before the opening bell, from Truist, Travelers, Regions Financial, M-and-T Bank, and Citizens Financial. After today's mixed reaction to Schwab and P-N-C, watch what these banks say about loan growth and deposit costs.

Second, more economic data. Import prices for September come out at eight-thirty Eastern, and industrial production follows at nine-fifteen. After two hot inflation reports in a row, any sign that price pressure is spreading will get a lot of attention.

Third, the chip stocks. The Philadelphia semiconductor index is on a seven-day losing streak. Watch whether today's bounce in CoreWeave, Oracle, and Micron spreads, or fades.

And through all of it, watch the ten-year yield. Today it fell even after a hot inflation report, because investors wanted safety. If yields start climbing again, the pressure on the most heavily borrowed A-I companies could come right back.

That's the wrap for Thursday. A record quarter from Taiwan Semiconductor that still couldn't lift the chip stocks, a rescue rally in CoreWeave after Nvidia stepped in, solid but picky earnings from Schwab and the banks, and a big rotation that sent the Dow up more than five hundred points while the Nasdaq barely moved. We'll be back tomorrow morning with the futures and everything you need before the opening bell. Thanks for listening. I'm Trade and Ticker.