Closing Bell - Closing Bell: Apple's AI Strategy, Wells Fargo's Bank Outlook & The Path of the Bull Market 01/13/25

Episode Date: January 13, 2025

From the open to the close, “Closing Bell” and “Closing Bell: Overtime” have you covered. From what’s driving market moves to how investors are reacting, Scott Wapner, Jon Fortt, Morgan Brennan and Michael Santoli guide listeners through each trading session and bring to you some of the biggest names in business.

All right, guys, thanks so much. Welcome to Closing Bell. I'm Scott Wabner, live from Post 9 here at the New York Stock Exchange. This make or break hour begins with this record-setting rally. Whether it is still intact or now in some serious trouble, thanks to the dramatic move in interest rates, we'll ask our experts over this final stretch, including BlackRock's Rick Reeder. He joins me momentarily right here at Post 9. In the meantime, let's show you the scorecard with 60 to go in regulation. We'll zero in on the NASDAQ. That's where the recent selling has been most pronounced. It's down three quarters of one percent right now off the worst levels of the day, below 20,000. As you

see, we'll watch it closely. NVIDIA and Apple under some pretty good pressure again, too. And speaking of, we've got Morgan Stanley's Apple analyst, Derek Woodring. He's coming up later to weigh in on the latest questions about that stock and iPhone demand as well. It takes us to our talk of the tape today. Has the path of this bull market taken a turn for the worse? Let's ask BlackRock CIO of Global Fixed Income, Rick Reeder. He joins me now at Post 9. It's good to see you again, man.

Thanks for having me. So let's talk about this backup in rates. I just want to know sort of what you think about it as you're sitting here like we all are, watching it and trying to figure out what it means. So, I mean, the first thing you say, man, that employment number on Friday was pretty powerful. And it led to this belief and looking at it, when you look at the confluence of data that's come out, you've got an economy that's operating at a pretty strong level. We've talked about it a bunch of times on your show.

People want to continue to talk about, well, this is it. The economy is bending down. We've got pressure in different parts of it. And if you look at how the service sector did, again, in hiring and you look at services generally in the economy, they're doing well. So, you know, you get asked all the time, like, where do you start buying rates here? And I, you know, I find long end interest rates still not that interesting. I mean, there is a point that you start adding as you get to around 5% on the 10 year, maybe add a little bit, but you've got an economy that the 10-year. Maybe you add a little bit. But you've got an economy that's operating pretty well, and you've got uncertainty around where inflation is.

I mean, the Fed, I mean, we're going to get CPI, PPI this week. You're still operating year-on-year core CPI at 3-plus percent. And core PCE we think is going to run mid-to-high twos for most of the year. Fed's still, you know, in a tough spot. Unless employment starts to soften, you've got rates that aren't going to come down from here of any significant magnitude. All right. So you make the case, it sounds like, first and foremost, that rates are going up for the quote-unquote right reason. Right? You tweeted earlier today about an economy, in your words,

as you just said, is in very healthy shape. So why is the stock market then having a problem with rates if it's for the right reason? So I think there's a near-term dynamic and I think there's an intermediate-term dynamic. So, you know, every time people say, remember it was like if the 10-year gets to 375, it's over 4%. It takes a little bit of digestion. You know, I know we've said it before. This economy is much less interest rate sensitive than ever before. And you look at things like the mag savvy. Look at the big tech stocks.

They don't borrow. In fact, they're net long cash. So, but you need to digest this rate dynamic. My sense is we'll go through this period. Rates will stabilize around these levels. I still think the trend is particularly long rates is to go move a bit higher still. Higher than here. Yeah. So, yeah. I mean, the 30 years, basically 5%, right? We're at, what, 480 on the 10. Are you saying that the 10-year is going to go over 5? So, first of all, I think the momentum of the 10-year is to move higher than that. Second of all, there isn't a lot of rationale for buying 10-year treasuries today.

You get so much yield in the front end of the yield curve. We talked about it on your show for a while. If you think about how 2024 finished, if you're sitting in the front end, you had significantly positive return. The one- to three-year part of the index was plus 4%. The back end was negative 4%. What's changed? You still have a relatively flat yield curve. You've got term premiums, not enough out the yield curve. So I still think you could have, and you've got a lot of issuance that's going to come. So I still think you could move higher in interest rate. Listen, I think once you get to five, it is, whether it's optically a ceiling or not, there is some buying that will come in. So I don't think we're going much higher. But listen,

I think the gravitation is you still move higher around economy that's in good shape and a Fed that can't really go until you get a couple of months of softness in the in the labor numbers. So you so you don't think that the the move higher in yields has made bonds attractive enough to be serious competition for stocks. I mean, because that's one of the conversations that's being had now. It's like, well, what was thought to be a really equity-rich environment, well, now you have competition again from bonds and cash. So it's a question of what bonds. So I love, I mean, to me, and I've said this before,

like people don't realize you can create, and we run portfolios with two-year duration, a very short interest rate exposure, where you're clipping six and a half percent yield. Those bonds I love. And by the way, you don't have to stretch in terms of credit quality. Those are great. So you think about what longer bonds are. And if you said, I've got two assets I can hold that have long duration, I can own equities or I can own bonds. Bonds, even at 5%, you know, I'm thinking like, what is my upside downside? You've got, so you think about mega cap, they're throwing a 30% return on equity. If I'm going to hold those for two years, three years, five years, and they buy back a huge amount of their stock, so they shrink the denominator, their book equity. So I can own that and compound 30%

plus, even with multiples that are not cheap, or I can own long treasuries. Like I think what bonds are today is you own shorter term bonds, you clip a bunch of income, marry that to equity. And I still think tech stocks, growth, equity makes a ton of sense. So, so, you know, I think the 10 year note's an alternative to buying mega cap. I don't think so. I mean, you already had an issue, problem, if you want to go that far with valuation, to some degree, right? I mean, you said it on this program numerous times. Yeah. It made you a little uncomfortable where equity valuations had gone. Yeah.

Did that make you even more uncomfortable where rates are relative to valuation? Now, isn't it even more of a problem? So, I would say, you know, we've shifted our exposure a fair amount. So remember, so being on your show, we talked about buying call options on equities and you could run a long equity position. And you think about when volatility for much of the year was so low, you could buy call options at 9, 10 volatility. So you could run a long position with upside convexity. Now, with multiples where they are, I would argue beginning of the year, there's some tax selling, there's some pressure that you could have volatility around rates, oil prices, etc.

I think it's so we still like being moderately long equities, but now you could buy down. But now we are moved much more to buying downside convexity, buying put spreads against positions, buying some downsides. So if you look at days like Friday, you know, your put options kick in. So it's a different expression than we were running for much of last year. But you're looking to be a little more hedged then now than you were then. Yeah. So a different type of hedge and upside. Whereas before we were long, but we were long and we were convex to the upside because we were long calls. Very different expression today. We're still moderately long. And I think, I still think if

you look at tech and the return on equity, the stock buyback and the amount of cash that's out there, pretty hard to see the equity market not finding its footing and having a decent year, not like last year. So you would be a buyer on the dip of the NASDAQ, for example? 100%. 100%. In fact, one of the ways to create some nice return or nice convexity or optionality is you can sell the down 8%, down 10% to sell put options to have some local protection if we go down 2% to 3%. So yeah, I would love to buy, particularly some of the big cap names. I would love to buy them at cheaper multiples. By the way, I think 20 years from now, people are going to go back and think about,

particularly in tech, and we talk about return on equity, these companies are throwing off. We talk about the stock they buy back, but also something that's pretty incredible. They are near monopolies, or I shouldn't say oligopolies, in businesses that are actually increasing productivity and consumers like. If you go back 20, 30 years and think about the big companies, the people really like those companies, was there pressure to break them up? These companies are doing exceedingly well, and the consumer is benefiting from their success. So I think it's a pretty powerful point in time. Are you optimistic over the balance of the year? Let's say, from election day, there was a lot of optimism, obviously, around deregulation and tax cuts and animal spirits around dealmaking and IPOs and capital markets and the whole thing. And I feel like now we are more predicting volatility over the first part of the year,

more so than maybe we've even experienced now. The administration hasn't even come into office yet. So I think you have to parse the discussion somewhat into, listen, I think there's some animal spirits at play around, whether it's new policy, new administration, deregulation, some incentives to build in the United States. Some of that is through deglobalization that creates a little bit higher inflation. But the animal spirits that I think are playing through around CapEx are real.

I think the dynamic, I also think you'll see inventory build that gets front loaded because people see tariffs out there. It's like, gosh, I'm going to build some inventory. I think the first couple of months of the year, you could see growth that's that's flattered to the positive side. What does that mean for interest rates? Not a great backdrop in terms of where rates go. So is there some gosh, when rates moving up, do I take a little bit a little bit of risk off the table? I think so. But but anyway, if you said to me confidence in the economy, feel very good about that. Do you have confidence in the Fed that they're going to get it right, even as you sit and say that their job is more difficult now?

So I think if I think they should, I think they should. How do I describe this? I think they should pause for a while and I think you sit back and watch the data. You know, we'll hear the commentary. There's a lot of commentary this week. There's a lot of commentary. I believe it is next week as well. We get CPI, we get hear the commentary. There's a lot of commentary this week. There's a lot of commentary, I believe it is next week as well. We get CPI, we get PPI this week. If I were the Federal Reserve, I would just sit back and watch the data for at least a quarter. And so, listen, I don't think the Fed, if you said to me, what is the calculus around markets today? What drives volatility? Clearly, it's oil prices. Clearly, it's what happens in terms of the growth of the economy, the consumer. If you said, where is the volatility around the Fed? I think we put the Fed,

as I said, I think today the Fed easing this year is going to be tricky. Back after the year, you could change. At all? Yeah. I mean, we're only pricing in one cut now. And if you said, with an economy that's operating, so I was looking at this payroll report. We've had our income benchmark was up over 5%, and it's been amazingly stable. So you've got 5% plus income. You could have 5% nominal GDP. If you're the Federal Reserve, are you going to cut rates into that? And by the way, financial conditions, despite some pullback, are pretty enthusiastic today. So listen, I think at least for the next quarter or so, you should assume this is a Fed that's going to be on hold for a while. Back half of the year, could you see growth moderate? You know, some of our models show some growth moderation, industrial production and others, second half of the year. But we got to see it. It's interesting because if, you know,

in September, when the Fed started cutting, we all assumed that this was the beginning of several cuts over the course of 2025. Interest rates have backed up more than 100 basis points since then. And there was a lot of optimism about the prospects for the equity market as a result of all of that. Rates were going to come down. The Fed was going to continue to cut. So can you be as optimistic today about equity returns if the whole calculus is now changed, both on the Fed path and the course of interest rates in the near term? In other words, how can you possibly be, as an investor, as bullish as you were back then, given the changing dynamic and the goalposts seemed like this, have now like this. So I think that's fair.

And listen, I think the interest rate tool, first of all, I think people overestimate, grossly overestimate the interest rate tool when these companies, the big companies that drive the stock market don't really borrow anymore. In fact, not don't borrow anymore, but they're net long cash. So I think, again, I think that gets overstated. Part of what we've talked about, I like being moderately long convexity to the downside. I do think that your window with multiples here is a bit tighter. I think that's totally fair.

But you've got to marry the interest rate to, I mean, think about what earnings are, what companies are. They're cash flow. They're operating leverage machines off the economy. If the economy is operating at a good level and if we're going to run 5% nominal GDP or close to that, not that hard to get 13 to 15% earnings growth or higher, particularly if you're in the right businesses that are levered to growth. So there's a balance. So where do you come out? You come out with, gosh, equity markets should do a 15% return this year. You think that? 100%. And by the way, you think about particularly big tech, we talk about ROE being those numbers.

Not a big hurdle if you're increasing book value that much. It's not that hard to get 15%. Wow. I mean, look, my commanders proved last night on the road with a rookie quarterback that you can doink. You can get the doink and you can still win. So even if the goalposts are more narrow, if you have to doink it through, as long as it goes through, it goes through. You sweat a little bit along the way. You do. But you still have to have the fundamentals of what gets you to that point. You have to have the earnings growth that is anticipated. It's pretty optimistic, don't you think? I don't know. So by the way,

we've talked about a bunch on the show. If you look at a bunch of businesses, small caps or otherwise, where you're not utilizing data effectively or you don't have the growth paradigm in place that anything around AI technology, medical technology has, yeah, those businesses are tougher. But, gosh, I just don't think it's that great a challenge for the companies. You know, I mentioned it was a consumer electronics show last week. I was blown away. I mean, two days of walking around.

Every company, every company's tagline is, this is what we're doing. No matter what it was, tractors, refrigerators, no matter what it was. AI, what do you think about what does that mean? The CapEx that goes into it, the R&D that goes into it. Pretty hard not to see a dynamic where those companiesEx that goes into it, the R&D that goes into it, pretty hard not to see a dynamic where there's companies that are attached to it, cloud, semis, et cetera, software that don't have the ability to actually grow their top line. But you don't, you don't, that said, you don't like the broadening story and you never really did. No, no, I, no, I like, I like being around.

Listen, I think there's, you know, the way I think about the broad portfolios. In fixed income, I believe in diversification. I believe, you know, you're not really in bonds. You're not playing for the upside. You're just trying to clip the coupon. In equities, I believe in being convex to the upside. I believe in you want to own and you want to be concentrated in the areas that are going to grow. And those areas are going to grow, maybe in a more profound way than anything

we've ever seen. I mean, look at the service economy, the service sector. And by the way, it's not just tech. I mean, you look at travel, leisure, like there is a service economy is in good shape. I just don't know why I have to take the risk in other parts that just don't have the catalyst for growth. That was a quick 15 minutes, man. I appreciate your time very much. I think we covered it all. Rick Reeder, thanks so much. We'll see you again soon. Mr. Reeder here back at Post 9. Let's send it to Christina Partsinovelis now for a look at NVIDIA. That stock is falling in today's session, as we said at the very outset today, Christina.

Well, you have the company's powerhouse customers. We're talking Microsoft, AWS, Google, and Meta. They're reportedly hitting some snags with NVIDIA's latest Blackwell chips. They're dealing with overheating issues and glitches, and the information is reporting some might actually scale back their orders. Not great timing when these cloud giants are also racing to build their own AI supercomputers. HSBC just weighed in about a warning about supply challenges. They're saying these issues could drag on through early 2026, and they're skeptical about NVIDIA keeping up its impressive streak of beating revenue forecasts by $2 billion each quarter,

which brings up the question of sustainability. And then there's another twist. Remember those new Biden administration rules about exporting AI chips? Well, analysts at Wells Fargo, Bank of America, Wedbush, they all think it might not actually stick. And here's why. There's an unusually long 120-day comment period,

which means if Trump, once his administration goes forward, they could potentially revise these restrictions. Right now, about 15% of NVIDIA's total revenue is exposed to China, but that portion has declined just over the last few quarters. Yes, it's a little bit higher compared to Q2,

but they have said it's declining. So between those technical hiccups, the supply chain concerns, and regulatory uncertainty, NVIDIA has definitely got quite a few balls in the air right now. And that's why the stock is down 2.5%. All right. Thank you for that, Christina Partsinovalos. Appreciate you. Pippa Stevens is here with a look at the big move in oil today. Pippa, I guess no surprise that energy is the best performing sector out of the S&P 500. Yes, Scott, and that comes after WTI jumped to its highest price since August

and is now approaching the $80 per barrel level on bets that the latest round of sanctions imposed by the U.S. on Russian oil could start to hit supply in the market. Now, Goldman Sachs estimates that the targeted vessels transported 1.7 million barrels per day of oil in 2024, which is about 25 percent of Russia's exports. The firm said that if Russian production falls below 1 million barrels per day on a sustained basis and if Iranian supplies also decline, that could push Brent to top $90 per barrel. Now, energy is the top sector on the heels of oil's jump with the XOP, which tracks the drillers pacing for its 13th positive session in the last 14 days. Scott?

All right, Pippa, thank you. Pippa Stevens, we are also tracking big movers right now in the retail space. Courtney Reagan here with that. Hey, Court. Hey, Scott. So lots of movers today from holiday quarter pre-announcements to major retail conferences running concurrently, Macy's shares their lower on its pre-announced results of the stores that it's keeping open. Along with digital, Macy's Inc. saw comparable sales growth, but the full portfolio did fall short of expectations and comped negative. Plus, you've got three quarters into a three-year reinvention, and the retailer is battling another activist. Barrington Capital suggests Macy's separate the better

performing Bloomingdale's and Blue Mercury businesses. So at the NRF Big Show, with all three of those CEOs of those nameplates on stage, I asked Macy's CEO Tony Spring for the first time if the activists are right. Should Bloomingdale's and Blue Mercury be sold to recognize the value? We're not getting the recognition for the value of these two brands. We continue to believe that there are synergies that are leveraged between the three brands, between warehousing, legal, finance, back-end operations, joint brand negotiation. There's just so much opportunity for us to kind of leverage the scale of the portfolio. Separately, Abercrombie shares getting hit pretty hard. Citi calls the reaction overblown down here about 17 percent. A&F raised its fourth quarter sales guidance range,

but maintained margins and didn't increase its earnings forecast. At the ICR conference today, CEO Fran Horowitz was upbeat. You're going to hear more from her in the next hour on overtime. Scott, back over to you. All right, Court, thanks so much. This is Courtney Reagan. We're just getting started here. Up next, top bank analyst Mike Mayo is back with us. He'll tell us why he is forecasting now a, quote, new era for U.S. banks. He'll tell us the names that he is betting on most this year after the break. All right. Welcome back. Bank earnings begin later this week with many stocks in that space coming off a very strong year. The question now, can they keep that momentum going as interest rates rise? Let's ask Mike Mayo. He is Wells Fargo Securities head of large cap bank research.

Welcome back. Happy New Year. It's good to see you. You say that the curtain is rising on a, quote, new era for U.S. banks. In what sense? Welcome to the new era for U.S. banks. We're talking about more free markets, more revenues, more intermediation, more letting banks be banks. The shackles are being taken off, so less regulatory complexity, less focus on just expenses, less marginalization of banks.

Do you know, Scott, that loan growth for the last couple of years has been about the worst in the last century? Loan growth on an inflation-adjusted basis has been negative the last couple of years, and a lot of thisjusted basis has been negative the last couple years, and a lot of this risk-taking has been done by outside the banking industry. Banks are going to be moving more front and center and letting them act the way they're supposed to. Okay, so you're obviously talking about deregulation and expectations of that, along with animal spirits and sort of everything else that's being figured is going to happen? Well, I want to change the word deregulation to re-regulation. But we're not talking about going back before the days of before the global financial crisis,

where it was a wild west and you had ridiculous leverage. And I went on your show back after all the catastrophes that happened. We're just talking about not sacrificing one iota of safety and soundness, but having said that, rid as much red tape as humanly possible. And if you reduce the complexity, you have more predictability about when banks want to price their goods, the hurdle rate can be lower, they could do more business. So the banks, yes, they'll benefit, but so will the clients. And frankly, the regulators could save a lot of money. You don't think that there's a prospect of banks attempting to make riskier loans if, as you say, the shackles are being taken off as they watch the shadow banking community

make loans and get returns like they would love to have but can't make because of the current environment? For the four years before the global financial crisis, bank loans grew, you know, not quite double nominal GDP. For the last four years, bank loans have only grown three-fourths the pace of nominal GDP. So when I worked at the Fed starting back in the late 80s, the adage was, if it grows like a weed, maybe it's a weed. The weeds are not growing in the banking industry.

The banking industry has been de-risked for the last 15 years. And by the way, if you don't believe me, believe the $7 trillion investment grade bond market that says large bank bonds are about the same risk as regular corporates, whereas the stock market, you're giving a 40% discount. To me, that says opportunity. Okay. Are they going to return more capital to shareholders more freely? I think the way to frame this is that banks will have more freedom to allocate the capital the way they seem most effective. So that means, yes, probably more. I'm talking about, you know what I'm talking about, dividends, buybacks, and a lot of the things that they haven't been able to do because they really weren't allowed to do it. Yeah, more dividends, more buybacks, but also more capacity to make

loans that they otherwise might not have made. If you know what your, look, you don't, banks don't know their cost of goods sold until after the Fed stress test. That's not the way to run a business. Like when you go, if you ran a restaurant, you wouldn't know what to charge for your steak. So it's the same concept here at banks. If they know their cost of capital, and by the way, if the cost of delivering that product can be reduced, then the hurdle rate lowers and they can make more loans and they can be more intermediaries, the way banking is intended to be done, as opposed to being marginalized as much as I've ever seen in my 40 years. What about higher rates?

You would, on the surface, think that they're good for lending, at least to some degree, but maybe it's counterintuitive and they're not as good. Look, I think the biggest risk to my bull thesis on banks, and I am bullish on banks. I'm a buyer of the sector. You're always a buyer of the sector. No, I'm not. I was 17 years negative from 99 to 2016. I was negative. On the whole sector? On the whole sector. Go back. I was on your show during the global financial crisis. Anyway, I was, and people called me a perma bear. Okay. So I'm not, but right now my level of bullishness is up

and I'd say, look, you have inflection. By the way, short, I've talked about a multi-year investment thesis for banks that you haven't seen for two decades. At the same time, you're likely to see inflection short term in revenues, operating leverage, earnings, and you have this regulatory change taking place. All right. I look at the performance of a lot of these stocks, as I said in the intro, that are already coming off great years. So how much of what you've just talked about has already been anticipated and is reflected in the share prices of the JP Morgans and the Goldman Sachs, which have had tremendous runs? My top three recommendations, it's definitely not reflected. And that would be Citigroup,

Citigroup and Citigroup. Citigroup is by far, you know, J.P. Morgan was my top pick a couple years ago. And then I shifted J.P. Morgan. I think the earnings will be good, by the way, this coming Wednesday, J.P. Morgan. But Citigroup, I think the stock can double in the next three years. I say it's a new era for the banking industry. It's also a new era for Citigroup. Because of what Jane Frazier has done to try and remake the bank. And she has remade. So to speak. The curtain's just rising on Citigroup's changes. There's a disconnect

between the changes Citi has made and the financial benefits they're likely to see. They're going from 50 years of this global matrix management structure, ridiculous, to five lines of business, payments, banking, markets, consumer, and wealth. And that's only been in place for three quarters now, not even a whole year. There's a CEO in charge of each one of those lines of business, payments, banking, markets, consumer, and wealth. And that's only been in place for three quarters now, not even a whole year. There's a CEO in charge of each one of those lines of business. There's transparency. There's a profit and loss statement. There's returns and there's targets. And it's exactly what Procter & Gamble did and led them to become the best performing stock in the consumer staple space. So in a way, Citigroup is the Procter & Gamble, the banking industry, and that's per our analyst at my firm, Chris Carey. What about capital markets

benefits for the players that would, you know, obviously stand to make the most money within that new universe, if you want to put it that way? Well, look, two words. Game on. It's game on for capital markets. But it's not game on for everybody equally. No, definitely not. And you see some of these capital market stocks, and they've run up, and it's a fair question. How much is priced in? But I think an inexpensive way to play capital markets

would be, once again, through Citigroup. They're a top five global capital markets player, so you don't have to go for the ones that have already taken off through Citigroup. They're a top five global capital markets player, so you don't have to go for the ones that have already taken off. Citigroup stock. Citigroup stock was up almost 40% last year. Oh, you know, the stock was almost $500 when I put the sell on back in 2008. Man, you say, I mean, just for those who don't remember,

this was like your most hated name ever, and now it's your most loved. Yes. Two of the ten chapters of my book, Exile on Wall Street, talk about how bad Citigroup is. Right now, this is by far the stock that I love the most because they're going from worst in class back toward normal. What about, before I let you go, the super regionals? You have overweight on State Street. I mean, I think there are questions, again, about those banks, at least in some respects, because of what interest rates have done. Can you be optimistic about regional banks in a still elevated interest rate environment? The bond market is talking to Washington, D.C.

They're saying, be careful because of bond yields. Ten year yields go, say, past five or five and a half percent. You know, this thesis has a wrinkle in it, Not Citigroup, but the general thesis does. So as long as Washington, D.C. listens to the bond market and doesn't have deficits or inflation that's too high, then the regional banks should do quite well, too. And the banks like PNC and U.S. Bancorp and Fifth Third, Bank of America, don't forget, and State Street, not quite a regional bank, but that would also be in my buying list. So I have a nice shopping list here for banks right now.

But you say if. I mean, this is if Washington listens. The bond market can scream loudly for a while and Washington may not be paying attention for a while. Well, Washington, D.C. may be forced to pay attention. If the bond yields go too far past 5 percent, there'll be enough disruption that something will have to give. We'll leave it there. All right, Mike, I appreciate you.

Thanks. That's Mike Mayo, Wells Fargo Securities. We're getting some news out of Starbucks. Pippa Stevens has that for us. Hi, Pippa. Hey, Scott. Well, Starbucks is rolling out a new code of conduct this month that will require cafe users to be paying customers. That does mark a shift of the prior policy in place for seven years that allowed the public to stay in cafes or use the bathroom regardless of whether they bought anything.

Now, this, of course, follows Brian Nickel taking over as CEO on September 9th of last year. Shares up just shy here of 1%. Scott? All right, Pippa. Thank you. Pippa Stevens up next. Apple shares falling on some weak sales data. Star in December as questions continue to mount over iPhone demand. Let's bring in top Apple analyst Eric Woodring of Morgan Stanley. It's good to see you. Welcome back. Thanks for having me. Happy New Year. So do you as well. Thank you.

What are we to make of these continued concerns about demand, whether it's the influential analyst over in China last week who talks about shipments being down? I have another report today. iPhone sales dropped 5 percent in the holiday quarter on AI disappointment. You're the guy on this story. What do you make of it? Sure. Sure. I frankly think both of those both of those reports are directionally accurate in that we have iPhone

units down year over year, roughly 76 million iPhone units in the December quarter as well. And something that I keep going back to is that right now the iPhone 16 is still largely only available in English-speaking countries, which means the majority of Apple's customers do not necessarily have access to what would be viewed as this key upgrade factor in their native language. Why would you upgrade to an iPhone if you don't actually have those capabilities? One reason would be to future-proof your iPhone. But what we're increasingly seeing is that is not necessarily taking place in international markets primarily, especially in China, where there is a lot of competition. So I directionally agree with a lot of the comments that are being made

about the December quarter. And what it's incumbent upon Apple to do, therefore, is make sure you're getting these features out, not necessarily quicker, although that would be ideal, but make sure that they're complete, make sure that they're enticing to the consumer, make sure the consumer understands what they're buying and how to buy it. That's a bit of a tougher sale, right, than selling a device where there's a tangible hardware upgrade that you can look, see, and feel differently in stores. So it is still a tough smartphone market. Competition is still intense. But really, to me, this is all about Apple intelligence still being kind of layered into the install base with really most of that layering in to come into the future. But this is a good part of why you remain bullish on the stock, why you have it as your top pick, why it remains overweight, why you have 273 on it, is because you're bullish on the eventual upgrade cycle.

I mean, at what point, Eric, do you sit back and say, you know what, I've seen enough? It's like election night, right? You see the data come in. You're like, well, I thought it was going to happen. Now you see the exit polling and you're like, you know what, I've seen enough. This is not going to be what I once thought it was going to be. Correct. Correct. So there's two factors here. One is, you know, the iPhone cycle that we've pointed to, we think is predominantly starting with the iPhone 17. Again, that launches September of 2025. That is when we believe the majority of Apple's users

will both have exposure to Apple intelligence and have exposure to key features, right? We've done survey work that would show Apple users want chat GPT integration and an upgraded Siri. You have chat GPT integration here in the U.S. It works quite well, but you don't have the upgraded Siri that comes in April. And so on a very short-term basis, you know, I think what we're seeing is a bit of fundamentals mattering. At the end of last year, Apple was up 2% for six consecutive weeks as even we were cutting our iPhone numbers in early December. Now the market is paying more attention to fundamentals, frankly, rightfully so. So I think this is a bit of a healthy correction.

You're also obviously seeing the 10-year having an impact, I think, on these growth multiples. So the iPhone 17 is still to us the cycle where Apple intelligence really starts to shine through. The iPhone 16 just doesn't have enough exposure yet to Apple intelligence as a key upgrade device. The other aspect here are the non iPhone related parts of the Apple story. Gross margins are extremely strong. We actually think in some cases, product gross margins could be underappreciated

as we go into a commodities down cycle. And then the services business, right? We wrote in the middle of December about services outperforming in the December quarter. App Store remained strong. Digital advertising remained strong. So there are factors within the Apple story that we believe remain very attractive. But to be fair, to get to that $273 price target that you alluded to that we have right now, which is based on our fiscal 26 estimates,

you need the iPhone, and really it becomes iPhone 17. So what we're watching for in the coming months, one will be, is there any inflection in markets where Apple intelligence is increasingly available, meaning the features are being built out or becoming newly available? And then the other part of what we're looking for is really as we look into the future markets like China, is there clear visibility into Apple

intelligence being available before the iPhone 17 launches? I think it's going to be tough, frankly, to get to my forecast in fiscal year 26 if Apple intelligence is not available in China. So I am harping a bit on China here. Obviously, it's the second largest market that Apple has. It's critical. Sure. Let me ask you, lastly, I guess what would be a more existential issue, a perceived lack of innovation. I ask you about it because it comes on the heels of what Mark Zuckerberg was talking about with Joe Rogan on the podcast. I want you to listen to what he said. I'm sure you've seen it, but remind our viewers if we could as we watch this. Let's watch this and I'll have you react on the other side on the idea that Apple hasn't done anything in 20 years,

according to Zuckerberg. Listen. They have used that platform to put in place a lot of rules that I think feel arbitrary and feel like, you know, they haven't really invented anything great in a while. And it's like Steve Jobs invented the iPhone and now they're just kind of sitting on it 20 years later. What do you make of what he said? Sure. I think innovation looks very different today for Apple than it did back when Steve Jobs was at the helm, right? Of course, Steve Jobs created the iPhone. It was completely innovative, new to the market. And I agree that Tim Cook has largely taken the platform that Steve Jobs created and pushed it forward. But to say that there

hasn't been innovation to me is just a little bit misguided in the fact that Apple has effectively become a semiconductor company without actually being a true semiconductor company, right? They design and they engineer all of their application processors. I think that's fairly innovative. They're increasingly doing more on the services side. It's a $100 billion annual run rate business. Back when I started my career, it was less than a $40 billion annual run rate business. So innovation just looks different today. I can agree that when it comes to new products, nothing has really displaced the iPhone. The iPhone is 52% of revenue. The iPhone matters just as much today as it did 10 years ago, as it did 15 years ago.

But at the end of the day, I still believe this company is innovative and innovation maybe just looks a little different and takes a little bit more time. Of course, it's harder to move the needle when you're a company with $400 billion of revenue. And Apple is learning that. But I don't believe that the innovation story is over for this company. All right. We'll leave it there. I appreciate you as always. Thank you for being with us, Eric. We'll talk to you soon. Thanks so much, Scott. All right. That's Eric Woodring of Morgan Stanley. Up next, we track the biggest movers into the close today. Christina Partsinevalos is standing by with that. Hi, Christina. Hi. Well, coming up, a major vaccine maker's billion-dollar warning. And the battle for an American steel giant definitely heats up.

Those stories are next. All right, we're less than 15 from the closing bell. Back to Christina now for the stocks she's watching. Tell us what you see now. Shares of Moderna sliding right now after the vaccine maker slashed its 2025 sales guidance by a billion dollars. Moderna CFO Jamie Mock tells CNBC increasing competition in the COVID market as well as falling vaccination rates did play a role. Moderna expecting revenue to ramp up in the later half of the year off the back of its new COVID shots and RSV vaccine for seniors. Shares down a whopping 17 percent. And shares of U.S. steel jumping as sources tell. CNBC's David Faber, Cleveland Cliffs and Nucor are preparing for a potential takeover bid of the steelmaker

after Biden blocked Japan's Nippon Steel from buying the firm. Cleveland Cliffs CEO reaffirming his interest in buying U.S. steel at a news conference today, but declining to give any details. Shares of United Steel up 6 percent. All right. Good stuff. Thank you, Christina Partsenevlos. Still ahead, the market zone. We'll talk about the shares of Honeywell today. All right, coming up next, we'll set you up for KB Home results out in OT. Market Zone is next. All right, we're now at the closing bell, Market Zone.

Sima Modi standing by with the latest on reports of breakup pressure mounting on one major industrial company, plus Diana Olick setting us up for KB. Those earnings coming up in OT. Jonathan Krinsky breaking down the crucial levels that he is watching within these markets. But Seema, we turn to you first on the analyst pressure on Honeywell. Yeah, Scott, Elliott Management is said to be pressuring Honeywell to speed up separation of its business, Aerospace, from automation. That's according to a report.

The activist investor disclosing a massive $5 billion stake in Honeywell late last year, calling on the industrial to split up its business as Honeywell shares have underperformed its peers. Plus, other spinoffs like GE-Vernova, which separated from parent GE, have performed exceptionally well, a sign that the market wants simplified stories and pure asset plays. Honeywell's CEO back in December did say the company is reviewing its portfolio and expect an update during its earnings call in a few weeks. Analysts say aerospace alone, Scott,

could be worth north of $90 billion. Wow. Okay, Seema, thank you for that. That's Seema Modi to Diana Olick now with what to look out for with KB. Well, Scott, KB Home beat analysts' estimates in Q3 revenue, but missed significantly on guidance. And at the time, KB CEO Jeff Metzger noticed in that release that June and July were tough, but as rates moderated in August, net orders improved. He said they were encouraged by strengthening demand

and the ongoing positive trend they were experiencing so far in their 2024 fourth quarter, which we're about to get. But that was September. And the cyclical low in mortgage rates was 6.11 percent on the 30-year fixed. As you can see, rates shot up right after that to over 7 percent. So the rest of the quarter going to be tough, rate-wise at least. We saw that in in Lenar's earnings as well. KB also had to lower prices to keep buyers coming in, and that pressured margins. Some argue that buyers are now getting used to a, quote, new normal in rates. We will see if that's true in a few minutes, Scott. We will, and we will see you shortly, Diana. Thank you. That's Diana Ulick to Jonathan Krinsky now. Put out a note today, say we could get a short-term bounce. It is worth noting that we are at least bouncing into the close today, certainly off the lowest levels. Dow's up 370.

S&P's gone green. More specifically, what are you looking for? Hey, Scott. So, yeah, we were looking at a level in the S&P 500 where it gapped up from at the election back in November. That was 5783. So we had that unfilled gap. We finally filled it today. We're pretty oversold. We know about internal breadth of the market. Only about 17% of the S&P 500 is above its 50-day moving average. That's typically a good reading to get a little bit of oversold countertrend rally.

I think the issue we have is when we look beyond that rally, we don't think the pullback on the S&P 500 itself is consistent with that deterioration in breadth. Typically, that sort of breadth washout, in fact, the last time we saw that was in October of 2023, you typically see at least a 10% drawdown in the S&P 500. So we think, you know, something around the 200-day moving average later this quarter certainly makes sense to us. 5572 is the number you have in mind. Would you be a buyer on that? I mean, it depends how we get there. You know, when you get these quick flushes like we saw in August, those tend to be better buying opportunities as opposed to if you see a slow, drawn-out drip like we've actually seen in a lot of the other parts of the market that have already succumbed to the selling.

So it really depends how we get there. Our sense initially, that initial test, you do want to be a buyer typically, but we'll have to wait and see. But I do think we see that later this year. What are you thinking about when you look at tech, which has been wrecked a bit as rates have crept higher? Yeah, I mean, it's funny. Tech, there's really three sectors that have not seen the selling to the same extent across the market. That's tech, communication services, and consumer discretionary. You know, part of the reason those are not as impacted by higher rates as some of the more cyclically sensitive sectors of the market.

So I think those are the parts that still probably do have to come down, and that's ultimately what brings the S&P lower. So I think it's hard to see the S&P test in two or three weeks. Jonathan, we'll talk to you soon. Thanks so much. Doesn't it for us and OT.