Closing Bell - Closing Bell: Are the Bulls Too Bullish? 01/17/24

Episode Date: January 17, 2024

Has investor sentiment gotten too bullish? Josh Brown of Ritholtz Wealth Management, CNBC’s Steve Liesman and New York Life Investment’s Lauren Goodwin discuss. Plus, Morgan Stanley’s Chris Toomey makes the case for caution and breaks down what he is expecting from the Fed this year. And, star VC investor Rick Heitzmann is giving his forecast for the magnificent 7. 

Welcome to Closing Bell. I'm Scott Wapner, live from Post 9 here at the New York Stock Exchange. This make or break hour begins with rates, the Fed, and your money. And on that note, New York Fed President John Williams speaking right now. About to anyway. See the room. That's where he's going to be. Our Steve Leisman is going to bring you the headlines as they happen. Perfect timing, too, as questions about the road ahead for the Fed are definitely impacting the markets today. Let's take a look at your scorecard with 60 minutes to go in regulation. A strong retail sales report this morning sent yields climbing and that immediately put pressure on stocks today. The 10-year note

yield rising to 4.11. Take a look at it there. It's just below that now, 4.10. Well, growth and tech, obviously the place is most impacted by that today. NASDAQ, one of the worst of the majors, led lower by Apple, Tesla, and Microsoft. You see them all there. Look at Tesla, down two and a third percent. Not much better for Goldman and Caterpillar today. They're among the biggest drags on the Dow. Take a look at both of those stocks,

giving some back, and that's a drag. Takes us to our talk of the tape, whether investor sentiment has just gotten too bullish. Let's ask Josh Brown. He's Ritholtz Wealth Management CEO and a CNBC contributor. He is with me here at Post 9. It's good to see you. Welcome back. You think that's the case? We got all bulled up because the way we ended 23, we came in here and thought, hey, this could be smooth sailing and maybe not so much. Let me answer your question with a question. Do you think the market goes up because people get bulled up or do people get bulled up because the market went up? A little bit of the latter.

Okay. I agree with you. Why wouldn't investors be bulled up? Did you see the way that market ended last year? It literally ended like the 4th of July. It was picnics and watermelon and then fireworks. And I don't know what, if you were an investor, what more you could have wanted to see. The VIX was just vol smashed almost to zero

and everything went up. Of course, people got bulled up. And that's quite all right. They should. I'd actually think there'd be something wrong if we had an S&P 500 finish the year up 25 percent, NASDAQ up 50 50%, and nobody was bullish. That would be problematic. Yeah, but it's one thing to get all bulled up on July 4th. It's another thing to be all bulled up in March because you're waiting for the fireworks that may not go off yet because they're not supposed to go off yet. It's kind of what Jamie Dimon was talking about today out in Davos.

I want you to listen to what he said about this idea. I always listen to Jamie. Market goes up and everybody gets bullish. Well, maybe that's a little too much. Listen. I think it's a mistake to assume that everything's hunky-dory. And when stock markets are up, it's kind of like this little drug we all feel. Like, it's just great. But remember, we've had so much fiscal and monetary stimulation, so I'm a little more on the cautious side, that we are facing a lot of things in 2024 or 2025.

I mean, maybe we're coming to grips with what we're facing. Maybe rates aren't going to be straight down. Inflation is not going to be straight down. Growth is going to be a little lumpy. So I actually prefer my risk manager to speak the way that he does. I would be terrified if he were on the air saying, you know, guns blazing, let's have another breakout year like we had last year. That's not what he's supposed to be doing, okay? This is the head of the largest deposit institution in the United States.

It's a bulletproof bank. It should be a bulletproof bank. And the reason it is, is because Jamie Dimon is a risk manager first and foremost. That's his job. I'm glad that he's speaking that way. I hope most people are. That being said, what we're experiencing right now is exactly what you should expect after a rally as blisteringly hot as the one that we just had. So I want to walk you through a

couple of things that we're looking at, and this is what we're talking to clients about. The first is the correlation between the VIX and the 10-year is at its highest level since 2018, back when the scariest thing in our lives was the trade war. Remember the trade war? That was fun. Okay. Anyway, the low point for this correlation was actually March of 2020, when it became apparent rates were going really low and not moving for a long time. Now we're back at a high of almost a six year high in that correlation. All that's telling us is that markets

are getting a little bit shakier, but for the right reason. If you're seeing that 10 year note yield climb, it tells you that we are further away from the Fed looking to take policy down and stocks don't love that. And that's perfectly fine. If we were selling off for any other reason, I would be singing a different tune. But that's really all that's changed. Nothing else has changed. We're back in an earnings season. So far, so good. The banks all had great things to say. We've got a lot further to go, but we are not experiencing a sell off based on a risk to

corporate profits. So it could happen. It's just not the story right now. What about the idea that we may be too bulled up on sentiment? We may be too bulled up. That's curing itself. It's curing the idea of all these interest rate cuts and maybe most of all that we're looking past a valuation that is stretched well beyond the historical average for all three of the majors. And that's what I spot the motor in yesterday. The so-called dean of valuation, said. The S&P is overvalued in his mind by 9 to 10 percent. But that has nothing to do with what's going on this year. And here's my proof. The worst performing sector, small caps, are the lowest valuation. So that is not what the issue is. Small caps are now down 6 percent on the year. They finished the fourth quarter with a 14% rally. Almost all of it happened in the last six weeks of the year. It's a little bit of a give

back. I want to go back to the S&P though. This is important. We have an average daily advanced decline of 44% in the S&P, which means on the up days, almost half of all stocks are rising. That's pretty good. Toward the end of last year, it was 56%. That's pretty hot. That's maybe too hot. So to your point, there was a lot of sentiment froth. People were very bowled up. All the surveys came out at the end of the year. People got really excited. We give a little bit back. It's perfectly normal. Happens all the time. Doesn't mean the top is in. Maybe we're giving a little bit back on our expectations as well of what the Fed's going to do. Our CNBC senior economics correspondent, Steve Leisman, joins us on that note because we did see the expectations of a March cut come down

after that stronger than expected retail report. And now, of course, we're waiting on Williams to make his remarks. We'll have to see what he says. Yeah, I'm not expecting Williams here to make particular remarks on monitoring the wires, Scott, not seeing anything at this time. But I really like the way Josh has approached this. It's very calm. It's very cool. It's very collected. And I think that's where the market is right now. Scott, I want to just begin talking about the change in expectations for the March rate cut. Before Powell spoke in December, we were around 45, 46 percent probability of a rate cut. We went all the way up that number there in the middle.

It was probably higher, but just as an example of where we were this morning, 78 percent, 76 percent. And now we're back down to where we were. So a lot of the froth and some of that froth, obviously, Scott, propelled the market. It has come out. Also, now take a look at the January 2025 outlook for the total rate cuts this year. Again, we were very optimistic, got a little bit more optimistic, and now we're back to where we were. So yeah, about a cut, 25 base point cut, it's come out of the market this morning. And I'm thinking, Scott, that if you think March, the market thinks March, I'm more in the May camp right now. Yeah, it's interesting. Let's bring in Lauren Goodwin here. She's with us as well, New York Life Investments chief economist and market strategist.

Is that what you think? And Steve, you stay with us, too. Is that what you think has gone on here? There's just been a little too much. Hey, it's all hunky dory, as Diamond says, or David Solomon to our gang out in Davos today, too. I think it's hard. He says, hard for me to see the market's view of seven cuts, you know, this year. I do think there's reasonable possibility of some, but it's really going to be dependent on what the data says. But seven?

Yeah, I think that's about right. If the Fed is right and they're able to engineer a soft landing, then three is probably about right. And if the recession camp, which I happen to be in, is right, then you're probably going to see more than seven as the Fed tries to catch up with slowing growth. I think what the market's been grappling with, though, since the December meeting is that the Fed spent two years talking about inflation, inflation, inflation, data, data, data. And now we're looking at data that's, if anything, firming a little bit. And we're talking about cutting, right? The paradigm has changed. And I think that's appropriate. But it means that the amount of information that the

Fed is taking in is a little bit less straightforward for investors. That's why we're seeing the changes in expectations that we've seen in the past couple of weeks. And, you know, Steve, it does raise the issue of what could be a growing issue for the Fed of you see the strong retail report and rates move up and you're like, well, the economy is still pretty strong. But then some of the other data has been a little squirrely. So do you really believe the strong data? What does the Fed really believe? Do they have a risk of overstaying their welcome with policy where it is now

and not cutting now because they think the economy is stronger than it actually is? I'm building a conundrum case. You've done a good job of building it, and I just can't see my way out of it, Scott. But I'll tell you what I think the Fed is going to do. Let me start by showing you that I don't know. I'm sorry if I don't have that chart available. But take a look at the fear of the Twin Peaks, Scott. We've talked about this. Let's go back to the 70s. Look at the twin peaks. Inflation was high. It fell. Fed cut rates and then rates and then inflation came back. We have one peak right now and the Fed does not want that second peak to happen. So it moves slowly. I think the way out of the conundrum is

as follows. A cut in May, assuming the data is there for that rate cut, which is, you know, continued declines in inflation down towards a low level, down towards the 2% target. And then I think Powell pulls the old every other meeting trick out of his bag right there. And he goes slowly in terms of cutting rates. The advantage of this is you get your second cut in July, which is, I think, far enough before the election for people to avoid that possible accusation that maybe the election is influencing them. And then that third cut, Scott, would come after the election, actually the day after the election.

And the Fed could take an option on a fourth cut if indeed the economy needs it. So this would be a measured approach. Cut. Let's see how the economy reacts. Cut. Let's see how the economy needs it. So this would be a measured approach. Cut, let's see how the economy reacts. Cut, let's see how the economy reacts, giving it an extra meeting in between. And I think the market would be fine with that. We do have to have a discussion about where ultimately the Fed is going. If growth is going to remain strong

and inflation a bit above target, you could have an elevated funds rate for quite some time. But it doesn't have to be this elevated the way it is right now. All right. That sounds good. The Leisman timeline. That makes that makes sense to me. Steve, thank you. And if Williams does say anything earth shattering, you know where to find us and we'll look for you there. That's Steve Leisman, our senior economics correspondent. Do you care? Do you care how many times the Fed might cut this year? I mean, the market, which what's interesting to me is as rates have ticked up and the expectations of March have come down, there has been a flight back to quality.

Russell's down like six percent to start the year. It's way worse than the three other areas. Mega caps have found some stability when everybody was talking about broadening, right? Yeah. I can't think of a single economic sector. There's 11 sector spiders. I can't think of a single one other than property owners, the real estate sector. I can't think of one other area in the economy where anyone is saying what we really need is to start cutting interest rates. Nobody's asking for it.

It's not a problem. We don't have massive defaults anywhere. Even in energy, they seem to be acting responsibly. This is just not a situation where if we get three rate cuts, it's devastating. But if we get five, everyone's going to want to buy stocks. It's just not where we are. We just do not have the same level of sensitivity to short-term rates in the S&P 500 earnings quilt that maybe we had had in the 70s or in the 80s. It's just a different market. So if it's going to be a little more uncertain, though, is that why you're seeing

a flight back to quality? I think it's as simple as you got retail spending just going absolutely bonkers still. And again, this gets back to what I was saying earlier. We thought the consumer would be much more sensitive to higher short-term rates than they actually ended up being. They're just not. They aren't, especially at the high end where their bank accounts are now oozing with yield. People are spending like there's no tomorrow. We're into like the 12th month of this. So it's really hard for me to envision a scenario where all of a sudden rate cuts are like the thing that's great for stocks. What's good for stocks are the following two things. This is my premise. Lauren might disagree, but right now, this is my

premise. The two things that matter most, falling inflation, check. Rising corporate profits, check. If either of those two things are in peril, and they might be, I'll change my mind. That's the current state of affairs. Talk me out of it. Talk me out of it. So maybe you could. Do you want to talk him out of it or agree?

I'll do my best to talk you out of it. I agree. I'll I'll do my best to talk you out of it. I agree when it comes to the equity market, soft landing, hard landing. Like we're talking about little bits on the side of zero. Right. Everybody expects economic growth to slow inflation to come down. It's just a matter of degree. So I'm with you there. That's a reasonable story for stocks. I like her already. Unless unless we can't keep up with his almost 12% earnings growth expectation. Earnings growth was flat last year. Like, I don't know how we're going to see economic growth slowing and earnings growth accelerating. But more importantly,

what we're seeing right now in the private markets is revenues are coming, are starting to come lower and companies are complaining. They're screaming about how high their cost and specifically cost of capital is. And so while we're in the expecting a mild recession camp, I actually think that's a more optimistic scenario for capital markets than many others could be because I think you get that really gnarly profit eater regulated in a way that I think is important for capital. Okay. I love that you went there. We have not seen any action whatsoever in spreads. When will we see those conditions that you're describing in the private market

manifest themselves in the public markets? When do you think that alarm might start going off? Well, the direct answer to your question is that it starts to go off when we see signs of earnings decline or unemployment claims rising. No signs in sight. No signs in sight. It's I will say, though, high yield credit in the public markets is one of our highest conviction calls. It was last year. It is this year for the for the exact reason you're lining up. Unlike other areas of the capital markets, high yield issuers got a pretty big boost from Fed programs during the pandemic. Yes. Their capital stack looks really good. We've seen a move up in quality over the past couple,

but really over the last 15 years. And so even in the case of a recession, as we see spread widens, I don't think we'll see them rise to any extent like we've seen in recent crises, because we're not going to have a financial crisis. But of course, as economic growth slows, you could see some some widening pressure. Do you think the S&P can withstand recession without crisis? We can do that, right? Yeah. OK. But that doesn't mean that you have neutral impact on valuations, right? I think that's that's that's that's the most critical point. I mean, yes. Can it?

Maybe. I don't know if it's so definitive as yes or no. Maybe. But do you think this market is priced for a recession? No. No, of course not. Certainly not. And it's certainly not priced for earnings to have.

We're not. We're not. It's definitely not priced for earnings to go back in the in the can. Right. We're priced for reacceleration of earnings from this point forward. All right. So here's a question then. What's the risk to earn? Okay, 12% might not be attainable. We've actually seen years where we start out with very high expectations. Expectations

start to ratchet lower. Stocks struggle in the spring. And then actually the expectations got too low. And then we start exceeding again. The bears hate that. It happens all the time. Isn't that a possible scenario here? And do you think things like AI, like, is that the reason why we could do 10% earnings growth, 12%, even as unlikely as it seems now? Yeah, but isn't that a bit what we saw last year? You know, when I look at the profits environment for companies, the way that Fed rate hikes work is that they impact housing and then manufacturing and services. And only then do they really start to impact profits, right? So that we haven't had a real sticky problem yet isn't surprising. But these things tend to compound on themselves. So if I saw some of those

leading economic indicators start to perk back up, so I saw bank lending standards loosen, I saw PMIs start to move above 50, then I would get off of the horse I've been on for two years saying, I still think this thing's going to slow, and say, they did it. They figured it out. They threaded the needle. They threaded the needle. But we haven't seen those leading economic indicators tilt yet. And so the way the economic dominoes typically fall, I expect, is still to come. Do we think that, Josh, the move, the broadening move of the market from the end of October to the end of the year was anything more than just a positioning race till the end of the year to just try and

get something out of what was nothing? Or was it actually built on some substantive thing that had a lot of people viewed viewing the market this year as that was the start of this broadening and now we're giving back? Yeah, unfortunately, I don't think it was built on anything substantive. I think it was as simple as we had record bearish positioning, I don't think it was built on anything substantive. I think it was as simple as we had record bearish positioning. I don't care how you want to slice it. You want to look at institutional investor surveys. You want to look at how much money went into money market funds. You want to look at strategists the way that Savita does and quantify that.

In any view, we just had record bearishness, people on the sidelines, out of the way. And then they just had to catch this NASDAQ. They had no choice. If you do this for a living, you're a portfolio manager. I know on paper you like to say you're making fundamental decisions about your investments. I just know it's not true because I've been here for 25 years. People are making career-saving moves in November and December. So what are they going to do? Chase Nvidia up 180%? Of course not. It's so much easier to buy

small caps, buy mid caps, justify it with whatever research you want to present to the committee. Those stocks move when you buy them, and you can pick up those extra percentage points, and it happens all the time. It's not a figment of my imagination. And the way you know that's true, look how quickly that whole thing unraveled. Do you know that the Russell 2000 right now is only 1% above its 50-day moving average? We had a 14% Q4 rally in the Russell for a 17% total return in the year ending December. And we've given it all back. Look at it. It's astounding.

Which is why. That's how you know it wasn't fundamental. Which is why I'll ask you, Lauren, are we back to a go-bigger, go-home market? Stay with the biggest because the others just present too much risk at this particular time. We're taking a balanced approach, as boring as it sounds, because one thing, well, we agree on a lot, actually. But one thing that I agree with is that even though we have a less constructive view on the economy, we're unlikely to see the market fall off a ledge until recession comes, and it's not here, right? And so when it comes to the big tech names, I think it's an important part of a diversified portfolio in a world where what they are providing in the structural economic

sense, powering AI, there aren't a lot of competitors. But I do think that there is an opportunity to take some of the gains that we've seen in the run-up at the end of last year and apply them to small and mid-cap growth where the application layer of AI is being built out. High yield, like we talked about, infrastructure, some of the more structural themes that we think will be more resilient. The wild card in everything is whether you actually get a recession or not and what role, if any, the Fed plays in that decision. Remember before, six months ago, it was like, OK, look, if we have to go into a recession, we'll go into a recession to crack inflation. Now inflation has played ball in a way that

they didn't expect it would nearly as fast as they did. And growth has remained strong. So their whole thing has changed to let's not kill what we don't have to. The Fed was trying to cause a recession last year. Well, now they're not. And they could not fight. Now they're trying to keep it from happening. That's a whole change of, that's the greatest pivot. Maybe.

Maybe they are. Or maybe they, look, I don't think they think they have these godlike powers, but they literally were giving speeches saying we may have to bring about a recession in order to achieve our policy objectives. They just couldn't fight the earnings growth coming from chat GPT. It's extraordinary. But they could not get the S&P down, and home prices bounced. For the consumer, which is 70% of the economy, if the value of their home is going up,

if their bank account is gushing with yield, and if their stocks are 30% higher, they're going to spend money in the store. They're going to travel. It's incredible. The Fed just literally could not do what it was trying to do last year. And most sane people, Lauren, myself included, would not have bet against them being able to bring about a recession.

And yet they couldn't. Now you're telling me they've definitely made this 180? I don't know. I'm not so convinced. We'll make that the last word. Guys, that was so fun. I appreciate it very much. Lauren, thank you. Josh as well.

See both of you again soon. Let's send it to Pippa Stevens now for a look at the biggest names moving in this market as we head towards the close. Hey, Pippa. Hey, Scott. Instacart shares jumping after Wolf Research upgraded the stock to an outperformed rating. The firm said the risk-reward profile is attractive and there are many levers to improve monetization and grow EBITDA. Wolf also said Instacart could be a merger target for Uber.

And logistics read Prologis under pressure after earnings, the company posting an 8% year-over-year increase in revenue, although KeyBank noting full-year core funds from operations guidance was slightly below consensus, though shares down about 3%. And be sure to catch an exclusive interview with the chairman and CEO of Prologis coming up on Overtime. Scott? All right, Pippa. Appreciate that. Thank you. We're just getting started here. Up next, the case for caution. Morgan Stanley's Chris Toomey is back with his investment playbook for this new year. We'll find out what he's forecasting for the Fed

and stocks, your money, the whole thing, because he's here at Post 9 just after this break. We're live at the New York Stock Exchange. Closing bell's coming right back. All right, welcome back. We're under pressure today. The major averages are after a strong retail sales report sent yields up and that questioned the market's rate cut expectations. Our next guest says stocks could see more short term downside ahead. Morgan Stanley's Chris Toomey runs one of the highest rated private wealth advisory teams in the country. Joins me now here at Post 9. Welcome back. Thanks for having me. You still don't like the market. I'm still cautious around the market. Why, Toomey? What's going on here? I want to be a bull, but I have to look at... But what prevents you from being one? I mean, a lot of people have turned.

Well, I mean, look, a lot of the things that we thought was going to happen last year happened, right? They were predicting a lot of good things happened, right? So inflation came down. We didn't go through an economic recession. We had an earnings recession. But if you look at earnings, earnings were actually negative for last year, right? So 219, 2022, you know, markets pronounced 219. We're expecting 215. We're right in the middle of this.

You know, financials, you know, big expectations, not a really great response. So earnings weren't great. We didn't get the rate cuts that we were expecting. You look at the market. You weren't expecting rate cuts last year. Oh, we were totally expecting rate cuts last year. And then we got two rate hikes. That's my point. You know, when we were talking last year, I said, if we get rate cuts, it's probably because there's something wrong with the economy. We go into a recession or we've got a problem with all of this debt outstanding that's going to have to be refinanced. Now, we were able to thread the needle by having the economy continue to do reasonably well, but earnings were actually negative last year. But interest rates have come down so much from the peak. Inflation's come down a ton

since the peak. Fed seems to be done with the hiking. You've gone through the earnings recession. You know, the markets are you've done this as long as anybody. Right. Look ahead. No. And when we are looking ahead. Right. We're in a situation right where valuations, while not necessarily a good predictor of market returns in the short term, in the long term are actually pretty good. And valuations don't look very good. Earnings, expectations, 10, 12 percent. We think that's probably high because we think margins are really probably going to have to start contracting. Liquidity, right, which was the great equalizer last year, which was caused by the regional banking crisis

and all of the activity that we put in to stabilize that, all of that stuff starts rolling off in March, right? So you're in a situation where earnings aren't looking great, valuations aren't great, and liquidity is being pulled out of the system. So I think caution is probably the right word. Until when? I think until you start to see a revaluation with regards to the market. I think you're right. The fact that the Fed is not talking about raising rates is a good thing. But the fact that the market's pricing six rate cuts is a problem.

Sure. But I mean, I think we can agree that six rate cuts seem a little bit adventurous over our skis. Yes. Right. Right. So what? The fact of the matter is they're going to cut. The regime has changed from hikes to now cuts.

And in the past, when the Fed's your friend, equity markets do well. That's correct. That's correct. Except for the fact that we've had zero interest rate policies for about 10 years. So you're right, rates have gone from 5% down closer to 4%. But we're in a situation where you've got a number of businesses that have been underwritten at a zero risk-free rate, right, that are now refinancing debt. So we talked about this last year, up to 2025, $5 trillion worth of debt has to be refinanced, right? 120 billion, particularly in commercial real estate this year alone, right? One of the things that drove the

markets down going into October was right, the 10 year shooting up with concern about the amount of effect that all of this debt issuance is going to have on the U.S. deficit, right? So that's not going away, right? And so the concern I have in the debt market is specifically around the fact that you could see a crowding out effect when all this treasury issuance and all of these refinancing start coming into the market, pushing yields even higher, because we really see that as the thing that's driving the market. I mean, Josh hit on that as well with regards to volatility correlating with regards to the 10 year. I think the good thing that we could see is if we do see stabilization within rates, you've got a lot of dry powder sitting on the sidelines. You could start seeing some M&A.

Aren't we already seeing the so-called green shoots of that? Right. I mean, rates have stabilized. They definitely have stabilized. Well, they were stabilized, but now they're starting to shoot up again. Right. Because of the concern with regards to everyone expecting this rate cut in March that is now not necessarily looking as rosy. And to your point, I think if you look at fourth quarter, so much of that performance was chasing, right? Oh, chasing and chasing and chasing. And now people are like, wait, do I really want to own this thing at this level? And if rates are starting to go higher, you're going to get a lot of weak hands selling in this market. What's the best? What's your best and best? Client calls you up, says the market's been going up a lot. What are we doing? What are

you doing? What's the best play? So I think I think the two areas that we really like, if you look at equities, we think it's probably going to be a suboptimal return. And there's other alternatives now that rates have gone higher. We do still like private credit where you're at the top of the capital stack and you're collecting very aggressive cash flows. Yeah, double-digit returns. 8% to 12%, right?

And then the other area that we're starting to see some opportunities are within triple net lease with regards to businesses that are going to have to start selling critical assets, that we're getting long term leases and getting another 8 percent. The one big issue for investors is the breakdown between the bond market and the equity market. Right. It used to be when equities were selling off, bonds would do well. And we're in a situation where they're correlating again very closely. Well, we had historic rallies in both in November. And now as bonds are selling off, equities are selling off. So where do you get that diversification?

So you really need to start looking at other alternatives in order to get that diversification. So you're telling me you don't like anything in the equity market? No, we do like equities. We do have positions in equities. I think it's going to be a bifurcated market. So to your point, I think you've seen this rally in quality very aggressively, right? And I think companies that are doing well are going to continue to be rewarded. Your point with regards to, you know, the Russell 2000 being cheap, it's cheap for a reason. A lot of these sectors are cheap for a reason because they're not growing their earnings. No. And the

leverage. That's the case I was trying to make on the halftime report today as well. Yes, of course, it's cheaper. But it's cheap for a reason, right? And these asset classes are going to have a real problem when they have to start refinancing a lot of this debt. So from our standpoint, you really need to be very specific with where you're investing. I think there are some areas in small cap that are going to be particularly interesting, particularly with regards to M&A. But I do think you want to hold on to quality here.

You make me, we'll make a deal right here. When you turn bullish, who are you going to tell first? I'm going to tell my clients and then I'm going to come on CNBC. That's why you're one of the highest rated in what you do. Good answer. Chris Toomey was on the spot.

He answered it right. We'll see you soon. Thank you. All right. Up next, the MAG7's show me moment. Star VC investor Rick Heitzman is back. We'll find out where he sees the tech trade heading and the names he is betting on just after the break. Closing bell. We'll be right back.

Welcome back to Magnificent Seven. Pulling back just a bit to start the year after that massive rally last year. Investors now looking ahead to those key earnings reports and who is really delivering value, growth and returns. With me now to discuss Rick Heitzman of First Mark Capital. Welcome back. Thanks, Scott. Good to have you back. That's what it's going to come down to, right? Like a lot of it was a rising tide lifted all boats last year. Yes. Now we're going to see which boats are good. We're going to see who's wearing a suit when the tide goes out. And I think we're going to see who's delivering real value. And in an up market, as we talked about

everything from stocks to bonds to real estate last year, what's really going to happen and who's delivering real value in 24? You think it was just you think it was too much hype or did you look at it and say, no, it's totally justified. This is a transformative technology. The kind of guidance that people like NVIDIA gave out was just astonishing. It was too much hype across the board when people said AI is going to lift all boats or perspective falling interest rates is going to be great for everybody. It's going to be great for some people, but it's not going to be great for everyone. You still have to put up the results. And that's why I think this year is going to be a year where it's a real stock picker's market.

You look at any one of the so-called Mag 7 and say, that's the one I've really got my eye on this year. For better or worse. I mean, you see there's at least been some divergence between the performance, right? Apple seems to be under a little more scrutiny this year, whereas kind of everything went up last year. NVIDIA's run again right now has been remarkable in and of itself. The stock just keeps going up. Well, at least NVIDIA has great fundamentals, right? They were blowing through their guidance. People are still on the AI train and haven't figured out what's really going to be for them, but they feel like they need to get as much as they can from NVIDIA. Apple, their PE doubled last year, but sales were down. And now

you're seeing some troubles in China, some other things. Maybe that was a little bit overblown. If you look at the fundamentals, they're already selling more phones than anyone else in the world. How many more phones could they sell? Whereas someone like Microsoft are now integrating things like Activision, have a consumer portfolio, have an enterprise portfolio, are dominant in large parts of the market, seeing a lot of growth from Azure, they might seem to have greater earnings upside. So I would imagine in the lens that you look at the tech world from private market valuations

have a massive correction and public market valuations in tech really didn't. They expanded. Correct. So because the private markets went through the pain first, what happens now? They lagged the pain, then went through a lot more pain. So they haven't rebounded the way the public markets did last year. But everybody kind of had an ugly 22. And then we didn't see the bounce in 23 in the private markets. And what you're going to see in the private markets, largely because there's no shorting,

there's no trading in and out, you're really going to see who's delivering value for their customers, who's really able to drive growth from both the top line and bottom line perspective, and which are really the great companies that are taking advantage of everything from AI to cloud infrastructure.

Are you being more discerning in what you look at and what kind of willingness you have to invest in ways that you maybe weren't, you know, scrutiny wasn't quite that rigid over the last, let's say, three years ago? I'd say three years ago, scrutiny might not have been as rigid. The market was moving so fast. And obviously, like everyone else, we tightened our strike zone. We doubled down on diligence. We were much more thoughtful about what we were doing and whether it related to pricing or the types of people we're getting into business with. We're making 10-year commitments on these investments.

We're not able to trade out of them if we decide we changed our mind. So these are deep commitments that are long-term commitments, and therefore we made a lot more stringent decisions. But that's gone on for a couple years, and now hopefully we're going to see the benefits of it in 24 and 25. Talking about some of the earnings, you know, the mega caps suck all the oxygen out of the room, but you have your eye on others. I'm not sure if you've invested in all of these companies, but DraftKings, you were early investor early there. So I don't know what your expectations are there, but Vacasa, CCC, Intelligent Solutions and Rover.

Yeah, there were a bunch of different trends. If you'd say, hey, we're throwing the babies out with the bathwater, a couple of those were SPACs. So they were SPACs, and people said, hey, I don't want to invest in SPAC stocks. They don't have support. They're never going to make it. Well, DraftKings has proven, although they went public via SPAC, it's how you were born, it doesn't matter.

It's how you're performing in the public markets. DraftKings did a great job, and Jason did a great job of not only driving revenue, but earnings. Vacasa has continued to hit their numbers and have been undervalued largely because they're a smaller cap stock. CCC has a great long-term business with great moats, but people might have overlooked them because they were a SPAC. And now I think the best investors are going back saying, hey, do people paint these with too broad of a brush? And now we have to get granular on how the quality of the business is. How does the role of these founders now change, even for companies that have been public?

Yes. You don't have to use Jason as an example, Jason Robbins at DraftKings. But anybody, when now investors are going to be much more, have much more scrutiny over profitability. It's not just going to be great idea. We're going to bet 20 years from now you're going to be profitable. So we're going to give you a massive multiple and we're all in. It's not going to be that way anymore. So most of those people came out. Those people in the public markets traded out.

Yeah, they sold those stocks. And so now you're looking at people who've been able to perform both tricks, right? People that said, hey, I was able to get money in maybe 19, 20, and 21 where growth was the key metric. And I was able to drive growth and market leadership. And then as the goalposts changed, I was able to quickly pivot my business, drive my culture to drive to profitability. And now coming into 24, those are the best CEOs who are able to say, hey, I know both tricks. I'm able to run an efficient business and I'm able to both drive top line and bottom line. And that's why I have a market leading company with important tailwinds. And that's why I'll continue to be important. Got to spend a little bit differently. Obviously,

raising capital is not what it was where the cost of capital is just exponentially higher. And recruiting and attaining employees and telling them what's going on. Rick, I appreciate it very much. Thank you. Rick Heitzman, First Mark. Right back on Closing Bell. Up next, we're tracking the biggest movers as we head into the close. Pippa Stevens is standing by once again with that.

Hi, Pippa. Hey, Scott. Two automaker names are stuck in neutral after Wall Street downgrades. We've got the details coming up next. We are fast approaching the closing bell. Let's get back to Pippa Stevens now for a look at the key stocks she's watching. Hi, Pippa. Hey, Scott.

Rivian shares are lower as Deutsche Bank cuts the stock to a hold. The firm saying there could be downside risk to Rivian's 2024 volume and gross margin expectations, as well as questions around the company's R2 model, including timing of capital needs, production ramp and profitability. And staying in the auto space, Ford in the red following a downgrade to neutral at UBS. The firm said the stock is fairly valued and it sees more limited upside to estimates for this year and next. Scott? Pippa, appreciate it very much. Pippa Stevens, still ahead.

Shares of Disney are dropping today, down near 3%. There's the stock right there. We're going to tell you what's weighing on it and what could be at stake for that company coming up. Closing bell right back. All right, we're in the closing bell market zone.

CBC Senior Markets Commentator Mike Santoli here to break down the crucial moments of this trading day. Plus, Julia Boorstin on the fight for Disney board seats. And Kate Rooney looking ahead to discover financial. Those results are out in overtime. Mike, your thoughts on this day?

I think it stayed within the rails. You know, it could have been worse, I think, given that we've had a really weak underlying tone to the market, definitely in pullback mode for a while. You know, we'll see if this is a real lasting show of resilience above 4,700 in the S&P or not. But we do, I think, you can now say if we did get over our skis in terms of getting too bullish, getting too aggressively positioned, assuming the soft landing was in the back, it happened a month ago.

And we've been basically paying for that for the last three or four weeks because we've made no progress. The average stock, you know, half the S&P is 10% off its high, off its 52-week high. And so underneath the surface, I think we've been coming to terms with this idea. So, so far, still in routine pullback mode. We knew we needed it. We're checking back to mid-December levels. I still think 4,600 is the line between routine pullback on the S&P and something worse. And 425 is sort of your line on the 10-year-ish, right? Yeah, that's essentially where it goes. And again, that takes us back to the Fed meeting in December. That's more or less where we started things.

All right, so the latest chapter in the Disney Peltz Chronicles was released today. Julia Boorstin, what's in there? Well, Disney shares are down about 3% today. On a Barclays note, out warning that, quote, there's a whole lot of noise and very little light at the moment in Disney, pointing to the risk that Disney's proxy battle

with Nelson Peltz distracts management from the critical strategic decisions which could shape the company's narrative for years to come, mentioning the sale process for Disney's India business, the upcoming deal renewal with the NBA, and finding a new partner for ESPN.

Now, all of this comes on the heels of Disney releasing its preliminary proxy, outlining its case against the nomination of Nelson Peltz and Jay Rizzolo for Disney's board, saying that Peltz has not presented a single strategic idea and that Rizzolo's experience was outdated. Disney's saying that Iger has made considerable progress on its strategic priorities. So we'll see how this all plays out at the annual meeting. Certainly will. All right. Be interesting, Julia. Thank you. That's Julia Boorstin. Now to Kate Rooney on Discover Financial, because those results are coming out in OT. What do we expect? Hey, Scott. So for Discover, watch credit card delinquencies. Back at the end of November, delinquencies had climbed to 1.54 percent. That was up from 1.47 percent at the end

of October. Charge off rates also climbed at the end of last year. Investors are looking to see if there's been a peak in credit losses. Also watching for some commentary around the possible reinstatement of regular share buybacks and the sale of its student loan portfolio. And then there's compliance-related costs. Discover's CEO left abruptly in August amid compliance issues, namely an SEC investigation around misclassifying certain card charges. Discover has said that could result in enforcement actions or monetary penalties. There may also be some commentary around that leadership shakeup that's expected earlier this month. Discover appointed Michael Rhodes as the new CEO and president.

That is effective on or before March 6th. Scott, back to you. All right, Kate. We'll see what happens. Kate Rooney, again, Discover Financial and OT. So make sure to stay tuned to that. You heard the sound effects. So we're about a minute left here.

The Dow's come off its lows of the day. I mean, the market, to your point, is just kind of just hanging in there in the face of a lot. I mean, and the question is whether it's kind of forestalling, you know, something that we need, which is to pull that slingshot back a little bit more. I know that even in the NASDAQ, you're starting to see some things look short-term oversold, believe it or not, even though the big stocks have held up better. You still do have 85% of all volume to the downside of the New York Stock Exchange. So there is some determined selling.

I mentioned the monthly VIX futures expiration is today. Last month, December 20th, it was that 1.5% drop day that came out of nowhere in the midst of a very strong period. So you do have some static you have to deal with in this market. But, yeah, so far, it's not really causing a whole lot of pain. It's not looking like a trend change just yet, even though you've got plenty of people profit-taking for three weeks straight. Yeah, the market's trying to decide,

you know, economic good news is good news, good news is bad news. And how good it was, because maybe retail sales were flattered by seasonal adjustments. Yeah, exactly. All right, Mike, thank you. We'll see you, Mike, tomorrow. I love you as well.

See, there's the bell. We'll go out red off the lows, though, and that's the important thing. I'll send it in seen that with John Ford.