Closing Bell - Closing Bell: Bank of America CEO on Earnings, Wells Fargo CFO Weighs In, Defense Downgrade 1/13/23

Episode Date: January 13, 2023

Stocks made an impressive comeback throughout the session after opening lower following big bank earnings. Bank of America CEO Brian Moynihan joins exclusively with his thoughts on the investment banking landscape, the possibility of a recession, and the state of the consumer. Sara also speaks with Wells Fargo’s CFO Mike Santomassimo for a look inside his quarter and the bank’s moves in the mortgage market. Plus the latest on Tesla, a tech warning, and Goldman Sachs analyst Noah Poponak on why he’s turning bearish on some defense names.

Stock staging an impressive rally off the early morning lows as we close out what is a solid week for the bulls with earnings now firmly in the spotlight. This is the make or break hour for your money. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look at where we stand. There's the S&P. Look at that turnaround intraday. Same thing for the Dow. Similar chart. We're at 49 points, but at the lows, we were down 274 points. The Nasdaq up a third of 1%. It's really the banks leading the charge. All weaker off earnings, all had a big intraday turnaround. The banks and consumer discretionary are the best performing sectors in the market right now. Consumer discretionary is working because Amazon

is adding another 3% to what has been a banner week so far. Amazon's up a 14% for the week. Gives you a flavor of what's been happening. Take a look at the scorecard for the major averages this week because we are on a four-day win streak here and headed higher. S&P gaining about 2.5% for the week and the Nasdaq Composite up 4.5% for the week. Some of the more risky stocks that got beaten up last year, they surged back this week. We'll talk about whether that can be a trend. Coming up on today's show, we've got an inside look at today's big bank earnings. In just a moment, we'll talk to Wells Fargo CFO Mike Santamassimo about his firm's results, along with his read on the housing market and Wells Fargo's future in that space. And then later,

Bank of America CEO Brian Moynihan breaking down his quarter, what he is seeing right now from the American consumer. It's a CNBC exclusive. Let's get straight to the banks, though. And this move we've seen in the middle of the afternoon, Wells Fargo, Bank of America, J.P. Morgan, Citigroup, they're all bouncing off a slump this morning after reporting fourth quarter results. Many rely on these banks as a preview for what's to come in the broader economy and the market. On their earnings calls, both Jamie Dimon from J.P. Morgan

and Bank of America's Brian Moynihan said they're expecting a mild recession and they're preparing for that scenario. Citigroup CEO Jane Frazier also sharing similar concerns. Take a look at the loan provisions, the money they set aside from all four banks, echoing those recession fears. They set aside more money for bad loans this quarter

than previously reported last year. J.P. Morgan set aside more money for bad loans this quarter than previously reported last year. JP Morgan putting aside the most, reporting a $2.3 billion provision for credit losses. Citigroup reporting 1.8. Bank of America and Wells Fargo putting aside a tad bit more than the previous quarter. We're going to dive into that question with some of the executives. But let's go to the market dashboard to dig into these moves with senior markets commentator, Mike Santoli. What sparked the turnaround? You know, Sarah,

I don't think there was anything that sparked the turnaround, except the S&P held yesterday's lows. And I think in generals this week and so far this year, it's been tough to quibble with the character of the action that we've seen.

In other words, dips are being bought. It's been a broad rally. It's been the average stock outperforming the indexes, even cyclical groups outperforming, as well as, like you said, those speculative areas getting revived. So, so far, so good in terms of a reawakening of risk appetites. Where it takes us, keep drawing this line. We'll cross, we'll keep drawing it until we kind of decisively break above it. That's the downtrend line. The 200-day average for the S&P 500 is right where we are right now. It's around 39.80-ish. So clearly trying to make a bid that this is more than just

one of those relief rallies. In terms of the financials, the group as a whole has outperformed the S&P in the last six months or so. In fact, it's at about a two-year relative high compared to the S&P. But it's not been the banks that's been driving that recent outperformance. Here you see over two years now, Berkshire Hathaway, right or not, is the biggest component in the financial sector in the S&P. It's more than 11 percent of the XLF. So you see that's been the performer. This right here, that's insurance stocks, also strong, also, of course, a big part of Berkshire. And then you see KBE.

That's the large cap banks index. And that's been lagging. It's been kind of dormant. They're not necessarily expensive. They're not really cheap. They're kind of pretty much in the middle of the zone and how they've been the last five or 10 years. And so you could look at that and say, well, maybe better than expected results are going to be a fuel to get these stocks going simply because they're not extended for the most part. On the other hand, it's tough when you have the shadow of a potential recession to get really overcommitted to the banks. You see it with the airlines this week.

They're the best performing names of the week. United, American, Norwegian Cruises and Warner. Having been crushed in the fourth quarter. That's the story. Yes. But also on some good results, at least with the airline. Mike, thank you. We'll see you soon. Mike Santoli. Let's focus on the banks and Wells Fargo in particular, recovering from this morning's slump after reporting an earnings miss. The results come after the bank announced this week plans to shrink its home lending business. And last month, Wells Fargo agreed to a three point seven billion dollar settlement with the Consumer Finance Protection Bureau over consumer abuses. Joining us now for first on CNBC interview is Wells Fargo CFO Mike Santamassimo. Welcome back, Mike. Good to have you.

Thanks, Sarah. Thanks for having me. It was such a messy quarter because of those penalties. It was almost hard to see what the underlying trend in the business was. How would you characterize it? Well, I think when you look through to the operating results, it was really good, solid progress again. And I think you look at whether the benefit we got in net interest income from higher rates continuing to come through in a pretty substantial way.

You saw really good credit performance again, strong capital position remaining, expenses were well managed while we continue to invest and roll out new products and add new people to cover clients. And so I think overall good, solid operating performance, even though the quarter did have impacts from the litigation and regulatory and remediation costs that we had in the quarter. But that stuff helps us really put some of these historical issues behind us. Well, right. But we've been talking about them for so long. Are we finally getting to a turning point in the regulatory issues or not, Mike? Well, I think, you know, what happened in December actually is a big step forward. We still have more work to do, so I wouldn't say we're done with all of what we've got

to get done, but I think it was a big step forward in terms of really putting some of those uh you know some of those issues behind us you mentioned the net interest income that's what everyone is paying attention to with all the banks and and clearly it was a big jump 45 from last year those those fed rate hikes certainly help the forecast though 10 in 2023 why was that not higher? Some were disappointed with that. Well, I think you have to look at the factors that go into it. As you said, it was really good performance. And as we came into this environment, we were set up pretty well to take advantage of higher rates through all the work that we've done over the last couple of years to really optimize the balance sheet. But as you look forward, it's really all the basic drivers

that are going to decide where we end up for 2023. It's what's going to happen with deposit balances as consumers continue to spend and in some cases move to higher yielding alternatives. It's going to be deposit pricing and the competitive environment around that. And then ultimately, it's going to be loan growth and what materializes there and that's all in the backdrop of what happens with with rates which is still a little uncertain in terms of exactly what that path of race is going to look like for the rest of the year. So what are you guys expecting? You added to your loan loss reserves again as others did. What what is the signal there as far as your expectations for what's going to happen

to the economy? Well, it's clear that the economy is going to continue to slow, right? And I think that's going to be the result of it ultimately as the impact of higher rates really takes effect. And you're starting to see a little bit of that now. And you're seeing a little bit of stress in some consumer segments. But overall, the increase in our allowance, the majority of it was actually driven by higher loan balances, particularly credit card balances came through, and a little bit was related to the economic environment. So it's really a sign of continuing to see that growth in the investments we're making in the card business, which we're glad to see to see come through the numbers and then the overall economic environment you know is is a smaller piece of it what about the housing

market you guys are really shrinking the mortgage business with that announcement this week ongoing process what why are you doing that and what do you see ahead for pain in this market well you know what we're doing is making sure we really focus on primarily on our wealth management and consumer clients. Mortgage is still going to be a really important business for us and a really important product for those customers, but we're going to focus our energy there in addition to really making sure we do a good job and even expand the things we do, you know, in minority communities to help support that piece of it. But when you look at the backdrop of what's happened in housing, you know, you're starting to see some price declines in,

you know, across the country, nothing super substantial yet in many places, but you're starting to see that. And given where rates are, you're seeing mortgage applications still at a 25, 26-year low based on some of the industry data there. And to state the obvious, refinance volume is very low just given where rates are and where it just doesn't make sense to refinance your mortgage in most cases. And so I think you're going to continue to see a pretty challenged market there across most of the mortgage players. And then many of the industry, including us, are continuing to make sure our business is right-sized for that expected volume over the next year or two. Year or two. I was wondering what the outlook is there for that

pressure. And finally, big news that you're restarting the buyback in Q1. What gives you the confidence to do that now with so much economic uncertainty ahead? Well, it starts with our really strong capital position of where we are. And you look at our CET1 ratio of 10.6, well above where we need to be from a regulatory minimum and buffers. And so that's where it starts. We feel like we've got plenty of capacity to continue to support our clients. You see a little less pressure from interest rates on the overall balance sheet. And so we feel really confident that we'll be able to restart that this quarter and still continue to be there for clients and still keep a really strong capital position. Quite a turnaround for the stock today, Mike.

It's up now 3.3%. Thank you for joining me with some of the color behind the results. Thanks for having me. Appreciate it. Mike Santomacimo, CFO of Wells Fargo. We're going to talk more about bank earnings later in the show when we are joined by Bank of America CEO Brian Moynihan for an exclusive interview. Also after the break, Tesla falling today as the company cuts prices in the U.S. and Europe. Is it a play for tax credits or a sign of a bigger demand problem? We'll ask

an analyst next. Dow's up 64 points. You're watching Closing Bell on CNBC. Check out shares of Tesla down today, but well off the session lows. The company announcing price cuts on Model 3s, Model Y vehicles in the U.S. and in Europe. The company announcing price cuts on Model 3s, Model Y vehicles in the U.S. and in Europe. The stock was also downgraded by Guggenheim Partners today to sell over concerns with the company's fourth quarter estimates. Let's bring in Oppenheimer senior analyst Colin Rush. How do you read the price cuts, Colin? Some people are saying it helps them actually qualify

for some of the EV credits in the new legislation to have lower prices. Do you think it's demand story what is this about. Yeah I think it is multiple things you know one certainly there's some concern around demand- you know and all the commentary around going into a recession you know it

looks like there's some inventory. That's been built in China but I think this is a- you know. An example of a good offense being a defensive move I think they're going after. This market- you know getting into consumers homes building good offense being a defensive move. I think they're going after this market, you know, getting into consumers' homes, building some goodwill with folks around the price moves as folks make some decisions around buying new vehicles. And they're going

to push a lot of products into the market as a result. We still think there's very compelling economics from a total cost of ownership perspective for EVs. And this makes it very compelling both in the U.S. and Europe with where these prices are going to shake out. So where does valuation stand now that Tesla's had such a big sell-off over the last year versus estimates, with some still cutting, saying the numbers are too high? Yeah, I think we're waiting for the fourth quarter numbers to look at where they shake out in the fourth quarter because they didn't sell everything they produced. And so there's potentially some headwinds there. We're also seeing a lot of the commodity prices come down to levels that it could turn into a tailwind for them

on margins going into 2023. I think we're looking for some incremental information from them when they report here about where margins shake out. Historically, the company's pointed to Porsche-like margins in the mid-30s as a potential for the company. And certainly, this is a process of industry building and a technology no change. And so there's going to be some ups and downs here. I think we want to see where it's going to level out here in the next, you know, quarter or two and start thinking about what this looks like long term as some of the new models get into the market. But I think that we're going to see a little bit of a dip on this pricing dynamic, and we'll see things start to level out by the second half of the year for the company.

Sounds like you're giving them benefit of the doubt. Colin, thank you for joining me with the take on Tesla today, which is notably underperforming. We've got a rally here in consumer discretionary, communication services, and technology stocks with 43 minutes left in the market trading session, there's the S&P. It's up about a quarter of one percent, which looks a lot better than where we were at the low of the day. We were down 35 points, now up about nine, just adding to the gains for the week, up two and a half percent for the S&P. Bank of America, along with all the banks, making a midday turnaround after trading lower following

earnings this morning. We're going to talk exclusively to CEO Brian Moynihan about the quarter and his predictions for the economy and the consumer when Closing Bell comes right back. Take a look at shares of Bank of America in the green now after beating expectations before the bell. Higher interest rates helping to offset declines in investment banking fees. CEO Brian Moynihan joins us now for an exclusive interview. Good afternoon, Brian. Thanks for joining us. Hello, Sarah. How are you? Doing all right. Trying to make sense of this turnaround. It looks like your numbers were good for this morning. The cleanest of the bunch, I'm told. Profits, revenues better, net interest, income climbing 29 percent. How sustainable are these numbers, given the economic environment we're walking into?

Well, you know, we had 85 cents a share, which has increased over last year, an increased link quarter. You saw NII pick up year to year, 3 billion plus. And so we've locked in the economic rate recovery and the rates going up, and that will go forward. But, you know, our core prediction at Bank of America is for a mild recession in early 23 to mid-23. And our Candace Browning Platt and the research team, which you have lots of colleagues on on a given year, have been there pretty consistently. So, you know, but it's going to, everything we see, it'll be a mild recession. And therefore, we therefore we ought to we and the rest of the industry which are in great shape on capital liquidity and everything ought to power through it and be able to stand and be ready to deliver

for our customers and so we feel pretty good about that will it be a little more interesting yes we'll be a little different yes because the stimulus and stuff that when the economy you know still a lot of it's still sitting there but you know we feel very good about our position we very very good about the team and how they performed. You said mild recession, and you mentioned that on the earnings call as well. And so did some of your colleagues at the other banks. Why are you so convinced that it will be mild if the Fed just keeps plowing forward with these rate hikes into a pretty sharply inverted yield curve? Well, what we're seeing is, you know, the Fed, as I've said to you in prior interviews, the Fed is faced with a challenge to bring inflation down.

And you're seeing some of the dish of that inflation tipping over. And that's good. And yet there's parts of it that's still worrisome. And so they're trying to get it right. And they've got to be more ardent about fighting inflation than anything else, because that's the job they have that, honestly, nobody else has. And so they're going to keep working. They've been resolute.

I think that they're going to hold rates high for long. They've been clear about that. But incrementally, the impact of the rate structure has come up dramatically to where it is today. And so the incremental from here to higher rates to five and a quarter, which is what we have predicted for the terminal rate, you know, that is a lot. You know, that's from where we are now, that's a bit, but not as much from zero up to there that we've got in the four.

So I think the next impact will still be there, the length which they hold will be there. But what gives us confidence is look at employment levels, look at wage earning levels, look at consumer spending levels. And, yes, they're starting to come down and they've come down, but they're still consistent with a low inflation growing economy. And as long as American consumers are in pretty good shape, America will be in pretty good shape. Yeah, I wanted to ask about an update on the consumer. You said on the call that you still see a cushion there and the consumer is still in healthy shape, even if it's slowing. So give us more color, if you could, as to what you're seeing and what you expect and just how big that cushion is. Well, think about a couple of different aspects. What

are consumers doing on a day-to-day basis? In the first quarter of 2022, they were spending 14% more in the first quarter of 22 versus 21. That is now back down to about 5% in the fourth quarter of 22 versus the fourth quarter of 21. You know, that is more consistent with a low inflation, modestly growing economy. And then what they spend on is switched from goods to experiences, you know, travel, out to eat, things like that. And so that's moved along, going to movies, going to concerts, things they hadn't been able to do and now are fully set up. So you've seen that change. And then travel is obviously increasing.

So that spending has come down to be more consistent where it was in 16, 17, 18, 19 as the Fed raised rates, but there was this normal level of spending. That's good news and bad news. Bad news is it's slowing down and the Fed has pushed the consumer to be a little more conservative than the environment has. But the good news is they're still spending consistent with growth. That's why I think we believe. The second part is, do they have money to spend? And if you look in a balance of our accounts, while they've been working their way down slightly, they're still sitting with multiples for the median income consumer, multiples of where they were pre-pandemic for the same consumer to come out a bunch of years.

So then the third is, are they able to cash flow and pay? And they're employed, and wage growth is still strong, even though it's flattened out a bit. And that's good news. And so you put all that together, that's pretty good. And then you go to the question of borrowing, and you can see delinquencies are coming up and people are saying, oh, my gosh, they're rising. But they're still not near where they were in 19, which is among the best consumer credit statistics our company has had in its history. So you're still not near normal. And that means, yes, they're getting worse, but incrementally in a broad base of consumers, you're not seeing the stress yet. So those are all bode well, but it's all slowed down. And that means the Fed may be

able to slow down and be more probative about which way they want to go. So that's my question about you and how that affects your business, Brian. The net interest income number, some gripes with the number you report a little bit lighter than analysts were expecting, leading them to wonder if the numbers were too high going forward. What does that number look like for you? And can it still grow if the Fed pauses? Yeah, so we had $3.5 billion of growth from last year's fourth quarter to this year's fourth quarter. In the last half of the year, we had $1.3 billion and $900 million-plus of growth in link quarter.

Those are pretty heady numbers. And now we're up to a level. And so now the question is, we've got to let the deposit level set in. And they basically, from the end of the third quarter, the end of the fourth quarter, are relatively flat. And then the mix of what the rate paid, are they in money market accounts or checking accounts or in a corporate business going into interest-bearing accounts? Those changes have occurred. We're seeing relative stability, but we're still seeing us drifting down in deposits in some areas

and repricing a mix. That leads us to believe you've got to be careful about your forward projections. Now, in the end of the day, what we told people today is that next year's NII for the year ought to be up nicely from this year's NII for the year, but don't leap off the fourth quarter and take it and annualize it out. And that's kind of the tension in the system. Until we get to stability in consumer balances, and then loan growth can add, and then you can grow deposit balances, that's going to be a challenge for the banking system.

But it's a pretty good challenge to have when you're earning 15% plus return on tangible common equity, your credit costs are under control, you're getting operating leverage six quarters in a row. We've been through tougher times as an industry and as a company. So you mentioned deposits going down a little bit. What is the story there? And how much longer can you keep paying these low rates on these deposits for consumers? It's a very sophisticated question, Sarah, because money is used for different, cash is used for different purposes. There's transactional cash, so money goes in and out to pay people's bills, and that's always a money in motion, and that has a certain level.

So in our consumer area, we have $600 billion of checking accounts. Those rates don't move much. Half of them or more are non-interest-bearing, so therefore they have no rate, and the other half are low-cost deposits to us, largely because that money is moving. Then you go on the far other end of the scale, which is in the corporate business.

You know, for large companies, they start moving their cash immediately out of zero when the rates moved up. And that mix has taken place, and we showed people that today. And then all the parts in between. So investment cash tend to move. Transactional cash tends to be sticky or is in no interest rate accounts. And that's because that's how we get paid is to do all the transaction work. Now, what makes it sticky is 3,900 branches, high customer delight, the best digital franchise in the country, the ability to go nationwide and accomplish your banking anywhere.

And then we have that nice wealth management business in the middle, which continues to add, I think last year, 115, 120,000 new banking customers in the wealth management business and a million new checking customers in the consumer business. Those both add new clients and new customer balances in, which helps us grow. Yeah, my question on that is on layoffs and just how you're positioning the bank. A number of your colleagues in the news lately, Goldman Sachs, Morgan Stanley, for announcing layoffs, retrenching, belt tightening ahead of the economy, which is expected to slow and go into recession. What's happening? Are you doing any layoffs? And why not? Well, the three parts to employee, the other day is how many people

you have. And you can get there by limiting, slowing down hiring. You can get there by laying people off and you get there by people leaving and retiring and stuff like that. So what happened in the four quarters of 2022? If you remember, if we were here last year at this time, we talked about the great resignation and oh my gosh, attrition rates were way up. And so we turned on a hiring engine to make sure we could meet it. And in a given month, we hired 4,000 people. 4,000 people left the company. We hired 2,000 people early in 22. Come out to the third quarter, 22, and that goes in the opposite direction. So we just slow down hiring. We let attrition be our friend, as we call it. We can start managing the headcount back to exactly where we want it. But at the end of the day, we have to have

teammates that can serve these great customer base well, but we have target levels. And so even with a 10% turnover rate in our company for a year, which would be very low and great on a relative basis, the lowest we've ever gotten is 8% or something like that, that means we have to hire 20,000 people to have the same amount of headcount as we did at the start of the year. So we have lots of opportunities just to manage headcount down, and that's what we're in the process of doing. Eliminate open positions, make it tougher to hire. No higher senior people. Let's keep that under control.

And then let's make sure we can provide great service and hire, you know, relationship bankers, people to call, wealth management teammates to financial advisors and client advisors and private bank, business bankers. We hire production people and keep operational excellence going on the back end to take out jobs that we can engineer out. Okay. Makes sense. Attrition. The pain is in investment banking. Is there any sense that we could be bottoming there and that we'll see a recovery in 2023? There's a sense and a hope that pipelines are still full. We bottom in that we've been bouncing around about the last couple of quarters, about a billion dollars in fees, which, you know, down 55% doesn't feel good year over year, but, you know, bouncing around around a billion in

fees. You know, before we had to run up in a pandemic with all the activity taking place because of change in rates and everything, we would be about a billion and a half in fees. So we've got some room to go even to get back to where it was in sort of a more balanced economy. But, you know, the idea is it stayed relatively stable last couple of quarters, right around a billion. But those teammates work within a franchise, the Global Corporate Investment Bank, which has lending, transaction services, investment banking, capital markets, and many other services, merchant services and things like that, which are growing around them. And they're actually getting record growth in earnings and returns at the same time investment banking's done. It's pretty amazing to think they're overcoming that downdraft. But, you know,

right now our pipelines seem to be fairly full. We've got to see the market stabilize so those get activated. You're talking in the IPOs, M&A, all of it? Well, you know, debt financing is always our biggest part of it. And then IPOs and M&A. And all that, with debt capital markets, that impacts the ability to do M&A. So it's all been kind of run around to stay in place. But hopefully we'll see this stability come in the system. And we've got to get through the debate that you and I were having earlier about where rates go and are we going to have a deep recession versus a mild recession. But that will take some time.

But at the end of the day, this is why we have this great balanced franchise. Our markets business, Jimmy DeMar and the team just had in global markets the best quarter, fourth quarter they've had since Merrill and Bank of America came together in 2009. So, you know, there's always offsetting things that make up for it. That's the power of the Bank of America franchise. And then finally, Brian, what about loan growth? Coming off of a pretty strong year for 2022, what is the outlook for 2023? Well, we basically think it moves back to where we typically have grown loans. It's sort of a mid-single digit growth rate from a high of 10 percent.

We grew 10 percent this year. That was a bit recovery still out of the pandemic and a bit sort of people borrowing back up. So we had a trillion dollars of loans. We fell all the way to $900 billion. We're back over a trillion plus. And now it sort of people borrowing back up. So we had a trillion dollars of loans. We fell all the way to $900 billion. We're back over a trillion plus. And now it sort of grows out from here. So we think mid-single digits sort of progressively growing through the year, probably led a little bit more by commercial and some consumer lending.

The first quarter, you'll see a downdraft in credit cards. You'll see an uptick in some other stuff. But again, the commercial borrowing has softened a little bit, largely because they're facing all the same questions we talked about earlier. And so the line usage is down a little bit. It was on a constant growing up. It flattened out. But we're seeing good originations in small business, helping as the largest small business bank in the country. So we feel good about that. So mid-single digits. Got it. Brian, thank you very much for taking all the questions and the time today on Earnings Day.

Appreciate it. Thank you, Sarah. It's getting noisy here because it's the whooping of the traders at 3.33 ahead of a long three-day weekend. That's what happens. That's what you're hearing. Brian Moynihan, CEO of Bank of America. Much more CEO insight into the outlook for the economy when the World Economic Forum kicks off in Davos, Switzerland next week, I'll be there with a huge lineup of CEOs. We'll talk to Jane Frazier, the CEO of Citigroup, off earnings today.

Salesforce is Mark Benioff. Palo Alto's Nikesh Arora. HP's Enrique Lores. Pfizer's Albert Burla. Breyer Capital's Jim Breyer. Coca-Cola's James Quincy. PepsiCo's Ramon Laguarta. ServiceNow's Bill McDermott. It's a great lineup in so many different industries across America and the world about what they're expecting for 2023.

It all starts Tuesday live from Davos. When we come back, Wall Street is buzzing about a major red flag being raised by one of Silicon Valley's most successful venture capital firms. Details when Closing Bell returns. What is Wall Street buzzing about? Another red flag for tech. Sequoia Capital might be Silicon Valley's most successful venture capital firm, but that doesn't mean it's immune from the economic slowdown. Sequoia is lowering its management fees for its two recently launched venture funds, partner Alfred Lin said at an event recently in San Francisco. The main change is that limited partners will now pay fees based on capital deployed

rather than the more common capital under management. The move comes as private companies have continued to slash their valuations. Just this week, the information reported Stripe cut its internal valuation by about 11 percent. That's at least the third time since June Stripe has done so, bringing the total reduction to about 40% in just six months. Stripe isn't alone. Another company waiting the wings to go public. We've talked about here Instacart cutting its internal valuation by 20%.

The information reported in late December, that's about 75% lower than its peak last year. Private markets generally lag the public markets. And with tech stocks still under pressure from higher interest rate environment, the worst may not be over yet. Although some signs of hope in the markets this week, certainly, with the Nasdaq up about 4.5%. Take a look at where we stand right now in the markets.

Looks like we are extending the gains. Four-day win streak here. Nasdaq's up three-quarters of 1%. It is being driven by some of the Chinese internet stocks. Amazon's having another good day, up three and a quarter percent or so. All those sectors, tech, communication services, and consumer discretionary are higher. The only thing not working today, again, the defensive groups. That's what's been lagging all week long.

We're talking healthcare, consumer staples, utilities. Small caps are up six tenths. BlackRock CEO Larry Fink making some hopeful comments about investing in 2023. We'll tell you what he said when Closing Bell comes right back. Goldman Sachs downgrading a trio of big defense stocks, and they're underperforming today. The analyst behind that call joins us when we take you inside the market zone. Gains are accelerating here into the close, up 130 points or so on the Dow. We'll be right back. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here,

as always, to break down these crucial moments of the trading day. Plus, Goldman Sachs' Noah Poppenack on defense stocks with a big call today. We'll kick it off with the broad market up 95 points on the Dow. S&P is about a third of a percent higher, Mike. If you look, and we've been talking about this every day, about what's working so well this week. First of all, Amazon is having a killer week. But so are some of the other more speculative parts of the market, the riskier parts and the more beaten down parts of the market, like the media names. Warner Brothers Discovery has become sort of a poster child for that. The ARK Innovation Fund having a very good week, up 15 percent almost. Are the charts convincing yet,

or do you just see this as a bounce? I wouldn't say the charts on most of those areas are convincing in the sense that they're all of a sudden now going to levitate anywhere near back toward their leadership position back where they were. But it is very typical of the first part of a new year where you do have just these reversals and essentially the kind of snapback type rallies in the most beaten up stocks. I would be concerned about it and think it might be a head fake if you weren't also seeing, you know, kind of the rank and file of consumer cyclical stocks do well. If you weren't seeing credit markets be very supportive,

if you weren't seeing a general kind of breath movement to the upside in this rally. So if it were just the beat up stuff that was getting bounces and it was a short squeeze, as opposed to that just being a feature of the overall picture, I would be more concerned than what I am right now. One stock we're watching is BlackRock. It's up a bit. The CEO, Larry Fink, sees more market opportunity ahead after a solid start to the year for the major averages. Here's what he told CNBC earlier today. From the perspective of long-term investors, I see 2023 to be enormously opportunistic. Actually, maybe the hardest years for investing for the long term were the last few years because of negative interest rates.

So clearly, Mike, that would be good for his business over at BlackRock as an asset manager. But what did you make of Fink's comments? Well, I think it's important to get at really what he was talking about wasn't just that so that that stocks are an outright buy here because of the levels there. But the fact that you do have yield in safer bonds that you can access pretty easily in a portfolio gives you a little bit of a head start. Right. If you if you just bought safe bonds at the beginning of this year with your whole portfolio, you have five percent income on the way to whatever else you do over the course of the year, whether migrate some of that into stocks or whatever. So he was basically saying there's just a little more of a cushion out there if you want to set up a diversified portfolio

and as opposed to kind of fighting against the headwind of zero percent rates where you just had to reach for further risk to try and meet your goals in terms of longer term returns. Yeah, and just the whole idea that we're back to a sort of normalized environment because we're not in negative rates. A lot of people, especially stock stock pickers and people who manage people's money, think that. What about BlackRock as a stock to own in this environment? Well, that's a stock that really does move as a magnifier of what's going on in the overall market. So because they get paid on assets under management as well as flows, it's kind of a supercharged way of playing the stock market.

It's held up relatively well. That's Block, not BlackRock. But it looks fairly cheap based on current numbers. And I would say that, you know, it's not going to necessarily distinguish itself apart from what the market itself does. But they've done a decent job of keeping the flows coming in, even in a tougher stress for the markets. Yeah. And with profit falling 20 something percent, BlackRock shares up a little bit. Let's get another check on the bank stocks heading into the close, because what a turnaround. JP Morgan, Citi, Bank of America, Wells Fargo, all trading higher, gaining steam throughout the session after weakening this morning on the back of results. We just spoke

with Bank of America CEO Brian Moynihan. I asked him whether he had a sense of when the pain in investment banking, those fees would be bottoming. Here's what he said. There had a sense of when the pain in investment banking, those fees, would be bottoming. Here's what he said. There's a sense and a hope that pipelines are still full. We bottom in that we've been bouncing around about, last couple quarters, about a billion dollars in fees, which down 55 percent doesn't feel good year over year, but bouncing around around a billion in fees. Before we had the run-up in the pandemic with all the activity taking place because of change in rates and everything, we would be about a billion and a half in fees. Before we had the run up in a pandemic with all the activity taking place because of change in rates and everything, we would be about a billion and a half in fees. So we've got some room to go even to get back to where it was in sort of a more balanced economy. But the idea is

it stayed relatively stable last couple of quarters, run around a billion. Right now, our pipelines seem to be fairly full. We got to see the market stabilize so those get activated. Pipeline fairly full. He specifically pointed, Mike, when I followed up, to debt financing, big area of opportunity in business for them, but also IPOs and M&A. And that's a pretty interesting call. If we really are at the bottom, then that would bode well, not just for his bank,

but Morgan Stanley, Goldman Sachs that rely more on investment banking. Yeah, I think it's a pretty easy case to make that activity probably can't go down much from here, right? Just there's been an absence of IPOs. You know, just general equity financing has not been strong. M&A is running well below where you would otherwise expect it to at this point in the cycle. So it does seem as if, you know, they're looking up at the at the chances for volumes to get better. Now, whether it happens quickly is a huge question.

I think that the IPO market is only really going to kick in if the NASDAQ goes on a pretty good run and you start to see small caps participate and growth investors are back in the game and they have inflow, all those things. But once it does happen, there are a lot of companies. So to the pipeline point, you know, we've gone a year and a half without really having much in the way of new offerings. So, you know, there's some catch up to do. The other takeaway, I think, and this is really what makes some of these banks battleground stocks, was on the comments from Moynihan on net interest income sustainability and also from Mike Santomassimo of Wells Fargo. Stephanie Link, a frequent guest on CNBC,

thought that Moynihan sounded more bullish than he did on the conference call on the net interest income outlook. What do you think? Yeah, in the sense that they don't feel as if it's going to become a super competitive environment on the deposit side to try and finance themselves, which would hurt the net interest margin. I think that's a it's a it's I think a acceptably plausible point. My point there is it's hard to move banks. They don't really need the deposits. That's why they're not bidding heavily for them. Remember, we came out of the pandemic. They were choking on deposits. So I think it's plausible that they can have that hold up a little bit better. Of course, we don't know exactly what the Fed path is going to be. That's going to have a lot more to say about net interest.

Right. If they pause. Goldman Sachs warning on some of the top defense stocks. Let's hit those. Downgrading Lockheed Martin, also Northrop Grumman, to sell Raytheon to neutral. The firm sees the potential for fresh scrutiny of the U.S. debt and a possible defense spending slowdown that could deal a blow to these stock prices. Noah Popinak, the analyst behind the call, joins us now. And Noah, what stood out to us is that it's pretty much against consensus. All we hear is that defense spending is ramping up from governments around the world, finally happening in Europe. Look at the geopolitical situation. We still have got a war in Ukraine. But you're sounding the alarm here on

budget politics in the U.S. You think that's going to make a big difference? That's part of the call, yes. And thanks for having me on, by the way. So, you know, defense stocks over time are pretty good companies. They have a naturally good business model, and they compound the cash flows over time. And it's true that last year, the geopolitical landscape became a tailwind to defense companies. The challenge is the budget ebbs and flows over time. It typically has actually strikingly consistent decade-long upturns and downturns. And we've had eight years of growth in the defense budget, even before, you know, what unfolded last year.

And then the price that the market's willing to pay for defense earnings also ebbs and flows. And after last year's large relative move, the relative valuations are also very high. The market will also oversell defense stocks when the defense budget's down, and there can be an opportunity to buy them at that point. But today, despite what you see in the geopolitical headlines, the bottom line, as we see it, is that defense stocks trade at all-time high valuations on all-time high budgets, and it's really hard to generate excess returns mathematically from that starting point. Well, we know that the environment is toxic in Washington, and we know that we have to worry about that. Johnny Allen, Treasury Secretary, sounding an alarm just today on the debt ceiling, debt expiry by June, having to take special measures. But I guess I'm wondering if we

can really afford in this kind of geopolitical day and age and also with some bipartisan support for what we need to do militarily and in the world if we can really afford to cut defense spending? Yeah, I mean, I'm not sure that we can afford to cut defense spending, and we're not really making the call that the U.S. will cut defense spending. The call that we're making is with where valuations are and what we hear from investors in the market,

we think stocks are pricing in that the defense budget will grow a nice steady 5%, 6% a year the next five to six years. If the defense budget is flat or up 1% or 2%, and the battle for the Speaker of the House talked about taking 24 spending back to 22 spending, so that would be down a little bit. If it's just flat or slightly up, that's worse than what's priced into the stocks. So the call here is not a reversal or solving of the geopolitical situation. It's really that what's priced in is a very robust scenario. I just want to point out two names, because NOC and LMT go to sell. Why are those in particular more vulnerable to you?

Is that a valuation call? Part of it is valuation. Those have become the highest priced stocks in the group, especially relative to the market and relative to the peer set. And then they're also the pure plays. They're the bellwethers in the space that are 100% defense. Raytheon has a sizable defense business, but it also has a great commercial aerospace business. We're bullish on commercial aerospace. We've spoken about the Boeing call here recently. General Dynamics has a private jet business. We're bullish on private jets. We already had a sell on a few other defense stocks. So it's really just where there's that pure play defense, which is more vulnerable to risks to the

defense budget in the multiple. Looks like Wall Street's picking up on your more cautious stance here on defense. Those stocks underperforming today. Thank you for joining us to talk about it, Noah. Appreciate it. From Goldman Sachs. Thanks so much. There's the two-minute trading, Mark. Mike, what do you see in the market internals?

Yeah, pretty positive again, Sarah. Now, the index has built strength throughout the course of the day. Breadth started out pretty much middling, and it's improved over the course of the day. You see they're not middling, and it's improved over the course of the day. You see they're not quite 2 to 1 advance in their declining volume. Definitely has been a grab for faster moving stocks, a little more beta exposure. Look at the higher beta stocks this year relative to low volatility ones.

It goes with what we were saying before, more aggressive speculative stuff, definitely outperforming in the early going as the S&P 500 was just a little too close to the 4000 mark not to give it a shot. We're going out pretty much right around that level and right around that downtrend line from the January 2022 peak. The volatility index really in retreat, going to close at 18. This is the lowest close since early January of last year. So essentially before the entire downtrend started. So we'll see if it's a new character of the market where this does not prove to be a sell signal for equities as it has when it's gotten to below 20 over the past year. All right. Leaving us with a bit of suspense there, Mike. Thank you. As we head into the close up 100 points or so on the Dow, we're not too far

from the best levels of the trading day. Again, we started actually we're just about at the best levels. We started the day much lower, down more than 200 points. Got an intraday turnaround, just building on strength we've seen all week. What's taking us there? The banks. JP Morgan, biggest contributor to the Dow gains. Caterpillar and Goldman Sachs, which reports earnings on Tuesday. S&P 500, also going to go out with a gain and a 2.5% gain for the week. What's working today besides the banks? Consumer discretionary. Thank you, Amazon, which is just having a great week. Healthcare, communication services also doing well. And so is technology. Big winner on the week, the Nasdaq, adding three quarters of a percent. Now up almost 4.5% for the week. That does it for me on Closing

Bell. Have a great weekend. I'll see you next week from Davos, Switzerland.