Closing Bell - Closing Bell: Dow Storms Back, Alphabet Antitrust Suit & REIT Rebound? 1/24/23

Episode Date: January 24, 2023

The Dow staging a late day comeback with a nearly 400 point swing following a mixed batch of corporate earnings. The Justice Department and eight states filing an antitrust lawsuit against Alphabet over its dominance in the digital advertising market. Colorado Attorney General Phil Weiser on why he is alleging Alphabet tried to control all sides of the advertising market and why that business should be broken up. Evercore ISI’s Mark Mahaney says the worst case for Alphabet is they are forced to spin off its ad business, which could end up being decent for investors. Cantor Fitzgerald CEO Howard Lutnick, who is also Chairman commercial real estate firm Newmark on why he thinks there could be a big rally in REITs this year. Bernstein’s Aneesha Sherman explains why she is downgrading Lululemon to sell and slashing her price target on the stock. And MoffettNathanson’s Sterling Auty on what he expects to hear when Microsoft reports earnings after the bell.

The Dow right now sitting at session highs, erasing a 319-point deficit as big-name earnings take center stage. 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 right now in the market. There's the Dow. It's up 141 points or so. It is in the lead right now, as I mentioned. The biggest contributor to the Dow gains, Travelers, Caterpillar, UnitedHealthcare. S&P 500 is unchanged. Again, tale of various sector performances here. Industrials, utilities, and real estate going strong. But the tech sector,

energy, communication services, they're all getting hit today. The Nasdaq is down a tenth of 1%. Remember, this follows a very strong back-to-back rally, especially for technology. Check out Alphabet. Story of the afternoon here. Taking a late-day dive on news that the DOJ and eight states have filed an antitrust suit against Google over its dominance in the digital ad market. We're going to talk to Colorado's attorney general, who's part of that lawsuit, in just a moment. Also ahead this hour, we will talk to Cantor Fitzgerald's CEO, Howard Lutnick, about his read on the economy, his outlook for the markets, and what he makes of the wave of vacancies in commercial real estate. He's also the chair of

Newmark, big commercial real estate player. Let's get straight, though, to Alphabet. Some late-breaking news here. The DOJ holding a news conference to lay out its case just this afternoon. Eamon Jabbers has the headlines for us. Eamon. Sarah, the Department of Justice's 153-page filing traces Google's history in the ad business all the way back to its $3 billion 2008 acquisition of DoubleClick. And it alleges that the company tried to create what they call a moat around its advertising business that harmed advertisers and publishers alike. Now, Attorney General Merrick Garland said the Department of Justice is not picking winners and losers here.

It's simply enforcing the law. For 15 years, Google has pursued a course of anti-competitive conduct that has allowed it to halt the rise of rival technologies, manipulate auction mechanics to insulate itself from competition, and force advertisers and publishers to use its tools. But Google's parent company responded with a statement this afternoon saying that, in fact, the lawsuit from DOJ attempts to pick winners and losers in the highly competitive advertising and technology sector.

It largely duplicates an unfounded lawsuit by the Texas Attorney General, much of which was recently dismissed by a federal court. Now, Alphabet says that the Department of Justice's suit would slow innovation, raise advertising fees, and make life harder for small businesses. But the Department of Justice says Google has engaged in a years-long plan to do two things. First, to neutralize competitors through a series of acquisitions. And second, to use its market dominance to force more publishers and advertisers to use its products. Now, this is just the opening salvo in all this, of course. This dispute is not going to be settled anytime soon, Sarah. Back over to you. Eamon Javers, Eamon, thank you. And joining us now,

first on CNBC, is Colorado's Attorney General, Phil Weiser. Colorado is one of those eight states joining the Department of Justice in its lawsuit against Google. Mr. Attorney General, thank you for joining me this afternoon. Great to be with you, Sarah. So why, as the AG of Colorado, are you joining this suit by the Department of Justice?

The bottom line for consumers are when you look for content on the web, often you're now being asked to pay for that content because the advertising costs aren't actually always going to the publisher. In many cases, Google is siphoning off these extra fees, $0.35 for every advertising dollar Google is able to capture because they've monopolized this market. They've got a dominant share on the publisher side, on the advertiser side, and in the auction in the middle. This hits consumers in the pocketbook by having to pay for content where otherwise advertising could help pick up some of that cost, not to mention undermining innovation in this market. Whenever you get a monopoly, it squelches innovation by controlling how the market works. The internet can be and should be an open platform for innovation. Because of Google's conduct here, it's not. It's not exactly a monopoly, though, is it, Mr. Attorney General? When you're talking about the ad tech market, they definitely have a large

share, what, 30 percent or so, according to eMarketer? That's not, there are other big players in there. What we're talking about here is a certain segment. If you're a publisher and you have content that you want to have ads, you have to go to ask, can I get ads filled on my website? And then if you're an advertiser and you want to place ads, you have to have tools to get access to getting it placed. So within this segment of placed ads, Google has dominance both on the publisher side and on the advertiser side. They've maintained dominance by acquiring companies and by adopting policies and squelching threats, all in violation of the antitrust laws.

Microsoft also, though, has been growing in this ad tech space and, in fact, made an acquisition of Zander. Why didn't you object when that happened? When you have a firm like Google that has dominant market shares, it's important to bring out the microscope, to look closely at what's driving that dominance. Is it innovation, competition on the merits, or is it anti-competitive tactics? To the extent upstarts can find their way into marketplaces, that's good for consumers. To the extent you get dominant firms like Google, who can undermine would-be rivals, often at their considerable expense, that's not good for consumers, that's not good for consumers,

that's not good for competition. Well, but speaking of competition, we've seen some of the other players, yes, they're big, but they're growing. CNBC has reported that Amazon's ad business has been growing faster than Alphabet's and Meta's. Doesn't that show that there is competition? What's really important in antitrust law is to define the market.

What is the relevant market? When you have Meta offering ads on its platform, that's really distinct from a publisher, the New York Times, for example, who wants ads on its website. And those publishers need these ad tools. And insofar as Google has monopolized the ad tools or the ad tech market, that's harmed competition and that hurts consumers. So what ultimately do you want to see happen here? So the relief that we're going to be seeking is to restore competition to the marketplace, to address the harms that have come from Google's conduct, and to open up this marketplace to competition so consumers can benefit. Obviously, this is the first step of a process. A complaint was filed today with the Department of Justice, several states, including Colorado. We know we need to prove up our complaints and we'll do that. In fact, this is one of three actions we have against Google, both this one involving ad tech tools, another one involving how they charge for apps,

and a third one involving its dominance in search and search advertising. You know, the European Commission has done this. Margaret Vestey is several years ahead of the U.S. regulators on these types of competition rules, especially as suits against Google. And they've resulted in mostly some fines, some court battles, not a ton in the way of changing behavior. How do you get around that? In the United States, and as Attorney General for the state of Colorado, we're committed to changing behavior in the marketplace.

That's why in the cases I mentioned, it's not only about money where appropriate, but it's really about how do we change behavior by having a court put in place protections to enable competition, to end practices that are exclusionary, and even structure relief to ensure that the market can be restored and that acquisitions that were done and had the effect of undermining fair competition can even be undone. You want to see the ad tech business broken up. I get it. What about the argument that Google is making, as Eamon reported, that this suit really largely duplicates a suit that was brought on by the Texas AG a few years ago that

was largely dismissed? We can debate exactly what that district court decision held, but I will say a number of the claims in that are going forward. I also would note this suit is the product of a considerable amount of work. For those who can read the complaint, it's obviously 150-something pages. It documents a range of actions by Google that are not normal competition on the merits. They're done for the purpose and the effect of excluding rivals, for making it harder to provide alternative services. These are the sorts of actions that violate the antitrust laws. And we're confident that the court will ultimately see this for what

it is and will want to take action to restore competition. Phil Weiser, thank you so much for joining me today to talk through this suit. Appreciate it. Thank you. On the breaking news, the attorney general from the state of Colorado. After the break, Bernstein cutting its rating on Lululemon today, warning a reset is coming. We'll talk to the analyst behind that call next. And later, don't miss our exclusive interview with Cantor Fitzgerald CEO Howard Lutnick. Dow is up about 133 points. Nasdaq's under a little pressure, though Apple is strong. Alphabet and Amazon and Microsoft weighing on big tech.

You're watching Closing Bell on CNBC. We've got an update on those trading halts that happened here at the New York Stock Exchange around today's open. Bob Asani with the latest. So, Bob, what do we know about what happened? Well, the NYC has just issued its third press release of the day, and it's the most complicated one yet. I'm not going to read it to you. You're not going to get much out of it. Let me just try to read it to you. You're not going to get much out of it. Let me just try to explain it to you. The NYSE has announced that they appear to be busting a limited number of trades that occurred this morning at the open. Several hundred stocks opened this morning without any opening

trade, essentially opening price and initial opening. And that caused a lot of problems, a lot of price dislocations. So they have announced that they are going to declare a number of trades clearly erroneous. That means they're essentially busting the trades, but not all of them. And that's where some of the difficulty lies in here. So the NYC has very clear rules in place for when they can announce rules and when they can say that stocks are busted, essentially. And they have to follow these rules. They have limit up, limit down rules as well that restrict when these stocks can halt and when they're down or when they're up and when they halt. And it appears right now that they're announcing that they're going to bust some trades that were outside of these trading bands, but others that may have been below the

trading bands or not. So, for example, this was a multi-stock event, and there could be many stocks that are trading above 30 percent off of their prior price the day before when they opened. Those stocks will probably be made whole. They will be declared clearly erroneous. Others that are trading below certain price bands, where even though they were down a lot, they weren't in a sufficient area around those price bands. They may not be busted and declared clearly erroneous. So it's a little confusing right now. What I can tell you, Sarah, is there was more than 200 stocks that were affected, including very big names. A lot of companies were down 10, 12, 14, 16, 20 percent or even more. And the question is, are all of them going to be declared erroneous or not?

And it looks like the NYC is declaring a limited number of them erroneous. Now, the big question here is what exactly happened here? And we don't know. They are not telling us. But it does look like in the past, these kinds of trading glitches have been associated with software upgrades or security upgrades around the system. We don't know that, but that has happened in the past, and that's a likely explanation for what happened. The one thing I can tell you for sure is the SEC is probably not going to be happy to hear about this, and likely there will be some large fines down the road. Sarah, back to you. All right. Nobody can make sense of it like you. Bob, thank you. Bob Pisani. It's a sour day for Lululemon. Look at shares taking a hit after Bernstein

downgraded the stock to underperform, cut its price target to 290 from 340. The firm noting that a cautious consumer outlook and a lack of pent-up demand are some of the factors weighing on the company's performance. Joining us now is the analyst behind the call, Anisha Sherman. Anisha, thanks for joining us. Certainly caught our attention because, you know, analysts have been trying to be bearish or call a top on Lululemon because evaluation for a while. But this is a company that is still growing 20 to 30 percent. So so what's the problem? Well, the problem is that Lulu has grown at 25 percent on a CAGR basis for the last five years. And that's been fueled by a number of catalysts. There was a wave of e-commerce growth where e-commerce went from 20% to 30% of sales in a couple of years.

There was the COVID athleisure boom where we all stayed home and wore athleisure for a couple of years. And there was a pent-up demand run this year where we were back to kind of social occasions. And there was a lot more spend on things like Lulu's belt bag and some of their outerwear and lifestyle wear. We're not seeing that kind of catalyst again in 2023. And so we're going to see a big deceleration in the growth trajectory. We're not going to see 20 plus percent growth anymore. I'm modeling more like low teens growth. And the problem with that is the entirety of the earnings growth for the stock comes from the top line. Almost all of EPS growth comes from sales. And so we're going to see a big deceleration in EPS growth from 33 percent this past year to something like mid-teens. And that

means that the multiple is going to have to take more of a haircut than it already has. So it has knock-on effects for not just sales, but also earnings growth and then also the multiple. So it's a triple header on Lululemon. And that's not to say it's not a sustainable growth story. It's just that that correction is needed right now to reset expectations to a new level of growth. No, and the margin warning was perhaps a signal that we got from the ICR conference a few weeks ago. But just to play devil's advocate, Anisha, the bull story on Lulu has always been that they are still very small. And there's a lot of runway for growth and expansion, whether it's in international markets where they barely scratch the surface, in stores where they've only got a few hundred, and in wholesale where they're not really even playing yet.

Yes. But, you know, if you look at the mix of sales, international is only 20 percent of sales. Eighty percent is North American sales, of which the vast majority is in North American women's, which is their core. And that's the maturing part of the of the business, which is which has been soaring the last few years, but will face tough comps and will slow down as we've seen the consumer become more cautious, spend more on promotions and less on full price and pull back spending. And we're seeing that across the sector. So, yes, international is a huge growth opportunity, but China is small as a percent of total sales. And, you know, the new products that have done phenomenally this year, like the belt bag, are a tiny part of the overall sales equation.

So the vast majority of the business contingent on strong demand from North America women's product. And that is where we may see more of a deceleration than people think. LISA DESJARDINS ANISHA, IT'S AN INTERESTING CALL. THANK YOU FOR JOINING US TO TALK THROUGH IT. ANISHA SHERMAN OF BERNSTEIN PREDICTING $290 FOR L, about 20 bucks lower than where we are right now. Let's show you what's happening in the overall market. Dow's going strong.

We're off the highs, but we're up about 100 points or so. The S&P 500, it's unchanged. It's a tale of various sectors, industrials, utilities, real estate, staples, financials, and materials are all green right now. Everybody else has red. The market being weighed down by health care and communication services in particular today. And the Nasdaq is really a tale of mixed performance right now with tech. That's why we're not seeing a big fall down a quarter of a percent. Alphabet, Amazon, those are the weights.

Apple and Netflix, though, are hanging in there, going strong. Little change for small caps as well. Still ahead, Internet analyst Mark Mahaney weighs in on the DOJ's antitrust suit against Google and the potential ramifications for investors. Plus, Microsoft gears up for earnings after the bell and the company's investment in chat GPT creator OpenAI will certainly be top of mind for investors. We're going to talk to an analyst about what to expect, all when Closing Bell comes right back. Elon Musk testifying for a third day now in that shareholder lawsuit over his tweets about taking Tesla private for $420 per share back in 2018. Steve Kovach with the latest details.

So what did we learn today, Steve? It's a tweet that won't go away. So Musk is done testifying, though. His testimony, like you said, after three days appearing in San Francisco federal court. Now, his attorney's line of questioning focus on Musk's track record, raising money and successfully returning value back to investors among his multitude of companies. But one revelation that's new here, Sarah, from the last couple of days, Musk claimed on the stand he would have sold his shares in his rocket company, SpaceX, which is a private company, by the way, to fund the go private deal for Tesla.

He estimated his SpaceX shares at the time were valued around 15 billion dollars. And now that's the first time Musk claimed that he would also be a source of funding for the deal besides the Saudi PIF, of course. Now, attorneys for the plaintiffs ask why he never brought up SpaceX before. Musk saying he doesn't recall, but pointed to the fact that, hey, it's common knowledge that he owned a lot of SpaceX and that he would have sold those shares to fund the deal. Musk also claimed he told the SEC about it, though, during that initial investigation. Meanwhile, also, Musk was renewing his tiff with JP Morgan, saying the bank, quote, hate Tesla and me very much.

There's the full quote right there you can see on screen after Tesla withdrew its commercial banking business from JPM several years ago. JPM, by the way, is suing Tesla for one hundred sixty two million dollars, saying the company owes it for business done several years ago. Now, this trial, the shareholder trial, is expected to last another week or so, Sarah, but Musk is done testifying for now. Yeah, so much drama. Now, Diamond versus Musk. Steve, thank you. Steve Kovach. Up next, Kenner Fitzgerald, CEO. Howard Lutnick on whether the recent rally on Wall Street is sustainable and whether he thinks the economy is heading for a recession this year. We'll be right back. Welcome back to Closing Bell. Here's where we stand in the market.

About 30 minutes left of trading. The Dow's going strong. The industrials are having a good day on the back of earnings. And that's what's powering the Dow and the S&P. It's the top-performing group right now, along with utilities and real estate. The S&P 500 is little changed. Would be the first decline in the last three. And the Nasdaq is down, but nothing major, down about two-tenths of one percent.

Alphabet's a part of that story, the suit by the DOJ and some of the attorneys general over its ad tech business. Let's head over to the market dashboard with senior markets commentator Mike Santoli. Mike, what are you watching? Yeah, kind of a flattish, quiet day for the S&P, as you mentioned, Sarah. But there's information in that, too, right? We're coming off of two back-to-back 1% gains over the past couple of trading days. Also, we're consolidating here in this very quiet way after a morning sell-off at the open and kind of gained strength throughout the day. We're doing it above last week's highs and also

right at this exact downtrend line everybody's been looking at. So we don't know which way it's going to break. Obviously, it could pull back from here. But I do think it shows you a little more traction in the market than it shows you vulnerability, at least in the very short term as we await, you know, Microsoft, which is more than 5 percent of the S&P reporting after the close. Now, the economic debate really comes down to which indicators you want to put more weight on and less. Hard versus soft data is one way to split these things up. Now, soft data are things like the ISM business surveys, you know, homebuilder sentiment, some consumer surveys, things like that. Goldman Sachs splits it up and says, boy, the soft data look real bad. And a lot

of those things have tended to have predictive properties. In other words, they're leading indicators to some degree, although they are also more sensitive and swing a lot more. Hard data is going to be things like employment, spending numbers, things like that, that you're actually measuring what's going on as opposed to mood and expectations and perception. So I do think this is an interesting one. You've seen times in the past, like in 2015-ish, when you did see the soft data erode really quickly, and you eventually did have an economic slowdown and a kind of industrial recession. But to me, Sarah, this is the interesting piece of what we're going to focus on to decide if, in fact, the macro is going to get a lot worse soon. It's the age old question

with surveys. Are they predictive or is it watch what they do, not what they say? Exactly. Or to some degree, can they be self-fulfilling? Right. If everybody's in a bad mood and expecting the worst, are they going to invest and spend accordingly? Mike, thank you. I'll see you in the market zone. Joining me for more on the market and the economy is Cantor Fitzgerald, CEO, Howard Lutnick. Howard, it's good to see you again. Great to see you back in the Americas. Back in America. Right. So we were in Davos together and you were on my panel on commercial real estate. And I guess that through your lens, you're chairman of Newmark, huge commercial real estate player, CEO of Cantor.

You're looking at capital markets and real estate, both of which have been hit really hard lately. So I feel like you're pretty negative. Is that right on the outlook? Well, look, interest rates going up is tough for real estate today. But of course, we all know that you make your money on the way in. Choosing the

moment to invest is the key to making money and investing. And the opportunity is coming in real estate. So I think starting this summer, when real estate reprices, you're going to see so much money moving to commercial real estate. It's really going to change the outlook. But I do agree, it's going to take a while, a couple of quarters. Why? What are you eyeing this summer? Some might think that time is coming sooner if mortgage rates and Treasury yields have indeed peaked. We're way off the highs. No, you know what? You know, that was what's so interesting in Davos. So the market's saying that there's going to be cuts coming, cuts in the second half of the year and cuts in 2024 by the Fed. And that's what the markets are saying.

But everyone at Tavos, and it was scary because everyone kind of agreed, people like me, saying rates are going to stay high. They're going to stay at 5% all the way through that. So I just don't buy this cutting stuff. I don't think the Fed's cutting into a recession. I think we're going to have a light recession. But I just don't buy these cuts coming. I think rates are going to stay up. I think real estate's going to have a tough next couple of quarters. And then it starts to come

as rates stabilize and people get confidence in that stability. I think you're going to see real estate start to rally. And that's the time to buy. That's it. Are you talking public sector REITs? Is that what you would tell people to buy? I like, look, public sector REITs? Is that what you would tell people to buy? Look, public sector REITs, you can see them. They're down 35%, 40%. I think they've got another leg to go down, right, when people realize when the 10-year stops being 346 and goes back to, you know, closer to 4%.

I think they're going to take another leg down, and that's the time to buy it. So I like real estate. I like opportunity funds in real estate, distressed real estate, public REITs, but not till the summer. Let them take another leg down and then it's time to go. But, you know, it's not just high rates that San Francisco have companies that are shifting to permanent work-from-home policies, the glut of commercial office space in this country. Isn't that getting worse? So you've got, remember, when you say commercial real estate, you're getting a lot of categories.

There's multifamily in there, which is doing well because rents are going up. There's industrial. There's senior housing and alternatives, other housing. So just talking office, we agree. So here's an interesting thing. The best new buildings in office have never had higher rates, never had rents this high, and they are on fire. Everybody loves the new sexy office buildings. B and C buildings, you know, they're not that nice. Mid-block. They're going to have a tough time. So I think that's an opportunity of change. I think, you know, in the 50s, there was industrial buildings all over these cities. They all went out of business and now they're lofts. Right. I think that's going to come again.

I think you're going to start that next year. You're going to start seeing these lesser quality buildings start to convert to residential. That's really interesting. It's an interesting opportunity that's coming. Right. And I think a lot of people are going to raise funds to do exactly that. We will as well. So that's an opportunity that's coming. But commercial, you're right. It's challenged both that rents are not rising and companies are not taking more space because they're thinking recession's coming. They're a little bit afraid. So the move is I think office is not probably the place to put your bets yet. But back end of the year, I think when this stabilizes, I think that's a time to place your bets on commercial. So talk talk me through the whole zombie office building becomes affordable housing.

Is that something that is realistic? First of all, who pays? Because, you know, local governments are already under fiscal pressure, and they're now losing out tax revenues because some of these offices are not getting renewed by companies. So what are the economics here? Okay, so local government has to clear the path of the regulatory hurdles, right? The regulations in local government are outrageous. They're this thick to do anything.

And they kind of constrain and restrain. So local government's got to clear the path away so that you can do it. And then the lender is the key, is Fannie and Freddie have just changed their caps and they've set aside lots and lots of money in order to do what they call purpose lending, meaning what's their goal? To get more low-income housing. They'll give you good rates.

They'll give you very high-quality loans and they'll help get these buildings to convert. So that's where they're going to find the money. But the federal government's got to help. Fannie and Freddie have got to help. And then we need local government to clear the path. I think it's coming. I think if you talk to the local mayors,

they understand it and they want it to happen. All right, one question on the canner business, Howard, because you guys invested so heavily in SPACs. And I have to ask you about it because SPACs have majorly underperformed and completely dried up. What is the future there? So remember, IPOs historically have been priced 20 percent below what you think the company's worth. So if your company was worth a billion dollars, you price the IPO at 800 to 850. So everybody makes money. Right. SPACs got so frothy that not only were they

doing a 20% discount, they were trading at a 20% premium. So if you look at the current ones, like my last deal was Rumble. And Rumble's trading right about $10 a share, raised $400 million. A great company, well-priced. I think SPACs will

be something that will stay the course in business. All these celebrities and these ridiculous people who should have never been in this business in the first place. Look, you're going to watch them all get washed out. And pros who know what they're doing will find that SPACs is a great way to take a younger company public. You've got to price it right, and it's got to be the right kind of company. But they're coming. Just check out Rumble. It's doing great. All right. And we'll hold you to that. And finally, Howard, I wanted to ask you, you know, about Donald Trump. You were you were a big fundraiser. I remember you hosting him at your place when he was president. And I

was wondering, we're trying to get a sense from business whether you're backing him again in his in his bid to run again. So the fun part was people asked me, how can you have Donald Trump over your house when the president of the United States ask me, how come you had Donald Trump over your house when the president of the United States of America says, will you host a fundraiser for me? The answer is, sure. You know, I'd be delighted

to have the president come over my house if Joe Biden called me tomorrow. Not everyone would say that to him. I understand. But, you know, this is America. And if Joe Biden called me tomorrow, I'd love to have him over my house.

I'd be fan-freaking-tastic. But, you know, I think, I think Donald made a mistake with Kanye. I think he's made a mistake with all these things. So I think he's created real challenges, and he's created real challenges for me, too. I mean, why in the world doesn't he think these things through? So you know what? I've taken a step back. Plainly taken a step back.

All right. That's an answer. Howard, thank you. Appreciate it. All right. My pleasure to see you, Sarah. Really good to talk to you. You too. Howard Lutnick, CEO of Cantor Fitzgerald. Look at 3M, biggest drag right now on the Dow after missing profit estimates and slashing its full year guidance. When we come back, we're going to discuss whether that's a red flag for the rest of industrials, which are actually outperforming and

doing better today. Dow's up about 75 points. We cut our gains in half since the top of the hour. We'll follow up for you through the close when we come back. Alphabet under pressure following a second antitrust lawsuit by the Department of Justice this afternoon. Up next, the potential long-term impact on the stock. That story plus 3M sinks and what to expect from Microsoft's earnings after the bell when we take you inside the market zone. We're losing a bit of steam. Dow still up at 35 points. Be right back. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here, as always, to break down the crucial moments of the trading day. Plus, Seema Modi is here on GEN3M and Moffitt Nathanson's Sterling Audie on Microsoft.

We'll kick it off with the broad market. NASDAQ is getting hit the hardest, Mike. It's down now six-tenths of one percent. Looked like a mild sell-off. It's now worsening here into the close. But with this first down day in the last three, some other interesting cross currents. Gold quietly hitting its highest price since April. Oil prices under pressure. What's the what's the narrative today?

Well, I would say with the Nasdaq underperformance, it's just some cold feet ahead of Microsoft's numbers. I think that stock in particular is down about 80 basis points and sort of weakened in the last hour or so. So kind of just noise after the run that we've had. S&P is kind of hovering here. We're up 15 percent off the intraday October low. So I think the gold outperformance is interesting. And it sort of works slightly in contrast with some of the other sort of risk seeking action that you're seeing in very small stocks and other things. But, you know, rates are down huge. The dollar has come off very hard. And this sort of global reflationary theme

that maybe is coming around with the China reopening, I would argue might have something to do with it. And by the way, other metals and other heavy stuff in the world is doing quite well. I don't know if that's related at all, but you see a stock like PACCAR today making a new high. It's up 8 percent, truck maker in the U.S. So there's weird parts of capital goods and basic materials working, even as some of the flimsier kind of discarded speculative growth stocks also fly this month. You answered the question. I was wondering why construction and farm machinery and heavy trucks was the best performing subsector today. There you go, Mike. So we've been watching shares of Alphabet this afternoon falling in midday trade after the Department of Justice filed a lawsuit against Google

alongside eight states. We heard earlier this hour from Colorado's Attorney General Phil Weiser. Mark Mahaney joins us. Evercore ISI Head of Internet Research covers the stock. Mark, here we go again with Alphabet. Any reason that this one looks particularly different or worrisome for you? Well, it's a focus on a different part of the business. So in the past, the regulators have gone after and the DOJ currently is going after the company search business. Google clearly has a very strong position there, but it arguably offers a service that's great for consumers. When you get to the ad tech part of the business, now this is a small part of the business, only about 10% to 15% of their revenue and maybe 5% of the company's profits. That's where there's just a lot of, I don't know what the right word is to put here. It's intricacies.

So they help publishers sell their ads. They help ad buyers buy ads. And they run the exchange in the middle. Like there's a lot of potential conflicts in that. So I think that's why the DOJ has been looking at this. And attorneys generals have been looking at this for a long time. I mean, it seems like an obvious place to look. Whether there are real alternatives in the marketplace, that's kind of – it's hard to see what the next big agency is or ad network that could come in there.

But anyway, this has been building for a while. It's here. It's going to be an overhang on Google shares, call it one to two to three points on the PE multiple. That's the drag. And I think you're going to have to expect that for the next couple of years. So it's a worst case scenario here for Google is what? My guess is the worst case is that they're forced to spin it off. I don't know that they, yeah, I think that's, that's where you had this negotiation last year and Google offered to sort of spin it off, but not really spin it off. So that's my guess.

And by the way, for investors, I don't think that that would be necessarily a negative development. Again, it's about 5% of Google's earnings. So maybe even a touch bit less than that. So, yeah, that's the take on it. I think that's the worst case for Google. There may be some fines associated with it, but investors will look through that, as they have with prior fines. It would really be a forced spinoff of the ad network business. Mark, who else is at risk? I mean, this is the first real action we've seen from the Biden administration, isn't it, on antitrust,

sort of picking up where the Trump administration left off on this front. Where's the next one coming from? What's the big worry that you have? Because you cover all these Internet giants. Well, Sarah, I'm going to go the other way. I'm going to talk about names that I think kind of show this is that are put in relatively better light because of this. I think Meta is one of those. Meta doesn't have any monopolistic position. If it did, TikTok wouldn't be, you know, have any impact on it that it has. So and then if you're going to build up a new ad network, I've got a couple of companies you should watch out for. Maybe this is Apple's big entry opportunity.

I could see them doing something like this. This would be years in the development, but it's possible. And then there's Amazon, which has already built up a pretty large demand-side network, demand-side platform for advertisers. That's almost as big as Google. So if you're going to put pressure on Google, you're creating opportunities for some of these other platforms. So Meta, Amazon and Apple seem like positive derivatives to me. Mark Mahaney, thank you for joining us with some of the stock implications of this announcement, this lawsuit today. Two major industrial companies reporting earnings today,

3M, which is the biggest drag right now on the Dow after missing profit estimates and slashing full year guidance because of consumers cutting discretionary spending. Meantime, look at GE beating on both top and bottom lines. Big stock reaction. Well, it's up at less than a percent thanks to strong demand for jet engines and power equipment. Chairs have been a little volatile because of disappointing guidance and ongoing challenges with inflation, which C.M.B., which CEO Larry Culp discussed earlier here on CNBC. Given the nature of when we buy and when we produce, some of the inflationary pressures that we all saw in 2022 will be with us in 23. That said, all in, we think price cost is a slight positive for us in 2023. Seema Modi joins us. Seema, what are the takeaways for you with some of these industrial giants,

which we often look to to get a read on what's happening in the economy? Well, Sarah, 3M and GE, they operate in two very different parts of the industrial world. So that's why the messaging was very different today. GE touting the strength in aviation as China reopens. CEO Larry Culp telling me he's seeing a dramatic snapback in air traffic there and now expecting China to get back to 2019 levels. But it is struggling on the renewable side. However, the struggles at 3M, Sarah, much larger, arguably, with CEO Mike Roman referencing consumers are sharply cutting discretionary spend and the real concern for investors is the legal issues tied to PFAS and thousands of lawsuits from US veterans that claim 3M's earplugs caused hearing damage.

So there's a lack of visibility and that's what's really been a big drag on 3M, not just today but if you look at a two year, you'll see 3M is down significantly compared to GE, which has really made restructuring a big priority and seen its share price up about 15% during the same time period. Mike, look at that gap. That's pretty stark. Yes. Well, for sure. I mean, I think that the realization of 3M's issues is something that you basically have to attribute that to right now. But both companies really in different ways are showing you kind of the messiness and the untangling of multi-industry conglomerates at different phases. GE making progress, but nobody can tell you what

the actual core earnings power of the company is. The guidance is tough to disentangle. So I think that the market is preferring to go over toward the either very pure play aerospace type things or pure capital goods, farm equipment, mining equipment, things that you actually are. It's more tangible. It's less financial engineering and it's less unwinding. Got it. Seema, thank you. Seema Modi. Let's hit Microsoft because it's out with earnings after the bell. This, of course, comes after the company announced a new multibillion dollar investment in OpenAI, which is the company behind the AI chatbot, ChatGPT. Let's break down what to expect with

Sterling Audie of Moffat Nathanson. He rates Microsoft as market perform $268 price target. There's a lot happening here with Microsoft, Sterling, but beyond just, you know, we'll talk chat GPT, but just as far as the quarter and the performance is going, they announced these layoffs. They're obviously in bell tightening mode. What do you expect as far as a slowdown potentially in cloud? Yeah, cloud is what's, you know, front and center for all investors right now. You know, the company talked about a five point slowdown quarter over quarter that's on a constant currency basis. That would put you right around 37 percent constant currency. When people see the press release and the reported number, you know, consensus numbers, our numbers are right around 30 percent. That's kind of the

bar that we're looking for. I think everyone knows that, you know, growth is slowing. The question is whether it's slowing more or less than expectations. I think anything slightly above that expectation level. So if we see a 36, 37 type of number on Azure, people are going to feel comfortable that the deceleration is kind of in line with expectation and they can focus on the positive of chat, GPT and the open AI investment. The layoff side, it's a couple of percent of expenses that they're really letting go. And frankly, across software, there needs to be a little bit of going back and trimming the fat because hiring over the last couple of years was aggressive given the growth that we've seen. This actually could be healthy. You're going to see companies come out stronger and more

profitable through this cycle. So how do you expect Microsoft to do guidance, to set the bar for 2023, given this kind of environment? Yeah, remember, they've got two more quarters in their fiscal year, so they're going to give six months worth of guidance. A lot of the calendar year software companies will give you full 23 guidance. I think it's going to be a lot of the qualitative things that we want to hear. So what's going to happen with Azure? Everyone's expecting a further slowdown, especially for the next two quarters. But what's going to be the qualitative commentary about the, you know, are they going to expect improvement when we get into the back half of the calendar year? I think that's going to be what's critical to listen to on the call.

On chat, GPT. So my AI guru is Jim Breyer, who I spoke with last week in Davos, because he's been talking about AI for many, many, many years now. Believes it's the future of healthcare and other industries. Says that the valuation that Microsoft paid is frothy. How is Microsoft going to answer that and paint it into their long-term vision? Yeah, it's always difficult when you're talking about these cutting edge, groundbreaking new technologies. I mean, I remember the valuation of Netscape when it came public, you know, felt like, you know, it was setting a bar or Google, etc. You know, this is something that can really be a game changer for Microsoft. We believe that 75%

of Microsoft's revenue could actually benefit from incorporating chat GPT into it. And I think this can be a massive competitive weapon in the various areas, not just cloud. We're talking about Office. We're talking about Power BI. So we think that, you know, while the initial sticker shock may get to some people, we think when you think about the next 10, 15, 20 years and the growth dynamics it can generate, it's probably going to be worth it. Mike Santoli, Microsoft is up this year, but just barely. It's underperforming the broader NASDAQ. And I know this is one of those that you look at as a true bellwether for tech. Sure. It's a bellwether mostly of sentiment and of people's just faith in the huge platform's ability to kind of churn out the numbers. Now, for calendar 2023, the estimates

consensus-wise for Microsoft, they're down like 11 percent, but that's better than many of the peers. Things like, you know, Alphabet looking like 20 percent from the middle of last year. This year's earnings estimates coming down. So it has shown more stability. I think there's a general faith that whether it's with the AI investment or other areas, that they're going to be covering the next frontier of what needs to be done. And so you're not going to necessarily be left behind. And by the way, a $10 billion investment at a $30 billion market cap. I mean, Microsoft bought LinkedIn like seven years ago for $30 billion when nobody knew why. So $10 billion on a $1.8 trillion market cap for Microsoft doesn't seem like a big cost of a bet on the future.

All right. Mike Santoli is not worried about it. Sterling Otte, thank you very much for joining me. Appreciate it. Thank you. Those Microsoft numbers coming right after the bell. Two minutes to go here in the trading day. Mike, what do you see in the internals?

Yeah, very mixed, as you would expect, from a flattish to down index story here. But definitely not a washout. We've had very strong breath coming into this year, but some give back today with somewhat more declining versus advancing volume. Look at micro cap stocks as a group compared to the largest 50 in the market. That's the XLG. And you see really a big gap opening up there with the smallest stocks outperforming by seven percentage points over the past year, but almost all of it in the last few weeks. That's a typical January effect, a little bit of excitement in some of the smallest names.

Volatility index not doing a lot, down another almost half a point, around 19. We sit here waiting for not just some more of the earnings, but also the PCE inflation number on Friday, the Fed on Wednesday. And we have the index is kind of hovering right at the crux of whether it's going to break to a new uptrend or not. All right. So here we are at a critical moment. Also on Microsoft, streets expecting a big move. Options market implying a move of 6 percent or larger in Microsoft stock. As we head into the close, take a look at where we stand here in the Dow. Started the hour up about 150 points on the Dow. Lost a lot of that. We're up about 118 right now. Oh, we came back a little in the last few moments. Travelers, UNH and Caterpillar driving the Dow higher. 3M,

Merck and Nike are the biggest weights. The S&P 500 is little changed right now. Utilities, industrial, staples, they're all doing well. Energy, healthcare, consumer discretionary, not as much. The Nasdaq composite down two-tenths of 1%. Maybe some jitters, as Mike said, ahead of the Microsoft numbers. There's also that Alphabet lawsuit weighing on those shares. Amazon down as well. That's it for me. I'm closing now.