Closing Bell - Closing Bell: Finding Opportunity 8/13/24

Episode Date: August 13, 2024

The market rebound takes hold after a softer-than-expected PPI print. BlackRock’s Rick Rieder joins exclusively to discuss where he’s seeking gains. Plus, Allianz’s Mohamed El-Erian sets investors up for a critical CPI report. And, Starbucks shares notching their best day on record after a CEO shake-up. Kate Rogers breaks down the move… and we dig into an activist shareholder’s influence.

Cal, thanks so much. Welcome to Closing Bell. I'm Scott Wapner, live from Post 9 here at the New York Stock Exchange. This make or break hour begins with the rebound in stocks, which have now gotten all of last Monday's losses back and then some. It's been a remarkable turnaround led by tech, which has some wondering whether that trade is now back as well, along with the markets at large. We're going to ask our experts over this final stretch. In the meantime, let's check out the scorecard with 60 minutes to go in regulation. It's a strong day today. And there it is, the NASDAQ leading by two and a third percent. S&P good for one and a half percent. There's the Dow trying to push back towards 40K,

all because a softer than expected PPI report sent stocks higher. They've held those gains, even added to them throughout this day. By now, you know about the big story of the day, Starbucks CEO out, Chipotle CEO now former, because know about the big story of the day. Starbucks CEO out. Chipotle CEO now former because Brian Nichols is going to take that job. Starbucks having its best day ever. Chipotle, that's worst in years, though it is coming off its worst levels, too. It does

take us to our talk of the day, finding opportunity in this market. Our headliner was doing just that a week ago when stocks were sharply lower. He called into closing bell last Monday and told us as much. Well, BlackRock's Rick Reeder is back with us now. He's the firm's CIO of fixed income and the head of the global allocation team. It's good to have you back. Thanks for having me. You sat down and you said, we've been selling. I'm a seller.

Yeah. I was very surprised to hear that based on what we talked about a week ago. So it's say pruning, trimming. Listen, when you take, I mean, today the market rally on a softer PPI, if you actually look at that report, it was mixed, but we're moving in the right direction on inflation. But when you take a step back and think about it, you've got an economy that's slowing. You're now pricing. I think we were at S&P where it was 51.80 or so when we were on last week. We're bumping up against 5,500 earnings. You can take the P.E. of the equity market of the S&P.

It's, what, 23.5. Tech is about 34. And even if you take off a forward, you're pricing a lot. You've got Mideast. You've got a CPI report tomorrow. And people say, well, and you've got a slowing economy. And people say, well, and you get a slowing economy. And people say, well, you know, we got the Fed that's going to cut rates. We're pricing in the Fed. I mean, you're pricing in foreign change cuts for this year. You're pricing in down to a 3 percent funds rate next year.

And the point being, like, is it time to trim a bit? You know, we've been on for a bunch talking about equities, ground on equities. Equities are going to be higher over a year from now. That being said, I think these valuations have gotten, have caught up with, and there's, you know, there is, I mean, think about where volatility is down to versus where we were on the phone when VIX was at 63. We're now under 20. So you can set up some structures now where you can buy some upside because volatility is down again, protect some downside.

And I don't know. I mean, it's a pretty big move in a short period of time. Yeah. That I that, you know, it's worth taking some chips off the table. You shocked by the rebound. You sound like you are. Particularly given the fact that, you know, I was looking at I was apostate or some of the Fed statements. We still have to see. I mean, I think you're going to see a decent CPI report tomorrow, but I would say the convexity of that number now, if you've got a softer PPI and after you're pricing in so much for the Fed, listen, if it weren't a good number, that wouldn't be a great thing in terms of the perspective of where the Fed is. So I am surprised we've moved as much as we have. I mean, I know,

you know, whether it's selling or buying some convexity today, it feels like a bit of a gift relative to where we were. I went to sleep last night and I was thinking a lot about the geopolitical thing about, gosh, what's going to happen? And now you come in today and you got S&Ps up 80 and 80 something points. Pretty good. I think it shocks most people relative to where we were when we had this conversation. Totally. A week ago and how quickly we've come back is almost like nothing ever happened. This was this massive panic attack over a growth slowdown and this unwind of the carry trade. Is there more to come as it relates to that, do you think? Are you fearful of that?

I would say a couple of things that make me feel better about it. Part of why the equity market's doing what it's doing, you cleaned out a lot of the gearing, a lot of leverage positions to a couple of trades, Japan being a big part of it. I mean, walking in on a trade before I walk in, but you look at where the Nikkei was coming in Monday morning. That's for a developed market, equity market to do what it's doing. And then you think about what sort of stimulated it. You had a weaker payroll report. Is the Fed behind the curve?

And by the way, geopolitical was there. So you think about where we are today versus that point. Maybe the news is a little better in some forms. I've been getting confirmation PPI, but we know inflation is coming down. But gosh, I read a load of earnings reports. And if you said, you know, top earnings were pretty good because margins continue to be reasonably high. You know, you go through this period, what companies do, you're able to keep margins up. But the top line revenue, you know, particularly you think about consumer, Donna, top line revenue was uninspiring. So

listen, I think the economy's fine. Is it softening? It's softening. You know, the delta of where we are today versus where we were last Monday. And it's almost it's almost extraordinary. Isn't the the multiple arguments skewed by the fact that as we have tech leading us back, we're once again to the top heavy market. And if you actually are going to get rate cuts and earnings are going to hold up because the economy is slowing, but not stalling or shrinking, that it's not as clean a picture as some would have us believe. What's the equal weight, for example,

multiple relative to what the S&P is when you put in all these tech stocks? So I saw there's a couple of points there. One, if you take out the tech stocks, say, OK, the multiple is actually not that aggressive. But then I read a load of earnings reports from those outside of the tech companies. I didn't get really inspired by, gosh, I'm going to miss the run up on top line revenue growth. And then I was like, by the way, I don't mean to be too aggrieved. I mean, I still like equities. I just think we've come a long way pretty quickly.

I was looking at equity risk premium today. I was looking at free cash flow yield and say, and then I was comparing it to where we could do, like in fixed income today, you know, we have this ETF. And they were clipping six and a half to seven in fixed income. And you said, gosh, I got to pay a 23 multiple off of last 12 month earnings. And I'm hoping that we don't see what we saw last week. And I got to hope that revenues accelerate and earnings and margins keep up where they are. Or I can just clip six and a half to seven. My only point being is I think

the needle can shift a bit from, you know, it's been equities, cash, equities, cash. And by the way, seven equities. And I think now you could evolve the portfolio a bit and maybe a bit less equities at these multiples. Can we talk about the 60-40 again? I mean, prominently. That's what I hear lately. You look at flows from, you know, some competitive shops of yours. You see where the flows are going. There's a lot of money going into fixed income funds.

Yeah. So I don't think the traditional 60-40 got you an index with a lot of exposure to the back end of the yield curve. Given how flat the curve is today, given how much debt the Treasury is going to issue, like what I just flow into, just get me a traditional index,

I wouldn't do that. But you can buy three to five-year parts of the yield curve where, you know, you've seen it play out today. That is the leverage in terms of where the forwards can move if the Fed moves. And you can get a lot of yield without going out the yield curve. Double B high yield in Europe, single B high yield in the U.S., securitization market. You can get a lot of yield. And by the way, not stretch credit quality-wise.

So I wouldn't, I'm definitely not in the mode of let's put on a standard 60-40, rotate more into the traditional 40, but build income. Income can be a really good, particularly the second half of the year where volatility tends to be higher. Would I own some income, more income than I have? I would. You mentioned Bostick, who was on the tape this afternoon speaking at 115, wants, quote, a little more data on the economy before cutting rates. Just to be absolutely sure, he says it would be really bad if we started cutting rates and we had to turn around and raise them again. I'm willing to wait, but it's coming. I mean, you think they go in September, right? I do. But the market's already got that all in. The markets have its pricing in, you know, almost 50 in September, two-thirds of the way to 50 in September.

The markets have its pricing four cuts for the balance of the year. Listen, I think there are members of the Fed who do want to see more data, do want to build more confidence. One man's opinion, you always do, you invest relative to what you think the Fed will do. I think they'll move 25. They'll probably do two more successive 25s. I personally think the funds rate is price wrong. At 5 and 3 A's, you've got inflation, three-month moving average, six-month moving average, core PCE, core CPI, even service level. If you strip out shelter, but even shelter is coming down, you're running low twos inflation, and you're building real slack in labor. I mean, obviously we talk a lot about the unemployment rate and too much time

on the unemployment rate, given the amount of people entering the workforce. But you look at the JOLTS data in terms of job openings, hires being down. You look at, you know, some of the cyclical areas of hiring that are really coming off travel leisure that have been a big boon of this economy in terms of people. Listen, you're building real slack. And, you know, I've said it before. It really hurts. You look at the consumer data, low income, small business having a really hard time. Local banks having a really hard time. You see that in delinquencies, auto delinquencies. So I would get the rate down faster. I would do 50s sooner. I would have gone in July, but I don't think they're there.

What if they surprise us, surprise you, and they do that? Remember, the whole reason I reached out to you last week in the throes of all this was because I saw a social media post of yours saying what you just did, suggesting that they're way too high and that they need to get it down quickly. If they do get it down quickly, does that change your perspective on equities in the nearer term? If they do get it down quickly, all you're doing is verifying where the pricing is in the market today because we're pricing so much. I think, and I do think, as you said with regard to Bostick, I do think there are members of that committee that don't want to be wrong and don't want to create a reacceleration. By the way, I don't think they will, but I think there's a view that you could reaccelerate inflation. I think that's flawed thinking, but I think they'll move deliberately because of it, and I think they'll do these 25s.

You could do 50s. Like, if they did 50 in September and then went another 50, I think the terminal funds rate, Chair Powell said it at the press conference. He said it at Humphrey Hawkins. The terminal rate is not going to be two again. You're pricing next year close to three. Like you can do 50s and say, listen, we don't necessarily going to go much further than four. And then you don't create a financial easing dynamic.

You don't create a potential acceleration. I just think you've got to get to four. And then you don't create a financial easing dynamic. You don't create a potential acceleration. I just think you've got to get to four. I mean, five and three-eighths relative to where inflation is relative to slack by any measure is the wrong price. You have your eye on Jackson Hole? I do, because that certainly is a point where you could describe the transition. You could describe the metrics that you're utilizing to think about how fast you would move. When you move, are you data dependent or is it a process? Is it a process where when we start moving, we're going to do consistent moves or is it we're moving once? And I think that's where you would articulate that.

I think there's some interesting things around the unemployment rate. The SOM rule has gotten a lot of focus, I think way too much focus. You're bringing a lot of people in the labor force. So how do you define what are the metrics you're thinking about? And Jackson Hole is going to be a big part of that. Yeah, no doubt about that. So let's go back to where we were when you sat down and we started talking about trimming some positions. Where would you do that? So I think tech's had a good go. Today's had a really impressive go. And I like tech longer term.

And by the way, I'm still in tech. I still believe you're supposed to be in it. I do think the free cash flow generation is terrific. You're pricing some pretty good multiples into, particularly in semis, you're pricing in some pretty aggressive multiples that you have to get the capacity, the energy to get the AI demand that you're pricing into semis today.

So cutting a little bit of that, and then general technology growth-oriented equities. We're pulling back a little bit. Again, I don't want to overstate it. I do think equities. We're pulling back a little bit. Again, I don't want to overstate it. I do think equities will win. But I think in the near term, I'm pretty impressed with how much we moved. And by the way, converting some of your organic equity exposure to call spreads and not to get too complex, but if you sell downside now to buy some upside, you can create some really neat convexity on the equity market. So as opposed to just sitting in just a delta one or just an equity position it sounds to me also though if if you are suggesting that cash could come off of or come out of money markets as rates don't

look as attractive as they did 18 months to 24 months ago, you would almost suggest that it goes into some degree of fixed income here rather than equities. Is that correct? 100%. I mean, the needle has to shift. I mean, you can create six and a half to seven yield AAA CLOs. You can run a portfolio, as Bink ETF we run, it's a high BBB, low single A rated portfolio average rating. You can create, we're creating literally now 690. So if you said, gosh, I can own some of that clip 690. So what is the run rate return on equity of the equity market? Let's say you get 10, you can compound at 10. If I'm getting close to seven and your free cashflow yield now, given where valuations are down, I would definitely move the needle more than that.

So I think and you're seeing it, as you said, not just ourselves, a number of others are seeing flows into fixed income. Yeah, the needle definitely. And by the way, second half of the year, the seasonals aren't great. You got an election, let alone the Mideast dynamic. So, yeah, I like I like de-risking a bit at this point in time. You're going to mark the one-year anniversary of the BINC, as you said, right? The Flexible Income ETF, the BlackRock Flexible Income ETF. And you're going to ring the closing bell. Yes, sir. Has it been a year that you expected in terms of what that fund was going to deliver for investors?

So, I'm pretty excited. I think we're one year. I think we're one year, I think we're almost 12% return for fixed income. Pretty good. And by the way, not taking a lot of long-end interest rate risk. High yield has done extremely well. Securitized assets have done extremely well. So we're super happy with performance.

Obviously, flows were beyond what we thought they would be at this point. You know, I think where people are viewing it, we're at a pretty unique point in time, in history. Think about inflation running at low twos, and you can still clip without going into, like, aggressive emerging markets, aggressive high yield, triple C high yield. You can clip that sort of yield, your real rate of return. I've been doing this, I don't want to say how long, for a really long time. Like, I mean, you think about the years where zero interest rates, a 2% funds rate. Like, that's a pretty neat point long time. Like, I mean, you think about the years where it's zero interest rates, a 2% funds rate.

Like, that's a pretty neat point in time. And so, yeah, I think it makes sense that people move in that direction. And by the way, not just necessarily this fund, but a bunch of ways to get some yield in the portfolio today. All right, go get them up there on the podium. We'll see you soon.

All right, that's Rick Reeder, of course, joining us today from BlackRock. Let's bring in now Christina Hooper, Chief Global Market Strategist at Invesco. Welcome back. It's nice to see you as well. Rick's point today is that I think this market's full, right? The multiple's expanded. The market's come back a tremendous amount since last Monday.

Agree or disagree? Well, certainly it's come back a lot. I think it speaks to the resilience of the environment. But I do agree that there could very well be significant volatility ahead. We could see some pullbacks. I just don't think that's a reason to take profits off the table, given how much cash is sitting on the sidelines for investors. Sure. But that's not the reason that he necessarily suggested you should. It was more towards the valuation of this market is now stretched, like all of the good news is in.

How do you respond to that? I don't think all of the good news is in. When we look at the forecast for earnings growth for the coming year, it's pretty good. And you have to factor in that there are more names in the S&P 500 that are potentially contributing to that growth. At least that's the expectation. So it's not just a few names. It's more of the S&P 500. I think that matters. I do agree that it's very important to be well diversified. And this is an attractive environment for fixed income, no doubt. And I would want adequate exposure there. To me, it's all about diversification. But I think it's important to maintain significant exposure to equities. But how would you look? I mean, over the long term, he said it himself. Did Rick Reeder a year from now, equities are still going to be higher. But that doesn't mean that there's going to be some choppy waters ahead. Do you think that earnings justify where the multiple of this market currently is?

Because I think he would cast some doubt on that based on the commentary and the forward guidance from several companies. If we get rate cuts and they start soon and they're significant, I do believe that that would be the case. OK, if you were going to do you take issue with the idea that you should trim some mega cap tech stocks right now, given the fact that they've snapped back so so sharply? Well, what I think the market is telling us right now is there's a higher probability of a recession, which means you want to be in some defensive names, arguably those mega cap tech names with the significant free cash flow generation are checking that box. wouldn't abandon them. I might trim them a little bit, but for the most part, I think it's time to just take some cash from the sidelines, add to fixed income exposure, add to alternatives exposure, so there's more diversification and a more smoothing of volatility, because there are likely to be some ups and downs going forward. What about small caps, which still seem to

get a lot of conversation about whether it's time to do that because the Fed's going to cut rates and they're finally going to get, many of these companies are, the benefit of lower borrowing costs. What do you say? I think small caps have significant potential. A lot of it is dependent upon what happens to the U.S. economy. Of course, there are increased risks of a recession every day that restrictive monetary policy remains this restrictive. But if the Fed starts to cut, and cut significantly, we are likely to see a reacceleration in economic growth, and that should benefit small caps, cyclicals.

We're likely to see markets discount that in advance. And so I think there's potential there. That's the beauty of diversification is you can hedge your bets and have some exposure there. Christina, we'll see you soon. Thank you. Christina Hooper. Thank you. Joining us here on Closing Bell. Shares of Starbucks, Chipotle moving in opposite directions, as we told you at the top of the program today. And that is following news today that Starbucks is replacing its CEO with Chipotle CEO Brian Nicol. Kate Rogers here with those details, what it could mean for both of

those stocks. What a day. What a day, Scott. Major news, as you mentioned, with Chipotle CEO Brian Nicol heading to Starbucks next month, September 9th, after some six years with the company. Lakshman Narasimhan out from the board and CEO role at Starbucks, effective immediately. And Scott Boatwright, interim CEO at Chipotle. Nickel is extremely well-respected in the industry as a visionary leery joined Chipotle in 2019 as the company was struggling with food safety issues and quality perception challenges with consumers. Under his tenure, it was a blip with few subsequent issues as he grew the company's loyalty and digital business into a real force and introduced new, successful menu items. Prior to Chipotle, he was Taco Bell's CEO, helping to create some viral moments with that brand with the introduction of breakfast and also catering to a younger audience, a legacy that remains today.

But the challenges at Starbucks will be different. First, its footprint, of course, much larger and more global, with more than 39,000 locations around the world, company-owned and licensed. The China and U.S. businesses are under immense pressure from consumers who are fed up with higher prices, speed-of-service challenges, and quality issues. So it remains to be seen how Nickel will tackle all of those. Back over to you. All right, Kate, appreciate that. That's Kate Rogers with our reporting.

And how about this juicy little tidbit I learned earlier today from sources telling me that Nelson Peltz's try-in built a substantial stake in Starbucks over the past few months and then had conversations with Starbucks board chair Melody Hobson. Sources telling me that try-in is happy with today's outcome, so much so that they sold their stake on today's big pop. Again, the best day ever for shares of Starbucks. We'll continue to follow that story. We're just getting started here on Closing Bell. Has the PPI solidified the case for rate cuts? Stocks seem to think so. So does Allianz's Mohamed El-Erian. Well, he's been arguing for rate cuts for a while now. So what happens now ahead of tomorrow's cpi print he'll tell us We are rallying after this morning's softer-than-expected July PPI print, the S&P and NASDAQ climbing back towards record levels seen last month. Investors now turning their attention to tomorrow's CPI print

and what that could mean for next month's critical Fed meeting. Joining me now, Mohamed El-Erian of Allianz. Welcome back. It's good to see you. Thank you, Scott. You surprised at how quickly the market has bounced back from last Monday's sell-off? I am. I'm like Rick. There was reason to bounce back, but the speed and the extent to which we've bounced back did surprise me. We still have a 35 percent probability of recession. And we had another corporate earnings report today from Home Depot reminding us of the weakness of the consumer policy. I think the market is expecting too much from the Fed. And finally, the technicals are still vulnerable.

There's still some carry trade out there. So I'm not surprised we bounce back. I'm just surprised how fast and by how much we bounced back. So the Fed's going to go in September, yes? Yes, absolutely. And if they don't, they'll go by 25. What raises it to 50, do you think? Because, I mean, you've made the argument that they're already too late, that they should have started cutting already. So I'm sure in your mind, you'd like to see them go more than 25, wouldn't you? I would, but I don't think they will. So there's two parts, Scott, as you know. There's a journey and a destination.

I would have rather they started the journey earlier, and they should have cut in July. But there's also the question of the destination. Where do they end up? They've been ambiguous about that. I think the market is expecting 200 basis points in the next 12 plus months. That would be too much. The market should be more looking for 150 basis points of cost. You think they've done a good job? I think they did a terrible job in 2021 yeah i know but this is 2024 yeah they've gotten a lot better that communication is still all over the place they've got to be more consistent um chair powell's going to have a golden opportunity in 10 days time jackson hall

to do three things one is be clear on what the net neutral rate is. That's really important. Two, tell us what sort of journey would he like to get there, how he would like to get there. And then three, be clearer on what he expects for the economy. If he does that, they can regain control of the policy narrative, and that will help enormously in terms of the next phase. You think we'll get all of that? I don't. I think this is a very cautious Fed. It's a Fed that's excessively data dependent. They got such a beating back in 2021 that they've been very shy about telling us strategically how they see the economy. So, no, I think they're going to be a risk averse Fed. And because of that, we're going to continue having volatility. Do you think there's any risk of cutting too soon or buy too much at this point and re-accelerating inflation?

Rick Reeder, I'm not sure if you heard his commentary or not, thinks that that's a false premise. Yeah, I think that the inflation risk is much lower than the unemployment risk. So to the extent they make a mistake, I hope they don't. I'd rather they make a mistake by cutting too much than by cutting too little. If you look at what's happening to this economy, we have lost most of our buffers. We no longer have high pandemic savings. Credit cards have been maxed out for the lower income segments. The last thing you need is the labor market to come under pressure because that's the sole thing keeping consumption going.

Which is why the Fed chair continues to talk about it in the manner that he does, right? I mean, do you take any comfort in the fact that if you listen to anything that he's said of late, the focus obviously appears to be more on the labor market than it does the inflation picture, because they feel, certainly seems, he does, that inflation is on its way back to target. Yeah, if you listen to him carefully, there's more focus on the employment part of the mandate, but he says they are balanced now. The inflation part and the employment part are balanced.

I don't think they are. I think the employment part is more important right now than the inflation part. That's why, as you noted, I argued that they should have cut last July. They view them as balanced. I don't think they are balanced. I think the employment part is very vulnerable right now. And that's why you think the soft landing probability is still only 50 percent? Yeah, I think there's a 50 percent soft landing probability, 35 that we fall into recession. That's high. And then 15 percent,

something we don't talk about enough, Scott, bigger but not hotter. The notion that we can have a series of positive supply shocks that allow us to maintain growth without overheating this economy. So if you look at the combined probability and, you know, I often tell people, don't just look at one scenario. Trace out your whole distribution of outcomes and look at that combined probability, it looks like treasuries are pretty fairly valued over the longer maturities. On the front end, we should have started cutting earlier. And credit, certainly high yield credit, looks expensive at this point. We'll leave it there, Mohamed. It's good to talk to you as always. Be well. We'll see you soon. Thank you, Scott. And Mohamed El-Erian joining us here.

Up next, Google holding its annual Pixel hardware event this afternoon. We're bringing you the headlines, the instant shareholder reaction as well. We'll do it just after the break. Close the bells, coming right back. Welcome back to the Bell. Google holding its annual Pixel hardware event today. Deirdre Bosa live for us today at that event. Joins us now with the highlights. Hey, Dee.

Hey, Scott. It was more than just about the hardware. And the key takeaway really was Google is going to be first to market here. Usable AI that will be in the pockets of Android users in the coming weeks. So that is going to be ahead of Apple. Apple intelligence is available sometime between October and next spring. I just asked Google's head of Android, Samir Samat, why they were able to bring on-device AI to users ahead of the competition. And he said, listen, we haven't

been working on this for a year or even a couple of years. We've been working on AI for more than a decade. And that's why. Now, unlike the Google I.O. demos earlier this year, the demos today, they were live. They were glitchy, and in one case, they had to be done on an entirely different device, but ultimately, they did show a personal assistant capable of more complex tasks

in line with things that we've already seen. But in that sense, Google is trying to say that it's showtime for generative AI. It needs to be usable, practical say that it's showtime for generative AI. It needs to be usable, practical, and it's got to make money, especially as those CapEx costs rise and investors look for return on investment. Scott? Do you appreciate it? Thank you. That's George Robosa, Mountain View, California, for us. Let's bring in Alphabet shareholder, now King Lip. He's Baker Avenue Wealth Management's chief strategist. It's good to have you back. Are you wowed by what you've seen today

as a shareholder? Hi, Scott. You know, I think it's the best Harvard event Alphabet has had for a long time. You know, in the prior events, you know, bigger screens, better cameras, they're great. But prior events, really the software technologies were sort of lacking. This time around, it really showed that the company is truly committed to the integration of software and hardware, which is what Apple does so well. So I think this bodes well for the Pixel phones. How are you thinking in general about, and Dee referenced this in her report here, spend versus return and time of return? What do you need to see as a shareholder you know as a shareholder this is you know our research and uh and development if you

if you would um with this investment our expectation is that you're going to have multiples on roi um there's always this sort of initial investment that takes cash flows and everything else, but we think it's a worthy spend. Just from the results that we've seen in terms of the digital assistant, Gemini Live, it's pretty incredible. I mean, you can have real conversations with this digital assistant that I think users could not just save minutes by setting a timer, but they can literally save hours by writing emails and doing research and due diligence. You heard Rick Reeder, I hope, at the top of our program sit down and say this market's full. We're selling or trimming some stocks. And when I asked him where, the first thing he said was

mega cap tech has come a long way. It's up 3.6 percent this week. What are you thinking about when you hear that? Well, we're not there yet. In fact, we would say the approach that we're taking is it's more of a barbell approach. In fact, we recently added to our Apple position. The barbell approach means that we're still overweight tech. We're still overweight growth. But we recognize that perhaps we're not going to see the same returns as we have seen in the

mega cap stocks. So other sectors will start to participate. But we still want to be overweight tech and we still want to be overweight growth because that's where the earnings growth is. I hear you. I mean, and I don't think that he would argue with that anyway to begin with. But there is the valuation question, right? I mean, to what point are you willing to be overweight, I think is the more valid question. As the valuations look rich to some, do they not to you? You know, valuations, you know, with the most recent pullback in tech stocks, I would say the valuations look a lot more reasonable. If you're looking specifically on Alphabet, for example, we're actually trading below 5 and 10-year averages in terms of its multiples. So

on an absolute level, having 20 times, 24 times earnings seems high. But historically, Alphabet has traded even higher than those levels. So with the earnings growth that we're expecting, 30% this year in the mid-teens and the following years, I think it justifies the higher valuations. All right. See you soon. King, thanks. Appreciate it. That's King Lip, Baker Avenue. Up next, we track the biggest movers into the close. Seema Modi is standing by for us today.

Hi, Seema. Hey, Scott. A top Nike rival is making gains in the athletic footwear market. We'll reveal which name after this short break. We'll be right back. We have about 15 minutes to go before the closing bell. Back to Seema Modi now for the stock that she's watching. Tell us what you see. Scott, on holding, reporting record-breaking earnings for the second quarter with a year-over-year jump in net sales of nearly 28%

as it continues to gain market share in shoes and apparel. The stock is having its best day since May. And Stiefel analysts there reiterating their buy rating stock up about 5 percent. And U.S. traded shares of Tencent Music tanking more than 15 percent after the China-based streaming company reported numbers on monthly active mobile users that came in below Wall Street analysts estimates. Executives on the call also acknowledged the macroeconomic challenges in China. You'll see shares down 15 percent. Scott.

All right, Seema, thank you. Seema Modi still ahead. Oil sitting out the rally. We're going to drill down on what's behind that slide. Back on the bell after this break. Got some earnings to set you up for in overtime tonight, including that company right there, Flutter Entertainment. Reports top of the hour. We run you through the key metrics you need to watch out for in the market zone.

We'll do that next. Time for the Closing Bell Market Zone. CNBC Senior Markets Commentator Mike Santoli is here to break down the crucial moments of this trading day. Plus, Pippa Stevens on why the energy sector is sitting out the rally for today. And Contessa Brewer looks ahead to Flutter reporting earnings coming up in overtime. All right, Mike, to you first. Have a strong day. We are adding to it as we speak.

Yes. Rick Reeder sat where you're sitting at the top of our program today and said he's trimming stocks. And I want you to listen to why. Equities are going to be higher over a year from now. That being said, I think these valuations have gotten have caught up. All right. So his point was, look, valuations are full and rate cuts are everything's priced in because the market snapped back so much from the depths of last Monday.

Right. So, I mean, we are still a few percent below the highs, the record highs of a few weeks ago in the S&P 500, in the Nasdaq. But I think you have to remember, I try to have been, you know, been pointing to this, that at that moment at the highs, you had just complete agreement on how ideal the setup was in terms of the probabilities of soft landing, the very small probability of hard landing, the fact that we even thought we had a fix on the election. And we hadn't yet had that kind of stutter step rethink about AI investing and the big tech pullback. So I think it's fair to say if that's your ideal spot for right now, four or five percent up from here, it feels fully valued.

Now, the market behavior itself has been very encouraging. Every day without a surprise has meant the market makes a little more progress back toward where it was trading before. We haven't yet kind of broken this little mini downtrend we've been in for a few weeks. We're close to it right now. But I was saying earlier, you know, we're in this zone of right where we finished July,

more or less, and right before we got the, you know, the bad jobs number. So, you know, I think it makes sense that we're kind of tacking back and forth. But the fact that we also are returning to mega caps being kind of defensive and and kind of this collective agreement that that they're somewhat safer at, you know, 10 or 15 percent down from their highs shows you that the muscle memory is

there. The VIX is under 19. Yeah. And that's part of it. Right. Everyone wanted to celebrate a broader market when you had crazy wild Russell 2000 stocks leading the way. That's not a formula for a stable, kind of comfortable rally. And the more the mega caps can be an anchor, volatility can come down. It's not renormalized to where we were, of course, below 15. But it's definitely more secure footing. It shows you we're not talking about macro stress here. We're talking about, you know, when the Fed does what it does and what the economy is going to look like when we're there.

Got one sector today, Pippa, that's red. It's energy. I know we're, you know, obviously concerned about what's happening potentially in the Middle East. But at least for today, oil is not delivering and thus those stocks are down. That's right, Scott. And it really seems to be those demand concerns of what's hitting oil today with Middle East tensions really taking a backseat for the moment. The market had priced in a retaliatory attack from Iran on Israel, which hasn't happened. And so we're seeing an unwind of the geopolitical risk premium.

At the same time, in closely watched monthly reports, OPEC and the IEA both trimming demand forecasts in part because of tepid Chinese consumption. Still, JP Morgan today reiterating its $90 call on Brent, really taking into consideration whether demand is really as weak as the market is pricing. Now, oil's downturn is hitting energy stocks, which are the only S&P group in the red. The upstream drillers with that direct exposure to commodity prices are leading the declines. NatGas, Focus, EQT down more than 3%, with Oxy, Diamondback, and Cotera all down at least 2%. Scott? Yeah, but, Stevens, thank you very much for that. To Contessa Brewer with what to expect now from Flutter and the earnings coming in overtime.

Contessa? Look, Scott, Flutter's putting a lot of eggs in its U.S. basket. It moved its primary listing from London to the New York Stock Exchange during the quarter, and since then, the stock is up about 3%. FanDuel is the clear market leader in the U.S., fueling most of Flutter's growth. Now, the street is expecting revenue of $3.4 billion, with the U.S. contributing $1.43 billion of that. But look, there are real potential challenges, growing concerns about a regulatory crackdown, big worries about states

hiking taxes on gambling revenue. We saw that in Illinois. Well, FanDuel's biggest competitor, DraftKings, announced in its earnings it's going to start tacking on a surcharge on winning bets in some high-tax states, so defraying the cost of that. Investors are going to watch and see if FanDuel follows suit, thereby eliminating any competitive risk perceived in those additional fees. There's also been a lot of competition, Scott, in the iGaming side. It has the potential vastly to overshadow sports betting in terms of profitability, with Flutter and, well, Vandal and DraftKings running neck and neck here and then bet in MGM working to recapture its lead a bit.

Flutter insists it has the edge and will maintain it. We see the stock up on the day about two percent. See what earnings deliver. Contessa, thank you. Contessa Brewer, we we're approaching the close here, Mike. We got a Dow that's good for almost 400 points. As you said, 5,400. We've eclipsed that. Now on the S&P, we passed the PPI test. And now we need to pass the CPI one in the morning. We do. And even as much as I thought that the inflation numbers, as long as they were mostly

in line and stayed out of the way, we'd be fine. We probably got our hopes up after PPI today that you're going to see further encouragement. No saying we're not going to get that, but I feel like the bond market's already there. And so I'm not sure. Once you are pretty sure the Fed's going to cut, you're mostly rooting for the economy to hang in there, not for inflation to plunge anymore. But yeah, it doesn't hurt. I also probably would have said that about weekly jobless claims last week, and that ended up being a bullish catalyst. What's interesting is, you know, when earnings season started, so let's call it the Friday when the banks start reporting July 12th, we were 5,600 on the S&P 500, right? So you've kind of softened up a little bit. You've

given a few percent back, even though earnings in aggregate have come in a couple of percent better than anticipated at the time, but not at that same margin of victory that we got used to. We got used to like five percentage points of advantage. And so, you know, you could say that the fundamental support is there. It's just that the rate of change is not as exciting and you're starting to see a little bit of wear and tear on some of the guidance. Rick Reeder teased up a good conversation for the days, if not weeks, ahead of, you know, what's in the market, what isn't in the market. You're going to hear people, and you already have, you sell the first cut

because of what stocks have done going into it to begin with. That's going to be the fascinating conversation over the next month, really. Without a doubt. But every sell the first cut winning trade, in other words, every time that was smart to do, it's been because recession was there. I mean, you're kind of using the sort of secondary indicator of what happened in the market instead of just saying, look, if they're cutting into a resilient economy that's not going to fall into recession, then you're talking about, you know, 1995, 1998, 2019, not like 2007, 2000.

Well, you don't want to take defeat from the jaws of victory if they're going to pull it off. That's right. And that's going to be the debate for the next five weeks. We're going to be talking about did they wait too long? Did they have it just right? Yeah. And what can we expect in terms of magnitude of easing? All right.

Big day for stocks. Mike, thank you. That's Mike Zantoli. We'll see you again tomorrow. See all of you tomorrow as well. We'll go out with a gain of better than 400 on the Dow. We said the S&P takes back 5,400 today. Tech is leading the way.

It's strong almost across the board. Almost 2.5%. I'll see you tomorrow. And I'll see you with Morgan.