Closing Bell - Closing Bell: Jobs shocker, NEC Director responds, Mega-cap tech falls short, PNC CEO on the consumer 2/3/23

Episode Date: February 3, 2023

Stocks declined in Friday trading following a blowout jobs number that nearly tripled estimates, and on the back of weakness in the tech sector after disappointing results from Amazon and Alphabet. National Economic Council Director Brian Deese breaks down what he called a “surprisingly strong” headline jobs number. Youssef Squali from Truist discusses his outlook for Alphabet and Amazon on the back of soft earnings. PNC CEO Bill Demchak talks about the signs he’s seeing from consumers and the state of the lending business. Plus the latest on Ford’s pullback, Starbucks and Apple results, and Ryan Cohen’s new target.

Stocks pulling back today in the face of disappointing earnings from mega cap tech and a red hot jobs number. But the Nasdaq and the S&P 500 are still on pace for solid gains to start the week. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look at where we stand right now in the market. Lower down 1.16 percent. The only sector higher right now is energy.

The Nasdaq's down 1.6 percent. As far as what's working, Apple has actually turned around and is higher. Tesla is strong as well. But Amazon, Microsoft, Alphabet and NVIDIA are holding back the NASDAQ. The Dow is down about a half a percent as we speak. So clearly some weakness, but overall pretty resilient considering that very strong jobs report and a move up in Treasury yields. 3.5 is your yield. Check out the key tech earnings movers. Amazon pulls back on guidance and cloud concerns. Alphabet lower as well, but off its worst levels. And then soft YouTube ads also hurt Alphabet. The stock is down 3.5%. Look at Apple, up 2.4%. Pretty remarkable comeback. Now higher despite a profit and revenue miss. We're going

to talk about all of these names in just a bit. Also ahead on the show, National Economic Council Director Brian Deese joins us to talk about today's blistering jobs number, which nearly tripled expectations. Plus, we'll talk to the CEO of PNC Financial for his read on the economy, lending and the American consumer. Sixth largest bank in the U.S. Let's get straight, though, to the market dashboard as we head for another winning week for the S&P despite the losses today. Senior markets commentator Mike Santoli here to break it down. And Mike, I would call this sell-off subdued given the magnitude of the beat on the jobs report. Sure. Very, you know, very contained, I would say. And in a sense, really to be expected, even if we didn't get that super strong jobs report. In other words,

we were already up so much and getting a little bit stretched in the short term that you would have taken any excuse to back off just a little bit. You mentioned the yields higher. They absolutely are, although very much within the range of the last week or so. So it's not as if it's really reprice Fed intentions. We have the S&P 500 has actually made this new multi-month high, let's say like a five-month high. It's still, well, I would say we get a 3% to 5% pullback from here. It's still really no problem. It will look like regular old profit-taking. It's going to be hard to really dent this trend with a one-day pullback like we have right now. We also have this really interesting feature of the market,

Sarah, this week, which really fit this year to date, which is the crash in momentum stocks. The momentum ETF, which tracks basically what's been doing well previously, has completely unwound. And here you have the momentum factor ETF, MTUM, relative to the equal weighted S&P 500 on a one year basis. This is what we've seen right here. Now, why is that? People say, oh, speculative stocks are running hard. Why is the momentum ETF going down? Well, the momentum ETF is 60 percent after last year, 60 percent health care and energy. The momentum ETF is a defensive ETF, and it's basically stuff that is not very cyclical. And so you have this big unwind right now. And the other side of this is the massive short covering we've seen. You have a lot of quant funds that trade momentum and other factors like value, like volatility and things like that. And so you saw this upside down action so far this year. This is what's destabilized. Some of the

action made it a little more volatile, but I don't think it has undercut the message of the market, which is underlying economy stronger than anticipated. Earnings not great, but we already priced it in. And the Fed may be kind of coasting to the end of its tightening campaign. Right. So the question is, is the Fed still coasting toward the end of its tightening campaign? The move up in the two-year note yield is significant. It's off the highs. We're back above 4.2. We were under 4.1. And it's now higher on the week, which is a bit of a change and a recalibration of maybe how much more the Fed's going to have to do. Absolutely. Although it's really taking place on taking back some priced

in cuts that happened beyond when they finished hiking. So you don't want to get into necessarily every little twist and turn of it. But I think at this point, the peak rate is still seen as being one or two more quarter point increases, then the real debate happens. Does it stay there for a long period of time, as the Fed's saying, or is something going to happen that causes them to cut? So really, the repricing has happened at the outer end of it, which is, will they cut in that one and two year window after they finish hiking? It seems harder to believe with such a strong job market. It does, without a doubt. I think it weakens the case for that call.

Right. Mike, thank you. We'll see you soon. Mike Santoli. Let's talk jobs now. That strong number that came out this morning. Non-farm payrolls up by 517,000 in January. Crushing estimates.

Unemployment rate falling to 3.4 percent. The lowest level since 1969. Average hourly wages gaining a third of a percent, which actually is some moderation, something the Fed wants to see. All this coming despite the Fed's efforts to slow down the economy and bring down inflation. I spoke with National Economic Council Director Brian Deese and asked if he was shocked by today's number. It was a surprisingly strong headline number and so certainly reinforces the strength and resilience of our labor market. But I think under the hood, there were a number of pieces that were positive and positive in what we want to see,

which is this transition to more stable growth as well. I would point to labor force participation, that increase, particularly for prime age workers. We're now seeing higher levels of participation, more people coming into the labor force. I think that's a healthy sign. And then, of course, on wages, we saw stable growth in wages, but moderation there as well. So I think that both of those signs, alongside the very strong headline number, reinforce that we've got a strong, resilient labor market, and we're seeing that progress while inflation is coming down. So I think that these are all pretty positive signs for where we are economically. Yeah, maybe, but the market's

not taking it particularly well. Stocks are selling off on this idea that the Federal Reserve is going to have more work to do now on tightening to crush inflation and weaken the economy. Is that the right takeaway? Look, more jobs for more Americans and people making higher real wages is good news. It's good news for the economy. It's good news for people across this country. And I think if you zoom out just beyond this one month, what we've seen over the last couple of months, the last several months, is precisely what we want to see in this transition. Resilience in the labor market, continuing to hit these historic levels in terms of low unemployment, the lowest in 54 years,

while we're also seeing price increases come down. We've seen inflation moderating. We're seeing those signs across the economy. So that's what we want to see. Obviously, we're going to have to keep a close eye on these things, but I think it's hard to look at the last couple of months and not see like we've made very significant progress, certainly from where we were several months ago. I know, but does this, I guess my question is, does this make you fear that inflation will not come down as fast as we

need to see? Yes, it's great news that we're still hiring. It's great news that wage is going up. But we don't want to see inflation turn around and continue to march higher or stabilize around these high levels. So does this make you worry about that? Well, I would say a couple of things. First, I think this report underscores that we all need to have a high level of humility in looking at traditional models that have predicted past bouts of inflation. I think it reinforces the unique nature of what's going on in our economy right now. And that shouldn't necessarily be a surprise given that the pandemic and the response to the pandemic supply chain challenges are all really quite unique things that we are living through. That's number one. Number two is that what we want to see is more people coming into the labor force and wages

moderation and not increased upward pressure. We saw both of those things in this report as well. And so I think at the end of the day, if you step back, we're seeing more jobs, real wage increases, low unemployment, and inflation all coming down. That's good news. Obviously, you need it. We need to stay vigilant and we still have a ways to go here for sure. But I think that we should we should take the progress that we are seeing in the real economy on both of these fronts and and try to build on that progress. It's why this jobs number was so surprising and is a little bit confusing because it's hard to square, Brian, with what we've seen, the layoffs in the tech sector. And I know it's a small part of the economy, but they've spread to the banking sector and chemical companies and toy companies, all trying to be more efficient

and some real weakness in manufacturing and housing. So two key parts of the economy. How do you put all that together with what's happening with jobs? Well, look, I mean, I think that the headlines and the breathlessness over some of the tech sector layoffs, I think, was what it was, exactly what you said. If you look at their share of the overall labor sector, I think that there's a lot of extension of that and breathlessness that was overdone, number one. Number two, if you look at weekly unemployment insurance claims, what you've seen is over the last six weeks, we've seen those continuing to come down and hit record lows. And we saw that in the JOLTS data, the hiring data as well. So I think that we are

continuing to see a picture economy-wide. Certainly there are differences in different sectors and we are seeing some weaknesses in some sectors and growth and strength in others. But economy-wide overall, we have a strong labor market, a resilient labor market, and we're seeing that resilience even in the face of prices coming down. So I think that's the core takeaway here. And then in the services number two was pretty decent today. It does make you wonder if the economy overall is accelerating or stagnating right now. Which is it? Well, look, I mean, we have for months now been in this constant state of people projecting three, four, five months out and saying there's a recession on the horizon. There have been people who are saying that we're actually in a recession now, which I think no rational person

can look at the data that we're seeing in the economy right now and draw that conclusion. I think what we're seeing in this economy is resilience. I think we're seeing resilience as we continue to move toward a more stable equilibrium and more steady growth. I think that that is what we're seeing right now. And there's no certainty that we will see that going forward, but certainly what we have seen over the last couple of months should give us increased confidence in that outcome. And I would say from a policy side, there's a lot of things that we can be doing to try to reinforce that outcome, in particular implementing infrastructure, innovation investments, clean energy investments,

in a way that gives companies the certainty to invest through this transition. And, of course, avoiding the kind of unbelievably negative self-inflicted wound that we could do if we had, you know, drama around the debt ceiling. So are you leaving on a high note? Why are you making the decision to leave now? Is this your last jobs report? Well, I made the decision to serve this president for two years. I've got young kids at home and it's the right time for me to pass the baton. But it's been an extraordinary privilege to work for this president over the last two years. It's been an extraordinarily unique economic moment.

But I will pass the baton and continue to root for this president and support his policy agenda from the outside. Will you go back to BlackRock? I'm going to I'm going to go home to my to my kids and and recharge. And that's that's that's my only it's my only plan that I have right now. All right. Keep us posted. Brian Deese, thank you very much. Appreciate the time. Thank you. No word on the BlackRock question. The Biden has announced that Deese is stepping down, has not officially named a replacement, though lots of reports pointing to Lael Brainard, the vice chair of the Federal Reserve, to take that job as the National Economic Council director. Taking a look at the market, we are at the lows of the session now, down almost 200 points on the Dow. Every sector

has gone negative. Energy just joining the rest, down 188. After the break, Amazon and Alphabet holding on to gains for the week still and strong gains for the year despite today's earnings pullback. We're going to dive into both reports with an analyst who just cut his target on both stocks. You're watching Closing Bell on CNBC. Well, investors have made it to the other side of this busy week of big tech earnings. Alphabet and Amazon in the red today, while Apple has reversed higher. Check out the big tech report card. Overall, kind of a mixed picture across the board. No company beat estimates on both lines. Alphabet and Apple actually missing on earnings and revenue. Joining us now to drill down on those two in particular, Alphabet and Amazon,

is truest global head of internet and media equity research analyst, Yusuf Squilly, he lowered his price target on both those stocks today. Yusuf, it's great to have you back on the show. Amazon appears to be the bigger problem. It's down more than 8% at this point, but you still think this is a buy? Did it not shake your confidence in the story? No, it did not shake our confidence in the story. Why? Well, for a couple of reasons. One, the reason the stock is down is really on what's happening with AWS. So AWS growth did slow down. We were hoping that it'd be able to maintain kind of high teen type of growth in 2023. Now, we're talking low teens, but we still think it'll, you know, turn the other way and start accelerating by the end of the year.

We don't think this is a structural issue. We think this is a temporary issue. We've seen it with Azure. We've seen it with GCP or Google Cloud. So we don't think it's particularly, you know, worrisome long term. Short term, clearly, you know, as revenues go down, this is a high margin business, margins go down, and that has an impact on Amazon's overall profitability for the next two, you know, quarters or three quarters. But outside of that, if you look at their e-commerce

business, they grew 14% in the U.S., right? They continue to grow market share, even though they control 45% of U.S. e-commerce. You look at their advertising business, they grew market share. They grew at 23%, advertising, by and large, digital advertising growing like 5%, 7%. So there are a lot of things to be really excited about, but AWS is definitely black eye for them, and the valuation is still very attractive. The weakness in AWS, and you noted it came on revenues, margins, and the guy down for the first quarter. Is that macro? Are you saying you think it's temporary because it's just influenced by the macroeconomic environment or something else going on there? No, that is it.

I don't think it's competition. I think it's very much macro. What we're effectively seeing is the workloads across the entire swath of industries, maybe less travel recently because everybody's traveling again, but there are a number of industries that are just seeing less consumption. And because of that, they're pulling back. At the same time, all of these companies,

ours included, are looking for ways to be more nimble, more efficient with cost. So a lot of large companies that have already moved to the cloud have been changing their contracts with AWS, with GCP, with Azure from a kind of a long-term guaranteed type of consumption monthly or quarterly to more flexible structure for them to pay less when there is less consumption. That's what they have had to do over the last two quarters. Unfortunately, again, I think that's going to continue over the next two or three quarters, but we do not think it's structural.

What about Alphabet? Clearly, the disappointment there on the weaker advertising environment, which is something we heard from the others, even Meta, though the stock reacted positively there. What was the problem here? Did the street expect more cost discipline? Well, yeah. So I don't think, honestly, it's about necessarily the top line on the advertising side because, you know, consensus was plus one. They came in at plus one or plus 0.9. I think the issue was more about, to your point, cost discipline. This is a great team, great company. They don't tell you much on the conference call. That's the bottom line. And so a lot of investors and analysts went into this call hoping that for once they'll actually commit to cutting costs by a certain amount, hitting certain

margin thresholds, et cetera, and they didn't do any of that. So that was a big, big issue for a number of investors. The other is called Microsoft, right? Microsoft is working with OpenAI to incorporate chat GTP in their search, I'll go. And so that has been seen by many as an existential threat potentially to Google or to Alphabet. We've written quite a bit about this. The bottom line here is we think it's too early to really make a determination,

but you step back and realize that Alphabet has been investing in AI more than anybody else and really longer than anybody else. And so next week, they're going to be launching or unveiling their own Lambda, which is their natural language model, similar to chat GDP, and then we'll see where that goes from there but those are the two issues that have been waiting down to stop so you like it you like it 120 numbers go down so of all of them just what one second left which is the best opportunity right now after earnings between the two I'd go with

Google with them with alphabet what about your whole coverage list oh well I mean one of our favorites going into 2023 with Facebook, and that's obviously a lot higher. That's worked well. Amongst smaller names, we like companies like the Trade Desk, which is a great play-connected TV. We like Double Verify, which is also a partial play on CTV. All right, Yusuf, thank you for joining me. Appreciate it. Thanks a lot, Tamara.

Yusuf Scully from Truist. I'll show you what's happening now. Down 120 or so on the Dow. We've recovered a little bit, but we're still heading south. Down 1% on the S&P 500. It's a winning week. The Nasdaq is still up about 3%, and energy has just popped back into the green on the day.

Everybody else is a little bit lower today. Consumer discretionary getting hit the hardest down 3 percent. That's an Amazon story. The Nasdaq down one and a half. Wall Street is buzzing about Ryan Cohen's latest investment and a brewing boardroom battle. We'll discuss the meme king's bet on Nordstrom that's setting the stock sharply higher today. And as we head to break, check out some of the biggest winners on the week in the Nasdaq 100, which itself had a winning week up three and a half percent. Align, Meta, AMD. So some earning stories in there dominating the list. We'll be right back.

What is Wall Street buzzing about today? Activist investor Ryan Cohen and his latest target Nordstrom. He's now one of the largest non-family shareholders, wants to use his position to shake up the board to support cost-cutting efforts as well. And no markdowns here. Look at shares of the upscale retailer surging on the news. Twenty-five percent. They were even higher earlier. It's still down nearly 70% from all-time highs

that were back in 2015. We reached out to Nordstrom for comment, the company telling us, quote, while Mr. Cohen has not sought any discussions with us in several years, we are open to hearing his views as we do with all Nordstrom shareholders. We will continue to take actions

that we believe are in the best interests of the company and our shareholders. Remember, Cohen made his fortune with online pet retailer Chewy, grew clout with the meme crowd big time when he used his stake in GameStop to push out executives to become chairman. He also took a stake in Bed Bath & Beyond, but exited the position in August and just last month built a stake in Chinese tech giant Alibaba. Other investments in his portfolio include Apple, Wells Fargo, Citigroup and Netflix, according to The Wall Street Journal, which first had the story. Mike Santoli, got to bring you in here. The 25 percent move up in Nordstrom justified? I would say not on any basis in terms of what Cohen might be doing there. Maybe to

spotlight the fact that this is a depressed stock at the lows in January. It was trading at less than 20 percent of sales. That's as low as it's ever been, basically, if you go back decades. So, yes, down on its luck, department store stock, five, maybe as an entry point. It's interesting, but not based on anything Cohen has done in other kind of challenged retailers like GameStop. He gets a lot of cred, but what has he actually done? Right. So, first of all, even the Chewy's piece of it, of course, a great company and a great idea, but sold, you know, for a fraction of what it would be worth a few years later. Apparently, Petsport had to build a lot of that company while they owned it. And then since then, the GameStop stuff was just really a lightning in the bottle mania that grew up out of almost nothing.

Company never turned around. And the company itself really did not at all turn around. And Bed Bath & Beyond went bankrupt. Right. So, you know, there's a way in which in a very short-term basis he kind of monetizes the, you know, the kind of afterglow of the GameStop experience, but it doesn't necessarily mean anything's going to happen as a result of his ownership. It's an interesting move, though, to pinpoint the board,

because it is a thin board. It's a small board, a thin board, and Mark Tritton, who's the former Bed Bath CEO, is on that board. Sure. So making some interesting. There may well be moves to make. I mean, I'm not saying there are. But also the family owns 30 percent of shares. Exactly. So it's a closely held, although not controlled. And remember, they wanted to take it private a few years ago. Yeah, they tried. They tried. Mike, thank you. This will be fun to watch.

Mike Santoli up next. We'll take the pulse of the economy and consumer lending when we are joined exclusively by the CEO of PNC Bank. Be right back. As we head into the final half hour of trading, we're seeing the Dow down 125. The S&P 500 is down a percent as well. Still hanging on to gains for the week, but combination of weaker response to earnings from Amazon and Alphabet. And of course, that very strong jobs report pressuring stocks today. The Nasdaq's down one and a half percent. That blowout jobs report, of course, concerns about tech earnings, all hurting the market, snapping a three-day win streak. For more on the economy and the state of the consumer, let's bring in PNC Financial Services CEO Bill Demchek. He's joining us now in a Closing Bell exclusive interview. Bill, welcome back. Good to see you. Hi, Sarah. It's great to be back. We've got to start with that stunning jobs report that we got this morning. How does it fit into

your view of what's happening to the U.S. economy? I'm going to try to do my best to not be the next armchair economist, but no matter how you look at that number, that was a wow number. And it fits into, you know, the thing we're seeing across all of our clients. There's nothing in that number, nothing we're seeing that said, you know, suggesting we're heading into a slowdown anytime soon. So do you forecast a recession? We have it in our official forecast, but it's, you know, we like everybody else, we keep saying, all right, well, we know this is coming. And then every single month, something happens where we push it out to the next quarter of the next month. And, you know, it just seems as long as the Fed, the market's going to keep fighting the Fed here, we're going to have this big showdown at some point and it

will happen. And, you know, in some ways, the longer it takes to get there, the worse it's probably going to be. So tell us a little bit more about what you're seeing, Bill, or not seeing in this case, any softening in commercial or consumer credit? No, not really. You know, we had an isolated incident in the fourth quarter. We've seen some normalization in what you would expect to see with consumer. But if you go back to basics, our basic consumer checking account, you know, is materially up from where it was, you know, pre-COVID. Now, it's lower than its peak, but it's a lot higher than it was. And the day's spending coverage that consumers have against their ordinary, you know, monthly

bills is much higher. Things feel really healthy. They do. But you're putting aside more and more provisions for bad loans so you're clearly expecting a turn. Well welcome to the world of CECL. So we have a model, we make a forecast, you know, and just like every other economist, you know, not every other one, but basically consensus view is we're gonna run into some shallow recession and that's what we have and we

run a model and if that happens, at least against history, we'd have bigger provisions and bigger losses. You know, part of the issue here is we run into, you know, we're running into this potential where somehow we're going to have a full employment recession where maybe GDP slows for a bit, but the labor market continues to be really strong. And that's unknown territory in terms of what happens to credit losses. I think if that happens, credit losses are a lot less than what people would otherwise expect. But you've got to see it in parts. I mean, the housing market, commercial real estate loans, there's got to be stress there. Now, so in the housing market, so residential,

housing prices are coming down. The affordability of a new house, it's tougher. But the loans we made, you got to go back. Most of the loans we've made over the last handful of years, the market ran up from when we made the loans. So the loan value on those loans is still really good. The affordability for the loans we own is great because interest rates, you know, we're coming off a base of zero. So a new loan today, that's why there aren't many, it's just much more expensive, but the stock of what we own is fine. You know, there's a little stress. We don't play much in this space, but there's some stress in the used auto market just because of how high residual value it's got.

But we just don't see it on our balance sheet today. Part of that is who we are. But I think a broader piece of that is just the economy is stronger than people think. It's coming down from what was just a roaring growth in inflation and wages and jobs and everything else and spending. And it's slowing down at the margin. But you've got to go all the way back to pre-COVID. It feels pretty good relative to where we were pre-COVID. So do you think the Federal Reserve will keep raising interest rates?

It obviously impacts your business and has been helpful for your net interest margins. Yeah, I think I don't get too hung up on whether they're going to go another 25 or another 50 or keep going. It's a function of how long they keep them there. And I'm in the camp that they're going to stay high for longer. You know, I take Charpaulo's word. My own economic views are closer to the what the fed is talking about than perhaps what's priced into the market even after today's move right you don't see the cuts coming anytime soon i i don't i mean the basic notion if we if we if we even if the economy slows down if we're running near full employment, and even if we get inflation

down to a two handle, why would they cut? Real rates would be marginally higher, but why would you do it and run the risk of lighting off inflation again? And they'll get there at some point, but I don't think there's going to be a hurry to do it. So some of the analysts were confused. You know, you've given a pretty positive outlook here. Loans are rising.

Interest rates are rising. That you talked down your net interest income numbers. And there was disappointment after the last quarter of earnings. So how do you explain that? Well, a couple of things. For 40 quarters, we missed our earnings guidance three times. One of those times was in the fourth quarter this year where we had some anomalous kind of one-time expenses.

And we had one big credit that was going to go bad no matter what the economy did and what point in time it was. It was a poorly run company and we had a larger position than we should have in it. And that, you know, we're predictable and we weren't in the fourth quarter and we disappointed our investors. And so, you know, that set them on edge.

And then as we look into this year, you know, we know provisions are going to go higher simply because the model is going to force them to that place. We talked down versus what analysts estimated on net interest income. And we did that partly because deposit costs are rising, no surprise. Fed's shrinking its balance sheet. Rates are going up. We're paying more to consumers to keep our share. But also because unlike the capital markets, credit spreads in the largely investment grade triple B area, which is where we lend, credit spreads haven't gotten wider. It's not reflected. Banks are slow at this. And so part of what we would have otherwise had in our head two months ago would be that credit spreads are widening,

and our revenue is going to go up more than we put in the comments I put in the fourth quarter. We'll see what happens. And by the way, we're no different than any other bank. I mean, maybe we're a little more straightforward. But, you know, spreads go up, we'll benefit others. Well, if deposit goes up more, deposit costs go up more than we think, it's going to hurt us and it's going to hurt other banks. Those are the two big, you know, what are credit costs going to be and what are deposit costs going to be as we go into this year? And that's going to be driven by the

market and the economy. Well, what about, why aren't you paying higher rates to depositors? We are paying higher rates for depositors. You know, it's, a couple of things are happening. First, you pass along, you know, you get a particular margin on deposits and rates go higher and you pass on that incremental margin. But also the competition for those deposits is liquidity generally is drying up on the back of the Fed's efforts, makes them more scarce. So, you know, if you looked at our average cost of deposits over the course of the last year, hasn't gone up as much as the Fed is. That's kind of the beauty of retail banking, but it's gone up materially. All right.

Fair enough. Well, that's why investors like to hear from you, Bill, because you are straightforward. See if it proves conservative or not. Appreciate it. Yeah. Bill Demchak, CEO of PNC Financial. Look at Ford,

one of the worst performing stocks right now in the S&P 500 after reporting a profit miss. Coming up, an analyst who just downgraded the automaker to sell because of meaningful downside risk, they say, to earnings this year. We'll be right back with that. Check out today's stealth mover, Generac. The stock is experiencing a blackout. Google and I am downgrading the generator company to neutral from buy, removing its current price target, citing valuation and concerns. Wall Street's earnings estimates for this year are too high. The stock had been a real power on Wall Street, up nearly 30 percent year to date

after being one of the biggest losers in the S&P 500 last year. That has been a pattern. A lot of the losers of last year, some of the biggest winners of 23. Winged is in China, pulling off shares of Starbucks today. Find out why the company thinks the headwind could soon fade straight ahead. That's Story Plus. Apple rallies and Ford falls when we take you inside the market zone. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day. Plus, Deutsche Bank's Emmanuel Rosner on Ford. Let's kick it off with the broad market,

down about 200 on the Dow. S&P is down 1.2%. Mike, though, we're still hanging on to gains for the week. The Nasdaq down the most, 1.7. I feel like the market can't really figure out, you know, coming off of that high from Wednesday in the Fed meeting where Powell talked disinflation, Powell brushed aside concerns about looser financial conditions. The market can't figure out whether today's jobs report was really a game changer in the way the Fed would think about how many more interest rate hikes are to come or what's next. Yeah, and I think, Sarah, part of the reason the market can't figure that out is that I doubt that the Fed itself would know exactly what their response would be, because there's going to be a time element to how they change policy from here.

Right. We have, you know, six weeks to the next meeting. We'll see what the data look like over that period of time. Going in small steps. I don't think there's going to be an overreaction to January because the premise was already this is a very tight labor market. And Powell explicitly declined to try and pinpoint some very big jump in unemployment that he believes will be necessary to get inflation under control. So I think for that reason, the market is treating it, you know, without huge stakes attached to today's number. And by the way, just in general, we came into this week up 6% in the S&P on the year. The common refrain was going to be tested. We have a Fed meeting and we have the big tech earnings. And through it all, even though all the tech earnings weren't great, you know,

we're not only up for the week, but we're up about 2% from right before the Fed announcement came on Wednesday afternoon. So obviously we cleared that test. We'll see where it goes from here. Yeah. How about that? Let's hit some of these tech earnings. Apple investors brushing off a weak quarter, managing to overlook the company's largest revenue decline since back in 2016. The drop is largely tied to currency pressure and production setbacks stemming from China's COVID disruptions. Shares had been lower to start the day. They rebounded shortly after the open, Mike. Why the rethink? You know, first of all, it wasn't a dramatic reaction.

I feel like people were definitely braced for a not great quarter. There's clearly a lot of faith that when you have management credibility, as, of course, Apple does, and when they say they see things bottoming and turning soon and they're going to be able to get production back where it needs to be, even though they didn't give explicit guidance, the idea is that they will probably make it work. The other factor is whenever there's a little bit of a short-term setback for Apple, it almost gives the bulls a reason to say, here's what's going to get better. Because, you know, there's really not a great growth story here, especially in the near term. It's much more about steadiness.

So I think the market where Apple outperforms by a lot from here is not a great stock market, in my opinion. It's still going to be mostly defense, but it's holding its own without a doubt. And it's, by the way, almost tripled the S&P return over the last three years. So it owes you nothing from this point. Wow. Let's head forward because it is tumbling today after reporting earnings and sales, which came in below estimates. Supply chain issues to blame for a shortfall in sales. Ford CEO Jim Farley discussing the quarterly miss with CNBC earlier.

We lost about 100,000 units of production, and that's very material for us. Came in late in the quarter. Most of his chips was some new supply issues. Now Now you could say, hey, that's just kind of bad luck for Ford. That's not how we see it. We could manage our supply chain all sorts of different ways. We were very dependent on broker chips, things like that. Emmanuel Rosner of Deutsche Bank joins us now. He just downgraded the stock to sell, cut his price target from 13 to 11. So the company, and you heard the CEO there, probably blaming the supply chain, but I read your note

and it sounds like you see bigger, more varied problems here. Yeah. Hi, Sarah. I think that it's more than just supply chain. I think that there's a few things that really bother us with the print and even more so with the outlook. I think there's lack of visibility and planning, I think, from the company. They had already had a profit warning in the third quarter, but then swore that it would still be able to deliver the full year guidance. And then obviously three months later, very large miss in there. I think their cost structure remains stubbornly high. It's true both in terms of fixed costs, as well as in terms of their bill of materials. And there's really no traction that's coming across the numbers. And so

as people want to be optimistic or positive on four, they're essentially thinking, look, could these guys improve their margins from their current levels? We're not seeing any traction of this. And actually, the outlook they gave for 2023 seems really aggressive to us. And we see quite a bit of downside. Right. Yeah. You have to also compare it to GM, which reported earlier this week and had a good quarter, didn't it? Yeah, absolutely. GM had a great quarter. Their guidance, which at the time might have felt a little bit aggressive, now in retrospect seems conservative compared to what Ford is saying, because Ford is essentially saying, look, we didn't perform well in 2022, but we'll get two and a half, three billion dollars of material cost savings as we move into 23.

This seems very aggressive. In the case of GM, they launched a restructuring program by expecting a few hundred million dollars of savings. They're also guiding for earnings down at GM, which seems realistic, whereas Ford expects to have their earnings flat, which in our view is going to be very difficult to achieve. So why is there a problem with visibility on supply for Ford and not as much for GM or Tesla or some of the others? Yeah. So I think this is, I think, our point. I think that supply can absolutely be disrupted in one quarter or the other. If you rewind back to middle of 2022, there were quarters where GM missed as a result of not being able to secure enough chips. And so these things absolutely can happen. It's just when they happen on a regular basis, this is when questions are being asked. In our case, we think the Ford issue is less about supply, which maybe created some weakness in the quarter, and much more about their cost structure, which is considerably heavier than GM, several points of margin.

And investors were under the impression that they were working on it. And it doesn't look like this is the case so far. So now the message for management was, don't worry, we're on it for next year, or I guess for this year. I think it's quite difficult to accomplish the sort of very large savings they're targeting while investing at the same time so much money needed for electric vehicles. And that's, I think, the conundrum of Ford. They need to fix their combustion engine operation. They need to invest in electrification all at the same time and promising to improve earnings and returns at the same time as well. All of this is extremely difficult. Emmanuel Rosner, thank you very much for joining

us on that downgrade today and the reaction to earnings. Appreciate it. With Ford down almost 8 percent. Starbucks shares are also sinking after the coffee chain posted an earnings and revenue miss. Weakness in China, one particular pain point here. Outgoing CEO Howard Schultz saying roughly a third of its locations in China were closed during the latest COVID surge. The company's CFO sat down with Squawk Box this morning to talk about the situation in that country. We have every confidence that the headwinds we're seeing in China today will lead to tailwinds. And that's what gave us the ability to be able to reaffirm our guidance on a full year basis, but also gives us a lot of confidence in the growth that we've

the growth that we've outlined for the years to come. Nike, what is the what is the market's take on this one? I think it's a little bit of, first of all, this is one of those stocks that had performed very well in the last 12 months. It's still already out. It's got a 52-week high. Yeah, exactly. And basically for the last year, it's performed pretty much in line with Chipotle. So naturally, you had people who were in these more stable consumer names that are not super cyclical. So I think a little bit of a give back there. And then the story gets refreshed a little bit with a potential China reopening and

maybe currency getting a little bit easier around the world. So, you know, it's hard to say that there should be a big swing one way or another. It trades at a mid high 20s P.E. That's kind of where these companies are these days. And, you know, market's absorbing it OK in the context of how much the stock had done last year. Overall earnings reactions, are you getting a threat? It feels like it hasn't been the best earnings season. It hasn't. I mean, we finally nudged up to about 70 percent of all companies beating estimates, which is roughly the historical average.

But it started very slow. And there's been some sloppiness when it comes to guidance, a lot of downward revisions. And the fact that the market has more or less toughed it out and looked beyond that probably shows you that the analyst consensus were a little bit lagging what people were expecting. In other words, the investors themselves pretty much figured it wasn't going to be great. The other thread is obviously meta, the most dramatic example of this. But this sense out there that managements have religion on cost and they're going to do what they can to defend profit margins, they're not necessarily going to be successful in all instances. Obviously, there's retention of a lot more employees across the economy we saw today than we might have thought.

And that could hurt margins down the road, some economists saying that. But right now, we didn't think it was going to be a great earnings season, and we're holding on to most of the gains year to date this week. I'm really thinking about Bill Demchak, CEO of PNC, telling me no real weakness in credit for commercial or consumer. Two minutes to go in the trading day. What are you seeing in the internals? Yeah, definitely some giveback under the surface there. Very strong breath we've had. It's been a feature of this market. It is negative today. You see almost three to one declining to advancing volume. So you have not just the weakness in the mega caps driving down the S&P.

It's pretty broad today. Take a look at natural gas making more new lows. Actually, the fossil fuels in general week today. But natural gas over two years, that's kind of a crazy round trip. Actually, now negative on a two-year basis. But that's sort of a bonus for the rest of the economy, typically all else being equal. Volatility index, you had a little bit of a bump midweek when you had these catalysts from the Fed. And the jobs number coming up are very quiet right now.

Some are going to say a little bit too low. Maybe we'll get there if we dip down to the mid-teens. But so far, shows you a market much more stable. You got some get there if we dip down to the mid-teens. But so far, shows you a market much more stable. You got some rotation and bond volatility is way down. Well, it looks like we're going to end an up week on a down note here with all the major averages lower. Take a look at the Dow, which got about as low as 200 points or so at the low. We're down 133 right now as far as what's having the most impact. Home Depot, Microsoft, Honeywell, and Salesforce, the biggest drags. And that's a reversal from what we've seen this week, where tech has been strong. Not so much today. That explains the S&P 500 down 1%. You've got

every sector lower here into the close. But again, for the week, we're still nicely higher, 1.65%. Fourth up week in the last five. The Nasdaq down one and a half percent today. But overall for the week as a whole, up three point four percent. Today, it's a story of earnings weakness. Amazon, Microsoft, Alphabet, NVIDIA all pulling back. But overall, stocks hold their gains with that celebration earlier this week of Fed Chair Powell potentially hinting at winding down rate hikes. At least that's what the market took out of it, out of it, even if he didn't say it explicitly. There goes the bell. Three major decline, not major, minor declines across the major averages. That's it for me. Have a good weekend. I'll see you next week into overtime with Scott.