Closing Bell - Closing Bell: Major averages pull back, Carson Block’s new short idea 7/12/22

Episode Date: July 12, 2022

The major averages fell in another choppy day on Wall Street, losing momentum in the final hour of trading, with the tech-heavy Nasdaq seeing the sharpest pullback. Eric Jackson from EMJ Capital makes the case for owning some growth tech names, and lists his favorites. Investor Carson Block joins to outline his new ESG-focused short idea. And Lightspeed partner Bejul Somaia discusses the state of the VC industry amid news a big down-round from fintech company Klarna.

Stocks are searching for direction in another choppy day of trading as investors await tomorrow's big inflation report. The most important hour of trading starts now. Welcome, everyone, to Closing Bell. I'm Sarah Eisen. Take a look at where we stand. Dow's down about 45 points or so. We've been in a range of up 172 at the highs and down 93 at the lows. S&P 500 giving up half a percent. You've got strength in groups like materials, consumer staples and

industrials. So kind of a mix of defensive and cyclical areas. But some real weakness, especially in energy stocks, as crude oil sells off hard. Health care, technology and real estate, the Nasdaq down a little more than half a percent. Small caps just barely positive. And there is crude oil. Brent, the international benchmark, closing below, settling below $100 a barrel for the first time in three months. Check out our chart of the day, though. It is the euro against the U.S. dollar, hitting parity overnight for the first time since 2002. According to CNBC data, that is one euro to one U.S. dollar.

It's painful for a lot of the U.S. multinational corporations, but on the plus side, it helps us fight inflation. Double-edged sword. Coming up on today's show, investor Carson Block out with a brand new short idea today. And he is joining us first on Closing Bell to discuss it. It's an ESG play called Hannon Armstrong. And as you can see, it is getting absolutely crushed on today's report. Down almost 17%. He will join us to make his case.

Let's go straight, though, into tech. It's been a volatile session for the Nasdaq just like the rest of the year. Our next guest says most growth stocks, tech stocks, that is, bottomed in May and could become big cash gushers a couple of years from now. Let's bring in Eric Jackson, founder and president of EMJ Capital. So, Eric, are you here to make a case for unprofitable growth tech companies? Well, Sarah, the best performing tech stocks, growth tech stocks over the last 40 years have always been big cash generators. But we get caught up in talking a lot about profitless tech. And, you know, I think what goes unnoticed is that many companies which might be profitless today are potentially one or two years away from becoming and joining the ranks of big cash gushers.

So you've got to pick your spots. But the big opportunities are looking for companies that are just on the verge of becoming free cash flow positive and then obviously accelerating over time, those are where the real opportunities are. So don't get scared away from profitless tech. Well, I'm curious who you're talking about because a lot of the names that you like right now have been absolutely hammered. And it's because they're profitless and because they have sort of future stories

and their valuations just got out of control. Well, I mean, I'll give you a couple of names I like, Sarah. Uber and Lyft. People sort of think of those as the poster children for broken business models. We've given up on them. They got obliterated over the last couple couple of months when when lyft announced uh some driver subsidies and yet both of these companies for the

remainder of this year are supposed to generate cash from operations and also be free cash flow positive um so for the year uber is going to be free cash flow positive. Next year, Uber is going to be free cash flow positive, even if you minus out stock-based compensation. And so when things like that happen in businesses like that, you obviously get a big re-rating of the multiple associated with those companies. So those are two quick examples of companies which I own and which I think, you know, could be on the cusp of a big turn in their prospects. But what happens to those companies in recessionary periods? We haven't really seen it before.

Well, one of the things I had a Twitter thread about over the weekend was it's really challenging in growth tech, because the end of recessionary events over the last 40 years is pretty limited. And most of the time we default to dotcom era or we default to the great financial crisis. But those were obviously very particular, special one time events. I've been more interested in going back and looking at the 1990 recession, which has a lot of similarities with what we've just gone through, especially over the last seven months in growth tech, where back in 1990, you're obviously coming into a big recession that really didn't bottom until the end of 1990. And the Fed got looser in early 91,

which perhaps we are a few months away from happening again. And so you saw some growth tech companies just get wrecked in 1990. Oracle, for example, was down 80% in seven months and finally bottomed in October of 1990. Adobe, which was a new growth tech company at the time, was down 65%. And yet when things turned and they turned for these growth tech names first before these other bigger S&P 500 type companies, the rebound was almost just as quick back upwards, like a truly V-shaped type recovery. In growth tech right now, most people don't realize it because the FANG stocks covered it up last year. Most growth tech companies have been in a bear market for 18 months. And so one of the things you you see when you look at 40 years of data, this the degree of drops in these companies,

the magnitude of the drop and the length of time that this has gone on is truly, you know, sort of beyond the norm. So and you could argue that it was worth it. It feels like that. We got carried away in COVID and all the rest. But I think the timing is right. And most of these stocks have bottomed in mid-May. We could see a very strong, powerful comeback in the second half of this year. Okay, Uber and Lyft are in one sort of category, Eric. But I wanted to talk to you about some of the other names

that you are along, including Carvana, for instance, which a lot of people think is a zombie company right now needs to raise debt or equity or else run out of cash and the markets are not too friendly for that this is a company that's trading like it's going out of business what where's the value there uh in it in a minus I mean it's quite possible it might I own some it's a very small position for me. But, and one thing I don't like about Carvana, which kind of makes me look at it with definitely a more skeptical eye

versus an Uber or a Lyft or an Opendoor, for example, which some people say is a zombie company too, but I beg to differ on that one. Wait, Opendoor was a Chamath SPAC. It's unprofitable. It's tied to the housing market. It's everything that investors don't want right now. And that's exactly why you should look at it, Sarah.

It was something like 36 bucks in February of 2021. It was four bucks, five bucks. It's five bucks today, four bucks, I don't know, a few days ago. This is exactly why you should be looking at it. So that one has been free cash flow positive for the last couple of quarters. I think it's a misunderstood business model and turnaround. But to come back to Carvana, the problem with Carvana is they've never generated cash in a quarter since they've been a public company from operations, let alone free cash flow so They know they promise to do that because obviously all growth tech companies have to bow down to Wall Street

And promise that they're going to turn things around and they've had count and all that all the rest And I do think there's something there in their business model But you know it's a bit of a show-me story if but if they can turn it around I mean this stock has gone from three hundred and390 in August of last year to $20 today. So if they can turn it around in a couple of quarters, it could be a powerful gainer. Like some of the most hated stocks, Eric, thank you for joining me to talk about it. We'll have you back on. And I know you like ARK Innovation as well, which similar arguments there.

That ETF is working today. It's up 1.6%. Eric Jackson. By the way, we. It's up 1.6 percent. Eric Jackson. By the way, we have taken a leg lower in the market. Just want to point out the Dow down 135 or so. So dropped about 100 points just in the last few seconds as we kick off this final hour of trading. Venture capital firm Lightspeed just announcing a raise of more than $7 billion for a range of new funds, including a crypto-focused project. We're going to talk to one of their partners about the kinds of companies he is looking to bet on with that new money next.

You're watching Closing Bell on CNBC. Check out today's stealth mover. It's Price Smart. Shares of the warehouse club operator hit hard after missing Wall Street's quarterly profit estimates because of supply chain issues and excess inventory levels. You've heard it across retail. That stock down 9 percent. Meantime, venture capital firm Lightspeed announcing today it raised more than $7 billion to fund early and growth stage companies around the globe. Lightspeed's portfolio includes names like Affirm, FTX, Snap and The Honest Company, to name a few. And joining us now is Lightspeed Ventures partner, Bejul Sumaya. Bejul, it's great to have you on the show. So how did you do that? Seven billion dollars in this kind of volatile environment. Thanks, Sarah. Look, I think it's really a reflection of the firm's performance and track record over time. This wasn't something that happened overnight. I think

we're fortunate to have the support of an incredible set of limited partners who've seen the firm over multiple fund cycles. And, you know, hopefully we'll reward that support with some good performance over the coming decade. So clearly capital isn't a problem, but what about deals? Well, I think, you know, I think in all of these areas, including in the venture landscape, the sense we have is that there'll be a flight to quality. And so I think we'll see the very best companies, for example, as the very best funds, perhaps benefit from an environment like this. But marginal companies struggle. In terms of the environment right now,

I think it's a little bit of a mixed bag growth. Obviously, the late stage privates market is in a very tough spot, not yet fully adjusted because a whole bunch of companies raised capital last year and don't need to come back to the markets. I think early stage continues to tick along. There's still a lot of strong founding teams out there building for the next seven to 10 years.

And so we're continuing to see some pretty compelling opportunities there. What about, I wanted to ask about buy now, pay later, specifically, you're in a firm. I don't know if you're in Klarna, Bejel, but that's been the story of the week. Raised new funding, $800 million. The valuation,

$6.7 billion. This was a company valued at $45.6 billion a year ago. 85% cut. So these down rounds are happening. What does that say about the space? Yes, Sarah, I think this is, you know, if

there's a company that is out and has to raise capital right now, it's really ugly. And I think, you know, that's a reflection. There's a lot of companies, as I mentioned, that don't have to right now. And that's what, in a sense, is going to cause, you know, cause the markets to take some time to adjust. I think, look, we've been through downturns, severe downturns before post the dot-com phase, not as severe and not as perhaps long-lasting in 2008. And those were really times

when some very compelling companies were born. And those were good times when some very compelling companies were born. And those were good times to invest, but also times when firms had to really steward their existing portfolios carefully. So one of the opportunities, I think, where you see value is crypto. That's one of the vehicles that part of the fundraiser today. Where is the value in crypto right now? And do you think that we've seen the worst of the carnage in some of these prices, like a Bitcoin or brokers that have gone bankrupt and not returned cash to shareholders? Yeah, Sarah, I think, you know, from our perspective, our effort around crypto is really focused more on the underlying technology, applications of that

technology, underlying infrastructure. And, you know, again, our view is very long term on this. When the firm started investing internationally in the early 2000s, the question was, gosh, is there really venture capital outside the United States? And it wasn't entirely clear then. I think with respect to crypto, we continue to believe that there'll be very exciting, very compelling applications of the technology and that actually over the next couple of years will be a good time to invest and build patiently because a lot of the tourist capital and a lot of the FOMO-induced interest is out of the market, reflecting in the price corrections that we've seen. From a new investment perspective, if you have conviction around the underlying technology, we think it'll be a good time to be sensible and put some capital to work.

Bejul, thank you for joining me today on the Fundraise to talk private markets. Appreciate it. And take a look. With 43 minutes left of trading, we've got the Dow down 150 right now. The S&P 500 continuing to lose steam here throughout the session. It's down almost a full percent. Remember, we dropped more than 1.2 percent yesterday. So we're lower on the week by about 2 percent or so. Every sector has gone red right now, including those that were outperforming like materials and staples. They're still doing better, but they're down. And now energy, again, at the bottom of the pack, the Nasdaq down 1 percent.

After the break, we're going to take a look at the relative performance of consumer staples and tech stocks and the premium being paid for predictability right now. And then later, Muddy Waters founder Carson Block on his latest short target in the ESG space. We'll be right back. Today's big picture, the U.S. consumer, still no recession signs. At least that was the message we got from Pepsi earnings today. Sure, Pepsi is a staple, so it does well in good times and bad. People always buy drinks and snacks, but Pepsi is doing really well. And it's broad based in terms of the gains, 13 percent organic sales growth. That was a beat. The company lifted its full year sales outlook to organic growth of 10% instead of eight. And it's not just higher prices driving this growth. Volumes were up as well. I talked to Hugh Johnston, the CFO

and vice chair. He said they're not seeing any change in behavior right now from consumers, no change in patterns at the high end and premium products like Starbucks Frappuccinos, which Pepsi does manufacture in bottles and at the low end products like Santitas chips in the food service business, which is restaurants that you would typically see slow down in recession. Pepsi's business grew double digits, their convenience stores up high single digits despite the high gas prices. And Pepsi, like all companies right now, is raising prices or shrinking packaging. Johnson told me he sees relatively low elasticity or pushback from consumers as a result of these price hikes. And he thinks that they're still benefiting from higher

wages. Now, as for whether the price hikes continue, Johnson says it depends on whether the consumer continues to hold up. But so far, despite all the hand-wringing lately on Wall Street, at least one giant consumer company is just not seeing the weakness yet. That brings us to today's market dashboard. Mike, also taking a look at Pepsi and the entire staples sector and its relative performance. What do you think? Yeah, Sarah, and investors' willingness to pay up for that predictability and performance. Take a look at Pepsi against Microsoft. Tell us a pretty good story of the last two years in this market. Because remember, Microsoft, one of the reasons it was so valued

is because of that perceived predictability of its results. It could grow in a secular way long-term through all environments. Now, as you see, Microsoft got pretty hot, pretty high momentum stock going back into the latter part of last year. And now it has surrendered a lot of that. And you see that Pepsi is now nosed ahead of it on a two-year basis with a smoother ride. That's basically the story of Staples

when the cycle starts to turn. Now, take a look at the valuations of the equal-weighted consumer staples sector of the S&P and the equal-weighted technology. And again, here you saw this huge premium in consumer staples. This was coming off the recession scare and the earnings recession in early 2016.

That's the last time that happened. And here you have it again, just building a little bit. Staples nosing ahead, more expensive, therefore more valued. This is where tech obviously got ahead of itself. One final point I would make is that the absolute level of forward price earnings multiple on the S&P tech equal weighted is pretty much at the lower end of its range. So it doesn't tend to get that much lower. It's really the really huge stocks in tech that are still holding that. I'm wondering where Apple is on this chart because it's often valued like a staple.

Well, Apple is over 25 times or 25 times thereabouts right now. It is Apple. It's Microsoft. It's the sales forces that do inflate the market cap weighted multiple. But as I said, an equal weighted base is not so much. All right, Mike, thanks. We'll see you soon. Shares of renewable energy firm. Look at Hannon Armstrong. They are plunging after investor Carson Block announced that stock is his latest short. Up next, he'll be here to explain why he thinks ESG stands for exaggerating, scamming and grifting when it comes to this company. We'll be right back.

One of the stock stories of the day. Check out shares of Hannon Armstrong. It's a climate solutions investment firm and it's falling about 20 percent now. This comes on the back of a short report out of Muddy Waters Research today titled ESG is exaggerating for is for exaggerating, scamming and grifting. Hannon Armstrong just telling CNBC in a statement in reaction to this, the report, which they put in quotes, by this deceptive short seller for which the Justice Department is investigating for suspected coordinated manipulative trading is an attempt to mislead and confuse the market. The report is replete with factual errors and numerous inflammatory and misleading statements. Hannon Armstrong's accounting is fully compliant

and indicative of our performance. We are proud of our long history of transparent disclosure and best-in-class accounting practices. Carson Block of Muddy Waters Research joins us now, first on CNBC. Carson, great to have you. But before we unpack that whole statement, for those not familiar with this company, how did it reach your desk? How did you start looking into it and what did you find?

Well, as one of these, we have spent some time recently looking into these ESG type companies. And it's just one that seems, first of all, an evaluation basis. I mean, even if you forget about the, you know, how much of the income is actually non-cash versus cash, it was just expensive. And it's one of these things where it seemed a little bit too good to be true. We noticed that disclosures about their EMIs, so these are companies that they take minority investment stakes in, that the disclosures had declined significantly over the years. And when we see something where a material part of the business, where the disclosures are declining, that always piques our interest. So we dug in and it took a lot of digging. I mean, when the company doesn't disclose much, I mean, we dug in and it took a lot of digging i mean when the company

doesn't disclose much i mean we really had to go to a lot of different places so for example joint venture partners their filings to understand what's going on at these investee emis we looked at delaware ucc filings so and we spoke to, to formers, uh, former employees. So we had to do a lot of digging and it took several months, but, um, it's a pretty extraordinary story. And, you know, I like just partly to address what they said, but the crazy thing is, um, I mean, given the misrepresentation of, you know, cash, you know, non-cash income as cash. I mean, there's nothing that we see that's illegal. Right. That's just how crazy the income.

You're saying, sorry to interrupt, but just you're saying that they're understating earnings. Is that the bottom line through accounting? So, well, they're basically there. So the main sin that this company commits, and this is not illegal, but there's there's very odd accounting that occurs with these renewable projects because you often have what's called a tax equity investor. And the tax equity investor is effectively investing in the tax credit. So once they've used their tax credit, then there's this book value adjustment that occurs for the other investor in there. Now, Hassee ends up in there and it can totally it can choose to offset this, but it ends up taking that book value adjustment, even though it's not Hasse's tax credit, even though it never got any cash from this tax equity investor, it takes this effectively, you know, their credit, their tax credit, more or less the value of it. And it runs it through as its own income.

So its EMIs are actually, by and large, losing significant amounts of money. So, for example, its largest EMI by assets, Jupiter, last year lost about $380 million. And it looks like Hasse recorded income, non-cash income from Jupiter of about $200 million. So what I want to rephrase that rather than taking a share of this $380 million loss, Hasse through the magic of this special accounting that applies to renewable energy projects said, hmm, actually, why don't we say that we got profit from this of $200 million? So that's really the core of what Hasse does. And this is cash. It will never receive this cash. What it does is it reverses that income gradually over 20 years. And so it's going to reverse that at about 10 million dollars. Now, it also makes loans, especially to its EMI's that are pretty stressed.

But rather than hasassee saying, hey, these loans are actually not going well, they're recording interest income in the form of PICs, so paid in kind. So that's basically the borrower saying, you know, we're having a tough time here. Here's an IOU, here's an IOU, here's an IOU. So it looks like Hassee is actually receiving interest income, but it's just adding to this what appears to be unsustainable debt load that these borrowers already have. But then the craziest part is to help it look like on the cash flow statement, Hasse actually is receiving cash.

Some of these loans that Hasse makes to these companies that are picking, well, then the company will take out a new loan and then repay a previous loan. So Hasse could say, oh, look, you know, we actually our loan book is, you know, our loan book is healthy. We're getting cash inflows, but it's just recycling cash. So Hasse's none of this is illegal, but Hasse's legal accounting manipulation is just so extreme. It's just so divorced from reality that it reported $127 million in net income last year. I mean, we think that the real number, if you take out all of these manipulative forms of accounting, I mean, at our midpoint estimate, the real number should be like a loss of about $235 million. The stock is down 20%. It's technical, Carson. It's hard to explain on TV. We

appreciate you trying to do so. It's a 27-page report that you put out. The rebuttal from the company clearly is sharp. And I did want to address something where they go after you and your reputation. They call you a deceptive short seller for which the Justice Department is investigating for suspected coordinated manipulative trading. We haven't really heard from you since those reports surfaced earlier in the year. Can you tell us anything about where that stands? Sure. So let me say two things to that. Number one, I've been doing this 12 years and I could have written that response myself. The whole DOJ thing is a little bit new, but I've been joking for many years that it's

kind of like a Mad Libs when these companies issue their responses. So everything they've said there is basically pro forma for 12 years other than the DOJ thing. So, yeah, it's been reported that the DOJ is a wide ranging investigation into short selling. And, you know, look, companies have been trying to sell the regulators on this fantasy that we short sellers all get together and, you know, decide like, hey, let's go destroy this company. And it's complete BS. Ultimately, that's what it's going to be shown to be. But I don't know. I call it my First Amendment tax, basically. That's what this is, you know, and that's all it's going to amount to.

Do you have any sense of where they are in this investigation? No. They don't really talk to us. So you know, but I'm not expecting it to ever result in anything that, you know, becomes a problem for us other than the annoyance of dealing with it. And my last question, Carson, is clearly you're shining a light on this company as an ESG investor. Do you think that there is other fraud manipulation? I'm not sure whether this is or not, obviously. But is this an area that you are increasingly looking into?

Because there have been a lot of bold claims and a lot of love from Wall Street in this sector for a long time now. Yeah, listen, so the answer is yes. And it's kind of amazing to me. And we also saw this with these government stimulus programs like PPP. I mean, there are a lot of people out there who the moment the government is offering money, just the machinations their minds must go through to think about how to grab this money. So given the significant subsidies that have been available for renewable projects. Yeah, I mean, there's I think there's a lot of there's a lot of grifting there. There's a lot of grifting the government out of tax, out of tax credits. And there's grifting investors as well, because, you know, there's been there's this robo bid, of course, for ESG.

Everybody wants to pat themselves on the back for saving the planet, you know, through their investments. And they've got these, you know, there's money that must flow into ESG. And, you know, there that must flow into esg and you know there are people who are bad actors and there are other management teams out there who are bad actors who are capitalizing on this um you know besides hassey so yeah i it's unfortunately and we've seen this in the in the vehicle space right i mean we reported on a company called excel fleet that's you know supposed to be electrified vehicles that That thing is blown up. You had Hindenburg Research showing just, you know, that Lordstown Motors was, you know, greatly exaggerating its order book and that Nikola rolled the truck down the hill.

I mean, the more I look in this space, the more bad faith I see. Right, it is. Well, keep us posted on that, Carson, on your next one. This one's certainly making waves. The stock, again, down 20% or so. Carson Block from Muddy Waters. Here's where we stand right now over on the markets. We just continue to move lower.

The Dow's down to almost 300 points, a full percent. The S&P down 1.3. Oil prices seem to be a bit of a culprit, at least weakening on recessionary fears. WTI 56 so big plunge there also treasury yields are under pressure too on those similar concerns up next we're going to discuss why airline stocks are soaring today and much more when we take you inside the market zone stocks are staging a late day sell-offoff, as Bespoke Invest just tweeted. Looks like the last-hour sellers are back from vacation.

We'll cover it all for you in the Market Zone next. We are now in the closing bell Market Zone. CNBC Senior Markets Commentator Mike Santoli here, as always, to break down these crucial moments of the trading day. Plus, we've got Pippa Stevens here on a rough day for energy stocks and oil prices. J.P. Morgan Asset Management's Mira Pandit on this late-day sell-off. We'll start there. We are getting a late-day swoon here in the major averages.

They're near session lows right now. Mike, we're seeing treasury yields falling, oil prices falling, the dollar rising. It's kind of an ugly, violent action here ahead of CPI. What's causing it? Pretty listless in equities with all that going on, Sarah, for most of the day. There was a pretty sloppy crude oil close around 230, kind of a weak 10 year treasury auction that's caused a blip up in yield. So we're sitting here and the apprehension ahead of the CPI data tomorrow, very low conviction, options expiration week. And it seemed as if we were trying to kind of hang around 3850 on the S&P 500.

That's one of those index strikes. That's the down 20 percent level from the all time highs. And then once we got a little bit of pressure, we kind of clunked right down to 3800. So next round number. I'm not sure if it's anything beyond that. But clearly illiquid markets ahead of a widely anticipated data release tomorrow morning. Yeah, NASDAQ is underperforming the S&P 500. We've seen some outperformance lately on some dip buyers, but not the case today with technology under pressure right now. Let's hit energy because it's the worst performing sector on Wall Street today. Slide in crude oil prices, WTI falling below $100 a barrel. Well below there. It's below $96 a barrel right now. Brent falling

below $100. Pippa Stevens joins us. Pippa, what is driving this big decline today? Yes, Sarah. It was a really ugly day for oil. WTI fell more than 8 percent and is now just barely holding above its 200-day moving average of 95.35. It hasn't dipped below that level since December. There are a number of factors fueling this decline. Of course, we've got the spike in COVID cases in China. We've also got the stronger dollar as well as recession fears. Meantime, thin liquidity can lead to exacerbated price moves. And traders now, their net long positions in WTI have fallen by nearly 30 percent over the last few weeks

and are now at their lowest in more than two years. And this all, of course, comes ahead of President Biden's trip to the Middle East. And Rebecca Babin from CIBC Private Wealth saying that there just really isn't any risk appetite to buy this dip ahead of his trip. Now, turning to the impact on energy stocks, we talked about the technical levels on the XLE last week. And you can see there was a slight bounce off that level. But then the sector has retested that 200-day moving average. And Matt Maley from Miller-Taybox saying if it falls significantly below that level, it will really throw into question the uptrend the sector has been in, Sarah,

for basically the past two years. Pippa Stevens, Pippa, thank you. Mike, I feel like we're sort of in a short-term versus long-term situation with oil prices right now. We're short-term. There are worries, as Pippa said, about COVID and the economy really slowing down, especially in Europe. But longer term, we still have to deal with these supply issues,

especially if Russia continues to be cut out. Without a doubt. And I know that oil bulls will point to the fact that, yes, this was a bad momentum break. It's testing some of the sort of uptrend lines. There has been a real kind of flush out of the energy equities. But near-term oil prices, spot and near-term futures are still trading in a big premium to the more distant months, right? You have that structure that still says that supply is tight. And clearly,

the market is also saying that there's going to be some growth concerns, but that's about down the road. It's not, you know, addressing what's happening in the moment on the supply-demand balance. So it's definitely tricky, but there's no doubt that it should help the peak inflation story, because obviously the Fed's told you that's what they're watching. But now it's much more about what's it telling us about the growth outlook. Well, on this topic, tomorrow, don't miss CNBC's Evolve Global Summit. I'll be speaking with Chevron CEO Mike Wirth. And you can still register, CNBCEvents.com. We'll play some snippets from our conversation on the show tomorrow.

The drop in oil prices is certainly helping the airline stocks. They're soaring today, holding on to gains right now despite this late-day selling. That falling oil price certainly helps with the jet fuel costs as they continue to deal with sky-high demand from travelers. American, the top performer right now on the S&P 500, updating its Q2 guidance, saying it expects total revenue to be 12 percent higher than back in 2019. And we're getting Delta second quarter numbers tomorrow morning. In addition, we've got an upgrade, Susquehanna positive on Southwest, citing its new fare class and a push to corporate travel. TSA checkpoint numbers also trending better than 2021, in fact, and in some recent days above the same day in 2019. And also just on this note, check out Boeing having the most

positive impact on the Dow right now, up more than 8 percent. It reopened 51 airplane deliveries for June, highest monthly total since March 2019. The question everybody has, Mike, and hopefully we'll get some clarity from Delta tomorrow and other and other earnings reports, is how long this pent up demand surge can last if the economy really turns. Exactly. That's why Americans guidance perhaps was a bit of a catalyst today for some relief. Let's keep in mind the airline group is down some 40-something percent from its highs. It's obviously been under a tremendous amount of pressure, 25 percent really in the last couple of months. So there has been some doubt built into the sector that we're going to see persistence in these good demand numbers and, of course, that they can preserve any kind of decent margins because they keep scrambling for staff. And obviously, energy prices going down is a little bit of a

boost as well. The Southwest call is interesting. That's the one of the big ones, along with Delta to a degree. It still is in the reasonable zone, the sort of pre-pandemic zone in terms of how it's valued. It didn't have to take on an enormous amount of new capital the way, say, American did in debt and equity sales. Morgan Stanley urging investors to take on an enormous amount of new capital the way, say, American did in debt and equity sales. Morgan Stanley urging investors to take some consumer names off the table today, including American Express, which it is downgrading to equal weight from overweight, slashing its price target on that stock to 143 from 223. The analysts there citing rising recession risks, inflation taking a bite out of consumer spending, and increased credit losses in unsecured consumer loans.

Kate Rooney joins us. Kate, American Express versus some of the other credit cards, how does it usually fare in this environment? Yeah, it's interesting, Sarah. Amex is uniquely exposed to that higher income consumer who's really seen as more immune usually from inflation and things like price hikes. That's not the case necessarily for Visa and MasterCard. They're more evenly distributed across those income levels. But in

their last earnings report, all of the payment giants really said something along the lines of that they're not seeing any weakness in the consumer and that inflation wasn't hitting spending quite yet. It can actually be a temporary bump because the average ticket cost ends up going up. So people will spend more. We'll see if that changes this quarter. But guys, ARK Invest, Kathy Wood just talked about this exact topic, that high income earner in her monthly market update. She also argued the Fed is making a mistake, still arguing for deflation over inflation, but mentioned that those higher income earners are feeling the pain for a couple of reasons right now. Here's what she said.

If you break it down between high income earners and lower income earners, what you find recently is that high income earners are feeling worse than low income earners. And they're feeling terrible because the food and energy price hikes have been a cruel tax on them. High income earners, however, for the first time, certainly in 40 years, have not had the stock market and the bond market going against them at the same time. So their assets are being hit, and now housing may be joining that list.

So, guys, Cathie Wood's argument there really playing into what Morgan Stanley's saying there about Amex and the high end consumer. Back to you. Kate Rooney, Kate, thanks. And I feel like, Mike, we should sort of disclose when Cathie Wood, and to her credit, she's been consistent. She's bearish. She thinks we're in a recession. She thinks we're seeing disinflation or deflation. That all helps the ARK Innovation Fund. That's what I'm trying to say, is that if we are in a low growth or no growth period, if we are in a period where inflation is coming down or declining,

that's really good for her stocks, which have been crushed over this current period where it's gone the other way. Right, or at least that is the type of backdrop in which those stocks could again come to the fore. They obviously, you know, our big picture view is that, you know, these massive waves of disruption are inherently disinflationary. And it's not going to be about the kind of current economic cycle. That's the reason that they perform right here. Although when it comes to the financials, it is very interesting because without a doubt, Morgan's telling us correct, if we get a recession and consumers are kind of fully, you know, struggling the way they would

in a normal recession, then the stocks aren't priced for it. But we also got upgrades on JP Morgan today, essentially saying they're in good shape if we don't get there. It really is the crux of the debate right now in the sector. One 52-week high today. That's Molson Coors, the brewers, having a good day.

So are the staples in general off those Pepsi numbers as well. Just a few minutes away from the close. Off the lows, but still down pretty much across the board. We got as low as down more than 300 on the Dow. Joining us is Meera Pandit, global market strategist at J.P. Morgan Asset Management. Meera, as we gear up for earnings season, the focus has all been on these macro numbers, inflation, which we'll get tomorrow, what the Fed is going to do. But the bearers, at least for equities, their argument is we haven't really factored in weaker earnings or weaker fundamentals for corporate America. What do you expect to see?

We do anticipate, I think there's broad consensus that we should be seeing some downward earnings revisions and some more realistic expectations on profits, which are looking really rosy right now. But at the same time, I still think we could eke out some positive earnings growth for the year as a whole, because we do have a pretty good cushion here in terms of margins. Now, what we're still looking for, though, when we hear guidance from different companies is how is pricing power being exercised at this point? How resilient is consumer demand? What is the situation with inventories, whether it's a glut or still some challenges in replenishing? And ultimately, you know, how are companies managing through this pricing environment?

Is there going to be any indication of employment changes, whether it's hiring freezes or layoffs? Those are the kind of indications that are going to help us understand how do revenues fare for the rest of the year and how do companies defend their margins? So with that said, what are you telling clients to do? Which sectors? What types of companies? Ultimately, we're looking for different sectors and companies that can exercise this pricing power and do tend to have a little bit more operating leverage. We tend to

see that in more of the value-oriented companies, whether it's energy, materials, or financials that are able to more efficiently earn profits. But at the same time, it's not a wholesale one sector or one industry or the other. It's really going to be on a company by company basis because we see a lot of differentiation under the surface between how different companies are withstanding this environment. What about growth versus value? That sort of debate is heating up again now as we wonder whether inflation has peaked. Another really strong down day for oil. You know, even if inflation has peaked, we're still likely to see high inflation throughout the rest of the year. I mean,

even if inflation gets to maybe 5 percent by the end of the year, that's still an environment of high inflation, even as we think about next year potentially being closer to 3 percent on inflation, a lot higher than we've experienced historically, at least in the last 10 or 15 years. So there's still definitely a case to own value in this type of environment. But as we head to the back half of the year and growth does become a little bit more scarce in the economy, people are going to be looking for it in portfolios. And even if the Fed doesn't necessarily pause or pivot this year, we're likely to see a slowing pace in terms of those incremental rate hikes. And if most of the Fed hiking cycle is done by the end of the year, then that does remove a serious headwind to a lot of growth,

which would have experienced a massive repricing throughout the year already by that point. Mira Pandit, thanks for your view. Stick with value over growth. From J.P. Morgan Asset Management. Almost two minutes to go here in the trading day, Mike. Down 190 or so on the Dow. It's been a volatile final hour of trading, though everything is negative. Third down day in a row.

What are you seeing in the internals? Yeah, it's definitely weakened over the course of the day, Sarah. It actually started out by 2 to 1 or maybe 60-40, positive to negative. Actually, the equal-weighted S&P has been outperforming the market cap weighted version for a while, but really, you know, not determining much of anything in terms of the outlook here. 1.3 billion on the advancing side, almost 2 billion to sell. Take a look at the U.S. versus the rest of the world. And you see the S&P 500 still kind of nosing ahead here, even with, you know, we have the strong dollar situation. The rest of the world clearly seeming like in much more of a growth scramble at this point. The volatility index ticking above 27.

We'll see if it actually can deflate a little bit after tomorrow's CPI number. I imagine we have the expiration on Friday. But after the CPI, that's kind of the next known catalyst that we have out in front of us, sir. Worst performer right now is ServiceNow. It's at the bottom, down 12% or so after some warnings by the CEO of a tough macro environment. As we head into the close, we've got a 200-point decline right now on the Dow. Boeing is the best performer, at least most positive contribution right now for the Dow. As far as the most negative, it's Microsoft. And the S&P 500, Apple's contributing the most to the SPY ETF that tracks the S&P.

Apple's actually bucking the broader technology sell-off. Microsoft on the other side of it. NASDAQ copped down for the second day in a row. And again, you're seeing some pretty broad-based weakness. It's not just Microsoft. Amazon, Alphabet, Adobe, Costco, all a little bit weaker today. Every sector right now is lower in the S&P 500. Energy by far the worst performer.

It's down about 2%. On another big slide in crude oil, also a slide in treasury yields, worries about the economy. That's it for me. I'm closing now.