Closing Bell - Closing Bell: Making Sense of the Summer Swoon 8/22/23

Episode Date: August 22, 2023

Does this late summer swoon mean a fall to fear for investors? Gabriela Santos from JP Morgan Asset Management and New York Life Investments Lauren Goodwin give their takes. Plus, star venture capitalist Rick Heitzmann weighs in on the IPO market after Arm Holdings announced it was going public. And, Morgan Stanley’s Jim Caron is forecasting further downside… but says that isn’t all bad news.

Welcome to Closing Bell. I'm Scott Wapner, live from Post 9 here at the New York Stock Exchange. And this make or break hour begins with unsettled stocks, an uncertain market, and whether this August upset is the opening act of a really rough fall. Here is your scorecard with 60 minutes to go in regulation. NASDAQ barely holding on today, rising yields, falling stocks. Stop me if you've heard this before, but it is again the story today. The 10-year reaching its highest level since 07 and stocks sinking into the red yet again nasdaq i just mentioned that coming off its best day since july been a bit volatile today there's the intraday chart so have shares of nvidia they were

up and then they rolled over it comes just ahead of that company's critical earnings report tomorrow in overtime rest assured tomorrow we're're all over that. Elsewhere today, a couple of retail wrecks not helping the story either. Macy's and Dick's Sporting Goods shares falling and falling sharply on earnings for those companies. And then there is the banks where more credit downgrades. See, those shares fall across the board, including most of the well-known regional names. It does bring us to our talk of the tape, whether this late summer swoon means a fall to fear for investors. Let's ask Gabriela Santos, JPMorgan Asset Management's global market strategist. Welcome back. Nice to see you. Nice to see you. So I look at your notes and you say this is not necessarily the start of

something worse once we hit the fall. I think we've come a long way in a year and a half in terms of appreciating that the bear market is likely behind us, as we believe, and that we're back to seeing a normal period of volatility in equity markets from time to time. So a 5% pullback once a quarter, a 10% pullback once a year within a bull market. And that's where we think we are. Since late July, we think this is some good old fashioned profit taking. You can really see that by the underperformance of those companies and sectors that had led before, whether it's large cap tech, semiconductors, home builders, or more recently, even banks. So ultimately, how far this goes, we'll have to see. It's seasonally a weak period, and it will very much depend on what

happens with earnings and CPI in the weeks ahead. But ultimately, we still have a constructive view of stocks from here. Okay. Correct me if I'm wrong. You sound more positive on the market than you have been since we've been having these conversations. Yes. And that has really changed since the end of May, because we, like a lot of people, had come into this year expecting a hard landing. Or it was always a conversation about a mild recession. But there was an expectation of a recession taking hold mid-year, combined with margin pressure on the earning side. And since then, we've had substantially better data on the macro front showing a normalization of the labor market, but not a collapse. So that can still support positive consumption at the same time that we've had better data on the inflation front, especially June and July super core increasing only 0.2 percent. We've also had

better earnings data. If you exclude energy and materials, earnings actually grew in the second quarter. So we have now come around to this view of a soft landing as the base case of the earnings recession being behind us and for it making more sense to take on more risk on the equity side, especially. Problem with all of that, and it's all, of course, valid, is that what you've also gotten, higher yields. And that's been the picture of late, right? Since the start of earnings season to today, the yield on the 10 years of 50 basis points. The market's clearly unsettled about where rates are. Stronger economy perhaps means higher yields than maybe we thought and higher perhaps for longer than we want.

What do we do with that? I think our conversations with investors the past two weeks have been entirely about this move in long-end yields. And there being a lot of confusion about why that's happening. And I think, first of all, it's been a sudden move, 60 basis points since mid-July, but it's also been the lack of clear understanding why. And if we translate that to stocks, not all reasons why yields go up are the same for stocks. Some are more positive than others.

If it's really driven by a fear of a no landing or a reacceleration that's inflationary, that's not good. But isn't that like a legit fear at this point? We think that one is a bit overplayed, shall we say. The no landing idea. The no landing idea. Too strong economy for everybody to handle. For everybody to handle. First, if you look at break-evens, they've only moved higher 10 basis points,

so it doesn't seem like it's really driven by higher inflation expectations and then on the growth side this idea that we're actually going to get third quarter gdp of six percent seems very very unlikely historically when the atlanta fed gdp now is over four percent it usually at this point overestimates growth by two percentage points we're still expecting a normalization of activity, especially consumption of services. That's a soft landing, not a no landing. OK, you need Jay Powell, the Fed chair and his panel to be your friend from here on out, don't you? Right. I mean, you in terms of Jackson Hole a few days from now, what's the risk? The

risk is that he's more hawkish than the market's willing to accept. Right. I think more recently, there's been an interesting conversation that's taking place rather than about the no landing fears. It's migrated into a conversation about our star. So what is in today's economy a neutral real rate? And I think that's where there's an expectation there could be some interesting academic papers published at Jackson Hole. So we'll be reading those on Friday and over the weekend. And really, it's about why our star could be higher. Is it because we've gotten better news on productivity? That's a good thing, actually, for stocks. And how high has that R-star gone up from 50 basis points real rates to 200? That seems very sudden. So we really think it's just marginally higher. And that's an environment that stocks can

do quite well. I know. But what if we thought what was the neutral rate was a good place to be? The stronger economic growth that you rightfully cite suggests that the neutral rate isn't high enough. I think what we're really expecting for the second half of the year is okay growth. So I think we get asked, is good news bad news? Is bad news good news? Okay news is good news. So it's really a story of normalization and growth, a little bit subtrend, a little bit below 2%.

Higher rates are still having an impact. And rates at nearly 5.5% are still way too restrictive, given that implies a 200 basis point real rate. So we can see rate cuts even in a soft landing scenario. Is that your playbook? You think we're going to get rate cuts? And if so, when? We do. And I think it's less about a mispricing for 2024. The Fed's likely going to take its time next year.

100 basis points sounds fair. It's more about the estimate for 2025, which by the end of 2025, investors are pricing in rates at 4%. That's that 200 basis point real rate that to us doesn't make sense. Settling in something closer to 50 to 100 basis points real rates or rates closer to 3% seems more reasonable. And that's why we've been advocating for adding duration as a nice hedge also against that more positive equity view. What about the lack of leadership, if you will, or the loss of leadership?

You've had tech stocks sort of drive the train here. And now over the last, you know, over this month, they've obviously weakened somewhat. If you don't get a reemergence of those names, you know, the apples of the world, NVIDIA's, which reports earnings tomorrow, which seems especially critical given everything that's gone on, is that a problem? Absolutely. And here is where this is the second biggest conversation we've been having with investors, which is even if we subscribe to a soft landing view and have more comfort taking on risk on the equity side, that doesn't translate into buying the market cap weighted S&P 500. There's a lot of discomfort with this record high

concentration of the top 10 companies at valuations that are at 145% of long run levels. So really a clean way to do it has been, there's been a lot of conversations about an equal weight approach, but we could even do a bit better than that by doing actual active management, given that there's a much bigger dispersion happening not just between sectors, but within sectors between companies. So thinking much more thoughtfully in a non-zero rate environment about valuations, about quality, about different structural opportunities. And we find that in other tech companies, but also in industrials and health care and energy. There's a lot to do there beneath the surface. OK, we'll continue that conversation in just a second. Let's bring in Lauren Goodwin now of New York Life Investment Management. So, Lauren, it's nice to see you as well. Welcome to the conversation,

one in which it certainly appears and sounds like Gabriella is more positive on the market that she's been in an awfully long time. You've been in the cautious camp for a long time. What about her view? Well, hi, Scott. Hi, Gabriela. One thing I agree with Gabriela on is that this is not the beginning of a protracted bear market. I am a little bit more cautious towards the end of the year, though, because I think that's something in current market pricing has to give. If the soft landing narrative is to pervade, then I do expect that we would see stabilization or even modest reacceleration of inflationary pressures. As Gabriella rightly pointed out, I think that's potentially very tricky for yields

and tricky for equities. It's the playbook that we saw last year, even if for a modest period of time. Or if we don't see that, then we see a mild recession, in which case the bond market pricing of today is more correct. But in any case, I do expect that we'll see some equity market turbulence here, likely closer to Q4 when we see either new inflation data that makes us concerned or new economic data that makes us concerned. What about the pop in yields? Gabriela obviously doesn't think that it's that sustainable from here. What about you? Well, I agree with the point that the way we would see a sustainable or stable, rather, increase in yields,

one that could be constructive for the markets as a whole, is one in which the productivity or potential GDP is pulled out further. But that's likely not what we're seeing right now. What we're likely seeing is a little bit of confusion around the inflation story ahead because in part due to the data that we've seen in the past couple of weeks, like outsized retail sales, this idea, again, that the economy could be re-accelerating. The other factor, though, that's contributing to long yields is the term premium. Supply and demand issues with large treasury issuance on the table, with changes in monetary policy globally that are on the margin

impacting demand for U.S. treasuries. These are all factors that can contribute to more treasury market volatility. And for that reason, we're actually not in the camp of adding extensive duration unless you can do it incredibly tactfully and tactically. This is an environment where because the medium term environment for yields is so murky, we prefer staying short duration and corporate credit, adding duration only in sectors like in municipal bonds where we see a little bit more payout in the long end of the curve. Do you want to respond to that? I think for us, the duration conversation is not going from record money market flows to 10s, 30s. There's no need to go that far out on duration. We think a sweet spot is being neutral duration, where we'd be speaking about a six year duration, because that way you can lock in these yields for multi years, not just for a few months or a few quarters.

You can also benefit from potential capital appreciation and you get the diversification benefit if fears about the economy come back. So it's more of a sweet spot. Yeah. So, Lauren, about Jackson Hole on Friday, right? Last year, we all remember, we're like, well, what's he going to say? There was so much anticipation for the Fed chair speech. It ended up being eight minutes, but it was a powerful eight minutes because between when he spoke in late summer last year and October, we hit the lows in the market. What's the risk this time around? Well, I think that the risk is not likely to be meaningful news on the monetary policy front. Last year, Jiripal had a very clear message to send, which was we're not done on inflation.

This year, he can continue to thread the needle that he's been threading, I think, with respect to we've seen some progress, but we're going to have to look at the data ahead. I don't think we're going to get much news on the near-term policy rate front. Where we might see some excitement is in this conversation about R-star, the neutral rate, which Gabriella already pointed out. If there is some sense within the Fed that actually there is a marginal difference in the policy rate ahead. We could see what I'd expect to be a tactical, modest expectation change in long rates because that would, again, reset the curve higher. Is that the risk you see as well for Friday's speech? We're still going to watch 10 a.m. Friday, Powell's speech. But we think more important are the academic papers that are published. That's the theme of this year's conference. It's always very academic, right? This year, it's about the structural

changes in the global economy. And that's why you've seen not just a rise in long-term U.S. yields, but it's been a global move higher in yields. There's a global discussion about a higher R-star. So that's where we can calibrate that discussion. It's probably marginally higher, but it's not four times the level that it was before the pandemic. And that can help calm some of these fears. So, Lauren, there are two sectors today that I think really sum up where we're at. Financials have been weak. And now you have the downgrades, the credit downgrades and the risks around that and a potentially weakening economy and what it means for those stocks. So let's deal with that and the idea that the consumer can only hang on for so long. And I mentioned at the very start of the program,

the Macy's, Dick's Sporting Goods, stocks that are having awful days. And yes, the consumer's been spending, but that spending has been really tailored towards travel and experiences. We think that's going to continue, and the CEOs of those companies come on this network repeatedly and suggest they're seeing no signs of anything weakening on that regard. But what can the market truly do if financials remain as weak as they appear to be in the environment that we are in? The market can keep doing what it's been doing, which is hold on. I mean, there's just been so much support for the consumer. Details that we've been, I think, learning in real time,

the idea that policy support from the pandemic for not just consumers directly, but to their employers through corporate programs, these remain important programs. Now, some of them are starting to roll off, including student loans in the fall. And we do see a mounting concern for the economy as a whole. I think this comes down to the foundation of our economic view, which is so boring at this point. But the idea that when the Fed starts raising interest rates, it takes 18 to 24 months to impact the labor market. Even though the Fed moved quickly this time, that timeline hasn't changed. And so we do expect consumer malaise to begin to mount again later this year,

although not expecting outright declines in employment until the very end of this year. And that's when we start to see the equity market turn. Is it just a matter of time before the consumer runs out of steam? So I think everything that we've heard today is not consistent with this idea there's a massive reacceleration happening in the economy, right? We've been hearing from retailers and home builders about consumers being more value driven, about being more cautious of discretionary projects and purchases, about seeing credit card delinquencies going up. It's just that it's a normalization of spending patterns in our view rather than a collapse in consumer spending. And what helps that view

is a normalization in the labor market rather than a collapse in hiring. I want you to answer the question in this next question. Then, Lauren, I want you to do it, too. And then we're going to be done. The biggest event this week, NVIDIA's earnings. We're going to ask our viewers the same question in a moment. So get ready for your own answers wherever you're watching. The biggest event this week, is it NVIDIA's earnings, just given what's happened with tech recently, where the AI narrative has gone? Or is it Powell's speech? We would say for the S&P 500, it would be NVIDIA's earnings, just given how much AI enthusiasm has fueled the equity market and given the weighting of those themes in the index in and of itself.

But I think if you look across assets, then the academic papers published at Jackson Hole are very, very important for the discussion on yields. OK, Lauren, same question. I have to agree. I think that it's NVIDIA because when it comes to the tenor of this market and some of the support that we've seen in risk assets, that's where some of the key questions lie, where, again, I think for the next couple of months, the monetary policy story is more established. Now, one area where I would take a slightly different view than what Gabriella suggested has to do with valuations in the mega cap Magnificent Seven companies. Not that they're not high, they certainly are,

but rather that the demand for these semiconductors fueling the AI trend is not only high, but the main area of demand, the other six magnificent seven companies, they're not particularly price sensitive. And so while we do expect that, and we do see these valuations as particularly high, we know that valuation is not an important market timing indicator. In fact, it's not particularly helpful at all when it comes to market timing. And so we're taking a more balanced approach with respect to tech, including mega cap tech companies, but also looking to the support of those companies, the digital

infrastructure and the new application technologies that may come over time in small and mid cap growth. It's going to be exciting. We'll see what happens. Lauren, thank you. It's nice to see you again. Gabriela, to you as well. It's good to see you here at Post 9. Gabriella Santos here on set with us. Brings us to our question of the day, which I already told you what it is. We want to know what you think. What matters more to the market this week? NVIDIA earnings or Mr. Powell's Jackson Hole speech at the end of the week?

You can head to at CNBC closing bell on the formerly known Twitter called X to vote. We'll share the results a little later on in the hour. Let's get a check now on some top stocks to watch as we head into the close. And Christina Partsenevelos is here with that. Christina. Well, let's talk about regional banks because they're lowered yet again as S&P Global downgrades several names. Associated Bancorp and Valley Nationals ratings were cut.

Why? Well, there was funding risk and the reliance on broker deposits. That's why you saw them lowered. UMB Financial and Comerica were cut also over large deposit outflows, and Key Corp was downgraded on the heels of constrained profitability. All of those names you can see on your screen,

Comerica, for example, down about 4%. But hey, at least the Bank of Monopoly is doing just fine, according to one new note. Bank of America is raising its price target and reiterating a buy rating on Hasbro, thanks into the success of the Monopoly Go game, which Hasbro gets royalty revenue from. Analysts say investors don't fully appreciate Hasbro's potential to earn big licensing revenues from its intellectual property library, including franchises like Transformers and Power Rangers. All that said, especially after we saw the success of Barbie.

Shares of Hasbro up 7.5%. All right, Christina, thanks. We'll see you in just a bit. Christina Partsenevelos, we're just getting started. Up next, signs of life in the IPO market. Arm Holdings filing for its IPO this week. So is this the start of a bigger boom in public markets? Rick Heitzman of First Smart Capital joins us next with his take just after the break. We're live from the New York Stock Exchange, and you're watching Closing Bell on CNBC.

Welcome back to Closing Bell. Chip design firm Arm Holdings filing for its initial public offering this week. And what could be a major test for the broader IPO market. Then our next guest says it could lead to even more activity into the end of the year. Let's bring in star venture capitalist Rick Heitzman of First Mark Capital. It's nice to see you. Hey, Scott, how are you doing? Pretty good. I mean, it's been a minute, right, for tech IPOs, especially ones that are grabbing all the headlines like Arm is. What's your expectation here? So I would say Arm, though, is kind of a tech IPO. What we're really looking for are the really tech growth IPOs,

like you might see in an Instacart or a Databricks coming. But this is, you know, beggars can't be choosers at this part of the market. And we're seeing something that looks probably more similar to, you know, the J&J consumer spin out of a slow growth, but at least a tech company looking to do a tens of billion dollar IPO. So at least we're excited for that in the interim. I mean, you mentioned Instacart, Databricks, I think was the other one you said. Stripe is on everybody's list, I think. And what are the other names you're excited about?

And if you think they're closer, how close are they actually? So I think you're going to see probably Databricks, Instacart, maybe a couple others go out in the fourth quarter. I think the conventional wisdom, it's plus or minus four or five high quality companies that are willing to go out for various reasons in Q4. But then there's another wave of companies coming in 2024, high quality consumer companies like Discord, high quality enterprise companies like DataIQ, which is similar to a Databricks or a Snowflake that are part of kind of the AI revolution that are both capturing the AI zeitgeist as well as having great fundamentals in their core business. Will we be back to, quote unquote, normal then as it relates to companies going public by whatever means they choose to go to the public markets? You guys, and I mean you guys as venture capitalists, have certainly had to change your own expectations in terms of time frame, maybe size as well of these offerings.

Are we going to get back to some state of whatever normal is? I think we're probably a year or so away from whatever the historical norm was. You know, this is definitely a cyclical market. In 2021, it was a wild rush to the market. I think there was 121 growth IPOs at that point. Last year was dead. This year has been dead probably up to this point, depending on if you count some weird companies that aren't really traditional growth IPOs like Acava or even Arm. So it's going to take a little bit to get back to it. The first companies that go out tend to be very high quality. They tend to be willing to take a little bit of a hit on valuation and they tend to be smaller IPOs

that want to get out. And, you know, whether it's Arm because of the soft bank aspect, whether it's Instacart, who's been ready to go for a little bit, I hope that those first companies are high enough quality and they have enough demand that they draw in the IPO buyers back to the market. I mean, the other piece of the capital markets pie deals, right? And maybe some tech companies are emboldened by Microsoft and Activision and they're beating the FTC, if you will.

What does that mean for the appetite among big tech to try and do stuff? Well, I think you hit on the two key levers. The first key lever is, especially for the larger deals, having an IPO as an alternative means that their window is not going to, means that if you're going to buy a company, the window might not be there for very long because the public markets are an alternative liquidity source for those shareholders and employees of the company. And without an IPO market, the bidders don't feel as aggressive or the need to bid before they miss the window. The second piece is, as you've alluded to, the FTC, especially

under the latest leadership, has been incredibly aggressive in shutting out especially big tech from the M&A market of size. So they've had both a natural governor on them from a regulatory perspective and a market governor on them. And we hope that both of those things loosen up a little bit. So we go back to what would be seen as a normalized M&A market, as you're seeing on the screen now, you know, the M&A market's down, you know, down 50 to 70 percent from historical levels, which is which is bad for the entire ecosystem. You know, the VC world, I presume, has its eye, you know, pretty clearly on smaller tech for obvious reasons for much of what you do. But big tech has dominated a lot of the conversation. And I'm wondering what that view is from the periphery, if we can call it that, of an NVIDIA,

for example, which, as we suggest, is so critical tomorrow for the earnings report in overtime that we're going to get. How do you view where that stock has gone? It's 200 whatever percent it is year to date. And now the pressure that's on companies like that to not only deliver, but to keep the AI narrative intact. I think you're exactly right. I mean, everyone's saying, how do you play AI? And a lot of the AI companies are going to be meaningful and material and that the next generation of what was Amazon or Google

for the beginning of the internet are still private companies. So you can't really play them as a public equity shareholder. So you're looking to buy at this stage of the cycle the picks and shovels, which effectively NVIDIA is. So now you're looking to that one company as kind of a barometer of the health on AI, which is the current meme. So it's going to be choppy.

I'm not sure what the earnings are going to be tomorrow, but hopefully they'll do a good job, and you'll be able to see there's continued interest in AI across the board, and people are building out the picks and shovels. But I hope people realize that this is a medium and long-term play, and maybe interim quarterly results might be choppy on their way to this AI boom. Yeah, that they reset their own expectations with what they delivered in terms of the guide last quarter. So we'll see. Rick, I appreciate it as always. Be well. We'll see you soon.

Always great to see you, Scott. Thank you as well. That's Rick Heitzman joining us for Smart Capital. Up next, trading the uncertainty. Morgan Stanley's Jim Caron is flagging a big buying opportunity just ahead. We'll get his take as well on a potential recession that could surprise you as well. Makes the case after this break and later your retail rundown. I mentioned these stocks earlier. Look at that. That's just ugly. Macy's and Dick's Sporting Goods both sinking hard in today's session. Break down those moves ahead. Closing bell right back. Stocks losing some steam now with the Dow heading for its fifth negative day of the past sixth.

Our next guest says any further downside could serve as a longer-term buying opportunity, given the likelihood of a soft landing. Let's bring in Jim Caron, CIO of the Portfolio Solutions Group at Morgan Stanley Investment Management. Jim, welcome. It's nice to see you. Good afternoon, Scott. Full trend intact. Why? Well, you know, the way that we see this is that we've had a pretty significant earnings decline first quarter, second quarter, and the third quarter is on the same path. If we believe, which we do, that we're going to avoid a hard landing and we may have a mild recession, soft landing, however you want to

categorize it, this could serve to be the inflection point where we start to see more of a broadening of the breadth and you start to see an increase in earnings potential as we move into 2024. Now, for sure, I do expect that we are going to see a mild recession it could come in the first part of twenty twenty four. You could even start late this year. But the point here though is that I think that the broader parts of the markets are already anticipating this and are reasonably priced for it. So as we start to roll the clock forward and as we start to think about this inflection point, if we avoid a hard landing, then if we start to see, you know, in my view, another 3 percent or so decline in the overall level of the equity markets, that this becomes a very, very nice spot to think about what could be more, you know, closer to $240 earnings at about a 19 multiple. And you could see levels of the S&P up closer to forty six or even forty seven or potentially forty seven hundred or potentially higher. But couldn't I also say if if if you lay out your case that if you think there's going to be a mild recession, that that would suggest that earnings haven't troughed just yet, which would then suggest that the market's not potentially as, quote unquote, reasonably priced as you just suggested it was because the implication being

that even weaker earnings potentially couldn't possibly be priced in. Yeah, no, look, that's a good counter argument. And it is a two sided risk here. We think, though, that the asymmetry is still to the upside because effectively people are I would argue more under invested in the equity markets. Now most people came in this year more overweight bonds more thinking about fixed income and less on the equity side. The recent couple of months has caused some shift in that sentiment and some shift in that narrative. But I would argue that there's going to be more support in terms of buying on the downside than there will be selling on the upside because people aren't already too long at this point. So if the markets were very overextended long, then I would agree with you, Scott. But to the extent that I believe that, I don't think that's the case. I think that the markets are still underinvested in equities, that essentially that dip is likely to be more dominant and that's more supportive. So really what I'm looking at is an asymmetric profile. And I think that the asymmetry

still leads me to believe that there's going to be more aggressive dip buying than rally selling. What about the backup in yields and what that potentially means for your projections on where we might go? If yields, which have, you know, they're up, what, I don't know, 50, 60 basis points since earnings season really began. If they remain higher now for longer, what's the upset to what you just said? Yeah, well, I mean, it's really a question of the feds. How high are they willing to take these take these rates? If we do get the slowdown, which I think that we will, this is actually good news for the Fed. It actually tells them that they don't have to hike interest rates.

So what I'm concerned about on the rate side is if the Fed sees that we're having too frothy growth or if the markets aren't correcting, particularly the equity markets are correcting. And that brings them into hike even more than what people are anticipating right now then i think that would be very very bad news if they start to fall behind the curve of inflation and start to see that inflation is unanchored that would certainly be very very negative because then the sky's the limit on how high they can hike interest rates but if if we see this slowdown which i do think we're going to get, we are seeing a slowdown in the data, then I think that they stay higher for longer,

but they pause. And I think that pause in and of itself is actually somewhat positive for the broader equity markets. I've been asking everybody, so I'm going to ask you as well, because we're thinking so much about NVIDIA's earnings tomorrow in overtime.

The importance of that report at this particular time especially is what? Well, look, I mean, you know, it's clearly important. It's very, very much a headline stock that's out there. We don't play it from a stock to stock perspective. I would say that it would maybe make people rethink growth. But from my perspective, you know, the growth sector, from my perspective, I think the opportunity is more in the value sector. So to the extent that growth has a correction, I think value is a beneficiary. So I think it's significant, but I think it's significant for different reasons. But so you because you like that, you can say that because you think the economy is going to still be better off than some would otherwise suggest. So a rotation there would make sense in your world. Exactly right. That's exactly right. So for our thesis to play out, we need to see a broadening of the graph. It's about the real

economy growing and moving higher. It's not just about the growth sector moving consistently higher and dragging up the indices. I mean, in fact, I think that's very, very unhealthy. I think we need to see the broader markets participate. And I think in a more healthy economic environment. So if we get this recession, if we get a mild recession, the sooner we have this recession, the better off we'll be, because the sooner it is, the more mild it is. If it happens later in the cycle, then the more deep it's likely to be. So I think that if we have the slowdown, it's a good correction. And I think we could reset. We can move higher. And the breadth of the markets will then start to broaden because

I think other sectors like industrials and materials and even consumer staples and discretionary, all of those other sectors can then start to participate in a much more meaningful way. So far, it's the long talked about recession that just hasn't happened yet. And I guess we're going to find out in the months ahead. Jim, I appreciate the conversation very much. We'll see you soon. Jim Caron joining us today. Up next, we're tracking the biggest movers as we head into the close.

Christina Partsenevelos is back with us for that. Christina. Well, there's a rare NVIDIA sell off, but don't worry. Investor optimism is still thriving. I'll explain what's going on with that move today after this short break. About 15 to the closing bell. Let's get back to Christina Partsenevelos with the stocks she is watching. Christina. Thanks, Scott. Well, cosmetics company Coty saw customers continue to splurge on expensive perfume and makeup, contributing to its revenue beat. But the

beauty provider forecasted annual profits below expectations, reason being is because of high production and labor costs, and those costs, along with the stronger dollar, are why Kody plans to raise product prices this year. Shares are down about 2%. Touted as the earnings report of the year, NVIDIA is set to report after the bell tomorrow. I know that's one of our Twitter questions to our viewers right now. Shares are about 3% lower, but for context, though, it opened at its highest level on record and after an 8% rally yesterday, Monday, after yet another $700 price hike from a Wall Street analyst. Separately, though, NVIDIA and VMware announced a new AI software product for customers to build in their own private data centers versus on the cloud.

So a little bit safer. This partnership demonstrates how NVIDIA aims to provide that total AI package, not just the hardware. So let's see how that materializes in tomorrow's report, which I'll be reporting for you. So be sure also to catch an interview with VMware's CEO that's coming up or who is coming up on closing bell overtime. Scott. All right. We will see you tomorrow as we look ahead to NVIDIA and we look forward to that. Christina Partinellos, thank you very much. Last chance to weigh in on our question of the day, which Christina just mentioned once again.

What is the most important event this week for you, investors? NVIDIA earnings or Jay Powell's Jackson Hole speech on Friday. Head to at CNBC closing bell on X. The results after the break. All right. The results of our question of the day. We asked what matters more for the market this week, NVIDIA earnings or Mr. Powell's speech at Jackson Hole on Friday, and the majority of you said NVIDIA. Well, I mean, it was close, though. 51-7, 48-3. Up next, we're setting you up for earnings and overtime.

Toll Brothers reporting in just a few moments. We'll break down the key themes to watch when those numbers hit the tape. That and much more when we take you inside the Market Zone. All right, we're now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli is here to break down the crucial moments of this trading day. Plus, Courtney Reagan on the major moves and ugly

ones at that in retail. And now what to expect out of Urban Outfitters earnings in OT. And that's not the only report we're watching either. Diana Olick is looking ahead to Toll Brothers after the bell. But Mike, we've got yields. Very much a story today. And then you saw the vote from our viewers on the most important event, NVIDIA and PAL.

It's pretty split. I'm wondering if you think we need quote unquote favorable outcomes from both to sort of reverse this malaise we've had here in August? I would say the first thing we need is for them to be out of the way, because honestly, a lot of times it's the anticipation of something like this that's a little more crucial than specifically what we get in detail. I don't know that we need favorable outcomes for both. I think that at this point, there's a chance that Fed Chair Powell has no real strident agenda in terms of market understanding of policy or positioning. And it could just be kind of we're data dependent. We're almost done, but we're not there. In other words, a reiteration of message.

NVIDIA is more interesting. The idea that do we have to kind of convey the notion that there's not going to be a place to hide and there's not a secular growth story that's going to protect you against this little corrective period we're in right now. I'm not sure. I do know that we got to, we tagged a 5% decline on the S&P. Just tagged it. We got these sort of minimally acceptable oversold conditions going into Friday's close. You know, so it was sort of like enough there to get you a bounce. Beyond that we're reaching for reasons for why we're doing anything. Bonds are kind of quiet today. Yields have kind of been oscillating around flat. So I don't think that that's been a major push. The other thing is you know we can come to some kind of understanding and a peace with this yield level if it's happening for acceptable reasons if the economy is truly resilient, it's not inflation getting out of hand again. And, you know, the growth proves that housing is not going to be killed by these yield levels.

All right, Courtney Reagan, big story today. Dick's Sporting Goods, Macy's, two ugly stocks. So where's that? And now what we might expect from Urban Outfitters and OT. Yeah, and don't forget about Lowe's, by the way, too, Scott. So Lowe's actually beat on earnings, revenues missed. It beat on comps. It reaffirmed its full year guidance. Then you've got Macy's. It beat on earnings and revenue, but disappointed on comparable sales. Affirmed guidance. And then Dick's Sporting Goods misses on earnings. Revenue

comps lowers EPS guidance. You can see the stock performance. Dick's down almost 25 percent, almost losing a quarter of its value today. Macy's down 14%. Lowe's, look at that, the lone outlier to the upside up almost 4%. BJ's Wholesale and Urban Outfitters also reporting here today each down about 5%. Urban we're going to hear from after the bell. Haven't heard from them yet. We are expected to see comp sales actually grow near 5%. Weakness expected, though, in the namesake brand.

Double-digit gains expected for anthropology and free people. Cities expecting an earnings beat driven by stronger sales and margins, but also thinks that expectations are pretty high going into this. And so they're downgrading shares to neutral. And obviously, it looks like investors have a little bit of doubt here as well after what they heard from other retailers in sort of that specialty area outside of Lowe's, if you will, today on what we're going to hear after the bell. Court, thank you. Appreciate it. Courtney Reagan, we will find out the other story

we're waiting on to Diana Olick, Toll Brothers. I don't know what expectations are, but the stock's down near 7 percent in a week and 7 percent is a key number because mortgage rates are north of 7 percent. What a coincidence, right? And it key number because mortgage rates are north of 7%. Yeah, what a coincidence, right? And it's all about mortgage rates. Toll is expected to increase both revenue and earnings per share as the luxury home builder capitalizes on still strong demand. The realtors, in fact, reported this morning that while sales were down in every price category in July, they were down the least in the million-dollar-plus range,

and toll's average price last quarter was roughly a million dollars. Now, the stock was upgraded to strong buy from outperformed by Raymond James last month. I would just flag that mortgage rate. The changes we've seen over the past quarter. The 30 year fixed was around six and a half percent at the start of May, but spent June and July pretty solidly over seven percent. In the last quarterly report, CEO Doug Yearley mentioned improved demand combined with a strategy of increasing supply of spec homes. Well, we'll see how that plays out in this new range of higher rates, Scott. Got to believe it's going to play somewhere. Diana, thank you so much. Diana Olick, we'll look forward to seeing you in overtime with that report.

So, Mike, we're going to have a two-minute warning in just a moment. So we're talking about rates, and we're talking about Powell at Jackson Hole. I mean, this March higher in rates, which are 50 to 60 basis points higher since earnings season really started, which maybe thwarted some of the good feeling coming out of earnings, have done some of the work for the Fed chair. Without a doubt. Right. Maybe he feels a little bit better about where things are, given that, OK, let's cool things off a bit. Stock market's taking a breather, too. Right, because there's a lot of sense going through

the summer that, well, 500 basis points of Fed rate hikes since March of last year really has indented the economy. Are we a lot less interest rate sensitive than we thought we were? Well, some of the action on the long end would suggest that you still are sensitive. Both the consumer, you know, the way the consumer cyclical stocks have behaved, Macy's CEO talking about an uptick or normalization in credit delinquency rates on their cards. All that stuff feeds into this notion that, you know, you're going to start to feel a little bit of a pinch. And for everything that reinforces the advantage that new home builders have in the housing market right now, it really just feeds the idea that the overall housing activity is kind of hurt pretty significantly by the fact that existing home market has locked up.

So all that stuff does suggest that there is some slowdown. I think what's also happened is the move higher in rates, which, as I said, coincided with a 5% drop in the S&P. That's not major, but it's also not insignificant. It's done a lot of what had to get done in terms of sentiment moderating off of extreme levels. The market's no longer stretched. I mentioned it touched an oversold condition. Probably has more to go. It doesn't seem like it's really proven anything just yet. But yeah, everything's moving in that direction for a normal type of correction, pullbackback reset in the context of a slightly higher yield line.

Let's note, too, that discretionary is actually positive today. It's one of the few... You can't look equal weight. You can't look at Tesla in that. Well, there's the foul. We're going to go negative on the Dow, 185 in the loss as we settle out here. I'll see you tomorrow.