Closing Bell - Closing Bell: Market Foundation Showing Cracks? 2/5/24

Episode Date: February 5, 2024

Is the so-called foundation of the market starting to show cracks? Morgan Stanley’s Erik Woodring explains what Apple’s under performance could mean for the mega-caps and the market more broadly. Plus, JP Morgan Asset Management’s Gabriela Santos is mapping out her rate cut forecast. And, Amy Kong from Corient says we need to see market breadth beyond big tech to sustain the rally. She makes her case and explains where she is seeing opportunity right now. 

All right, thanks so much. Welcome to Closing Bell. I'm Scott Wapner, live from Post 9 here at the New York Stock Exchange. This make or break hour begins with stocks under some pressure amid new questions about the durability of this rally. We'll ask our experts over this final stretch if the surge is once again too top heavy. In the meantime, your scorecard with 60 minutes to go and regulation looks like that. Been a bit of a turnaround for the Nasdaq and the S&P, threat to go positive here. Dow's been under pressure most of the day, but that's really been on weakness from McDonald's and Boeing. The Russell getting ripped a bit today on a big jump in yields following more hot economic data this morning. And also perhaps the fallout from Fed Chair Powell's comments last night on 60 Minutes about a push past March for that first rate cut.

Does take us to our talk of the tape. Worries once again. The rise in stocks is too narrow that the so-called foundation of this market is starting to show some cracks and could be in bigger trouble if the mega cap names start to falter. One name for us in focus today, Apple. That stock has underperformed the others in the group over concerns over its sales growth, among other issues.

Nice move today, though. There it is, up 1.5%, almost 190. Let's welcome in Morgan Stanley's Eric Woodring. He covers that name for that firm, and he's here for his first interview post-earnings. Welcome back. It's good to see you. Thank you, Scott. Thanks for having me. What's your overall read? I mean, what a nice move today. It is. Nice move since earnings and a nice reversal, too. What's your overall read on earnings since this is your first chance to tell us. Yeah. So let's go with the good and the bad, right? So the good was December quarter, record services growth, record installed base, record spend per user on the services side,

16% operating income growth, 26% free cash flow growth, better than expected earnings. So a good December quarter. The bad was the guide down. They guided about $3 billion below where we thought they would guide revenue for the March quarter. $3 billion. $3 billion. That's not an insignificant number. On $90 billion, right. It's not an insignificant number. It's low to mid-single digits. But the challenge there is it's a product issue, and really we think it is mostly a China issue. There's a challenge with demand in that market. It's a macro challenge. It's a product issue. And really, we think it is mostly a China issue. There's a challenge with

demand in that market. It's a macro challenge. It's a competition problem. We think Apple has to solve that. But outside of that, I thought it was a good quarter. Okay. Why do you think the stock market is essentially giving Apple the benefit of the doubt that they're going to figure it out? I mean, a guy down, as you said, not an insignificant number, clearly a China problem. So why is the stock reacting the way it is? So I think we need to go back to late 2018, early 2019. That was the first time Apple negatively preannounced in over 15 years. At the time, the challenge was weaker demand in China, China macro problems, some pricing

challenges in China, and it ended up being one of the best buying opportunities for Apple investors. That's when iPhone replacement cycles peaked and obviously accelerated from there. We think the setup feels very similar today as it did back then. We're going to figure out the China problem. I mean, let's refresh our viewers' memories, too, in that we're talking about a sizable piece of revenue. Second biggest market. What is it, 20 percent, 15 percent? 20 percent. Second biggest, Apple's second biggest market. OK. How long is it going to take to figure it out? So it's been about four quarters now of year-over-year declines in China. Again, mixed results, let's call them.

Again, we think part of it is macro-driven. The China economy is obviously going through some challenges. But now Huawei is a competitor again for the first time in four years. We think that is more of a temporary dynamic, right? Apple took back share from Huawei over the last four years when Huawei went away. It's only natural for Huawei to be more competitive when they come back. But still, they have trailing edge technology. Apple is pushing forward into AI. We think that will give them advantage over the longer term. But we need to get past this kind of nearer term share shift dynamic before we can get there. You've had a, you know, I don't know, a pretty thoughtful coverage period in the conversations that we've had about this stock, very frank

at times as to maybe not wanting to buy the stock at certain levels, which aren't that long ago. Today, you say you're buying the dip. You remain overweight 220. So the stock looked like it was technically challenged for a while. The chart looked awful. And you sat here and said, you know, I wouldn't really buy it here. Maybe it was like 169 at 167, somewhere around there. What's changed? So two things. Again, we talked about it maybe towards the end of the year. The Google TAC risk, the Google DOJ risk, to me, has been pushed out a bit.

Still a risk to be cognizant of, but not a near-term event or negative catalyst to be wary of. The second factor is we now have a better idea, or we think we have a better idea, of what Apple's ambitions are come the developer conference in June, and then the iPhone 16 launch in September. We think, and Tim Cook somewhat alluded to this, that they will introduce AI into their phone, generative AI, for the first time. We think that matters a lot. It creates the ability to use your phone in a whole new way,

and perhaps your old phones can't give you that same experience as these new devices might. That becomes very positive for the iPhone replacement cycle. You think that's going to happen at WWDC, that sort of that'll be the big thing? That'll be the teaser for it. Ultimately, I think what they're going to do at the developer conference is introduce the idea of what they're going to bring to iOS 18. They'll also give an opportunity to kind of build out the AR, VR ecosystem from the Vision Pro that just launched. But ultimately, we think it's going to be one of the more important developer conferences we've seen in a number of years. In terms of generative AI and the expectations

that you have, and they're obviously high by virtue of what you just said, what leads you to believe that their play into AI is going to be more profound, let's say, than what Microsoft is doing with OpenAI? What, you know, others are doing with Anthropic? What's going to be the difference maker for Alphabet? I mean, for Apple that says we we really need to be excited about this company's foray into AI. It was it was worth the wait, right? Right, right, right. So we've seen, well, maybe what I would say for Microsoft, Microsoft is addressing more of the enterprise opportunity, and they are doing a great job at it. Obviously, clearly, early results are very solid for them. For Apple, this is going to be a consumer opportunity. We look to what Samsung has done already with the Galaxy S24,

leveraging Google's technology, really positive response to that phone. We're seeing an increase in builds there. You know, when we think about Apple, we think of one of the most innovative American companies in the world. And I guess my answer would be, why would I bet against Apple? Any market they've come into, not only have they succeeded, they've taken the majority of profits. Apple is very typically secretive ahead of the big product launch. I thought it was very notable that Tim Cook even alluded to introducing AI later this year on the earnings call. That's usually not a forum that he would do so, but he did so. I think that means there's some power and some real emphasis behind this.

What happens, I'm thinking about China again, too, if the goalposts, so to speak, have moved in China for a variety of reasons, regulatory, governmental, et cetera, and some of the issues that had existed around that company over the past, you know, 18 to 24 months. What if the goalposts don't come back, right? There was that report that shipments are going to be down, could be down 15 percent. Right, right. From a very influential analyst. I know I'm sure you follow that person's work. What do I make of that?

So I actually have iPhone shipments in China in fiscal 24 down 28 percent year over year this year. So I'm taking a very hard-nosed look at China and saying this is a challenge market, again, for multiple reasons. I think something that goes understated maybe with Apple are the non-Chinese emerging markets. Apple, maybe in the last three or four earnings periods, has consistently brought up India, Indonesia, Mexico, Brazil. We think these markets, as they continue to grow and China shrinks, they become more influential to the overall growth story. Don't get me wrong, China remains important. Apple needs to continue to work to regain that share that they might be losing this year. But I do think that these non-China emerging markets are becoming more influential. You're almost suggesting that whatever gap is left from whatever drop off in China remains for,

if it worst case scenario remains for an extended period of time, it will be lifted up, the slack will be picked up by the Indias of the world. Is that fair? So to speak, I'm also not saying that China is going away. What I'm saying is, again, we have to think back to 2018. Apple and Huawei did coexist at the same time, and Huawei was doing maybe eight times the amount of shipments that they're doing today. Again, it's natural for Huawei when they're coming back, especially at the high end, to take some share from Apple. They're the only two major competitors at the high end in

China. But we just think that is more of a temporary share gain to get back to where things might have used to be. But ultimately, Huawei can actually grow the pie in China. China's been a market that's been weak for seven years. If the China market can actually grow, you can see Apple and Huawei growing at the same time where share-shift dynamics don't matter as much. Is it possible to think that if the AI entry for Apple is so revolutionary, as you say, with generative AI,

that it causes this renewed upgrade cycle that has been somewhat stagnant. You know, maybe partially pandemic related that that's the spark for a quicker upgrade cycle. That is the spark in our eyes. We have in fiscal 25, we have an acceleration of replacement cycles, only slightly, but an acceleration, which ultimately drives growth in iPhone units, drives growth in iPhone ASPs. It's actually somewhat similar to the introduction of 5G, where you have to turn over the installed base to devices that can now power this new technology, just like 5G did back in 2020. Okay. What about Vision Pro? You know, big splashy spread in Vanity Fair. You know, they call it Tim Cook's moonshot.

Is it? Look, some moonshots are just that. They may not, you know, pan out the way we think they're going to be or be as revolutionary from a monetary standpoint fiscally for the company. How do you view that? How do you model it into what your future projections are going to be? So in the near term, it's just based off supply. We know that this is a very controlled launch. And so we have roughly 350,000 units shipped in fiscal year 24.

That'll represent 30 basis points of total revenue. So it is a rounding error, so to speak, in the near term. To me, what's important are the use cases, right? We've seen Disney Plus come out. We've seen Max. We've seen some sports partnerships that Apple has with the Vision Pro. But can that app ecosystem build? That's going to be the answer as to whether this becomes a $4 billion business, an $8 billion business, or a $40 billion business. I got you. Let's broaden the conversation, if we could. Bring in CNBC contributor Bryn Talkington of Requisite Capital Management. Bryn,

it's good to see you. Thanks for being here as well. Yeah, thank you. You do own Apple. I don't know how large you are in the name, but it seems like this story has really turned a positive page since some of those concerns around the stock price and then, you know, immediately after earnings. Definitely immediately after earnings. I mean, it almost bounced off the 200 day. And so the little bit of the problem technically is it continues to make lower highs and it's in this tight channel. But I think to what you guys were just talking about, to me, you have to think through China is the second largest economy in the world,

incredibly important. And where I would kind of think through the 2018 narrative is you have to think that, go back then, Hong Kong was free, not under CCP. Xi Jinping was not president for life. And this whole like channeling his inner Mao. And I just think China has taken this fundamental shift downwards. And any operator in China, I think is just going to be structurally lower for the intermediate term. And so I think Apple is going to continue to be a market performer. But here's what I think is exciting. There's no other company in the world that has this much trust and this much loyalty. If you look at all the loyalty numbers than Apple and with a $2.2 billion installed base, I think the market will continue to give them the benefit of the doubt.

But it will be like a market performer this year as it is in a transition. I think it's a transition year for Apple. I mean, the incredible thing, Eric, is that, you know, the it's probably the most powerful installed base in the history of any consumer product and certainly one of the most powerful installed bases in the history of stock ownership, in that it's really hard to break people out of this name, doubt Apple and its stock at your peril. And I think we're learning that. That is fair. That's very fair. Again, $2.2 billion, 2.2 billion active devices, over 1.3 billion iPhones. If you think about just how many Apple devices you own on your person, let alone your corporate iPhone, maybe, and then think about how that has grown over time, it's really incredible to think about.

I am an Apple consumer as I am an Apple analyst, and that's because I love the product. So as long, you know, you've been around the Apple universe at Morgan Stanley for years before you were covering it alone just like you are, or at least in the forefront like you are now. So the valuation has taken a time travel with you over your period. How do you justify the valuation where it is now relative to where it was? Not that long ago, either. No, no. So we've gone through a few business model evolutions. In 2018, it was thinking of Apple as a consumer or cyclical hardware business to a platform. I think something

that Bryn mentioned that is very important is kind of this churn in loyalty. As long as this churn in loyalty narrative remains intact, which it very much does, you are not churning away from the platform. You're just maybe not upgrading next year. That's the elongation of replacement cycles. As long as you are still keeping your iPhone, historically, you spend more over time. That is very powerful for the Apple model. Again, another way of framing it is in the last 12 months, Apple has added 120 billion new users to now spend on the platform. That's, excuse me, 120 million. That's a lot of people that can spend on the platform.

That's billions of dollars. So that becomes important, supports the multiple over time. So this, Bryn, is one of those conversations that we've had around all of these companies. Look, and you own NVIDIA, right? And you've been having this argument with people, and the valuation has actually come down over time. So how do you address this with Apple? Well, I mean, you can look at Apple like kind of a consumer staple.

Also, look at Apple like a Costco. There are certain, like a Visa, there are certain companies, because of the durability and consistency, are just going to have a higher multiple. And I do think after COVID, that market multiple of Apple will stay high because of that durability of earnings. I think, though, as it regards to AI, Scott, we are so early in this. And so I don't think any of us can really

understand the implications long term. But I think the Vision Pro just delights us to say, hey, this company is still innovating and we are going to continue to be a shareholder long term because we know Tim Cook and team are innovating and just look at what they're doing with the Vision Pro. What about, Bryn, the idea that, and I'll go back to where we started the entire program before we brought Eric in, the narrowness in the market, more concerns, yet, you know, we keep hearing about it. Well, they're cropping up yet again. That suggests, I think it was Barron saying that the foundation of the market is starting to show cracks, that if you get any falter from these companies, then you're in some bigger trouble. Well, it doesn't seem like we're going to get fault out of these companies. If you go back and look at the reports, you know, that Microsoft meta, even Apple and Amazon,

and then we have NVIDIA in a few weeks. But I think it's important, you know, there is that adage, and adages are true, is markets are weakest when narrow and strongest when most broad. And what I've seen this year, look at like ARK, down 15% this year. Coinbase down 35%. You've seen some of these stocks that have had huge 2023 numbers really kind of breaking down in just the first month of the year. So I'm keeping my eye on that because that's just going to say, was that just tourist capital doing a mean reversion trade?

Do you want Apple to do anything with this pile of cash they have, Brent, as a shareholder or just, you know, let Tim Cook and the team there just do with it what they please. Continue to buy back a boatload of stock. They do more than any in terms of buybacks, I believe. How about that? But you absolutely want them to spend that on R&D that they're ultimately able to monetize. And so who knows how much they spend on Vision Pro and who knows what other types of R&D.

But you definitely want to see a growth company plowing back some of that money, not in buying back the shares and kind of gaming the earnings per share, but actually plowing back and innovating. So it's like we all talk about Apple's high cash flow, but its free cash flow yield really isn't very high because, what, it's got a $3 trillion market cap. I think it's only around 2% or 3% free cash flow yield. It is a big number, but you need that to go back, part of that to go back in the company. Otherwise, you start questioning, where are they innovating? how do you feel about cash so i i think brennan's right so something that we looked at at morgan stanley was typically companies that return more cash to shareholders either through dividends or buybacks outperform their peers when that outperformance is supercharged is when they're also reinvesting that capital to drive further growth to generate more cash flow and create that

virtuous cycle so they will continue to buy back $80 billion of stock a year, but I'm totally on board with reinvesting that capital to grow. They need to keep doing that. Are these new technologies like AI and whatever comes next or supplements that the reason why they don't do any big deals? Because they wait for moments like this to plow the cash into that next frontier, whatever that may be for their business? No, I think Apple, you know, this has always been Apple's kind of M.O.

when it comes to M&A. The biggest deal they've done was Beats Electronics almost a decade ago, and that was $3 or $4 billion. So they've created their own TV business, their own movie business. Obviously, they've created their own AR, VR product. This is Apple's M.O. They buy early-stage companies, take the talent, take the engineering products, weave them in, fill product gaps, and then put the Apple kind of special sauce on them to create what we love and know today.

What about car? I'm trying to think of other things that have been mentioned throughout the years. Car, there's sports rights, health. Where does this all go? I'll touch on car very briefly simply because car is a tough one for me. Car, there's a lot of competition in the market. There's already established brands. I love and know what Apple does, but that's years away.

And so my view on car is really they have the CarPlay software. Leverage that to make an entrance into the auto market a little broader than where they are today. Car is just a very hard sell today. We know that they're going, we know that they're in health. Apple Watch is obviously the key kind of tool for that today. Car is just a very hard sell today. We know that they're going, we know that they're in health. Apple Watch is obviously the key kind of tool for that today. Obviously, the goal is to broaden that over time, but that's a very long tailed kind of growth opportunity that won't be solved in a day. The last thing I didn't, and since we're talking about, you mentioned the watch and there are obviously, you know, regulatory issues around that. What about broader regulatory

scrutiny of this company by Justice, which has been, you know, reported about that at least it's taken a look. You worry about that at all? I do. I mean, I do think regulation somewhat can stymie some of the innovation that Apple is trying to come to market with. We've heard for a few years now the DOJ plans to bring some form of enforcement or some form of case against Apple. You know, we've heard that for a few years. So it's not that I wouldn't expect it this year. I would. We've seen it globally.

But ultimately, that takes a lot of time and takes a lot of kind of different turns over that period of time. To me, it's not a near-term risk, but it is always something to be very cognizant about as an Apple investor. We'll make that the last word. Good to catch up with you again. Thank you, Scott. Thanks.

Eric Woodring here. Morgan Stanley joining us about Apple. First comments from that earnings report. All right, Bryn, thanks so much, too. We'll see you soon. Bryn Talkington joining us as well. Let's send it to Pippa Stevens now for a look at the biggest names moving in the market. Hey, Pippa. Hey, Scott. Well, Catalan is higher as Novo Nordisk's parents company says it will buy the contract drug manufacturer in a deal worth eleven and a half billion dollars, excluding debt. Novo Nordisk will then buy three of the company's sites from its parent to boost manufacturing capacity for its blockbuster weight loss drug, Wagovi.

And elsewhere in pharma, Morphosis is surging as Reuters reports that Novartis is in advanced talks to buy the cancer treatment company. The report doesn't include a potential price, but Morphosis currently has a market cap of roughly $2 billion. Shares are having their best day ever, up some 58 percent as Novartis trades along the flatline. Scott? All right, Pippa, we'll be back to you shortly. Pippa Stevens, thank you. We're just getting started here on Closing Bell.

Up next, gaming out the Fed, JPMorgan Asset Management's Gabriela Santos is with us, mapping out her rate cut forecast and, of course, the playbook, too. We're live from the New York Stock Exchange. You're watching Closing Bell on CNBC. Welcome back. The major averages paring back earlier losses today after stronger than expected economic data cast more doubt around the timing of Fed rate cuts. So should investors reset their own expectations and fine tune their portfolios to match? Let's ask Gabriela Santos of J.P. Morgan Asset Management here once again at Postnight. Nice to see you again. Nice to see you. So, all right.

Chair Powell said, OK, March probably not happening. So now the probabilities went way down. Now, you know, we're gaming out when it's really going to happen. What matters most, do you think, for this market? I think the general message we got in December is what matters most. We're past the rate hikes, and we're now talking about when we start going down the other side of the mountain for rate cuts. And that truly is a better environment for both stocks, bonds and credit. And I think especially because of the reason why those rate cuts at the moment are set to be coming, which is normalization on the inflation side of the mandate versus an actual concern from the economic growth standpoint. But I think what we're doing now is just fine-tuning expectations of exactly when, exactly how much for this year.

And we certainly think it's more of a middle-of-the-year occurrence in that the Fed will start very gradually cutting rates 25 basis points at a time, maybe only three or four this year. But the direction of travel is the same. So what I hear you saying is that cuts are coming. That's the only thing that really matters. Doesn't matter when and how much. The fact of the matter is that the trend

has changed. I think for the market overall, that's correct. But there are certain pockets of the market for which this actually does matter. The actual timing of when we get interest rates to normalize once again. OK. And that's why we do think it's too early for things like small caps, as well as regional banks, which are kind of interrelated. Small caps, just because 40% of that debt is floating rate, half of it matures before 2030. And a lot of it is made up of financials and specifically regional banks, which, as we got reminded last week,

are still under some pressure from the credit size, as, as we got reminded last week, are still under some pressure from the credit side, as well as the net interest margin side. That's interesting because, you know, normally we would say, OK, the market anticipates, you know, what's going to happen six to nine months in advance. So maybe you'd have positioning in advance of that. What you're suggesting is this may be one of those occasions where those spaces of the market don't get rewarded until the Fed actually cuts. Is that fair? Or even perhaps when we're a bit further along, I think what you see along in the cut in the cutting cycle and in the economic cycle, what you normally see for things like that are very economically sensitive is they do tend

to bottom before the economy does. But it's when you're already towards the bottom of an economic cycle and about to reaccelerate. And we're not quite there yet. We'll get to it. Eventually, there will be a recession. There will be a recovery. But for right now, we're still late cycle. We're not quite at that moment yet. So we're still looking for later on the moment to be truly much more optimistic about small caps and financials. There was an interesting note off the trading desk at J.P. Morgan today, essentially a mea culpa, which they use those words and they say the cautious call we held since the second half of January has proven overly conservative. Are you more positive on the market today than you've been in many months? I think what was encouraging was the delivery on the earnings front from some of the magnificent

seven. Most. From some, most, not all. Well, that's true. And that is still a key message here. Well, so look, in some respects, we're talking about magnificent six at this point. Or five or four or new sevens. And I think that's where that's an evolving discussion. But if you look at an equal weight index, it's still flat for the year or a small cap, as we were discussing, is actually down for the year. So I think if there was a reason to be more optimistic versus what you were expecting, it was much more on the delivery of the mag seven. Now, that's in the short term. We think if we stretch out the horizon further the next few months, the next few quarters, we think much more of the optimism and enthusiasm should be in other sectors where you're going from

earnings recession to earnings recovery. And that is, we don't think, fully appreciated by the market quite yet. Is the narrowness of the market of a great concern to you or not? It's not a great concern if you don't think that you're actually going to get substantial disappointment from the majority of the Magnificent Seven instead of just one or two. And then you would see the whole index being pulled downwards. What we ultimately think is they will deliver pretty good still earnings growth for this year, 20 percent. But instead, if you're looking for a reason to actually expect more of a return at the index level, then it's really about looking for where the delta is moving the other way from earnings recession to earnings recovery. I don't mean to

bring up things that are happening out, you know, respected to J.P. Morgan today, but Marco Kalanovic, a few. I mean, it's just where the action is right now that, you know, there's a new note out from Marko Kalanovic. I know you know who he is, obviously. The risk of a disappointment on both sides of the Goldilocks narrative still exists. Are we taking for granted all of this other stuff? Have we just decided that everything's just going to remain great? Fed's going to cut. Inflation is going to continue to plunge. Economy is going to remain strong and everything's going to be hunky dory. Remember Jamie Dimon not that long ago? Let's not pretend everything's hunky dory. And I think that's where last year we were talking about everything with such broad brushstrokes about the economy, about rates. Either it's hard landing, soft landing, rates up,

rates down. And this year, I think it's much more about actually using a fine brush and defining exactly what we mean by these things. We expect a 2024 economy, 2% growth, no recession, 2% inflation, 4% unemployment. You could say that's a soft landing, but honestly, I think it's time to retire the plain metaphors because it misses the nuance that that is still not a perfect landing, right? There are pockets of the economy that are topped out and that are actually decelerating from here, especially around the services sector, still pockets of credit stress. We mentioned regional banks, commercial real estate. So it's not a perfect landing.

And actually, the plane never lands really, truly. The economy is always on the verge of some kind of end of cycle. Well, some say no landing means that we just keep, you know, roaring along to which you ask the question, is it too good become bad because it doesn't enable inflation to come down enough or it just makes it sticky with the possibility of going back up now? You know, people like Jan Hatties at Goldman Sachs would say, well, I'm thinking about that, but I think the answer is no. Are you worried about that at all?

And we think, no, we're actually less concerned about the inflation side of this, with no landing being very, very strong growth, but inflation ever normalizing. And that's ultimately because we've gotten a lot of good information recently on inflation for six months. Chair Powell acknowledged this. We just need to keep going in this direction. And actually, the good data we received last week on two fronts. The first is an improvement in productivity, and hence unit labor costs are actually coming down, now below 2%. That's not inflationary. It was 6.5% a year ago. So much better news in terms of that inflationary pressure. You can't have good jobs without that inflation pressure.

And then on the other side, we also got the news that about 80 percent of inflation pressure right now is really just shelter and autos. And as you get the delayed impact in those, we have a much more conviction that you can get to 2 percent on PC and CPI by the end of the year. I appreciate you being here again. Thanks. Thank you. Gabriela Santos joining us today. Up next, searching for strength. Stocks under pressure as we head towards the close. They are well off the lows, though. Now, Corian's Amy Kong is breaking out her market playbook where she's finding some opportunity here. That's after the break. But first, it's February. That means we're celebrating Black

heritage. Here is National Urban League President Mark Morial. Black History Month is not about excluding the contributions of any. It's about lifting up the contributions of a people, but it's also about the celebration of the long work and the long struggle by black Americans who were enslaved in this country and the role they've played in the making of modern America. Black Americans are America. We're back, and we are in the red today, across the board. Modest losses for the S&P and the Nasdaq.

Dow still down about one-half of one percent. The S&P retreating from last week's record high, powered by big tech earnings. My next guest says, well, we need to see market breadth beyond big tech to sustain the rally. She's betting on growth stocks to outperform value in a lower interest rate environment. Joining me now, Post 9, is Korean's Amy Kong. Welcome back. Hi, Scott. So just top heavy market is OK? Just keep betting with what's working? You know, the expectations for some of these tech companies that I've reported last week has obviously gone much higher now.

It's been high since the end of the year. And I think given what we've seen, the consensus expectations have moved even higher. That is a concern of mine. I think there is just less and less room for error. And I think that is a risk that I think we all need to be very mindful of going into the back half, although the earnings were good, to be fair. So what do we do then? Because the broadening hasn't happened. And every time there's a little one step forward of the broadening, it takes two steps back.

And the Russell sells off a lot. And we're back to this same top heavy conversation. What changes it? Yeah, you know, you're absolutely right, because not only is the expectations high, it's the earnings quality was pretty decent across the some of the big tech that we saw. So it is a very interesting dynamic that we're in. It's not it's very difficult to kind of move away from this group because the earnings quality, the beating of the consensus expectations is all checks off from what we saw last week. I mean, it's really stark, too, when you look at the difference between the earnings growth and the sales growth between mega cap tech and everything else.

It's actually stunning how they've diverged so much. I can't agree more. I think these companies continue, or just tech in general, just given size, economies of scale, great balance sheet, great cash flow, they just have, again, more flexibility to, whether it's increase a dividend or initiate a dividend, buybacks, or even continue the innovation path, that all checks off for some of these big tech things.

So we've been hitting new highs, obviously, on the S&P. I'm looking over your shoulder to see where we are now. We're 49.50. Apparently, March doesn't matter. We thought March mattered, and then Fed Chair Powell at the meeting basically wrote it off, and the market had a little bit of an issue for a minute, and then it sort of came right back. It's funny you say that. You know, when you look at the Fed futures, expectations are still for six rate cuts. The Fed is going to meet seven more times between now and year end. And so until we get to a point where they haven't started raising or cutting rates yet and they're still six, you probably still would expect six rate cuts again from what

the markets are expecting. When do you think we get the first one? It's very difficult to say. I would imagine that it could be sometime between June and July, and this is my personal opinion. I think the Fed is, again, trying to be very careful in terms of their initiating this process, as they call it, with regards to the down rate cycle. And the last thing they would want to do is to lower rates or start

lowering it. And the totality of the data suggests that that was too premature. That's the mistake that I think they are trying to avoid at all costs. Well, the other mistake people worry about is they wait too long to start cutting, right? And that causes undue harm to something that they actually don't want to snatch, defeat from the jaws of victory. That is absolutely correct. I think, though, that because some of the economic data points, whether it's the jobs report suggesting that the economy is still quite resilient, that gives the Fed a little bit more wiggle room to delay the first cut. I felt they keep talking about it. I think Chair Powell did as well last night, this idea they

almost have an insurance policy in their back pocket that they weren't sure they'd have because the economy is so strong. So they have the ability to remain patient for a little bit longer than maybe the market initially wanted. But I think understands, well, if they're patient and waiting for the right reason and then they cut for the right reason, then we're good. Yeah, I think so. And I think, you know, the markets need to also be very careful, too, that, you know, the first couple of rate cuts, perhaps that's just taking some of the cream off the top. But when you get to a point where you're talking five, six, seven rate cuts, you know, it could be the beginnings of another conversation. Is the economy resilient enough? And maybe that's why the Fed needs to cut.

And so that could be another risk that can bubble up if, again, the rate cut starts to get to that fourth or fifth or sixth rate cut. I read the pieces of a note that came out from a well-known strategist that we follow who's been negative on the market for a while now and says the risk is still of a disappointment on both sides of the Goldilocks narrative. How would you assess that? Are we too complacent that everything's just going to be fine? There is a level of complacency that does put me at a little bit of a cautious mood. You know, you've got the market trading at close to 20 times. The MAG-7 is obviously well ahead of that metric. And there just hasn't been enough of a dampening effect on the market to really,

again, create more awareness. And so I do worry about this complacency. And again, barring no shocks to the system, this complacency should continue, but there is always room for shocks and we're very aware of geopolitical tensions that are rising across many parts of the world. Monetary policy error continues to be a high risk dynamic for us. Face case, recession or no for you? The odds of it has obviously gone lower. And I don't necessarily use the term recession at this point, but I do think moderation is still

in the cards. And the market can withstand that or that's not necessarily priced in? For the time being, the data suggests that the market can withstand that. I mean, the jobs report from last week still suggests that consumer wage inflation is still 4%. And again, as long as that continues, that should be able to offset CPI still at 3+. And as that dynamic continues, again, that could be a resilient factor. It's good to see you. Thanks for being here. All right. Corey, it's Amy Kong here at Post 9. Up next, we're tracking the biggest movers as we head into the close. Pippa Stevens is standing by once again with that. Hi, Pippa.

Hey, Scott. Well, one consumer name is up double digits after reporting results, and we've got all the details coming up next. We're about 15 minutes from the closing bell. Let's get back now to Pippa Stevens for a look at the key stocks that she's watching. Hey, Pippa. Hey, Scott. Well, Estee Lauder is popping after earnings, with the company also saying it's cutting 3% to 5% of its workforce

as part of a restructuring program. In its Q2 report, the cosmetics maker is saying it's at an inflection point, positioned to return to organic sales growth during Q3 and positioned for stronger profitability in the second half of the fiscal year. And Coinbase under pressure, as Mizuho says, the Bitcoin ETF could actually be a double whammy for the company. The firm estimates that on a net basis, outflows from funds where Coinbase is the custodian have exceeded inflows. That leading Mizuho to reiterate its underperformed rating on the stock. Those shares down 9 percent. Scott. All right, Pippa. Thank you, Pippa. Stephen,

still to come, a fast food flop. Shares of McDonald's under pressure today. Tell you what's behind the move lower just ahead. Closing bell. It's coming right back. All right, welcome back. Two names in the semi space we're watching today on Semiconductor is surging after reporting results above Wall Street estimates for both revenue and adjusted earnings per share. And NVIDIA also climbing today. What else is new?

Hitting another all-time high after Goldman Sachs increased its price target to $800 a share from $625. And speaking of semis, up next, NXP gearing up to report in overtime. We're bringing you a rundown of what to look out for when those numbers hit top of the hour. That and much more when we take you inside the Market Zone. All right, we're now in the inside the Market Zone. All right, we're now in the closing bell Market Zone. CNBC Senior Markets Commentator Mike Santoli here to break down the crucial moments of this trading day. Plus, Kate Rogers on the sell-off in McDonald's shares today

and Steve Kovach looking ahead to NXP results, those coming in over time. Michael, turn to you first. We obviously didn't like the prices paid reading today, but the other economic data was strong. And we're in this fight of, hey, good is good, but maybe, you know, it has to be in the right places. Yes. And we have to see if the market itself, you know, has sort of over discounted the good being good and maybe not yet. It's a tough market to be a bear because you thought you had a pretty good downside shot today.

Yields up pretty sharply over two days. You had the prices paid number. The index itself very overbought. The market's not really in gear. There's a lot of stocks falling by the wayside. But unless you're talking about isolated areas, the weak points of the market, the index has been finding a way. And, you know, the buy the winner strategy, of course, also keeps working. Can't go on forever. You know, I'm still very open to the idea that, you know, February, you get some chop. Positioning has gotten a little more aggressive. So don't be surprised if we find an excuse to back off. But when earnings are not setting off alarms in a broad sense, and they're not,

especially about first quarter estimates as they're now being revised. And you're not necessarily seeing the economy buckle in any way. And even the senior loan officer survey today was all of a sudden a friendly reading as opposed to being a warning. It's tough to make the outright negative case. Yeah. Rough day, Kate Rogers for McDonald's. I'm looking at shares down three and a half percent or so. What's going on? That's right. It's. A mixed quarter for McDonald's for Q4. EPS was a beat, but the company's revenues missed. Comps coming in below estimates in all segments. Globally, they were up 3.4%.

In the U.S., comps were up 4.3%. And a key storyline here, international developmental license markets saw sales increase by 0.7%. That one was far below the projected increase of 5%. The segment did have positive comps in all geographic locations, with the exception of the Middle East, which was impacted by the war, as CEO Chris Kamchinsky had warned of last month. Kamchinsky also laying out some interesting commentary on the earnings call today on the consumer, saying the company is still seeing some pressure with the consumer at $45,000 and under annual incomes. That cohort actually decreased in the most recent

quarter as groceries have become more affordable. The company, though, is gaining share with middle and high income earners, but value really in focus for all customers across the segment. We'll hear more from Chipotle tomorrow and see what they have to say on that. Yeah, sure. Well, look forward to that, too. Kate Rogers, thanks so much. Steve Kovac, we're looking ahead to NXP. Those earnings are in overtime. What can you tell us? Yeah, and NXP, you know, they have their chips in just about everything.

But two important segments, Scott, to pay attention to that'll give you a read on some other industries. Autos, Street expecting that business to be up about 4% to $1.89 billion. But some signs that category might be softening. Microchip technology, CEO said on their earnings call a few days ago, automotive chip demand could be a bit weaker. At least that's what they're seeing. But mobile, also a big part.

NXP makes those NFC chips for phones. That's what lets you tap to pay, open your car door, things like that. Revenue there expected to be down more than 4%. As we know, 2023, a tough year for mobile phones. And the guidance, though, that's going to give us the big hint if any of those trends are turning around. Pay particular attention to the mobile there, Scott. All right, Steve Kovac, thank you very much. We'll see you in OT with those numbers. Mike Santoli, we have their sound effect, means less than two minutes to go.

You mentioned, you know, it's tough for the bears, but some just can't break the fever. Yeah, they they're still doubling down on this idea that it's just two Goldilocks in the minds of the bulls. And that inflation is just not going to take that. That last mile is going to be tough. And, you know, the Fed's not going to cut on the timeline that you want. Things go wrong. It makes sense when everything seems to be meshing in a perfect way to say, how might this not work out? So I do understand that.

And you have a lot of these sort of time-tested indicators that still keep people from completely capitulating to the bull case, whether it's the inverted yield curve for many, many, many months or the leading indicators or just the general sense out there that we're now reliant on income growth. You know, we have full employment already. Usually things start to soften up. So I do think it's a good thing that we still have this reservoir of skepticism out there. I've even made the case that the fact that the index at the leadership has been so narrow in this market, while it's definitely a little bit of a warning sign based on historical patterns,

it also keeps people from fully trusting the market. And that's actually been a good thing. It's kind of, it creates its own sense of we're not going to go all in at this point. Now, again, it can't work forever, but I think for now, until the market sort of stops embracing the good news and or you really start to have something, a stress fracture in the capital markets,

whether it's caused by yields or something else. Last year, it took the Silicon Valley Bank thing to really knock us off course into a correction in the early part of the year. They're not a good crowd here today. I'll get you this day back. I just want to talk through it. If the bells are ringing. Still a negative day across the board.

Get off the nose. I'll see you tomorrow. I'll see you tomorrow. Good job.