Closing Bell - Closing Bell Overtime 3/1/23

Episode Date: March 1, 2023

A fast-paced look at the after-hours moves and late-breaking news live from the New York Stock Exchange. Closing Bell Overtime drills down into stocks and sectors, interviews some of the world’s most influential investors and gets you ready for the next day’s action. 

We got the scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I am John Fort. Morgan Brennan is on assignment. Coming up this hour, key reads on enterprise software and detail on retail. When we get earnings results from Salesforce, Snowflake, and American Eagle, those numbers just moments away. But we're going to begin this hour with breaking news.

Tesla's Investor Day kicking off right now in Austin, Texas, and that is where we find our Phil LeBeau. Phil, what are the chances that we get a new car? I don't think we'll get a defined new car, but I do think we'll get perhaps some parameters of what to expect with a lower-priced model. Three things to look for, three things that the street are expecting. You mentioned a lower-priced model, and again, I do not think they're going to say this is model two. This is what it'll look like, but they will give us some outlines potentially on a lower priced model. What's happening with the Mexican plant that we heard about from the president of Mexico yesterday, the more specific

details, how many vehicles will be built there, what type of vehicles. And ultimately, this is all about Tesla driving down costs. They've got the hammer. I have talked about this for some time. When you look at their margins, when you look at their supply chain, they can drive down the costs further and increase their volumes, which is ultimately what they're hoping to do. Elon Musk will talk about deliveries, perhaps in a broad sense. They are expecting 1.8 million vehicles to be delivered this year, up from just under 1.4 million last year. But remember, the long-term goal, John, is annual deliveries topping 20 million vehicles. For a point of reference, John, the most vehicles ever delivered annually by any automaker,

I think it was pre-2006, 2007, it was Volkswagen at about 12.4 million. That's a big goal to get to 20 million. The Analyst Day, Invest investor day is just beginning. We'll have updates throughout the hour. Looking forward to that, Phil. Elon Musk makes some big promises. We'll see if in this economy they get bigger or smaller. Now, as we await earnings, let's turn back to the broader market on this first day of March.

Bring in Eric Johnston from Kenner Fitzgerald. Brad Slingerland from NZS Capital. Welcome, gentlemen. Eric, you've been negative. And hey, given what's been going on, correctly negative in a lot of cases. We're in the last month of the quarter. And my question is, should investors reposition themselves if they've been somewhat long equities? Consumer confidence was pretty weak sell-off in in february is extremely poor and we're in we're seeing this you know kind of real time where if the economy were to stay strong that's likely going to lead to inflation staying very elevated which means the fed will have to go even further and so the fed is going to have to continue to raise rates as long as the economy is strong. And then once the economy starts to weaken, which we fully expect will happen, then that's going to hit earnings.

So you have a situation where if rates stay high, multiples need to come in, and it likely leads to a further downfall down the line in the economy because there is a lag effect to these rate hikes. And then once the economy falls, then earnings would have a fairly long way to go to the downside. Yeah, so the leading indicators are all fairly negative right now for markets. As strong as the labor market is right now, other indicators are suggesting that in the months to come, things are going to weaken. OK, Brad, at the same time, the 10-year yield kissed 4% today, backed off. And I couldn't help but notice, despite that, Snowflake, I think, ended in the green. So did Bill.com. After big earnings, Duolingo, little stock, was up better than 20%? We'll hear from the CEO later.

But might that signal that actually investors see some value, even in certain growth names? I think that's right. I mean, it's all about where have we come from and where are we going? And over the last year, we've seen one of the biggest routes for growth stocks, for tech stocks in particular. And the starting point is much more attractive today than it was going back to the end of 2021 or the beginning of 2022. So I think there are a lot of opportunities. And of course, as inflation looms ever on the horizon and rates might go higher, technology remains one of the biggest deflationary forces across the economy. So you can find those companies in the software sector or the chip stocks that enable that

software that are going to help companies beat inflation. If the Fed can't beat it on their own, then you can find a good starting point. Then I think that explains some of the positives that you see in the market today. Okay. So Eric, what should investors do with fixed income? Hold on. We also got Salesforce earnings are out. We're not going to tell you about them yet because we're going through the numbers, but wanted to mention that that is a key report that we are looking for after hours. We'll bring you the details when we have looked through them. So Eric, what does this mean you do on fixed income to sort of balance the risk in your portfolio here as specifically as you can? Sure. So I think you want to own I think you want to own bonds. I would go towards the shorter duration somewhere in the

zero to five year area. Clearly, the bond market has had a very large move over the course of the last month, month and a half as inflation expectations have been reset. But I think we're getting to a level, especially in the short term, where I think most of that move is probably over. And it probably is a very good entry point to go into even money market funds, but going the two and five year. If you look at right now, the earnings yield of equities relative to the yields that you're getting in treasuries, that gap is the smallest that we've seen in 20 years. So essentially, if you look at the earnings yield of 5.4% and you look at where money market yields are at 4.8 that 50 basis point spread is very very small meaning that you're not getting paid to take

the risk in equities and so i not only i think we will see a migration of assets to go from the volatile equity markets to going into more risk-free assets, whether it be money market funds with zero volatility or taking on some volatility in the two to five-year area. I do think from a credit perspective that credit certainly looks OK here, although I'd rather be in treasuries than credit and then equ, you know, equities, equities last. You see the numbers on the screen. Snowflake results also out. We are going through those as well right now.

That stock moving lower after hours by about 7 percent, while Salesforce now up about 10 percent. Of course, that's just an initial move. Brad, what's going to be important in these two software companies' numbers? Hold on. Hold that thought. Steve Kovac has gone through the numbers, has them on Salesforce. Steve, what do you see? Yeah, we got a big beat here as we're watching shares go up about 10% now, John. Let's go here.

It's a beat on the top and bottom lines. We got $1.68 adjusted for EPS. That's versus $1.36 expected by the street. And then on the revenue side, also a beat, $8.38 billion versus $7.99 billion expected. Guidance also really strong here for Q1. They're expecting up to $8.18 billion revenue. The street was looking for $8 billion. So exceeding expectations all across the board here, John. And as, of course, we know, all this activist investor activity going on.

So we're expecting to hear more on that on the call, which starts at 5 p.m. And a lot more, Steve. Thank you. Got it. With Jim Cramer's exclusive interview with Salesforce CEO Mark Benioff. That's tonight, 6 p.m. on Mad Money. Don't want to miss that. Now let's bring in Senior Markets Commentator Mike Santoli.

Mike, margin's going to be in focus when it comes to Salesforce, right? Not just in this quarter, but what investors can count on from here. Yeah, John, exactly what I was just looking at and probably is perhaps behind some of this pop. Full year, fiscal 24, that's the year that's just started. The non-GAAP operating margin guidance around 27 percent is what Salesforce is saying. For the past year, it was more like 22 percent, I believe. So clearly they're building in some margin expansion revenue coming in the past quarter ahead of estimates. It seems like a lot of the fronts along which, you know, investors were patrolling for risks came in better than better

than feared, at least at first blush. All right, Mike, hold that thought. Brad, I wonder how important is the detail here on how Mark Benioff and Salesforce get to those margin numbers, right? Because they've got to thread the needle of sort of bringing the cost down while not alienating the workforce, the employees that they need to keep and continuing to invest in product to make this transition into an AI era? Yeah, well, we've been investing in software for almost 25 years, which is a little bit longer than Salesforce has, I think, even been around. And one thing we know about software is it is capable of generating margin. And as growth slows down, it's just an equation of adding your margin,

getting it higher, and as that growth comes down. And it's a pretty big needle to thread, as long as I think that you're being responsible about growth and margin. And so we think there's plenty of opportunity in a company like Salesforce, which is a position we've owned for many years, to do that. And I think the pressure that has been put on them and other companies who may have been spending more than they really needed to for that growth has been a positive and will continue to be a positive for Salesforce and for other software stocks in the market. All right, Derek, I know you're broadly negative on equities, but I assume you're taking some opportunities when you see them. Are there particular sizes of companies, say in tech, maybe even in software that you're particularly looking at? And are there data points, metrics that are important to you that will single that

one out as perhaps being worth a gander? So I think secular growth is the place that you want to be within the equity markets. I think the names that are going to get hit the hardest are some of the ones that are being bought right now in cyclical sectors like industrials, home builders, and financials. We think the outlook with those three sectors and in general, the cyclicals is quite negative based on what we see three to six months out in the economy. And I do think that money is going to flow back into secular growth, including some of these software names that we're talking about tonight, and then also into some of the FANG names, the mega cap tech names. And the idea will be that I think investors are going to want to go to mega cap for safety and

are going to want to go towards secular growth to be able to play groups that won't necessarily be a hit as hard during a economic downturn. Okay, Eric, hold that thought because we do have a look through on the numbers for Snowflake. Christina Parts-Nevelis, what do you see in these numbers? Well, initially, we're seeing a top and bottom line beat, but yet the stock plunged dramatically down about 7%. It's regained some of those losses, still down about 4%. So what we're seeing is an adjusted EPS of 14 cents a share. The street was expecting four cents, so that's a beat. On revenues of $589 million, the street was expecting $575 million. The reason you're seeing

some strength for the Q4 quarter for Snowflake was their product revenue. Product revenue came in higher than what the street was anticipating, so that's a source of strength given it's the biggest contributor to their revenue line. The company also announcing a $2 billion buyback. Total number of customers came in a little bit higher, 7,828 customers. So I'm still going through the report. There's no guidance provided either. Just to understand a little bit more why you're seeing such a negative reaction in the stock,

down about 3% when you're beating on the top and bottom line. So, John, I'll just keep looking through it. Yeah, we'll keep looking through it. And tomorrow, Christina, we're going to have Snowflake CEO Frank Slootman right here on overtime. I will point out 53% year-over-year growth. Not out of line, again, with expectations, but this is a company that a few quarters ago was doubling year-over-year. Mike Santoli, what do you make of this move? Don't want to put

too much on it. We haven't heard the call yet, but it's an interesting contrast between Salesforce and Snowflake and perhaps what investors are looking for. Yeah, in terms of the reaction, I would say also in terms of, you know, where these stocks are valued, you know, there's obviously going to be some deceleration in the annual pace of growth, of revenue growth. I think that's something people are focused on. It's not a surprise, but maybe you've had people who had bigger eyes about what they would project in terms of further growth from here on out on a slightly bigger base. The other piece of it is a $2 billion buyback. I guess in general, you would say that's a shareholder-friendly gesture, but it's typically not the sort of thing you're looking for from, you know, a company like this that really isn't deep into its profitability phase,

clearly has plenty of cash. And, you know, a lot of times it's done to offset stock based compensation more than it is because they feel like their shares are of value. So I'm not sure if that's a positive or negative contributor to this reflex reaction, which now is less than 4%. Yeah. Mike, thanks. Brad, I'll go back to you on this one. Remaining performance obligations of $3.7 billion, 38% year-over-year growth. That's different from the revenue number in this kind of stock. How concerned do you have to be? How closely do you have to watch the new business coming in the door versus the business that they're continuing to capitalize on that came in the door a while ago?

Well, Snowflake's a slightly different business than something like Salesforce or some of the other ones which are more subscription-based because their business is more transactional-based. So it is dependent on how much the customers use it day-to-day, quarter-to-quarter. So it's important that they're bringing in new customers, but also that their existing customers are growing their usage. And because some of that's transactional, it can be tied a little bit more to macro. It can be a little bit more volatile than, say, a subscription stream from a business like Salesforce or Okta or some of the other more durable revenue streams that are out there. Okay. And I would point out also 330 customers with the trailing 12 month product revenue greater than a million dollars.

So size of customers working for Snowflake there as well. Eric, I'll finish with you. We talked a lot about tech right now, but zooming out on the health of the consumer, the broader economy lows was down quite a bit today. And we've got Best Buy coming up tomorrow. What are the signals that we're getting on not just the health of the consumer, but the amount of gas left in the tank from the consumer to spend on things besides necessities? Sure. So, I mean, credit usage from the consumer has been has been surging. The excess savings that they have from COVID has been going down for about a year and a half and is predicted to hit zero probably by about the middle of this year. And we're seeing other leading indicators around looking at around loans and credit standards that

are all tightening. And so right now, the consumer is fully employed, has these excess savings, and has the ability to borrow. But this can all change very quickly as the unemployment rate starts to tick up, as excess savings start to come down. And if you look at some of the industries with the tightest labor market that have had the tightest labor market, there are signs that that is starting to ease. We heard that from Marriott on their conference call, Uber and others, that are essentially saying that they're now much more in balance, in balance. And so as a result, that could change. All right. So caveat investor, Eric, Brad, thank you both. Up next, a closer look at the two big after hours, cloud movers, Salesforce and Snowflake, and why the former is attracting so

much activist interest. A top analyst is going to join us to break it all down next. And later, a first on CNBC interview you won't want to miss. We're going to talk to the CEO of Pharma giant Eli Lilly about the company's decision to slash insulin prices by 70 percent and cap out-of-pocket costs. Overtime is back in two. Welcome back. Salesforce and Snowflake. We've got a real contrast of opportunities and challenges for investors as each reported moments ago. We got conference calls in a few minutes. Mark Benioff's Salesforce was the defining application software company of the cloud era, earning a spot in the Dow during the pandemic. But its spending on M&A and headcount since then hasn't delivered on profitable growth. Meanwhile, Snowflake is a contender to be a defining company of the data and AI era. Revenue growth has been remarkably strong and operating margins trending in the right direction.

We can see here revenue growth. That is Salesforce in blue at the bottom. Eh, just kind of flattish. Look at how big Snowflake's revenue growth has been. That's why you got that valuation ending last quarter down about where it is now, just about 50 percent. They reported 53 just now. But then operating margin growth year over year. You can see the orange again is Snowflake trending upward this way. Frank Slootman trying to be really efficient. Activists have been all over Salesforce like ants on a cupcake because you don't see that blue moving in the same

direction. So a question is, should investors bet that activists are going to help Benioff get religion on efficiency? Should they bet Snowflake can efficiently grow into the AI-era Salesforce? Now let's talk to Brent Thill about it, senior analyst at Jefferies. Brent, what do you think between these two? Who's got the best opportunity? And if you have any read off of these numbers, which just came out before the call, let me know what it is. Yeah, I think, look, Salesforce.com has the most opportunity short term just because they've been run so inefficiently. And that's why all the activists have come into the stock to drive margins higher. The initial margin guide now in the high 20s is exactly what investors wanted.

So it looks like the activists are having a good, positive impact on how Salesforce is positioning their expense structure. They also had a little bit better backlog growth than most of us thought. Most of the previews were pretty negative. So overall, I think Salesforce is getting their act together on the cost side. That's really the biggest issue that investors have had. And that's why the stock is jumping so much. On the flip side, Snowflake had a good quarter, but they brought the guidance down. So they initially were guiding to 47%. Now they're guiding to 40. Their backlog growth slipped to about 38% growth versus 66% last quarter. So still, I think when you look at the models, Snowflake has way more opportunity than Salesforce

in front of it as it relates to penetration, great management team, but it is a capacity-based model. So as companies idle back because of the macro jitters, they can theoretically idle Snowflake spend back faster. For Salesforce.com, it's a seat-based model. It's fixed. You can't really do anything with it. Okay, so give me the sort of risk-reward on Snowflake now, the way you see it.

I'm really intrigued by their cloud app strategy and their snow park strategy, both of which they say they want to have developers build inside their environment. They've got a very loyal customer base. They want to become, again, the sales force, right, of the AI era. How closely should investors who are looking to be in a stock for a while mark their progress, Snowflake's progress, in getting a developer community to build apps on top of what they already got? Yeah, it's happening now. And I think a lot of companies, when you talk about the AI world, we're seeing so much data, we don't know what to do with it. And our firm is making the journey to Snowflake to figure out how we deal with our corporate data to make better decisions for our clients and for our own corporation.

So we're early on the journey. Many of the other companies are really early in the journey. So I would basically say if you rewound and you looked at Salesforce.com eight to 10 years ago, that's where Snowflake is at today. This is a management team that understands how to build a great franchise. They did it at ServiceNow. They're doing it here at Snowflake. We're really early. So the way I would frame it is if you're a value investor, Salesforce is a great story. If you're a growth investor, Snowflake, we think, has plenty of runway and has a big opportunity. Again, they just reset the numbers. So we

think ultimately there's probably more upside over time in Snowflake given the moves today. Alright, back to Salesforce for a moment. How quickly, if quickly, does Benioff have to get these activists off his back and focus on product to make that AI transition? I was just a few days ago talking to the CEO of a startup, ThoughtSpot, who was talking about taking Tableau's lunch. I mean, you can't let that kind of talk go on too long. Yeah, I think that Mark doesn't have to get them off their back. He

has to embrace them and bring them into his ohana, as he describes it. I think ultimately, he's a peacemaker. He's going to figure out the right pathway. We've all known, and it's very obvious to everyone that's covered this company, and I've covered it since pre-IPO, that the company has spent more than they need to. The DJs, the Matthew McConaughey's, all the things that they're doing, they can cut out, right? This still is a great product. It's a great company. So there's an incredible amount of expense to trim and against nothing against Matthew McConaughey. But the point is, the expense cuts are so clear that it's just obvious Adobe, Intuit, Oracle, all their peers are materially way higher. And they just got into a high 20%

margin, which is the streets somewhere in the low to mid 20s. So they gave you, they got part of the activists off their back, if you will, to your point, with the margin guide, and they just have to keep doing it. This company's capable of putting up 35 to 40 percent margins, and they just got it at 27. Yeah, maybe it's better to have like five activists than one really determined one. Brent, thank you once again. Benny off tonight on Mads. Sluetman tomorrow right here on Overtime. And now American Eagle earnings are out.

Melissa Repko has those numbers. Hey, John. So American Eagle is reporting a strong holiday quarter. It beat on both the top and bottom line, and the stock is up about 6% on the news. For earnings per share, it reported 37 cents adjusted versus 3030 that were expected. And for revenue, it reported $1.5 billion versus $1.48 billion expected. What's

notable here is that American Eagle is really breaking from what we've heard from other retailers. It said that it was able to hold the line on promotions in the holiday quarter, and that translated to better margins for the company, something that, frankly, we're just not hearing a lot of from retailers. So that may explain investors' reaction today, that they're relieved to hear that news. It also put up a pretty decent outlook for the quarter, especially in this environment. For the first quarter, it said it expects revenue in the range of flat to up low single digits, which, you know, considering what we're hearing, is a lot better than predicting a decline. Back to you, John.

Yeah, that's an outlier, Melissa. Look forward to talking more about this space with you in just a few minutes on the show. Meanwhile, shares of $300 billion pharma giant Eli Lilly ticking higher today after the company announced a huge cut in the cost of insulin. We're going to talk to CEO David Ricks about the decision to slash prices,

plus the latest on Lilly's drugs for diabetes, but perhaps obesity eventually, and Alzheimer's. We'll be right back. Welcome back to Overtime. Time for a CNBC News update with Julia Boorstin. Julia? Good afternoon, John. Jurors in the Alex Murdaugh trial were given a tour today of the family property where his wife and son were shot to death in the feed room of a dog kennel.

After the jurors left to hear closing arguments back in the courtroom, news cameras were allowed onto the 1,700-acre estate. One of the top prospects in next month's NFL draft is facing misdemeanor charges in connection with a car crash that killed a University of Georgia teammate and a football staff member. Jalen Carter is accused of reckless driving while racing another vehicle when its driver lost control. NFL coach Brian Flores, who accuses the NFL of being, quote, rife with racism, can press his discrimination charges against the league and three teams in court. A judge rejected the NFL's attempt to force Flores into arbitration

except for his accusations against the Miami Dolphins. And railroad workers in East Palestine, Ohio, have reported migraines and nausea as cleanup continues in the wake of the Norfolk Southern derailment. That's according to representatives from its U.S. rail unions who met with Transportation Secretary Pete Buttigieg in Washington, D.C. today. Back over to you guys. Julia, thank you. Now, Eli Lilly shares in the green today after the company announced it is slashing prices on a number of its insulin products and said it would expand a program

that limits patients' out-of-pocket costs to $35 a month. Joining us now in a first-on-CNBC interview is Eli Lilly's CEO, David Ricks, and our own Meg Terrell. Meg? John, thanks so much. Dave, thanks for being with us. It's a really big day. And, you know, I want to start by asking you about the reaction you've received to this news. You know, the president even tweeting his support for Lily lowering the price of these drugs. And we've heard from patients who are excited about this. The stock actually rose. Normally, you wouldn't think the stock would rise on a company slashing the prices of its drugs, but are investors supportive of this in their conversations with you? Well, thanks, Meg, for having me on. And it is a big day for patients

who use a little insulin because no matter who you are or where you are, you should have at least the same or lower costs as of today. And that's important because we know insulin affordability has been a challenge. I haven't spent much time with investors today, but the ones I have spoken to, I don't think are too concerned about this. Although, you know, there is a headwind financially. We put that in our guidance this year, but mostly I think they're focused on the new products that are driving the future growth of the company. Insulin is an important product for a company. We've been making it for a hundred years, but it's not really a growth driver. And so I think that's the investor perspective for today. But we do serve two and a half million patients and they care

about the news today. Yeah. You know, the president issuing a challenge to other manufacturers that they should follow suit and cut the prices of their insulins as well. You know, I reached out to Novo Nordisk in Santa Fe and they both detailed the steps they've taken so far, which seems similar to ones that Lilly had also taken with patient assistants, introducing different versions of insulin at lower prices, but not actually talking about cutting the list prices. Are you challenging them to follow suit? And if they don't, how do you think that's going to affect your formulary placement and insurance coverage? Well, they'll have to decide what they want to do.

We are challenging the whole system. I made those comments earlier today. Whether it be PBMs and insurance companies, employers who design their own benefits, pharmacies that can choose to carry low-priced options like our $25 generic of our own product. We challenge everyone to participate in solving the problem. And I think we all have heard enough about insulin affordability. Here in America, we should be able to solve this problem ourselves, and Lilly is taking these actions today to lead again on this issue. You may recall we launched the first biosimilar in the U.S. to Lantus called Basaglar six years ago. We launched the first authorized generic to our own product, and we were the first

to buy down copays at the point of sale. You know, this builds on all that. And sure, everyone could come along with us. That'd be better for patients with diabetes. David, thanks for joining us on Overtime. It's John Fort. I want to ask about Manjaro, your diabetes brand name, that people are excited about potential approval for weight loss treatment. I believe in trials people lost up to 22% of body weight on this. My question is on your pricing philosophy. There's an estimate out there that you'll be doing $5 billion in revenue on this alone in 2026. So to get there, do you have to have separate brands for diabetes and

obesity with this drug? And for obesity, is this inevitably going to be expensive? Yeah, thanks for the question. We're obviously really excited about Monjaro for diabetes right now, which just launched last summer and really had an unbelievable initial uptake because it's just so effective, driving glucose control to almost normal levels and people losing quite a bit of weight with diabetes. We have studies ongoing and a review at the FDA now for the weight loss indication. We should get three more phase three studies by mid-summer to really complete that package and hopefully be approved at the end of the year. We obviously don't talk about our pricing approaches before launch. You know, our competitor has two brands. Mostly that's because the access for weight loss medications

and really obesity as a health condition is so different from diabetes. Generally, diabetes medications are broadly covered in insurance and obesity medications are not. So the payers like that to differentiate between who's got what prescription. So that's that would speak in favor of two brands. On the other hand, two brands, you know, it's more things to remember and and so forth. So we'll work through all that between now and launch date, hopefully this fall. Oh, that is really fascinating, something I want to dig into at a later time. But Dave, I have to ask you about your Alzheimer's drug too, because of course, you've got big news coming in a phase three trial expected to read out in the second quarter.

Can you tell us about your confidence level heading into that readout and also your reaction to the news that Billy Dunn, the chief regulator of neurology drugs at the FDA is leaving? You know, he's really been seen as a champion for flexibility, particularly in Alzheimer's. So your confidence in the phase three trial and then also your reaction to that news. Yeah, thanks for that. And Billy was a champion for change and getting new treatments to patients. Some controversy, obviously, but someone who thought we ought to be thinking of diseases like Alzheimer's, like we do cancer, things that we could diagnose with, diagnostics objectively and approve drugs more rapidly. Of course, that's our philosophy too. So we'll have to see who takes his role. But I think

that's really only germane to the accelerated approval question, because as you may know, Meg, this is the phase three pivotal for Dononimab, our Alzheimer's study, the readout in the spring. And we'll shortly after that, if it's very positive, which we hope to have it very positive, just get a regular approval. So I think the regulatory risk is not so different with Billy's departure for our program. We've never been more confident in Dononimab's success. Part of that builds on the fact that a competitor molecule was successful in the fall. That's good for the amyloid hypothesis, but we think we

designed a great program. It's fully enrolled. We're waiting for the final data here in the next few weeks and months, and that'll be a big, big day for us when that data comes in. And from there, we hope to get to patients as soon as possible. You know, Alzheimer's has huge unmet need, and we're happy to be at the forefront of that one. All right. David Ricks, CEO of Eli Lilly, thank you. And, of course, thank you to our Meg Terrell as well. Great to be on. Thanks. After the break, Wall Street's latest love affair.

Strategists are embracing one specific part of the market, recommending the highest allocation there in nearly two decades. Mike Santoli is going to explain what it is and why next. Plus, Elon Musk now speaking at Tesla's Investor Day. We're going to bring you the headlines ahead on Overtime. Welcome back to Overtime. Mike Santoli is back with a look at why Wall Street strategists are getting more bullish on one specific part of the market that I'm a little obsessed with as well. Mike. Yeah, John. I mean, there's been a rush back toward bonds. It's been a rediscovery in some respects.

This is from Bank of America's quantitative strategy group. They keep track of the recommendations of the average sell-side analyst, the average Wall Street strategist. And now you see the recommended bond allocation is up toward 35 percent. Let's call it a third. It's pretty much the highest. It's been just slightly exceeded by a couple of moments in 2011 and 12 and back in 2008. Now, naturally, that corresponds with times of risk aversion when the equity markets have been turbulent or declining already and the safety of bonds was attractive. But also, I think right now what's going on is somewhat of a novelty factor after 10 years with yields anchored near zero by the Fed and by low inflation. And here we have, you know, the availability of a lot of relatively safe yield in the five, six percent area, depending on where you look.

Even real yields adjusted for inflation, adjusted for expected inflation, look relatively generous right now. I do think it's worth keeping in mind, though, that these periods when basically bonds were a consensus trade among the sell side have not necessarily been immediately gratified with higher bond prices and lower yields. So you've had to kind of deal with some of the turbulence here. As a matter of fact, this was really the low in yields for a while back there in 2011 and 12. And they went from about a percent and a half in the 10 year treasury right up to three percent in less than a year or so. OK, so, Mike, but if you're buying these for for the yield, for the cash flow, which a lot of investors should be, if you're not looking to trade,

say, a bond fund, I mean, five plus percent looks pretty good. But you've got to be careful of the leverage in some of these, right? Well, sure. If you're buying a fund, if you're buying like a closed end bond fund, be careful of the leverage. You know, one of the best determinants of the long term returns from something like a government bond is the yield you get up front. It pretty much corresponds to eventually what you're going to get there. Don't expect it to be like a massive run from there, higher in price or a crash. So that's a pretty good comfort, I think, especially if you own riskier stuff in a portfolio. So to me, it's about normalization to the long-term role that bonds had in a portfolio,

which was give you that yield cushion, enable you to take more risk in other part of your portfolio, if you so choose, and just maybe stay slightly, at least, ahead of inflation. Word is bonds. I like it, Mike. I appreciate that you did that. And speaking of debt, mortgage applications hitting a 28-year low as interest rates just keep spiking. Up next, we're going to discuss whether that's

creating cracks in the foundation of the case for a soft economic landing. Be right back. Mortgage demand from homebuyers dropping to a 28-year low, with higher rates pushing buyers back to the sidelines. But in order to achieve a soft landing, our next guest says housing affordability is key. Joining us now, 314 Research founder and strategist Warren Pies. Warren, I want to start off in a slightly different direction. Unaffordability, bad if you're trying to buy a house, but if you own a REIT that's got apartments in it and multifamily, might it actually be good because, hey, you've got more demand from renters? Yeah, thanks for having me. That makes sense. If you look at basically what's happened with the housing market versus the rental market, we've had both markets have exploded post-pandemic,

but you've seen house prices way outstrip rents. So yeah, I think when it comes to the specifics of multifamily, that could be a positive. But I mean, our main point as a kind of a quantitative macro shop is to try to determine what's happening with the economy. And we've really started to zero in on the housing market. I think housing affordability is the real housing cost right now. So that's the average monthly payment in real terms is close to $3,000 a month. And so every time we've ever seen house payments get above $2,000 in real terms, we see a slowdown in first home builder sentiment, then construction spending, and finally you get construction layoffs. Now that's really central to any recession call

is construction layoffs. So I mean, that's what we're watching. Is it different this time because inventory is so low at the same time? So even though stuff is unaffordable, maybe home builders are still going to build because there just isn't that much inventory out there to begin with? Yeah, I mean, I think it's different for a lot. That's a huge differentiating factor for this cycle. I mean, there are a ton of homes under construction, so there's work to be done on that front. It's taking longer to build a home. I think there's labor hoarding because there is a shortage of construction labor. So if you're going to say, how's this cycle play out versus the average cycle, I think it's going to take longer. And another factor on the consumer side is just

the amount of stimulus. I think it's really difficult for the average analyst or person on the street to realize how much money got pumped into the economy. And what we've seen, if you go back to the end of last year, everyone thought we were going to come into 2023, have a recession. But reality is when you get a little bit of backup in mortgage rates, you get a little bit of backup or falling in mortgage rates, falling car loan rates. You start seeing demand accelerate because that underlines stimulus. So, Warren, how do house prices come down if inventory is so low? If people don't want to move and sell their house in this environment because they can't find someplace else to live, how do we get that soft landing from better affordability? I think the way you get the soft landing is ultimately, you don't want a soft landing, almost by definition, couldn't require a big decline in house prices. And so we would look

at it happening more on the mortgage side. And so we modeled out, OK, what happens during QT? What happens during high volatile periods for interest rates in general? What you see is the spread between mortgages and the 30-year blowout. That needs to revert to historic norms. That would take mortgages down to about 200 basis points. Let's say you get another 5% haircut on house prices as we obviously continue completing the homes under construction. And then you have just rates moderate in general. And so these are a lot of things that have to go right. It's not our base case, but it's a potential path to a soft landing.

Well, it's given us a good look. Warren, thank you. Warren Pives. Thanks for having me. All right. Find out why Duolingo is a huge winner today. Here's a hint. It's got something to do with AI.

Check out shares of Okta, sharply higher in overtime right now, more than 13%. The company beating on both the top and bottom lines while also providing very strong guidance, including forecasting an unexpected profit for the current quarter. For the full year, revenue guidance was in line, while earnings more than double what analysts expected. And yes, you're going to hear from the CEO, Todd McKinnon, tomorrow right here on Overtime. But Box, moving in the opposite direction, off by double digits. Investors focused on the current quarter guidance. You can see single digits, high single digits right now, off 9%. Earnings and revenue falling short of estimates. Full year revenue guide also disappointing. And speaking of movers, it's a big day for language learning

app Duolingo. That stock closed up 22% today, second best day ever. The company beat in part thanks to its explosive growth in daily users and a 67% increase in paid subscriptions since last year. Co-founder and CEO Luis Von Ahn guided to better margins this year, in part because Duolingo is incorporating open AI, yes, into new, even higher-tiered service that's going to teach through conversation. I asked him about it in a Fort Knox earnings conversation this morning. Take a listen. People who are very serious about learning a language, one of the things they want to get better at is conversation. It's been hard with technology up until generative AI. It's been hard

to mimic a conversation with a real human to be able to train you with it. This is why in the past, human tutors really made a lot of sense because you could practice conversational skills. Now with generative AI, we finally are at the point where even if it's not fully perfect, we actually can start mimicking a conversation with a real human. And there's so many good things about that. Not only is it cheaper because we don't have to pay the human tutor to have the conversation with you, but also we can actually get better and better with it. For investors, this is one of those potential AI bellwether stocks. If they can get more efficient and a higher margin through AI, then maybe some others can too.

All right, breaking news now on the Senate's ESG investing rule vote. Eamon Jabbers has details. Eamon. John, we just crossed a key 50 vote threshold, which means the Senate now does have the votes it will need ultimately to repeal a Department of Labor rule, which allows fund managers to consider ESG considerations when they're making investment decisions on behalf of retirees. That is, if you are in favor of ESG investing, you don't want this to pass. If you are opposed to ESG investing, you do want it to pass. It looks like it is on track to passing because we just crossed that 50 vote threshold. The kicker to this, John, is that President Biden has said that he will veto it when it gets to his desk. Anyway, this is a flashpoint,

though, for cultural conservatives and people on the right on ESG investing, and it shows just how much momentum that line of thinking has in Washington, D.C. We'll see whether that has any influence on Wall Street as well. John, back over to you. All right, Eamon, thank you. Up next, the key earnings to watch tomorrow. American Eagle's up 7% on earnings.

Tomorrow we get Best Buy, Costco, Macy's. Melissa Repko, what did we learn from Lowe's and others that might help viewers ahead of tomorrow? Hey, John, American Eagle is really standing out as an outlier here. I mentioned earlier the surprising thing about them is they said it's lower than expected promotions. And that's really the opposite we've heard so far, which is that consumers are looking for a deal and they're spending on what they need, not what they want. And so that bodes not so well for Macy's and Nordstrom tomorrow because they sell a lot of discretionary stuff, handbags, clothes, et cetera. It does bode better, at least for Costco and Kroger, who sell a lot of groceries. All right, Melissa, thank you. Well, we got to close out here. That does it for overtime. Fast Money begins right now.