Closing Bell - Closing Bell Overtime: Bull Versus Bear Debate; What Tightened Lending Standards Mean For The Economy 5/13/24

Episode Date: May 13, 2024

Bulls versus bears: Carson Group’s Ryan Detrick and Cantor Fitzgerald’s Eric Johnston square off on where the market goes from here. T. Rowe Price portfolio manager Tony Wang gives his tech and AI playbook and OpenAI rolls out its latest product. Neuberger Berman’s John San Marco on top picks heading into retail earnings. Our Leslie Picker reports on tightened lending standards for banks and what it means for economic growth.

The stock's trading in a pretty tight range ahead of a number of key inflation reads and earnings reports on the horizon. That is the scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I'm John Fort. Morgan Brennan is off today. Coming up this hour, we are getting you set for a major week of AI headlines, including OpenAI Spring Update, Google IOs Conference, and more. T. Rowe Price's tech portfolio manager joins us with the mega cap companies he says are best positioned to cash in. And the consumer takes center stage as big box retailers, Home Depot and Walmart get ready to report results. We will break down what to watch

with John San Marco, who runs Neuberger Berman's Connected Consumer Fund. We begin, though, of course, with the market as the major averages sit within striking distance of record highs. Our first guests have very different outlooks on where stocks are headed in the next few months. And joining me now are Ryan Dietrich from Carson Group and Eric Johnston from Canterfix Gerald. I mean, welcome, guys. Gloves on in a way. But just to set things up, Ryan, stocks are expensive on a valuation basis. But you say the bull market is still young. So which outweighs in your mind? Yeah, John, thanks for having me. And happy GameStop Day, everybody out there, right? Listen, there's a lot of ways to look at this. But this bull market's 19 months

old, right? Up over 40% since October, just recently when we had the bull market started October 22. And you think about it, the average bull market lasts about five years. I get it. Every time is different. Yes. But look at what we just saw last week. New highs on advanced decline lines on the S&P 500, on the NYSE, and on mid caps, and almost 52-week highs on advanced Klein lines and small caps. What is that telling us? What's the message of the market? There is a lot of participation, John, under the services, not just four stocks, not just seven stocks, whatever we call it. There are a lot of stocks participating. And one final comment here, historically, you tend to get a summer rally in the election year, and I get it. Every time's

different, but we really think that flush out we had, the 5.5% pullback minor pullback we had last month was enough. And now we're back to the bull market and things still look good to us. All right. Now, Eric, you were bearish about a year ago, then you got tactical, said it's a tactical trading market. Now it sounds like you're turning bearish again. You're not looking for a summer rally, right? I'm not. So, you know, I would say that we are one of the backdrops of this overall market is that we are late cycle. This is the longest period we've been below a 4% unemployment rate ever. This is the longest period of time we've had consecutive 100,000 plus jobs reports ever. And so we are a late cycle. And what's happening now is that

the economic data is clearly decelerating as we speak. And so some people are arguing that it could be short-lived, which it may be. But I think the market is not pricing any high enough risk that this is the beginning of a larger deceleration. The labor market, as an example, while very strong, is clearly decelerating. The job openings decline or hit a new cycle low. The new hires print on that same report also hit a new cycle low. And then you saw a payroll report most recently where if you take out health care and education, the cyclical part of the economy jobs were below 100,000. And then within the services sector,

which has clearly been the backbone of this economic strength, ISM services employment was the second lowest print ex-COVID in 10 years. The ISM services new orders, second lowest in 10 years ex-COVID. And then we're seeing it from corporates too. So there's clearly a slowdown going on right now. And I think the market is just not giving a high enough probability that this could be the beginning of something larger in terms of the deceleration. All right, Ryan, not that I'm trying to start anything, but it kind of sounds like Eric saying you're whistling past the graveyard here. I don't know. I mean, you mentioned GameStop off the top. What do you make of this rally overall in some small and mid-cap tech companies today? And just in general, I mean, AMC and GameStop themselves were both up,

I think, what, more than 70 percent? Let me take a look. Something wild like that after Roaring Kitty resurfaced. Yeah, 78 percent for AMC, 74 percent for GameStop. So is this ripple effects of Roaring Kitty resurfacing or something else? Well, clearly for those names, of course it is when he came back, decided to come back last night on X there. But you mentioned like mid-caps. I mean, mid-caps are quietly doing, in our opinion, very, very well. I mentioned the advanced decline line, a lot of participation of Brett there. We can get into inflation. I love the conversation here because, yes, things are slowing down. That's the big question. Are we slowing down just heading right into a recession or after a 6% nominal GDP last year? Are we just slowing down a

little bit? Of course, we're in the camp. We're just slowing down a little bit. I mean, the last three months, we've still averaged 242,000 jobs. Remember 2019? Pretty good year. Average 166,000 jobs back then. And one more thing, we just talked about ISM. Those are soft data surveys. I'm not ignoring the soft data surveys. Look at the hard data. Manufacturing, construction has been soaring. We're creating as many cars now or producing many cars now as we were pre-COVID. There are some hard data things that are saying, you know what? I know this sounds crazy. This is more early cycle when we look at some of the data we're seeing in manufacturing and potentially in housing as well.

So there's two sides to every story, but we just don't see a recession over 12 months here. Yeah, is the sun coming up or is it going down? Eric, might this rally of the unloved today be a sign that retail investors are still too excitable? So it clearly can be. I mean, I think that, you know, the retail investor is already, their exposure is already well above average, but they've been, you know, sort of less in the more speculative areas for the past, you know, six to 12 months, both from an options perspective and from some of these meme situations. And so you get situations like today, and it actually has an effect that really permeates the entire market where it causes other stocks that have high short interest that retail may not be going after.

It causes those names to squeeze and other momentum crowded long names to come under pressure. So even though the big moves today are really in two names, it's really having actually an effect throughout the entire market, which is pretty interesting. Yeah. I mean, even going beyond those two names, Groupon is up 16.5%, Stitch Fix up 15.5%. I mean, you know, those aren't exactly meme stocks. Now, Ryan, you like industrials and financials in this environment, even though you think it's early cycle. Why? We do. I mean, if we don't see a recession, like we don't, we think those areas would do well.

I mean, look at financials. We've been overweight financials all year. We added a little more financial just about a month ago on that pullback we saw. And look at the leadership. I mean, it is what it is. We're seeing relative strength out of some of those regional banks, out of the banks in general. I mean, financials, again, if there's no recession, should do well. Industrials are kind of in that same camp for us. We're more neutral technology. But again, we think those cyclical areas should do well. And I know

everyone's come on this network for a while, talking about small caps, me included. We do think the rest of this year, small caps could do well if we start to get maybe like the earlier conversation, things slow down a little bit, maybe inflation starts to come back. And we expect to see probably two cuts this year. And we are overweight, small caps and mid caps have been our largest overweight all year. We're comfortable there still. We think those areas will do pretty well, you know, the next five, six months or so. And Eric, do you dislike industrials and financials here? So there's parts of industrials. So what I would say is that you really want to be with

the secular themes that are going on, which is really the big themes being AI and then also the fiscal spending through the Infrastructure Act, the CHIPS Act, etc., which does help parts of the industrial sector. But our view is you really want to stay with the high cash flow, large cap, more secular winners. And you want to be underweight or short, those that have higher debt, just generally higher leverage, are more cyclical and don't have leverage to some of those themes, whether it be AI or the fiscal themes that are out there. All right. Nothing like a debate to draw out the facts. Eric, Ryan, thank you both. Thank you.

We turn now to Senior Markets Commentator Mike Santoli for his first dashboard. Hey, Mike. Yeah. Hey, John. A lot of shifting around, as you really were alluding to there, in terms of within the market, what's been working, what hasn't. I like to monitor what's called the pure growth and pure value portfolios. This is the very cheapest stock statistically in the S&P 500 and those that are either the highest growth or maybe sometimes just the highest valuation. You see over a one year basis, value has actually pulled ahead only slightly. Very similar charts, as you see right here. But, you know, things like financials in particular are helping out while tech is drawing

down that pure growth portfolio. Now, it probably also is a fact that a lot of the crazy stuff you were just talking about that's really starting to move today, it's not in the S&P 500. So that would otherwise be in pure growth. It's just not quite registering here. But both in general, healthy looking charts with growth further off the highs. Another relationship that probably isn't a relationship in anything except that these areas got washed out would be utilities, which now suddenly everybody's been focused on, and the Chinese market, both deeply, deeply unloved until very recently, especially right there. If you look in the last month and then, of course, even early part of this year when you had the bottom in the Chinese market, that's the FXI, Hang Seng in Hong Kong also roaring here. Now, there's nothing that should make these stocks

look similar in terms of fundamentals. It really is just about the fact that we had a market that was just over leveraged to the highest momentum names going into the end of the first quarter. And then you had some upending of that trade. And what that's meant is money has flowed into the abandoned, orphaned, underloved areas. Utilities and Chinese stocks both had massive, massive outflows for like a year straight before this little pickup, John. Mike, we've been in this range for about a full quarter now, three months since beginning of February. How much in all of this churning around have the underlying dynamics changed?

You know, we've definitely had the old leadership break stride. And so you're not sort of able to rely on the old tech stuff. And you've had, aside from just sort of a recycling of some of this sector rotation that we've had in there, I do think you've seen a slight less cyclical bent to this leadership. So it is a stutter step in terms of confidence in how the economy is going to hold up and just the pace of it. At the same time, we're trying to absorb this rise in yields on the other side. So in general, earnings have come through well. And that's really the underpinning here. So if I look at valuations at the all time highs in late March, valuations now actually slightly cheaper on a P.E. basis just because those earnings have

come through and time has passed. Yeah, it's like from February up into April and then down and then back up again. We'll see where it goes from here, Mike. Thanks. Well, OpenAI hosting its spring update today and reports say Apple might be in talks to put chat GPT on iPhones all ahead of Google I.O. That starts tomorrow. We're going to ask a tech portfolio manager for his take on which mega cap names are winning the A.I. race. And Intel shares still deep in the red for the year. But the stock outperforming today on reports of a potential 11 billion dollar deal. That story and much more when Overtime comes right back.

Welcome back to Overtime. We've got breaking news on Games Global, which was meant to price its IPO this afternoon. Contessa Brewer has details. Contessa. And instead, they've yanked their IPO. They will not be IPOing. That was scheduled for tomorrow to begin trading. They had intended to price these shares at $16 to $19 per share at the midpoint, hoping to raise about a quarter of a billion dollars, which would mean its market cap was at about $2 billion.

Games Global supplies the online casino games that all these other platforms use. So they're making the games that you actually play on DraftKings or FanDuel or BetMGM, not all of them, but some of the hit games that they supply there. And it's a company that there was a lot of excitement about it going public tomorrow. They were intending to ring the stock exchange bell on Thursday, and instead they say because of current market conditions, the company has determined not to pursue at this time the initial public offering of the ordinary shares. As you can see, some of the other platforms, these sportsbooks and those that offer online gambling in the states where it's legal, they're off just slightly today. They're off anywhere between 10 and 20 percent off their 52-week highs from March.

But the market conditions that they're citing, we did see IPOs last week, of course, John, and those went off without a hitch. So it may just be in this case that Games Global wasn't able to get the price that it was intending for its shares. We were supposed to interview the CEO this week as well, and I have not heard from the company about whether that's still happening. Of course, if I get that, then we should get some more insight into why they decided to yank it right now. Yeah, interesting. I mean, the VIX has been practically asleep. The market's near all time highs. We didn't have dramatic moves today. So it just sort of makes me wonder, as you mentioned, what what market conditions they're referring to. But the other thing is, this is this would really be the only pure play on iGaming in terms of publicly traded companies

because the rest have either bricks and mortar casinos or the big business is sports betting. And iGaming is extremely lucrative and it's the hope of the future as states begin to adopt more legislation around it that it could be the big profit driver in this space. So there was a lot of excitement about Games Global going public. All right, we'll see what happens next. I'm sure you'll tell us, Contessa Brewer. Thank you. Now, here's one thing that did happen. Open AI hosting its spring update today

as mega cap tech companies get ready to unveil their own plans to continue capitalizing on the AI revolution, starting with Google tomorrow at its IO developer conference. Meantime, Google ticking a little lower earlier in the session on a report saying Apple might be in talks to integrate OpenAI technology with iOS and the iPhone. Let's bring in Steve Kovach with more.

Steve? Apple shares about up 2% or so today as well. But as for OpenAI, like you said, front-running Google's big developers conference that's happening tomorrow with an announcement of its own. So what's happened? It revealed the latest AI model, which it's calling GPT-4-O. That's not a zero, but an O, letter O, which is capable of having natural conversations with you. No more asking a question and then waiting for an answer before you can ask another,

like you may with assistants you use today, Siri and Alexa and so forth. Just talk to it like you would your best friend. You can even interrupt it, ask it to speak in a different tone, and a lot more. It also does real-time translation between language. It's also multimodal. That means it can process images, text, or voice. OpenAI says it'll be rolling out over the coming weeks, and the company's CTO teased there's even more to come, a so-called next big thing to be revealed soon. CEO Sam Altman wasn't part of the event, but he did publish a blog post about GPT-4.0, calling it, quote, the best computer interface I've ever used.

Also of note, Altman called OpenAI a business and will, quote, find plenty of things to charge for. Remember, OpenAI is structured as a nonprofit organization and has been sued by co-founder Elon Musk for allegedly abandoning its original mission and focusing on profit. Instead, we'll see how that one shakes out. In the meantime, expecting Google tomorrow, which has multiple stumbles trying to launch its Gemini AI system. It's expected to show off similar AI features at its developers conference. It also shared a video on X earlier

that appeared to be a demo similar to what we saw from OpenAI today. You're looking at that right now. Now, OK, a lot to process. Questions about will Apple stick with Google, not just for regular search, which Google pays Apple for placement on the iPhone. That just pays $20 billion. Yeah, a lot. Or will they go with OpenAI? Now, Sam Alt20 billion. Yeah, a lot. Or will they go with OpenAI? Now, Sam Altman's talking about being a business. Are they a business that could pay more than Google for placement on the iPhone? How would you process that? That is the big question. If this deal does happen, Bloomberg reported, I believe it's Friday afternoon, that they're close to some kind of terms of the deal. Now, which way does the money go?

OpenAI doesn't have hordes of cash like the way Google does in order to do it. So the question becomes, does that mean Apple is paying Opening AI to license the technology? And also, what cloud are they using? Does this mean Microsoft gets to see a benefit because, as we know,

Opening AI processes everything on Azure? That is a huge question because this could be a quiet way for Microsoft to finally get in on the iPhone the way it's been begging to do for so many years with Bing in the same way that Google is doing with Search. I can't imagine Apple paying for it. I can't imagine Apple doing a Super Bowl type thing where you do it for free and then that gooses Google or Microsoft or somebody to pay more down the line even on top of Search. Remember, they're reportedly talking to Google as well to bring in Gemini as part of the iPhone 2. It's going to be really interesting on June 10th to see how all this comes together at the end of developers conference season.

We're calling it the summer of AI. It's kicking off right now. It's a different twist on developer conference. Normally, they're not necessarily as exciting. This is going to be a big one. For sure. Yeah. Well, for more, let's bring in Tony Wong from T. Rowe Price.

He is the portfolio manager of the Science and Technology Fund. Top holdings include Apple and Alphabet. Tony, is Apple potentially a bit of a kingmaker here or no? Yeah, I think that Apple is really uniquely positioned here. I mean, if you think about it, they essentially have a really loyal, captive user base of a billion of the wealthiest consumers on the planet. And they haven't really done that much with Gen AI. And in terms of what they can do is really look across the large language models like that you guys were talking about earlier and choose which ones have the best use cases for their various features. And so I think they've got a big opportunity. The iPhone has kind of had more muted cycles in the last couple of years. So I think that the AI iPhone coming up could trigger a big refresh cycle. And

I like the stock here and the company as well. Yeah, I have no idea whether an open AI chat GPT-4 placement on iPhone and iOS happens or not. But if it were going to happen, it seems to me like an open AI announcement like this ahead of it would make sense, right? First, announce that the product's out there, and then you would announce that it's a part of Apple's operating system. It seemed like Google rebounded a bit, the stock did, that they didn't announce a deal with Apple. But a deal with Apple wouldn't be announced outside of an Apple event, right? Yeah, I don't think anything is finalized until June. But if I'm Apple, I think it's smart for them to not do exclusive deals at this point. We're still really early in generative AI, and I think that

they're still testing which ones have the best use and the best performance for their various use cases. And if you think about it from kind of a negotiation standpoint, it's smart to have multiple vendors. So I'm not surprised that they're talking to everybody, and there could be a few others in the mix as well. One of the most proven AI productivity use cases at this point is for developers developing code and people use OpenAI for that as well. A big piece of what Apple talks about at its developer conference, WWDC, is developer tools for developing on mature platforms like iOS and iPhone, as well as things like Vision Pro, how much do you expect AI and perhaps even OpenAI to play into that?

Yeah, I think it's going to be a big part. And if you think about Apple's strength, it's really its ecosystem across all its different hardware products, as well as its software. So I think integrating that and making it really elegant in your lives is what Apple's really good at. They're really a

design-first company, and they're really great at integrating technology. So it's not too invasive, but very, very useful in our life. And so I think we're at that tipping point where consumers are expecting that, they want that, and I think Apple's in a really unique situation to deliver that capability. And everybody should check out that demo from OpenAI on the voice interaction with 4.0. It's very much like the movie Her. Tony Wong from T. Rowe Price, thank you. Now, sticking with tech, Intel finishing at the top of the down today on a report from the Wall Street Journal that it's nearing a deal with Apollo to finance a plant in Ireland. Apollo would put up more than $11 billion,

though details are unclear outside of that per the journal. This would be one of several recent public and private partnerships aimed at boosting Intel's chip production, including for helping build its capital-intensive factories. The U.S. awarded $8.5 billion under the CHIPS Act to Intel, and then some loans on top of that. And in 2022, Brookfield Asset Management and Intel entered into a $30 billion partnership around the construction of the Chandler, Arizona chip factory. Well, Home Depot kicks off big box retail earnings tomorrow before the bell, with inflation concerns still top of mind for American consumers, as evidenced by today's New York Fed survey. Up next, the man who runs Neuberger Berman's connected consumer portfolio gives us his read on spending and the companies you should be watching. And a Square deal website hosting firm Squarespace jumping today on news.

The company is going to be taken private and a multi-billion dollar buyout. We're going to look at the competitors that could be future takeout targets when Overtime returns. Welcome back to Overtime. Squarespace popping after announcing it's going private in a nearly $7 billion all-cash deal with private equity firm Primera. Primera is paying $44 a share. That's about a 30% premium. But below, Squarespace's original $50 reference price went public in a direct listing in 2021. Now, this follows a trend we've been tracking here on Overtime.

Smallish enterprise tech companies being bought out by private equity or by larger firms. That includes Tama Bravo acquiring Darktrace just a few weeks ago and a little more than a year ago, Coupa Software, Qualtrics and Cvent. And don't forget IBM announcing its intent to buy HashiCorp late last month for more than $6 billion. So what does this all mean? Well, take a look at Squarespace's two main competitors, GoDaddy and Wix. Wix moving higher today as a lot of smaller cap tech did. GoDaddy, not so much, although at about a $19 billion market cap, it's a much larger company, maybe less of an M&A target. JMP's Andrew Boone writing that this is a unique Squarespace story, doesn't

extend to other website builders. Plus, we're seeing a lot of small and growthy companies outperform on this session. After all, yeah, as we mentioned earlier in the show, GameStop is up like 80 percent today. Speaking of Squarespace, big box retailers Walmart and Home Depot are gearing up to report results this week as a mixed picture emerges about the American shopper. According to the latest New York Fed survey, consumers increased their inflation expectations last month to 3.3 percent on a one-year basis. So will those fears be evident in this week's big earnings reports? Let's bring in Neuberger Berman's John San Marco, who runs the Connected Consumer Portfolio. John, welcome. These two companies, very different.

Home Depot has got the whole commercial and construction arm of this, which reflects perhaps different things. What are you looking for in these reports? Great. Thanks, John. Thanks for having me on. Very different setups. At Home Depot, they're actually coming out of probably a two-plus-year period of home improvement recession, if you will. I mean, consumers spent all they could on their homes back when COVID first started, and then they've had to digest some of that. Demand expectations are quite low. They serve a very high-end consumer who's generally more resilient and sitting on a mountain of home equity. And so we see things

getting better there, not necessarily in the first quarter, because the first quarter, you know, may or may not have some hurt from weather and rates and consumer confidence. But we think we're nearing the bottom of that cycle. And we own a little bit of that in the active ETF that we manage. And then Walmart, on the other hand, I mean, they've been doing everything right. They've been in the right place at the right time. They're hitting on a number of new growth vectors, like an advertising business and a third-party marketplace business. Expectations are a little bit higher there. So, you know, we'll see how tomorrow goes.

But just taking a step backwards, this is a business that has some new, promising, exciting opportunities. And the data we look at all suggest they're doing well on those fronts. In a way, inflation has benefited Walmart where it's hurt Home Depot, right? Because Home Depot, you Home Depot had items priced higher that helped their revenue. And then on the consumer side, when consumers have been hurt by higher priced items, you saw more of the middle class

that might not have shopped as much as Walmart heading into those stores. So how do you expect the inflation setup to affect Walmart in particular? I think that's well put. Not only does inflation drive some drive down, excuse me, trade down into the Walmart store from perhaps less competitively priced retailers, they're also selling a product that has pretty inelastic demand. So they take the pricing up and by and large, you know, the consumer is

going to continue to buy the same amount of toilet paper and batteries and cereal and so forth. So it's been a good guy that's becoming less of a good guy. And at this point, I think that's all pretty much rear view mirror. And I think inflation is sort of a non-factor looking forward for Walmart. Inflation's come in quite a bit. At Home Depot, to your question, I think the bigger issue is as inflation stays too hot, when it got too hot, interest rates spike, of course, and that has all sorts of suppressive pressure across the home improvement complex. Speaking more on that, one thing that a lot of people tend to do to pay for home improvement projects is tap into their home equity, and that gets a lot of people tend to do to pay for home improvement projects is tap into their home equity and that gets a lot more expensive with interest rates stubbornly high right

exactly yeah it makes it a little harder to move to slow down uh housing turnover and that's that's a headwind for the business now it has been a headwind um and we're at multi-decade lows so i don't you know i think increment, we're likely in a better situation a year from now. And to your point, it also makes tapping into home equity, no matter how much home equity it is, it makes it more costly and a little less appealing at the margin. But again, incrementally, I don't believe that home equity lines have been some huge tailwind for Home Depot that now they have to anniversary. Rather, expectations already sort of reflect this higher rate environment.

All right. Well, you got us ready. Appreciate it. John San Marco from Newburgh, Vermont. Time now for a CNBC News update with Contessa Brewer. Contessa. John, former fixer Michael Cohen will be back on the stand tomorrow at the Trump hush money trial. But earlier this afternoon, Cohen walked the jury through the stormy Daniels payment. Prosecutors are now asking him specific questions regarding the false business records, including conversations with former Trump CFO Allen Weisselberg about being reimbursed for his payment to Daniels.

U.S. military assistance is already on Ukraine's battlefield from a multibillion-dollar aid package Congress passed last month. That's according to National Security Advisor Jake Sullivan today. Sullivan announced the U.S. will have another package in the coming days to help accelerate the pace of weapons deliveries. And George Clooney will make his Broadway debut in Good Night and Good Luck. It's a stage adaptation of his 2005 film about journalist Edward R. Murrow, in which he also starred and directed. Clooney is co-writing this for stage and will star as Murrow this time around, though David Strayham had that role in the movie. The play will premiere next spring. Murrow, you know, set the stage for journalists everywhere.

Set the bar rather high for the rest of us, John. Yeah, we're not all as good-looking as George Clooney, though you are, Contessa Brewer. And so are you, John. All right. Up next, Mike Santoli with one big takeaway from earnings season so far. He will reveal it next.

And as we head to break, take a look at Walgreens Boots Alliance near the top of the S&P 500 today after a report said the company was looking for potential buyers for its U.K. pharmacy chain, Boots. We'll be right back. Welcome back to Overtime. Mike Santoli is back with a look at profit margins as earning season starts to wind down. Mike? Yeah, John, they've back on the upswing in terms of profitability. This is S&P 500 company operating margin.

So it's not the absolute bottom line profitability, a more expansive measure. But you do see it's in the upswing. Now, it includes also projected consensus profitability going out into next year. But we have actually held up pretty well. So what this suggests a few things. One, the mix within S&P 500 earnings now skewed a little more toward large cap growth companies, which inherently have higher margins. You also do have, I think, some cost cutting that did take hold across corporate America as they were dealing with wholesale inflation, as they were maybe anticipating a recession, that has helped out profit margins because pricing has largely held up. And, of course, the economy has remained strong. So maybe there's room here for some easing back of pricing on the consumer level.

There's a buffer here with profitability. But also it explains perhaps why S&P 500 still manages to be within less than a percent of its all time highs, even though we're wondering which way bond yields and Fed policy are going. In a way, is that continuing spike at the end of that chart you've got also showing it's not just consumers who expect prices to remain high going forward? In this sense, it's probably analysts who just expect that. So maybe there's some inherent optimism there in terms of analysts projecting into the next couple of quarters that we're going to continue to go higher. But, you know, it's worth keeping in mind that we were there, you know, in 21 and 22. But yes, I do think you

have a lot of confidence being expressed among companies that they're going to be able to hold on to most of the pricing that they've managed to push through in the last couple of years. OK, but that means there's also in the face of competition, the opportunity, perhaps. Yes. For some of those profits to be sacrificed in the name of market share. Unless, you know, we repeal the laws of capitalism, some of this should be competed away. I do think that's, if anything, the macroeconomic kind of optimistic way of looking at it. We kind of made it through this period.

People maybe have built up their cushion ahead of any kind of weakness, and they can respond to it if it's seen coming. Well, whatever we do, let's not repeal the laws of capitalism. I totally thank you. Well, these days. A key recession indicator that's been correct since I left for college might finally be inaccurate. Up next, why this time around is different and why it's good news for bank stocks. And check out shares of drug maker Insight, the big winner in the S&P 500 today, after announcing it's going to buy back roughly two billion dollars in stock, most of which will come through a modified Dutch auction.

Be right back. Welcome back to Overtime. For the past 30 years, a recession just about always comes after bank lending standards tighten, and that tightening began two years ago. But Leslie Picker looks at why we might not get a recession this time around. Leslie. Hey, John. Yeah, the usual playbook, one that you may have read about in Econ 101 while you were in college, I heard you say that in the Ds, is that the Fed raises rates, banks pull back on lending, demand for lending plummets, and then a recession follows. But so far, that hasn't been the case in this recent tightening cycle.

Jefferies constructed an index that measures the percentage of banks tightening credit standards based on data from the Fed's Senior Loan Officer Opinion Survey, or SLUs. Now, the research shows that over the last three decades, every recession has coincided with that index rising above 30. You can see on that chart, the scale is inverted here, but that correlation took place during the pandemic and in the financial crisis and the dot-com bust. But even though the Sluice-based index surpassed 30 at the end of 2022, GDP has been relatively stable. So why is this time different? Well, Jeffries notes this will actually

be the subject of a, quote, host of future doctoral dissertations because it's not exactly clear. One theory, though, from the report is that the 2020 era of QE flooded with banks with reserves, which have blunted the impact of higher rates so far. The explosion of private credit may also be muting the impact of higher rates because it's serving as another source of funding as traditional banks tighten their own standards, averting a soft landing and the recent resumption of loan demand are helping fuel a huge reversal in the Spider Bank ETF, up 46% over the last year, compared with declines of nearly 30% over the prior year. Perhaps an indication that kind of beginning in this tightening cycle,

many investors were expecting kind of that playbook that we laid out. But now that that hasn't proven out to be the case, bank stocks are feeling a little more comfortable with moving higher. Interesting. So what is it that normally happens after banks tighten their lending standards that perhaps won't happen, right, because the usual sequence isn't playing out? Is there some potential next step that we're not anticipating now? Well, usually it's kind of a supply and demand dynamic. Ultimately, they tighten their

lending standards as such that it throws the economy into a recession. And then the Fed is forced to cut rates to get the economy out of a recession. And therefore, banks are able to loosen up their lending standards. And the demand kind of comes back into the picture because loans are cheaper with lower rates. And so the whole cycle kind of starts back over again. So it's unclear what's going to happen this time around. We have seen fewer banks more recently report that they are pulling back on their lending standards. It hit kind of that 30 in Q4 2022. And that number, that index that Jeffrey has created, has gone up since then, indicating that lending standards are still tightening. It's just a smaller magnitude of banks that are pulling back on them. So it

remains to be seen if we don't go into a recession, kind of what that means for the overall lending picture. Although with rate cuts, I guess we could see, kind of depending on the magnitude there, a resurgence in more loosening of those standards. Yeah. I wonder if the banks will know when to loosen without a recession. I guess we'll see. Leslie Picker, thank you. Well, Alphabet is set to announce its latest AI ambitions at its developer conference tomorrow. Up next, the top analyst on what to expect and whether it'll be enough to satisfy investor appetite for more AI. And because you love overtime and you want even more, we've got a QR code for you. I know you're waiting for it.

You can scan it. It's on your screen. Follow us on LinkedIn where we do post exclusive content. Meantime, Overtime on TV. Be right back. Welcome back to Overtime. The battle for AI supremacy heating up as Alphabet prepares for the Google I.O. Developer Conference in less than 24 hours. Google is expected to announce its latest slate of A.I. advancements.

This on the heels of Open A.I.'s event today, where they announced a new A.I. model and a desktop version of ChatGPT. Here to discuss is Rohit Kulkarni, senior research analyst at Roth MKM. Rohit, good to see you. So Google has an interesting advantage here in that it can build its AI directly into Android, into the Pixel, into apps like Maps, and people will use it as long, I guess, as it's good. Is that what you expect to see? Hey, I think the AI stakes for Google are higher today after OpenAI's event today.

I think Google has the best possible distribution channel across enterprise and consumer. As you just said, John, they have the workspace apps and they have the direct-to-consumer apps. So smallest tweaks in any AI model, as in a lot of enterprises and billions of consumers start to benefit right away. So I think that's the advantage. And that's why Google is the AI pioneer with both tech, innovation and distribution. Now, particularly when we're talking about things like conversational AI, it seems to me that that's a mobile centric use case. And they've already got this massive install base. So how much pressure does that put on them to both get the right use cases that

people will actually enjoy using versus some of the complaints that Meta is getting on the way they built it into Facebook, and on Apple to perhaps choose somebody different than Google so that they don't end up improving android uh... as they benefit on the iphone absolutely i think uh... the the second point over there john uh... about uh... the apple relationship is is very key uh... what google can not tell us uh... tomorrow this week uh... with regards to

uh... mobile a i a system improving the mobile search and making search multi-modal search understands text very well they can understand images and they can understand voice to a certain degree but imagine all of those three together that's what open AI is trying to tell us that they are better at today but I think what Google needs to do this week is show that search has better multi-modal capabilities than anybody else. And that's why they continue to work with Apple next month. A factor I think tends to be

undervalued is how AI gets used by developers to build apps more quickly. If we look at this very profitable shift that Apple has done toward its own M-series chips, for example, on the the Mac a big part of the reason why they were able to do that is because they had developer tools that made it easy for developers to translate their app so how do you see that factor developer tools driven by AI playing in here in these dual developing developer conferences yeah absolutely I think with regards to the tools for the developer community, remember Google I.O. started as that. Now we are in the 16th year where it was initially

only a tech-only conference, and then certainly investors and people like you and me started to show up in hordes as AI started to become more front and center of the conversation there. And what Google has, has is two interesting assets. They have the cloud to host the apps, and they have the AI APIs to enable those apps using their Gemini model.

So I think making it as frictionless as possible for developers is something that Google has tried to do. And I feel if they take it a step further this week, that is going to be a game changer for developers to essentially be very locked into the entire Google ecosystem to build apps, host apps, and then grow those apps. How do you think Google Alphabet is positioned on costs? Should these AI applications catch on? Which is gonna need to ramp up faster, the cost to actually deploy them at an inequality way or their ability to monetize them on the other end?

I think costs probably ramp in the near term. Google has already indicated that CapEx this year is going up almost 50%. They're gonna be spending up almost $50 billion in CapEx this year is going up almost 50%. They're going to be spending up almost $50 billion in CapEx, and almost vast majority of that is going towards building out their AI infrastructure. So probably the worry for investors is Google eats up some of the costs in the near term

as they help developers grow their AI apps with the hopes to monetize them in 25 and 26. But near term, probably that creates a cost headwind. But I think so far what Google has done is reduce their cost basis in other parts of the business with hopes to eat up the costs in the AI side. All right. We'll see if they get their money's worth

in monetizable usage. Rohit Kulkarni, thank you. Well, Wall Street is bracing for another key reading on inflation tomorrow. Up next, what to expect from the latest PPI report. That's a producer price index and the other potential market moving events on the calendar as well. And don't forget, you can catch us on the go by following the Closing Bell Overtime podcast on your favorite podcast app. We'll be right back. Welcome back to Overtime. Let's get you set for tomorrow's trade. Home Depot, the worst performing stock in the Dow today. The retailer reporting Q1 numbers before the bell tomorrow. Analysts are cautious as the housing market slows and faces difficult comps from the pandemic.

In the meantime, the Biden administration reportedly set to slap fresh targeted tariffs on some Chinese sectors, including potentially electric vehicles. Treasury Secretary Janet Yellen saying at an event today it's possible the U.S. could see a significant response from China. Plus, another read on inflation. April's producer price index. Economists are expecting gains year over year. Really interesting trading day. The S&P about flat with the WCLD up one and a quarter. ARK Innovation Fund up almost three. We'll see what happens tomorrow. That'll do it for overtime. Fast Money starts now.