Closing Bell - Closing Bell Overtime: Calpers CEO Marcie Frost Runs America’s Largest Public Pension. Here Is Where She Is Allocating Funds. 7/24/23

Episode Date: July 24, 2023

Major averages closed higher – the Dow’s 11th straight positive session. Cantor Fitzgerald’s Eric Johnston makes his case for why he’s still bearish on equities. Earnings from NXP Semiconductor, F5 and Whirlpool. Susquehanna’s Christopher Rolland reacts to NXP numbers and what it means for autos and the consumer. Citi’s Phil Drury breaks down the IPO pipeline and how he is positioned in the tech sector. Calpers CEO Marcie Frost on investing more in PE and VC opportunities. Plus, Gabelli Funds’ Tony Bancroft on defense sector earnings and Wells Fargo’s Michael Turrin on this week’s mega-cap earnings. 

We start now. The Dow hitting a fresh 52-week high in trading today. Major averages all in the green. That is the scorecard on Wall Street. But the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. We just mentioned it. The Dow closing higher for an 11 straight day. It's the longest winning streak in more than six years. And investors now turning their attention toward earnings from NXP Semiconductors, F5, Whirlpool, and Cleveland Cliffs. We're going to break down all the numbers as soon as they hit the wires. And later, we will discuss the massive week of tech earnings set to hit Wall Street when we're joined by Citi Global Head of Technology and Communications, Banking, Phil Drury. And the CEO of pension fund giant CalPERS on where she is finding big opportunities outside of the stock market. But let's get right to it and the markets. Major averages closing higher today. The S&P 500 positive in five of the past six sessions today, led by energy and financial sectors. Our next guest, though, remains bearish on equities. Joining us now is Eric Johnston, Cantor Fitzgerald, head of equity derivatives and cross asset. Great to have you on. Why are you still bearish here?

Thanks for having me. So, you know, clearly the market has a significant amount of momentum and the fund flows have been very strong. You've seen, you know, $70 billion go into mutual funds from retail. Hedge funds have been increasing their exposure. And you really have seen it from all parts of the market, chasing momentum, buy and call options, et cetera. But we think the fundamental backdrop is still quite negative. Stocks are not bound by any sort of fundamentals. And they can deviate from time to time on the downside or the upside. But ultimately, we think the fundamentals play out. Right now, the market's trading, for example, at 20 times earnings. And the earnings

yield is actually less than the money market yield. The last time we saw that happen was in 1999 and in 2001. And a multiple of 20 times, I think six months ago, no one would have thought was the appropriate multiple. Now that we're here, price is dictating the narrative to say, hey, 20 times is OK. And then we think that the economic risk is one sided and the earnings risk is is one sided, meaning that if everything remains OK, then what you see right now, which is sort of subdued, but steady growth would remain. But we think the risks are not for explosive growth to the upside, but actually the opposite. The risk is really the downside for economic growth. So what would you be looking for in terms of something that would trigger that risk to the downside right now? Because so far, most of the data has been Goldilocks, right? It's been at least the economic data. Case in point, even the flash PMIs today,

they've been signaling what the market with this narrative wants to see right now. It's a great question. You look at the markets now and it's been complete, you know, it's a Teflon market right now where nothing has been able to damage it in terms of what we think could could damage it would be one of them is earnings. So earnings have been a beneficiary of inflation. It's been very clear for the last two years and it's actually been very clear for the last 10, 20 years where sales are moving with inflation. Equities are not aities are not priced in real

terms. They're priced in nominal terms. So they have benefited from inflation. As inflation comes down, that is going to be a headwind for earnings growth. And in terms of the economy, if you look at some of the potential catalysts for the economy ahead, because I think ultimately it's a weak economy that's going to bring down the market. It's not going to be the Fed. It's not going to be policy. It's ultimately going to be a weak economy. And we have the student loan moratorium that ends in two months. We have the excess savings, which are still high, but go down by the day. And a bunch of other factors like that, that I think are going to hit the economy. So, Eric, I think the question is how.

And I like this. We had Tom Leon last week who's like the anti-you, right? So people can hear the arguments and figure out how to make their own investment decisions. But for people who have been bearish like you and on the wrong side of this market, I think there are twin dangers, freezing in place and kind of assuming, okay, it's gone higher, but now my thesis is going to be right. And the other danger of trying to chase and take on additional risk to catch up to where you might have been if you had called it correctly. So what do you do now? Have you tweaked anything based on what you've seen in this market and how it's reacted or not to your

previous assumptions to have a different sort of approach starting now? So I think the question you have to ask yourself for anyone is, does it make sense to pay 20 times earnings for stock prices? So if you look back historically, has that been a good strategy to do that? My second question would be, is it a good strategy to buy the market when the unemployment rate is at 3.6 percent, meaning full employment? You know, is it a good strategy to buy stock stocks when earnings estimates really have very little upside and potentially have downside? OK, but but but you've been wrong about this year so far. So I wonder, are there areas where you see new opportunity that, say, didn't exist several months ago, beginning of 2023, where

you're saying, OK, like maybe equities in general don't make sense, but this pocket over here does or this fixed income strategy has emerged that, you know, has a lot of potential that we might not have seen seven, eight months ago? Sure. So I think seven or eight months ago, no one was talking about AI. That's clearly something that has been obviously very well talked about and we think is going to have tremendous impact on the economy over the long term. How you make money in that in the short term is a much more challenging feat. But when we look in the market right now, we like health care. Health care has been a pretty material underperformer this year, has certainly been left behind. And when you look

at the defensive sectors that are out there, we think others have challenges. Consumer staples, we think have challenges. We think real estate has some challenges. But health care is an area where the secular trends are behind them, meaning our tailwind for them. And valuation levels within health care actually look very attractive relative to the overall S&P 500. So that's a place that we would certainly like. Eric, hold on just a moment. F5 earnings are out. And our Steve Kovac has those numbers. Steve? Hey there, John. Yeah, and it's a beat on the top. Sorry, a beat on the bottom line here. EPS coming in at $4.21 adjusted. Street was looking

for $3.76 adjusted. And just a slight miss on the revenue side of things, Sean, $4.79 billion in revenue there. Street was looking for $4.82 billion. We're still going through the report, and I will let you know what we—oh, I'm so sorry. Hold on. I read the wrong report here. I'm sorry. EPS is $3.21. Let me correct that.

I'm sorry. It is a beat on the top and bottom line. EPS is $3.21 versus the $2.86 adjusted. And let me correct myself again on the revenues, which is a beat. $703 million versus the $699.1 million adjusted, John. All right. Got it. And I know you'll keep looking through that.

And we can get back now to Eric Johnson. All right. Eric, you mentioned $19.99 in terms of some of the metrics you're looking at. Does this feel like a market going back to the tech bubble and bust? So I don't think we're anywhere near where the top of that bubble was. But I think we're at prices where if you are bullish and think that stock prices should go higher from here, then you're betting on another bubble is the way that I would the way that I would phrase it. Right. Right now, with the S&P at forty five fifty and money market yields at five percent. Right. Your break even one year from now is somewhere in the, you know, call it forty nine hundred area on a non-risk adjusted basis. And so you have to believe that we are going to go into a bubble

in order to get the risk adjusted returns in equities. And I think betting on another bubble, I don't think is the way to go. If you look at some of the bold estimates out there, whether it be 250 for earnings next year and then 270 the following year, even if that were to happen at current multiples, you're trading at multiples that we haven't seen other than situations like 1999 or the COVID bubble when interest rates were zero and the fiscal and monetary stimulus was massive. So that's really what you, that's sort of the concern about owning equities, you know, at these prices. And with the inflation kind of hanging and looming out there as something that could remain sticky, I think a bubble is going to be hard to,

unlikely to happen. Got it. What happens if earnings come in better than expected? I know there's this expectation that we're going to see a contraction for this season and that perhaps that's the trough, at least based on what Wall Street consensus is right now. We just got F5. I realize we are early in the week. All the big names come out starting tomorrow. But what happens if everybody's been too conservative in their estimates? So, yeah, it's a huge week. And I do think that estimates are going to beat this quarter. Right now, the estimates are for negative year-over-year growth. I think they likely come in somewhere around unchanged year-over-year with winners and losers that are out there. But I think broadly, if, you know, clearly, I think the bull case is that estimates do ultimately beat consensus. So the estimate

for next year is for sales growth of 5% and earnings growth of 12%. This year, sales growth was 4%. So you're betting on sales growth accelerating while inflation is falling. How much, Eric, of a factor is the Fed still in the market? A lot of chatter that this next hike that we're expecting this week is going to be the last one. Some people saying that. But, you know, our Steve Leisman, he's going to join us later today, can sketch out some scenarios where that might not be the case. Do you view one scenario or the other as being more likely? And is there market impact there?

Or does it eventually just get priced in like everything else? Yeah, I think that there, you know, I think there, I agree with the rest of the market that they're in the ninth inning of the hike process. Right now, the market feels fairly confident that Wednesday is the last hike and that they'll be done after that. I would just say that I think if asset prices are where they are now, I think there is risk of further hikes down the road. You look just in the past week, we've seen oil, WTI getting close to 80. We're seeing wheat prices go up, corn prices go up, inflation break even is moving higher. So I do think that inflation is going to loom around, but I don't think that the Fed is going to be anywhere near the factor that it has been the last couple of years. I think kind of broadly

speaking, they're at approximately where they're going to get to. And but they probably keep rates here for a for a fairly long time, as long as the economy is is holding up. So but I think we're really much more going to move to what is the economic growth outlook? What is the earnings outlook as opposed to what's the Fed going to be doing. Okay. Eric Johnson, Cantor Fitzgerald, head of equity derivatives and cross asset. Thanks for being with us. Thanks for having me. NXP semiconductors earnings are out. Christina Parts Nevels has the numbers. Christina. John, we're seeing a beat for earnings per share of $3.43. The street was anticipating $3.29 adjusted for Q2. NXP also posting revenue of $3.3 billion. That's also a slight beat. The street was expecting $3.2 billion. For its revenue guidance for the following quarter,

the quarter that we're in right now, Q3 revenue guidance, a range of $3.3 to $3.5 billion. The street was anticipating $3.3. So definitely a little bit higher end of the range given there. And then if we're just going to break it down for Q2 revenue, because there were some concerns about the auto sector, automotive, industrials, mobile, communications, all of those numbers came in higher than what we're seeing from the estimates on FactSet right now. So the stock is up ever so slightly, just about 1% now, let's just say. But so far, some strong numbers. Okay. Christina Partzenobles, thank you. Joining us now on the chips, Christopher Rowland, senior equity analyst at Susquehanna. Christopher, looks like the midpoint in revenue for the guide is a bit higher. The stock, a little higher after hours. But there's been some concerns that manufacturing

in the auto market, particularly in the segment that NXP focuses on serving, might be slowing down and that that could hit them in the future. Any sign of that or any concern of that? Or are you still interested in what the stock can do from here? Yeah, in this report, we're not seeing those kind of signs of a slowdown. In some of our other checks into the back half of the year, we could indeed see some auto slowdown globally. For a company like NXP, though, they've been trying to catch up on backlog, this huge backlog of orders that they've had given their limited supply. Now, for about two years, they've been trying to catch up to this backlog. We don't think it's until mid next year that they're fully going to do that, particularly for automotive.

So talk to me about NXP versus Qualcomm. Both of them, players in this auto space, Qualcomm tried to buy NXP versus Qualcomm. Both of them players in this auto space, Qualcomm tried to buy NXP some years back. Is one of them valued more attractively against that auto opportunity? I know with Qualcomm, you've got the smartphone overhang as well, but it's one of those growth areas that they try to highlight as being a positive for them. Yeah, for NXP, automotive is more than 50% of the total company's top line revenue. And for Qualcomm, this is significantly less. So this really is, NXP is an auto story overall. As auto goes, NXP goes. And Qualcomm is a handset story, and handset is not doing so well right now.

I would say it's a tale of two cities between auto and handsets right now. Yeah, it sort of speaks to, I mean, the resilience of auto speaks to the normalizing supply chain and the fact that you're starting to see more of these vehicles get made and reach consumers that have been looking to buy them. You know, it says here in the release for NXP, it says that navigating through the cyclical downturn in our consumer-exposed businesses, at the same time, continued strength in automotive, core industrial communications, infrastructure businesses, consumer-exposed businesses. What's the read-through there, not only for NXP, but other peers in that area and what we're going to hear through this earnings season? Yeah, so they still do have meaningful iPhone exposure. So there could be a hint to something there. They also have handset exposure more broadly. They may be talking

about the more broad handset market. Beyond those two markets, I would say consumer is somewhat limited for them. They did call out comms as an area of strength. That is surprising to us because all our checks for comms and 5G infra have been very, very weak and they play there. So that was a surprise upside for us. Okay. Christopher, thanks for joining us. Shares are up more than 1% right now. Thank you. Whirlpool earnings are out. Steve Kovac has those numbers too. Double duty, Steve. Double duty, yeah, Morgan. So shares up slightly despite some mixed results here. EPS coming in at a beat, Morgan, $4.21 adjusted.

Street looking for $3.76. Revenues, just a little bit of a miss here, $4.79 billion versus the $4.82 billion Street was looking for. And some CEO commentary here saying in the release, quote, we are well positioned to benefit from housing driven demand recovery, noting they have a lot of deals with housing makers there. And then also reaffirming guidance for the full year, Morgan, including sales for the full year of up to nineteen point four billion dollars, Morgan. All right. Steve Kovach, thank you. Shares are up fractionally right now. Housing driven demand recovery. We've been having this conversation for a while now, and it really, I mean, you can debate whether the bottom is in for housing, but the idea that there's stabilization there as homebuilders move in to create more inventory and take a bigger piece of the market more broadly right now, Whirlpool seems to be benefiting.

Somewhat, but it's still a revenue miss, so one wonders. All right, up next, Citi's Global Head of Technology and Communications Banking on the outlook for tech valuations and deal-making. Overtime is back in two. It's a big week for tech. Major names like Meta, Microsoft, and Alphabet reporting earnings throughout the week. Joining us now on set is Phil Drury. He is the global head of tech and communications banking at Citi.

Phil, are the private deals, are deals kind of gearing up again as the market has heated up again? I started to hear some companies saying, OK, I see opportunity in AI, can't sit on my hands here. We'll grow into the valuation that we have to pay. Thanks, John. And Morgan, good to see you. There's certainly been a big impasse, right? It's been about 18 months. You look at M&A volumes year to date in tech, down 60 percent, so down more than the broader M&A market. That's been a confluence of reasons why, but one of them is a seller impasse. Just the rapid deterioration in public valuations, given the sharp rise in rates and the inflationary concerns, that impasse is definitely starting to

thaw, obviously helped by the tech stock rally that we've seen year to date. And also, don't forget the financing markets now are starting to with sites on peak inflation and peak rates. And we forecast a 10 year below where we are actually today. As that thaws, we should start to see more deal activity, both M&A and also IPOs. What's that conversation like behind the scenes? For example, IBM just did this deal, announced this deal, was it last week, week before? What's getting the companies and the lenders sort of off the dime to do those deals? I think just a greater sense of positivity on overall outlook. So consensus views are now softer landing in terms of the broader economy, likely to be the first quarter. We obviously don't have an immediate solution to what's happening in Ukraine and Russia. That can remain as an overhang.

I think some thawing of tension, perhaps you could say, between the U.S. and China. And we may even see some of this large cap, some of these large cap tech deals. We may well talk about some of the guidelines with the FTC that have come out recently. But we might see some deals get over the line. And that should give some more confidence to deal activity as well. So you expect that you could actually see some deals get over the line from a regulatory standpoint? Because I feel like I've had a number of conversations with bankers and the like where it seems like a lot of cold water has been thrown and splashed across sectors, across industries where so much M&A is concerned. Yeah, no one's really wanting to call it. And I think we've got

utmost respect for the regulatory bodies. But at the heart of M&A, the heart of what drives that corporate ambition, it's to improve performance and to fill gaps, right, in terms of the operating nature of the business. So a lot of respect for what the regulatory bodies are doing. Guidelines and clarity, I think, is very important. But there will undoubtedly be some confidence if we can get a couple of deals over the line. Also, if you just think about M&A and you look at financial sponsors and the amount of dry powder that they have at the moment, I think there's a potential

to see more activity in software. As an example, we think we've called peak consumption levels. And I think some of the sellers, Citi, we advised just last week on the Forcepoint deal in cybersecurity, representing Francisco Partners. I think we'll start to see a little bit more of activity such as that. Interesting. So it seems like there's almost three different buckets. There's M&A, there's IPO going public, and then there's raising capital in the private markets. I realize every situation, every company is different, but for some of these private companies and these startups that maybe have been kind of stuck in position for a while now, what are the most common conversations and what are people willing to do? Well, when you want to look at appetite in the public markets, first thing you do is look at follow-on equity offerings. We've priced a number of follow-on equity offerings recently at pretty normalized discounts the convertible bond market has has been pretty active of late companies selling stocks at

premiums with coupons inside of where they'll they'll raise in the straight bullet debt market so these are the types of signals that we show private companies who are potentially looking to go public to say, look, the market is much more investable than it was. Right. Look at the VIX at 14 right now. You look at 85 basis point standard daily deviation. Twelve months ago, that was a two and a half percent, 250 basis point standard deviation. So the market definitely feels more investable today. That should give the confidence to potential issuers to come to market. Look at Carver. Yeah, go ahead.

What's the role of the surprising relative strength in Europe? Andy Jassy was just telling us a few weeks ago, you know, more upside there than he expected, more stability, either in terms of deals or in terms of the overall health of the market and global demand that's giving confidence to that, where does Europe fit in? I'm not sure I would necessarily agree that Europe feels more investable right now than the U.S. I'm not saying like more than the U.S., but more than expected for 2023. Look, I think, you know, companies need to finance, right? And at the end of the day,

it's that need that can drive potential sellers to come to market. I don't think the last 18 months has been a buyer impasse. I think it's just been seller's choice as to whether they raise private capital or not. And a lot of those U.S. companies in particular are very well capitalized. So there's not the same need or urgencies to raise capital. It's very much, well, yeah, we'll raise capital in our time. Perhaps there's a little bit more pressure on some of these companies in Europe to potentially need to come to market. All right. Phil Drury, thanks for joining us. Thank you. It sounds like you need some green shoots. That's what it sounds like in terms of the deal making and capital raising environment right now. All right. Well, up next, the CEO of pension fund giant CalPERS

and why she thinks the private market may be generating more opportunities than the stock market right now. Stay with us. Welcome back. America's biggest public pension fund, CalPERS, seeing a 5.8% gain over the past 12 months, ending in June, according to its preliminary report, beating its benchmark. This comes as CalPERS grew its target allocation for private equity from 8% to 13%. Joining us now, CalPERS CEO Marcy Frost.

Marcy, great to have you on the show. I guess break down the fiscal year and how you were able to drum up a return that did meet or exceed your expectations? Yeah, thank you. We're slightly above our benchmark performance. Public equity did quite well, even with the factor weighted sleeve. We do have some drawdown risk protection still in the portfolio. And then a real success story for us was our private debt program, which was a new allocation of 5% of the portfolio going there.

Team did a wonderful job of allocating and getting that money to work for us. You know, on the opposite side of that, in a very diversified portfolio, we had private equity, you know, performing negative, fixed income performing at a flat level. Got it. I mean, the opportunities in the private markets and alternative investing, you know, the reports that perhaps you are looking to invest in the VC landscape a little more aggressively, for example, where are the opportunities and why do that, especially where venture capital specifically is concerned? Why do that now? Well, I think we, you know, we always take an opportunity to look

at the various asset classes and where we're putting, you know, the capital to work for our 2 million members. And private equity and venture sleeve in particular, you know, there was a period of time where CalPERS had some experience and, you know, certainly had some lessons learned during that time frame about 10 years ago. But, you know, we have a new team in place. We're seeing high quality deals come in. And we're really looking at whether there is an opportunity or the deal flow to put 10 percent of that 13 percent of private equity working in venture. And so the team is, you know, reviewing a number of deals that are coming in. We're excited about the prospect of reentering that space. The other area really for us is co-investments. There was a period of time where

we were very active through the co-investment lens or the co-investment space. And again, a bit of a stall period there where we have now over the last three years, reinitiated or relaunched, rebooted that program and seeing some really great success there as well. So we need to diversify. Yes. Yeah. I was wondering about private debt. It was way down there at the bottom in terms of the allocation in your portfolio. I think it's at 2.2 percent. And I wonder, is that a narrow window of opportunity that there was to really go more strongly into that in the rising rate environment when some companies were looking for cash, frankly? Or if you think despite

the risk, that's an area where you're going to continue to grow your allocation? We will continue to grow the allocation there. The policy target is to have 5% of the portfolio allocated to private credit or private debt, you know, however you want to phrase that, with 2.2 percent of that allocation being put into play. Now, right now, we're doing that through some very high-quality managers, and we do see opportunities to continue those allocations, continue that check writing. And in private equity, what's your approach there? Can you talk more about the degree to which you're going alongside established players

if there are certain industry areas that you're focused in on more than others? Well, we always look at where we have the experience and really the utility to put the capital to play. So we have very strong high conviction managers, high quality managers. As you know and your viewers know, there's quite a wide dispersion of private equity returns, and it's really based on the quality of the manager having the relationship with that manager over, you know, a number of fundraising cycles. So, the team has been working very hard

to make CalPERS another LP of choice and really to get that money into play. So, you know, I think what's been really helpful for CalPERS and like some of our counterparts, some of our peers, we're really in a very strong liquidity position. So, you know, we did this look back of the private equity program over the last 10 to 15 years,

and really what we found is that we were not a consistent provider of that capital over these vintages. And so, where we have some of our, you know, our benchmark groups, our peer groups who are really at their policy levels and don't have checks to write, we find ourselves in a very different situation. We have checks to write. We've got liquidity to write them. And we see deals coming in on the co-investment, which of course does not have the fee drag that we've experienced when we've had this non-diversified portfolio. For better or worse, right or wrong, ESG has become a politicized topic.

How are you thinking about it? How are you approaching it? So we really have not changed our approach to environmental, social, or governance issues. We've always looked at factors related to climate-related disclosures and the way that companies are managing for the future, whether that's energy transition or anything else related to climate. On the social side, it's really about human capital and the way that both public companies and private companies are really treating employees because through employee performance and productivity, that is what increases the value of these public companies, private companies

where we're invested. And then also having the appropriate governance structures over these companies to make sure that we've got independence on those boards we've got boards who are looking out for the long-term capital formation and not just those short-term returns so our position on esg has not changed we're trying to keep politics out of the portfolio it's not always easy but these are but these are really risk issues that we have to think about long-term. Yes. All right. CalPERS CEO, Marcy Fraud. CalPERS with a P, not the other one. Yes. Thank you. Right. Exactly. Time for a CNBC News Update with Contessa Brewer. Contessa. John, we have an update on the Gilgo Beach serial killer case. Investigators are scouring the

suspect's property for clues now. A yellow excavator was seen scooping dirt in Rex Howerman's backyard. Investigators are looking for evidence that it indicates any of the killings actually happened there. The wooden deck has been dismantled and replaced with a white tent, and one investigator was spotted using equipment to scan for buried objects. Being from a very rich family increases a student's chances of being accepted to the nation's most elite universities, which you probably didn't need research to tell you, but a new study out today by a group of Harvard economists quantifies it. Even accounting for standardized testing scores, children of one

percenters financially were 34 percent more likely to be admitted than the average applicant. And students from the top point one percent were more than twice as likely as to be accepted. And two types of Trader Joe's cookies are being recalled because they might contain rocks. The grocer warned the almond windmill and dark chocolate chunk and almond cookies could contain rocks the cookies have a sell-by date for this october so they actually could break your teeth john all right uh contessa there's a rocky road yeah oof fedex pilots grounding a potential new labor deal with the delivery company. Up next, find out where talks go from here, what they could mean for shareholders, and take a look at shares of F5 Network surging in overtime

after reporting earnings at the top of the hour. That conference call just getting started. We will bring you any headlines later in the hour. It's been a turbulent day for shares of FedEx after its pilots union rejected a tentative new labor agreement. Frank Holland has the details. Frank? Well, John, the FedEx pilots union rejecting a tentative contract deal as rival UPS is a week away from the end of its contract with the team's union. It's a possible strike that would have a potential $7 billion economic impact. Alright, back to FedEx now. The Pilots Union releasing a statement saying, our members have spoken and we will now regroup and prepare for the next steps.

In the coming weeks, the FedEx ALPA leadership, that's the union for the Pilots, will meet to establish a timeline for assessing pilot group priorities. So take a look at this. This is actually video of the FedEx Pilots picketing outside the New York Stock Exchange this spring when CEO Raj Subramanian was there to announce a reorganization of FedEx into one single operating company. Then in June, the two sides announced a tentative deal. But today, 53 percent of union members, they voted against it. The National Mediation Board is expected to get the company and the union back together for more talks. FedEx releasing a statement saying the tentative agreement voting results have no impact on our service as we continue delivering for our

customers around the world. FedEx will continue to bargain in good faith with our pilots. The company looking to assure customers there will not be a disruption in air delivery that generated nearly half of FedEx profits last quarter. Back over to you. All right. Frank, thank you. Morgan, I got to think that if you're UPS looking at this, you're thinking, you know, Teamsters, you're holding out. It's like, OK, this is labor's time. Well, it's labor's time in general. And by the way, not just in transportation, where you're also seeing American Airlines pilots reject the pay increase and an extra billion dollars going towards their contract

on the heels of the United deal that was just struck as well. But to your point, UPS and Teamsters going back to the negotiating table tomorrow. We've got UAW coming up, what, in September, I believe. Those negotiations have already started in the meantime. I mean, there's something here, and I'm sure it's going to be something the Fed is watching as they go into their two-day FOMC meeting as well. Yes, labor market seems to be loosening a little bit, but it's still incredibly tight. And you still see structural shortages for things like pilots. I'd say it would be a dramatic TV series about it, except there's a strike of the writers and actors. So there you go.

There you go. All right. Up next, the top portfolio manager on how to play the defense and aerospace industry ahead of earnings from Boeing, Raytheon, Northrop Grumman and many more. Stay with us. Welcome back to Overtime, a big week for aerospace and defense earnings. We'll hear from names like Boeing, RTX, which is formerly known as Raytheon, General Dynamics, and more. Here to give us his investor playbook, Gabelli Funds Portfolio Manager Tony Bancroft. Tony, welcome to the show and welcome to CNBC. Thanks for having me, Morgan. John, it's a pleasure to be here.

Okay, so we've got a number, we've got a whole bunch of names on tap. RTX kind of kicks it off tomorrow. Commercial aerospace versus defense. What do you like more? Why? What do we need to watch? You know, I like I like them both very much. It's they both have some very strong structural and secular tailwinds. You're you're seeing essentially, you know, production rates at at Boeing still not back at levels they were pre pandemic. So we've got a long tail. We've got a long runway there. And on the defense side, defense budgets expected to be up about 3 percent this year. And you're seeing tensions in China with Taiwan, and you're seeing the war in Ukraine and us trying to resupply

Ukraine and ourselves. And then all of NATO essentially getting a wake-up call from what happened last year and also increasing their defense budgets. Yeah, I mean, Lockheed Martin, 8 percent increase in sales last week. The fact that they upped aspects of their guidance as well. This counteroffensive in Ukraine does not seem to be going as planned, at least according to media reports. If you see this war continue to drag on, for better or worse, does that end up being positive for these backlogs and for demand for some of these defense companies? You know, who knows what's going to, how's the end game of all this is going to happen. I think either way, on February 24th last year when Russia invaded Ukraine, I think Europe and NATO said,

you know, we need to really get serious about this 2% GDP target. And you're seeing it. You're seeing all these orders, F-35s, missiles, you name it. NATO is coming to the table and starting to, and that's about a $50 billion

annual increase in the NATO budget. That's almost 8% annually of more spending if all the 31 NATO members were to spend at the 2% target. What about the China factor? China's been buying a lot of planes, but their economy is looking a lot shakier than people expected at this point. If they pull back even a point, what kind of an impact does that have on specific companies or the industry? So on the commercial side of the business, you know, China, there's two manufacturers

for all intents and purposes, Boeing and Airbus, and China's growing. You know, China wants to travel. I think that the data point they put out is about, there's about 300 million middle class coming up into the emerging economy, specifically China and India. And they they want to this the experiential So they're going to be buying those planes one way or the other, and I think we're going to see more and more orders as we go forward. All right. We'll see what we get from GE tomorrow, too, speaking of jet engines and

how all this plays out, both on the military side and the commercial side. Tony Bancroft, great to have you. Thanks for being with us. Thanks, Morgan. Thanks, John. Up next, we'll discuss whether Jay Powell and the Fed could be ready to hike rates for the last time this cycle or not. We'll be right back. Federal Reserve kicks off its latest meeting tomorrow investors are trying to gauge how many more interest rate hikes are on the horizon steve leisman joins us to explain why might be two steve yeah we got to do a little math john so just hold on here and trying to figure out how high to hike and where to hold the funds rate the federal reserve looks at the nominal rate that's the

one everybody follows but also the real funds rate that is after accounting for inflation. It's this measure that tells it how tight or loose it really is relative to the economy. And it's a measure that suggests the Fed has more work to do. One way to calculate the real rate, we take the one year ahead New York Fed inflation expectations. We subtract that from the current funds rate. That shows the current real rate is 1.3 percent. But the average Fed forecast suggests they want it higher. In fact, the average real funds rate forecast, you got the 5.6 nominal for this year, minus their 3.2 inflation forecast shows they look for a 2.4 real rate, more than a percentage point above the current rate.

It declines to 2.1 next year. Both are well above the forecast for the neutral or long-term rate of 0.5 percent. And here's a little history for you folks. A real rate above 2% is above the long-run rate of 1.48 since 1960, just above the average rate for an expansion during that time, but well above. I couldn't believe when I calculated this number. The minus 1.3% real rate since the great financial crisis. The good news, it's far below the 10 percent real rate of the vocal year. So as tough as it is now, the Fed has been far tougher in fighting inflation. The bad news is that's further to go. Sounds like when you're punishing a kid, it could be worse. It could be worse. So it also sounds like there's probably not a very strong likelihood that Powell doesn't keep September on the table then for another rate.

I actually think Powell is in this every other month mode. Yeah. He doesn't want to admit to being in every other month mode. But I think what he's doing is he's going to hike and he's going to wait. The likelihood, I think, is they come back and do it again in November. But remember, there's two pieces to this puzzle, the nominal rate and the inflation rate. If the Fed wants to be in a certain place, it can get there two different ways.

The inflation rate can fall, and that raises the real rate, or the funds rate can rise. Right now, what the Fed's own forecast shows is they get half of the 100 basis points they need from a decline in inflation, and then half or 50 basis points from a 50 basis point rise in their funds rate. So we're talking about all these labor actions happening, potential strikes, strikes that are happening. If wages go higher because of labor's relative strength, how does that play into when does that play into inflation concerns? So I think there's two pieces to that puzzle. Again, one piece is higher wages does create the possibility of the potential for more inflation.

But you have to wait to see whether or not it passes through. Because remember, between higher wages and higher prices are profits and margins. Whether or not those higher wages require them or if companies can pass them along is uncertain. What we want to see is more competition. We actually, I actually have this sort of reverse idea of the Fed. I think the more people you employ in the service sector, the more rates will come, the more inflation comes down. Because the only supply in the service sector is labor, right?

The problem is this. The problem is where are the workers going to come from? We have seen primate workers come back to the workforce. We need to see if we can get other folks there. All right. Siri's sorry. Did somebody just scream at us? Yeah, that was Siri. She's sorry. Siri's sorry? Yes. Why is Siri sorry? Steve Leisman, thank you. We know you'll be bringing us all of this content as the week goes on. Big week. It's big earnings day tomorrow as well. Alphabet, Visa, and Microsoft are on deck on overtime.

Up next, an analyst who recently raised his price target on Microsoft weighs in on the key numbers he's watching for. Welcome back. Tomorrow will be an action-packed hour of earnings when, over we break down results from Alphabet, Microsoft, Visa, Texas Instruments, and Snap. And right now we want to zero in on Microsoft, what to expect language and the nearness of that, or is it something that they're actually going to deliver in the report itself? Azure stabilization and AI contribution are the primary two factors by a long shot. Azure stabilization is something they talked a little bit about last quarter, signs that

that is continuing to surface and that growth rate is stabilizing. AI contribution expected as a 1% tail end if that continues to move up. Those are the primary factors investors are focused on. Which matters more? In this market, it feels like AI is the bigger point of the puzzle. I mean, they are somewhat related to one another. I think AI is the big point of focus in the market right now, and Microsoft stands as the most likely beneficiary we see within software. Anything

that supports that thesis supports the long-term case for upside in numbers here, which I think is what investors are ultimately focused on. Stock's up almost 44% year-to-date. Does it have further to run? We think it does. Our price target moves up to 400. We like it into earnings. We think there's room for upside in numbers throughout the course of the year, particularly as some of the new product efforts, the Microsoft 365 co-pilot product efforts stand to roll through the model. And we think Microsoft is well positioned as both a consolidator of IT spend and a beneficiary of the move back towards cloud and back towards AI.

All right, Michael Turin, thanks for joining us. Shares are up fractionally right now. Appreciate the time. Great. Yeah, Morgan, Microsoft's report is complicated. They got PCs in there, which could stand to recover a bit based on inventory. They got LinkedIn and Office as well as Azure.

Yeah, plus there's that Activision Blizzard situation. That's a future thing, right? I know it's a future thing. It's like a show up in the numbers. Yeah. How much investors are going to focus on those possibilities versus what this report is telling them right now. Yeah. All right. We got a very busy week on tap. In the meantime, major averages finishing today higher. The new 52-week high for the Dow, specifically the transports, was the underperformer. Yeah. That's going to do it for us here at

Overtime. Fast money starts now.