Closing Bell - Closing Bell Overtime: Can the bear bounce continue? 6/6/22

Episode Date: June 6, 2022

Morgan Stanley’s Mike Wilson thinks this bear bounce still has some steam. But how long will it last? He makes his case. Pimco’s Erin Browne is getting bullish on tech -- she breaks down that trade. And, Mad Money Host Jim Cramer weighs in on what he calls “unsustainable rallies.”

Welcome, everybody, to Overtime. I'm Scott Wapner. You just heard the bells. We are just getting started. In just a few minutes, I will be joined by Halftime's Josh Brown for his latest read on the markets. We'll also speak to Star Pimco Portfolio Manager Erin Brown, who makes a bold new call on stocks, both for what she's buying and what she's shorting. Don't want to miss that. We do begin, though, with our talk of the tape, The World According to Mike Wilson, who just today said this bear bounce can continue, if only for a little while longer. Let's welcome him in.

Morgan Stanley, chief U.S. equity strategist and chief investment officer. Welcome back. It's good to see you again. Thanks, Scott. Good to be with you. All right. So you did publish this note today. You said the bear market rally that began a few weeks ago can continue for a few more

weeks until, quote, the Fed makes it crystal clear they remain hawkish and earnings revisions fall well into negative territory. That combination should ultimately take the S&P 500 towards 3400 by mid to late August. That sounds to me, Mike, like somebody who didn't expect stocks to be where they are today. Well, I mean, we talked about 3800 being the first stop we got there. We've had a nice rally off of that. I think that's kind of playing to the playbook pretty closely. I think we're maybe today we've pivoted a little bit more so as I would have thought 4200 would have been it.

Looks like it may be want to push a little bit further, 43, 4400. But I want to make it crystal clear that, you know, the fire and ice narrative is well established at this point. And that's why we still think the Fed will be hawkish, as they've alluded to here recently, trying to walk back some of those more dovish comments. And we're going to see second quarter earnings probably follow the tape of what we saw in Q1, which is margin pressure and just having to take down the back half numbers a bit. So it's sort of a drip drip with the tightening of the vice from the Fed with a disappointing earnings profile. And that's usually not a great combination for stocks. So I think that's right in line with how we've been thinking. Why is fire and ice well established?

And I mean, earnings aren't disappointing really at all outside of a few companies. And we haven't had nearly the number of revisions than I think you would admit you were expecting at this point. Well, that's, I mean, I think the revision breath is now decidedly negative. So, I mean, you can see that chart you just put up. We've made a huge 180 from where we were. And look, the revision fact, that's what we talked about today in today's note, which is that these revision factors always take a little bit longer than you would think, because, you know, that different companies get the, you know, kind of get the message later, and it usually takes three or four quarters. So we think it began in Q1. We think there's no doubt that margins disappointed to where people were at the beginning of the year. That's step one. Step

two will be top line. And then we'll have to get the second half reset from where I think expectations are, because they're still pricing in a continuation of the over-earning that's been going on. So I think it's on schedule. I don't think it's slower. I think it's well-established that we've got more tightening than people were expecting at the beginning of the year. And we've got a slower economy and slower earnings growth than people were expecting at the beginning of the year. And what we're saying today is that that combination is just not finished yet. How do you know you're not just too negative?

I mean, I just go like to Lloyd Blankfein and his tweet, which I want you to react to, because, you know, you're certainly among, if not the most dour person on where earnings are going to go and then ultimately where stocks go. Lloyd says, quote, dial back a bit the negativity on the economic outlook. If I'm managing a big company, of course, I'm preparing for the worst. But the economy is starting from a strong place with more jobs than takers and is adjusting to higher rates. Riskier times, but may yet land softly. It sounds to me like you wholly reject that. Well, I mean, Scott, I'm in the business of doing stock analysis and market analysis.

Right. And based on your economic analysis, though. That's right. And so I think it's set up pretty well for what we're predicting at this point. We've kept our numbers. We were at where Street was the beginning of the year. We said multiples would come down. That's happened now. We've come down four to five turns.

That part of it's done. Now we have to see the earnings come down. So I just think this is what makes a market. You know, Lloyd can be bullish on the setup and I can be bearish on the setup. That's what makes a market. And we're going to see who ends up being right. But your whole point, though, is that multiple so multiples have come down enough and now earnings are going to meet that the rubber is going to hit the road there. And that's what drives things lower. So your whole story now is riding on a deterioration of earnings.

That's exactly right. So the fire part of the narrative, the inflation is now fully priced, I think, in terms of where expectations are, what the Fed's going to do. They're going to follow through. So there's the hope that they're not going to follow through is misplaced. However, there's a lot of expectations now in their reaction to that. And that's appropriate. The Fed's doing their job. And that's now priced into the multiples. What's not priced into stocks now is the earnings disappointment, which we are starting to see more of. Just last week, we saw a couple of the bellwethers having to take numbers down either via the analyst community or via directly. So there's just more of that to come. It's always slow, Scott. I mean,

we've done this four or five cycles now. We've seen it before. It's a drip, drip, like I said, unless there's an event. If there's a recession or some exhaustionist's shock that, you know, forces companies to be more aggressive, then it will happen all at once, like in March of 2020, and it'll overshoot in the other way. But we're not expecting that. This is going to be a very gradual sort of disappointing earnings picture, probably two or three more quarters. Yeah, but see, you just you just alluded to it was like a veiled reference to Microsoft and Apple of last week, I think. And Microsoft, you know, revised its EPS by three pennies based entirely on FX, on on exchange and not based on fundamentals. And in terms of Apple, that's your own analyst who is, you know, look, Katie Huberty is a great analyst and people follow her very closely, but that wasn't Apple taking down its numbers or guiding lower. That was your analyst placing a bet

or a guess on what a slowdown in the app Store ultimately means to growth in the services business so earnings could be at risk as a result. That's far from Apple guiding down and Microsoft guiding down on fundamentals, no? Well, look, you can spin it any way you want to. The numbers are coming down for both. And the reality is— But that's a fact, though, isn't it? Fair—just to be fair here, I'm not spinning it at all.

Those are the facts, are they not? Yeah, FX matters. You're assuming that you're saying you're telling me that foreign exchange is not a fundamental driver of earnings growth. It is right. Foreign exchange absolutely either helps or hurts multinational earnings profile. So right now the you know, the dollar is up about 10% on a year-over-year basis, and that's going to amount to about a 5% headwind to S&P 500 earnings. You heard about that today. So I think there's just going to be more of that, Scott, right? So the thing that this is the end of the earnings revision cycle, I think, is misplaced. And we could be wrong, but that's what our analysis is telling us. We've been very forthright in that. We've been pretty deliberate

in that message all year. We think it is coming in that direction now, and we'll see how it plays out. But I think to sit here and say that, you know, the earnings revisions are over at this point, I think would be naive. I didn't in any way suggest that they are. I just wanted to make sure we're on the same page in terms of who did what and potentially why. And the reason Microsoft did that was not because of the deteriorating fundamental environment. It was because of FX. Now, I'm not saying that's not a material change to what the outlook should be, but it's far different from saying we are seeing a fall off in demand. There's an enterprise spend

slowdown. And that's why we are pulling in our earnings estimates. And that's, in fact, not what they did. And let me ask you this. Friday seems to be the Super Bowl for inflation watchers, right? We get the CPI. The risk seems to me at this point, at least for stocks, to be to the upside. I mean, what happens if the CPI comes in better than expected? What are you going to make of that if that is the case? Well, no, man, I think, look, that's part of our reason we think stocks can kind of hold up in here, because, once again, that gets back to the fire argument. And I just said a minute ago, I think the inflation has peaked. So I think that will fuel the fire in the other way, meaning it will make people feel better that inflation has peaked

and that can keep stocks buoyed here in the short term. But once again, what we're more focused on now, Scott, for stocks is the growth profile. And that will come down to earnings, but for this quarter and the second and third quarter and probably the fourth quarter. And so inflation to me is kind of looking in the rearview mirror. It's historical. I don't think inflation is going to accelerate from here. I mean, they're very high numbers to begin with. But, you know, going from eight and a half to, say, seven and a half is hardly a win. That's not a good enough win for the Fed to stop their tightening, you know, a policy that they're going to they're going to go through the rest of this year. So we know that they're doing 50 in June. We know they're doing 50 in July. Are you modeling your forecast based on your assumption that they're doing 25 or 50 in September? How does

that factor into how you're thinking about it? Yes, we're modeling our forecast based on our rates team's forecast for 10-year Treasury yields, which is right around here, quite frankly. It's about 3%. They're not that much more bearish than where we are today over the next six months. But at 3%, the equity risk premium today is 270. And this is another point we've been making for quite a while, Scott. As you know, the rates move, we think, is largely over in terms of its impact on stock valuations. The part now that has to adjust is equity risk premium, which should be around 350, given where kind of other metrics are that we model. And that is the growth component, right?

Equity risk premium is directly related to growth projections. And so we think equity risk premiums will go up towards 350 or higher, and that's when the multiple comes down ahead of the revisions. Or revisions just come down and then multiples can stay here. Any way you slice it, though, our risk, the way we see it, is that it's on the growth side now, not on the rates or inflation

side. Well, you keep making the argument that and you keep saying it, I think the way you put it in the past, the numbers are wrong or the number's not right. Is that referring to the earnings number? Because I felt like before it might have been the multiple. Now that the multiples come in, you're looking elsewhere to meet your forecast. That's the right question, Scott. So remember, the multiple usually moves ahead of the earnings. So what we're saying is that 16, 16 and a half times, which is where we traded to at 3,800, that had fully reflected what we think is where the Fed's going to be, right, in doing their hiking campaign for this inflation fight. Okay, so that's over. But now the multiples can

go lower than 16, 16 and a half in anticipation of, you know, earnings coming down. And that would be 14, 14 and a half times kind of the current earnings estimates that haven't been cut yet. And the answer likely lies somewhere in between, meaning the multiple will come down a bit and earnings will come down a bit and they'll settle somewhere in between. Either way, it ends up being 34, 3500 sometime. You know, it's hard to predict the exact timing is sometime between now and probably the beginning of the third quarter earnings reporting season. But we go back up to 39. Is that what you think?

Ultimately, we should rally back towards 39. Remember, that's a 12-month target by May of next year. So we don't want to pin ourselves down and think that we're good enough to call the exact target at the end of the year. But yes, we think once we get to 34, then that's over. Then the bear market can be over and we can look forward. But, you know, 3,900 where we got to 3,800 a month ago, there was really no upside at that point. So it's hard for us to get bullish. We're more neutral at that point.

To get really bullish on the index, we're saying 34, 3,500 is a level because that gives you 10% plus upside. Now, within all that, Scott, there's always stock opportunities, right? I mean, we obviously, you know, have to pick stocks and sectors as well. And we've had good success with that this year with being defensively oriented. Energy has been far and away the best performer. And that's where the actions could potentially change. We could see people rotate back towards industrials or technology companies at some point because they get cheap enough. Or we could see them go back into even consumer discretionary at some point. We'll see about that. We're not ready

to make that call. That's what we're focused on. We're very focused on trying to be in the right places within the stock market at this point, given the damage that's already happened. Done a good job doing that so far. Let's expand the conversation to let's bring in Ritholtz Wealth Management CEO and co-founder Josh Brown. He, of course, also a member of the Halftime Investment Committee. Josh, you heard Mike Wilson state his case. Earnings are going to are going to be the thing that brings the house down. So I guess I would, Mike, I'd like to ask about the composition of the S&P 500, because it strikes me that a lot of the biggest casualties of the current bear market really are companies whose earnings are not really going to be making any kind of contribution to the S&P.

Like if you think about pull the fangs out, a lot of the biggest tragedies that we've seen in this crash, which makes it very different from 07, 09 or 2000 to 2002. A lot of the biggest sectors or individual stock stories that have crashed the most really weren't even profitable. Most of them were in the Russell 3000. They're not even in the S&P 500. So it's hard for me to really see earnings completely fall off a cliff. So I guess maybe you can get into a little bit about how much lower you think the E needs to go.

Are we talking about negative 10 percent year over year by Q4? Or like what do you think the severity of that earnings fall off looks like? Yeah, no, I think you make a good point, Josh. It's not we're not expecting a calamity across the board. We're not even expecting a recession. We're saying that earnings are about 10 percent too high. And as you know, the market looks forward, you know, forward 12 months. So forward 12-month estimates probably got to come down by about 10%. That's where kind of we are over the

next, you know, 18 months relative to where consensus is. If you put that 16.5 multiple back on it, that takes you down to that 34, 3500, right? That's 10% lower. And I think that's where we start to get interested because then the earnings are de-risked they can grow from there and the multiples can hold in but you know i think the one thing that people are really struggling with right now josh and and i think you've done a good job of kind of highlighting these people is that multiples okay are not going back to where they were right so go back six months ago and i would say almost everyone i listened to or heard was saying that we were going to hold that multiple 21 times, or at least north of 20.

That's over. So 16 times is where we think it is. Maybe it's 18 times. Maybe it's 17 times. But the idea that we're going back to 20, 21 times, I think if people are holding on for that, that's a mistake. So once again, it's a combination. Multiples are going to stay at these lower levels, and then earnings adjust 10 percent and we can move forward. That doesn't have to be a recession.

That doesn't have to be, you know, year over year down 10 percent. That just means the estimates today are 10 percent too high. This other idea that you put forth at the end of my initial, you know, questioning, I suppose, was that, you know, some of these stretched sectors such as energy could roll over. And I'd love to get Josh's view on that, because people continue to pick energy stocks. People continue to play the momentum there. And I want to know, Josh, if you think they're ultimately going to get hurt by a rollover in that winning sector. Well, I would have to be able to predict the price of crude oil and natural gas

in order to say definitively. And of course, I'm unable to do that. So is everyone else. But I would say we've seen a huge rally in oil and gas. But even still, those stocks have gone from about 1% of the S&P 500 to 5%. And I know a lot of the earnings growth we're counting on is coming from that relatively small slice of the market.

But market cap-wise, it ain't that much. So yes, energy stocks could roll back half the rally. I don't even think the overall market would feel it at an index level. And I think that speaks to how large tech, telecom communications have gotten, even with those stocks down as much as they are and energy up as much, probably still the latter group is not going to move the market overall. This plays into, Mike, the conversation about value versus growth. I want to read you a blurb today from Evercore ISI, where they talk about the transition to value from growth, which they, by the way, don't think in any way is a fly-by-night

deal, a trend change they expect to be measured in quarters or years. Is that what you expect, too? Because I feel like there are plenty of people who think that it's just a matter of time and maybe it's not that far down the road that you get a wholesale move back to growth. You know, I want to go back to something Josh was talking about earlier. I mean, the contribution to earnings growth this year from energy materials in particular has been outstanding. I mean, it's 50 percent of the growth is from energy, just that alone. And that's another question I think, you I think index level investors need to ask themselves. Should I be paying the same multiple if the growth is coming from deeply cyclical sectors like energy and materials? It may continue. We're actually bullish on energy as a house. We think energy prices are

going to stay higher. And I think that energy prices will stay higher up until the point we have the next recession. So that would argue for energy to be in your portfolio today and materials too, relative to their benchmarks. We have kind of an equal weight, but we have overweights within those subsectors and we're making a positive bet there. I think that with respect to value versus growth, I'm not as committed one way or the other. I think with the damage that's been done to the growth segment at this point, I think both can work. I think what we're not going to go back to is an era where it's all growth or it's all value like it was in sort of that 2002, 2009 period. And so we're going to continue to do what we do best. We're going to find opportunities in both segments and not get

so dogmatic that it has to be one or the other. Josh, you want to entertain that question too? I just think the big controversy is not whether or not inflation will fall. And the further we go month-wise, the easier the comps get. I think the real controversy now is whether or not we've already paid enough in blood for the environment that we're in. If the year were to end today, 2022 would rank as the seventh worst calendar year for the U.S. stock market in 100 years. So, like, have we not done enough penance? Even if you look at a 60-40 portfolio, we're down about 12.5% in a 60-40 mix of stocks, bonds. If the year were to end today,

that would be the sixth worst annual return in 100 years. You've got a stock market that's, the average stock is in a bear market since last February. So it's 16 months of punishment for most stocks. At an index level. We hit a record high on January 3rd to start the year and pretty much have had a collapse up until two weeks ago, like a free fall. So you say to yourself, if Mike's right and there's another 10 percent down coming for earnings revisions, you might want to just say, OK, that could be true. And also what could be true is the optimists don't care. They start buying ahead of or concurrent with those negative earnings changes because they know there's a trillion dollars worth of cash coming in the form of buybacks.

And we're going to start sniffing out the earnings recovery that we hope would take place in 2023. So if we're going to have a recession and a real bear market, it'll be a strange one where unemployment is at 3%. I don't think any of us have ever seen anything like it, even in the history books. So it's hard to get too negative, even if you think earnings are too high. And just to underscore it, Mike, as I let you go, you can have a final comment, too. For certain, you don't expect a recession. That's one of the payoffs of this whole thing that I heard you say. That's right. I mean, well, like I said, we could have that downside and then a quick recovery in the absence of a recession, like 3400 would be it. And that's not a bad outcome because, look, don't forget, you know, the Josh's point. I mean, we were up a hundred percent in two years off a high level to begin with. So some of the payback

is related directly to that, that, you know, what I would say was kind of an outrageous run up, right? So there's some of that going on too. But the bottom line for us is the risk of recession has gone up materially and we don't know the answer, right? We're not smart enough to know if it's going to be a recession or not. Until that risk comes down a lot more, it's going to be hard for the market to really take off. And that's all we're telling our clients now. There's no rush in here, particularly at 41, 4,200.

At 38, sure, we can start picking away there. Just understand that that's sort of fair value. And, you know, it's not going to run away from us. Yeah. All right. I appreciate it, as always. Mike, thank you so much. Mike Wilson from Morgan Stanley. Josh Brown, of course, thanks to you. I'll see both of you again soon.

Hey, check out Amazon finishing higher in its first trading day following that 20 for one stock split. And that leads us to today's Twitter question. We want to know what company should be the next to announce a split. We're not going to give you choices. We want to hear from you. What do you think? Head to at CNBC Overtime on Twitter. Let us know and we'll share some of the responses a little bit later in our show today. Up next, making the bull case for tech. PIMCO's Erin Brown is watching a key piece of data this week. Why she thinks it could provide some serious upside for that sector. We're back in just two minutes.

We're back in overtime. Investors have set their eyes on a key inflation indicator later this week. It's the CPI. My next guest says that report could be a bullish signal for tech stocks. Aaron Brown, PIMCO Managing Director, Portfolio Manager as well, joins us now. It's nice to see you again. Are you already buying big cap tech in anticipation of this? We have. We started buying equities a little bit across the board and gotten modestly overweight, you know, versus our benchmark. I think, you know, many of these growth oriented names that are considered more long duration assets have really suffered at the hands of higher inflation and higher yields. And I think now that we're starting to see, you know, at least a pathway for lower inflation, you know, on the horizon, at least for core, you know, headlines should stay up there. I do think that you're going to start to see some of these growth names stabilize and

start to see a little bit more bid back to large cap tech. Which ones have you already started buying, if you don't mind me asking? Well, I mean, we're looking at the higher growth-oriented, I mean, sorry, the higher sort of free cash flow generative companies. You know, some of the large cap FANG names I think look attractive here. Ones with idiosyncratic risk I would stay away from, but I do think that, you know, by and large, you know, you think about, you know, names that are sort of top of mind for large cap tech. And that's sort of what we're buying. OK. All right. I appreciate that.

Going into as much detail as you could. I totally understand. What about this idea? And I hope you heard our conversation with Mike Wilson a few moments ago. You're buying and you're increasing risk at a time where he says the story still can fall apart. And it's going to fall apart because earnings have yet to come down to a place where they really need to. Yeah, I think Josh was really right about his comments earlier. I mean, the market's already anticipated. I think the fact that generally analysts are behind the curve in terms of how they forecast earnings. And so the market's already anticipating something in the low single digits for earnings growth this year.

We've seen multiples compressed from about 21 and a half times to about 17.8 times today. It's pretty big multiple compressions year to date. You know, at the same time, we've seen many the average stock in the S&P 500 trade considerably lower. And so we've been in, I think, an earnings recession for the equity markets, at least in terms of how people are pricing and investors are pricing it for a little bit of time now. I think that everyone's already sort of expects that earnings estimates are going to come down. I don't think that's going to be a surprise to anyone. Quickly, before I let you go, some of your newest thoughts are to short the shippers and go long solar. Can you briefly tell me why on both of those trades? Sure. On the

shippers, you know, we've seen, broadly speaking, across the consumer durable space, pretty significant, you know, multiple compression and stocks, you know, fall. And we've seen the shippers really outperform. I think a lot of this is on optimism of a Chinese opening, particularly in the last couple of weeks. In our view, you're already starting to see shipping volumes start to decline. I think that the pricing power that they've had over the last two years is going to start to decline as well. And at the same time, you have potential disruption from the longshoremen contract, which is ongoing right now. And so I think that shippers right here, just based on the

outperformance, based on the fact that there's a lot priced into these names, stand poised to underperform. On the solar names, we've had pretty good news over the last couple of days, and particularly today from President Biden supporting more production for solar panels. One thing that's been really holding back solar production here in the U.S. has been these tariffs that have been longstanding. Now that we're seeing this lifted for the next two years, you're going to see a lot more production coming back onshore. The supply chain is going to ease. And, you know, particularly the more growth oriented semi names are sorry, the growth oriented solar names here in the U.S. I think are going to really start to do well. So despite the bounce that we saw today, I think that there's a lot more

in store for these names. All right. Good stuff, Erin. I appreciate your time as always. That's Erin Brown of PIMCO joining us there. Up next, altitude sickness, earnings estimates hitting new highs this year. Estimates are feeling the effects. Ed Yardeni joins us with what's at stake and his forecast for the rest of 2022. We're back in overtime after this. It's time for a CNBC News Update with Shepard Smith. Hi, Shep. Hi, Scott. From the news on CNBC, here's what's happening. Boris Johnson still has his job. The British prime minister just minutes ago survived a no-confidence vote by members of his own party in Parliament. Had he lost, it would have triggered a vote to choose a new prime minister in the UK. Sweeping gun reform

measures signed into law today by the New York governor, Kathy Hochul. Ten bills in all, including one that raises the age requirement to buy Hochul. Ten bills in all, including one that raises the age requirement to buy assault rifles. It was 18. It'll now be 21. Another law bans the purchase of body armor. Yet another expands red flag laws. And 82 million COVID vaccine doses were tossed out in the United States since December of 2020. That's according to news CDC data shared with NBC News. The overall amount of waste is in line with what the World Health Organization estimated for large vaccination campaigns. But health experts call the waste alarming at a time when fewer than half of fully vaccinated

Americans have a booster shot. Tonight, tracking the carnage of another weekend of mass shootings, plus the latest in the Elon Musk and Twitter saga, and why it may be the best time ever to find a summer job. On the news, right after Jim Cramer, 7 Eastern, CNBC. Scott, back to you. All right, good stuff, Shep. Thank you, Shepard Smith. Are markets suffering from altitude sickness? That's what my next guest is calling it. He's Ed Yardeni, president and chief investment strategist at Yardeni Research. Good to see you again. What are you referring to? Look, I think since the beginning of the year,

we've seen an altitude sickness when you look at the valuation multiple. The valuation multiple on a forward basis for the S&P 500 was 21 and5 at the start of the year. We got down to about 16.5 at the lows a few days ago, and now we're back up to 17.5. So I think to a large extent, clearly with the benefit of hindsight, the market was overvalued. A lot of that was in the mega cap eight, big cap names, technology related kind of names. I think we've seen a tremendous correction in that area. And now the question is whether the market can accept the kind of earnings expectations that analysts are delivering and whether those expectations will be correct. I think they will

be correct if there's no recession. But clearly, I can't dismiss the risk of a recession, which has been clearly increasing. I think most people have been conceding to that fact. But even if there is no recession, don't earnings still need to come down if you're going to have a slowdown? And they really have not come down. And I think that would be the Mike Wilson point of view, who I spoke with just a short time ago. I don't know if you had a chance to hear any of that, but he's not calling for a recession, but he still says earnings expectations are delusional at this point. Yeah, I don't think they're delusional because I think one of the reasons that they've been boosted is because of inflation. Revenues are automatic inflation hedge. Revenues of the S&P 500 go up along with inflation. And then the question is, what do earnings do? And

that, in turn, depends on the profit margin. And so far, the evidence, I think, has been pretty convincing that companies have done an amazing job of holding on to their profit margins. We've had a few exceptions with a company like Target and Walmart. But on balance, earnings in the first quarter, instead of being up 5%, have have come up come in at 10 percent. And clearly companies, the bulk of the majority of companies have actually held on to their profit margins. If they can continue to do that, which I think they might be able to do, then earnings will continue to grow along with the revenues and revenues will get a boost from inflation. Stocks are an inflation engine. This is going to be the biggest point of contention then because, I mean, heading into the next quarter. Because some would say, well, it's going to get real in Q2.

Q1, you know, again, looking backwards, right? You still had the ability to pass on prices to your customers. And at some point, you run out of room and you just reference Target, Walmart and some others. Those were arguably just the beginning, not the end. You don't agree with that? I don't agree with that. I think companies have done a remarkable job at increasing their profit margins during good times. I think during these bad times, they are continuing to do a very good job of it. Now, of course, maintaining profit margins isn't necessarily just a question of

whether you can pass your costs into prices. There's also productivity. And I'm a big believer that a lot of companies are increasing their productivity. I'll grant you that the first quarter productivity numbers were awful. But there's definitely been an upward trend in the growth cycle of productivity. And I think that's going to continue to come through loud and clear. And I think one of the ways that happens is with technology spending. I think technology spending is also going to be a big surprise going forward here. So I think that the earnings story is not as grim as others are making it out to be. I think, look, Scott, you have to admit,

the earnings story has held up remarkably well up to now. And for over a year, there's been lots of reasons why it shouldn't have done so. So I take that as some comfort in the notion that something has changed. I think companies are managing for the profit margin and they're doing an awfully good job of it. So the Yardeni equation to me sounds like this. A, earnings hold up, plus B, multiples have already come down a lot, equals C, the bottom's in. I think so. And the other thing that's important to consider is at the beginning of this month, the Fed started quantitative tightening part two. You know, we've had a previous episode of quantitative tightening. And what we learned from that is that there's no predicting how long it'll last. That one didn't last very long. But one thing I'm considering here

is that the Fed has to believe it has to be doing econometric work showing that quantitative tightening now is equivalent to some increase in the Fed funds rate. I wouldn't be surprised if when they ran their model, if they didn't come up with something like 50 to 100 basis points as the impact of quantitative tightening part two on the financial markets. If that's the case, then that would argue that they don't really have to increase the Fed funds rate much past two, two and a half percent. All this talk about three, three and a half percent may be misplaced, given that quantitative tightening also has a tightening impact. We're going to find out and we're going to get a good idea of where we really stand at the end of the week with CPI. And I appreciate it. And I'm sure we'll speak to you

in the days ahead, if not before that report. That's Ed Yardeni of Yardeni Research. Still ahead, unsustainable rallies. It is all part of what Mad Money's Jim Cramer is watching as we kick off this new trading week. He is going to join us from San Francisco coming up where he is spending the week with a tremendous lineup of guests. But first, we are tracking some big movers in overtime. You know who? Christina Partsenevelos is all over that as usual. What's on deck for us tonight? Well, we have another software maker out with a mixed view

about what the future for sales entail. And the Buy Now, Pay Later world has new competition, and it ain't a small player. I'll have those stock movers right after this very, very short break. Tracking all the action in overtime, Christina Partsenevalos is here with the biggest movers of the day. Christina. Well, we've got a big mover in the after hour. Big, I should say, almost 1%.

And that would be software maker Coupa, which posted a 3 cent beat. But its outlook came in a little bit mixed. The company guided its second quarter earnings above consensus. However, revenue for the second quarter fell short of what analysts were expecting. The stock, though, still up. Look at this. I wish I could say it. It was up almost 1% and now it's not.

Let's move on to shares of Affirm, also up about half a percent. Could be changing. Pairing back losses from this afternoon after Apple announced it would join the buy now, pay later world and essentially compete with Affirm. Hence the reason why we saw the stock drop and now it's coming back up half a percent. Apple pay later service allows Apple pay customers to make purchases in four equal payments over six weeks with no interest or fees. So competition in the space is ramping up. And then lastly, shares of Peloton. They were moving in the overtime, too, after the company announced a new CFO, Liz Coddington. After the current CFO stepping down

after four years, Coddington most recently was the VP of Finance for Amazon Web Services. And you can see shares of Peloton up half a percent. Scott. All right. Christina, thank you. Christina Partsenevelos. Up next, we are going beyond the big debate over a hard or soft landing. Our next guest sees a third potential outcome that isn't getting enough attention.

He'll explain in our two-minute drill. Overtime is back right after this. We're back in overtime. It's time for our two-minute drill. Joining us now is Richard Bernstein. He's CEO and CIO of Richard Bernstein Advisors. Good to see you again. So let's talk about this premise you have.

There's hard landing. There's soft landing. What's this third outcome? So, Scott, great to be with you the third outcome is that the fed just isn't isn't fighting hard enough here and that we have more inflation than people think for longer and we don't get a recession for quite a far out into the future yet um you know i think it's kind of a false dichotomy hard landing landing, soft landing. It could be the Fed's not really fighting. I mean, is that really true, though? I mean, are you throwing this out there just to throw it out there or is that what you actually believe? Oh, no, I really you know where we've said many times we think the Fed is hunting,

but it's like hunting an elephant with a pea shooter. So, you know, they've got their pith helmet on. They're out in the jungle. They've got their khakis. They look splendid. But and they're talking the game, but they're not really fighting. And so what that leads to is more inflation longer than people think. I mean, what if inflation is a already peaked and how are they not fighting? I'm not following you here. What's wrong with what they're doing, right? QT plus 50 plus 50. And you've had everybody from Brainerd to Mester come on our air in the last week, suggesting the pause in September is unlikely. Well, that's my point, is that they're jawboning like crazy, but they're still very fearful of tightening too quickly. So here's a way to think

about it. A very, you know, play along at home, the home version of Hollywood squares. The real Fed funds rate, the Fed funds rate minus inflation, averages 1% over the long term. Under Volcker, it was plus 10, right? That was the famous sledgehammer coming at the economy. Today, it's like minus 7%.

It's virtually the most negative real Fed funds rate in history. It's hard to argue that you're trying to slow the economy. It's hard to argue that you're really trying to fight inflation with a negative real Fed funds rate. So you could even cut inflation in half right now and you still have a negative real Fed funds rate. You could make the argument, too, and then we got to go. I mean, the jawboning seems to be working. Well, we'll see. I mean, you know, you have you have pro inflation sectors leading the market quarter to date. You know, energy is up. You'll find materials is outperforming. Industrials are outperforming. And you're finding the ones that the sectors that really depend on slow growth, no inflation, falling interest rates are the ones that are lagging.

So I think the market has sniffed this out a little bit. All right. We'll see. Rich Bernstein, I appreciate your time as always. Great. Thanks, Scott. Yep. You bet. Coming up, Mad Money host Jim Cramer joins us with his expert market take. We're back right after this. Let's share some of your responses to today's Twitter question on the back of Amazon's 20 for one stock split. We want to know what other companies should announce a split. There you see it. Chipotle, without a doubt.

OK, that's a good one. I think a lot of people may be thinking that Tesla booking holdings, Chipotle, Lockheed Martin, particularly with a new era of great power competition. The Dow should have a major defense contractor in its index and its high current prices make admission unlikely. Appreciate all of you responding after the break. It's Jim Cramer. Overtime. We'll be right back. All right. It's time to go out west. Jim Cramer joins us from live at One Market in San Francisco. It's good to see you. Welcome back to Overtime, my man. Oh, thanks for putting me on Overtime. And I've got to tell you, Scott, I'm not like The Undertaker, but I do see negatives.

Mike Wilson. Yeah. He takes the under. Speaking of. He takes the under, too. He does take the under. Unsustainable rallies. That's what you said today at one point after we gave it all up.

AMD opens up two and a half. So you figure, OK, buy it ahead of the Thursday meeting. You can't lose. And then it cuts your heart out. Apple, they present some interesting products. Stock goes up. Then it goes right back down. NVIDIA opens higher and then boom, nothing. Eli Lilly is up 10 and it finishes up one and a half. But Genrac did well. What does it mean to you, though? I mean, so take it from here and tell us what it means for where we are then in your mind. What kind of what does that action a point to? We have not washed out the sellers. We they still when they get a rally, they blow it out. It's amazing that there's

still people in it. They're so I mean, I'm out here. This used to be where you would go. And the first five interviews would be, OK, your stocks at 100 is going to 700. I mean, now you're trying to find guys who are actually making money of which they most of the guys who are making money don't want to come on anymore because they know that they're just the kiss of death. And periodically you have a company that is just I mean, we have service now and they delivered and delivered and delivered. And that stock is going higher. But I just and anything cybersecurity does well. But I got to tell you, Scott, in the end, the market is just such a tease. It'll open up a couple every stock that you want opens up one opens up two and then it just cuts your heart out. And we're not done until the cardiac the cardiac kill is finished.

And we're not there yet. But you you do think that people are too negative, though, judging from your response to Lloyd Blankfein's tweet, which I saw you say as well, that you think people are too negative or at least you think that he's on to something. Yeah. The idea that Eli Lilly was only up a buck and a half or maybe the biggest blockbuster in history. I mean, a drug that allows you to lose 20 percent of your weight that you don't want. I mean, come on. I mean, you tell me that that that 50 percent of the country doesn't want to be on this drug. This stocks at 305 on Saturday evening. For heavens. I mean, you know, people are buying it in the third morning, whatever. And then it opens. It goes up to 310 and then it just hits a brick wall.

Now it's like the drug didn't work. I mean, honestly, the stuff was breathtaking. I'm reading some New England Journal of Medicine. I mean, I'm watching, of course, the Warriors while I'm reading the New England Journal of Medicine. And I cannot believe, I said, this could be 20 points. This could be 20 points. In another market, it would have been 20 points. In this market, it actually opens up and then just crushes you. And what is this? Scott, you know that a really good market does not open high and cut your heart out. That's what we have.

But the companies themselves are doing better than we think. That's what I'm so upset about. What are you searching for out there, Jim, in terms of answers? You're going to be with a stellar lineup, which I'm going to let everybody know in just a second who you've got, because it's literally a who's who in terms of the companies who are out there. What answers are you searching for, Jim? I want to know whether it's gloom or whether there's a slowdown. I want to know what inflation does to the business. I want to know whether they're still hiring or they're laying people off. I want to know what happened to the gusto. What happened to the can't miss? What happened to the swag? I mean, there used to

be guys out here, and it was the Pats, okay? It was the Patriots. They used to come in, and you knew you were going to get blown away. Here, I come in, and it's like, kind of tepid. Now, the people I have on tonight are very exciting, but all I do is look at companies that didn't make money, whose stock went up big. And now they don't want to come on. They don't come on. Why do they want to come on? Because they lose you money. I mean, they ought to just open up a company called Lose You Money and make it a software company. Not even talking about the private markets and how valuations are in the process of coming

way down. 50% of the companies make no money. I got this from Renaissance. 50% of the companies make no money in this market. And that's a lie. You throw a lot of darts at a lot of companies that are losing money. And then you got companies that we know and love that are just obliterating us, you know, a door dash.

I mean, this reported a pretty good quarter. The stock just door dash. I mean, this reported a pretty good quarter. The stock just does nothing good. Airbnb reported a pretty good quarter. Nothing. Who do you got tonight? I'm going to go through your lineup for the week, but quickly tell me who you have tonight. ServiceNow, incredibly lucrative company, making money hand over fist. Fantastic.

Bill McDermott. And we know, we just think, CrowdStrike. Well, the bad guys never stop, right? Evildoers never stop. Right. Evildoers never take a vacation. So they are they can protect you from the worst type of hack, from the worst kind of ransomware or something that would shut down your whole company. They can protect you and they do a very good job. And then I'm trying to look for a bottom for Twilio. Twilio's had had a good quarter and then they said that they're not going to have a good quarter.

But the 2023 would be probable. So then you have to measure whether a company that does really well when they get rid of third-party advertising, when they get rid of all the stuff that you hate that follows you on the web, they should do better. But I've got to find out whether they will. I know, and you will. Uber, Lyft, Snowflake, many more. Tonight at 6, Jim, I appreciate it. I've got to run.

I mean, Lyft has got to put up. What do you got to run for? I've got to go. I'm already over. I'm already over. Melissa's like waiting to go here. It for? I've got to go. I'm already over. I'm already over. Melissa's like waiting to go here. Sometimes double overtime. It is overtime.

Now it's – we're at triple overtime. I'll see you tonight at 6 o'clock.