Closing Bell - Closing Bell Overtime: Fed Releases Stress Test Results 6/26/24

Episode Date: June 26, 2024

The Fed released its annual stress results for the 31 largest banks in the country. Hennessy Funds Portfolio Manager Dave Ellison and RBC’s banks analyst Gerard Cassidy break down the investment implications. G Squared Private Wealth’s Victoria Greene and Ariel Investments’ Charlie Bobrinskoy on today’s market action. Earnings from Micron, Levi and AeroVironment. 

Well, a late push higher for stocks with plenty of movement under the surface as Amazon closes at a record and surpasses $2 trillion in market cap. NVIDIA comes back from its lows as well. 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 Ford. And we've got a big hour of breaking news coming your way. In just moments, Micron releases its quarterly numbers with the stock up more than 70 percent so far this year. Plus, earnings are coming from Levi's and drone maker AeroVironment as well. And at 430 Eastern, the Fed releases its annual bank stress test results with big implications for capital returns to investors. We will be all over that news when it crosses. But let's begin

with the markets and a record close for Amazon as the company reaches two trillion dollars in market cap for the first time. That move helping the Nasdaq to outperform today up about half a percent, closing higher. But let's bring in our market panel. Joining us now is G-Squared private wealth CIO and CNBC contributor Victoria Green and Aerial Investments Vice Chairman Charlie Babrinskoy. Great to have you both here. Victoria, I'll start with you. Amazon, $2 trillion club. Where does it go from here?

To the moon. It's just a pit stop on the way to $3 trillion. They'll be there in no time at all the way the market's moving. But seriously, this stock has so many revenue components and they continue to add to it. AWS ads was 11.8 billion last quarter. And then today they're releasing that new low cost direct from China to compete with Temu and Shin. And so they're continuing to look for new revenue streams. I see the stock is not going to be exponential like Nvidia, but slow and steady, continuing to grow revenues. And with the AI lift both internally as well as on AWS, you know, they described it,

that AI is being built on AWS. Basically, everybody is going to utilize it. I see this as a stock that has continued upside. And it's one of my favorite plays, long-term hold in the discretionary space. Absolutely. I think this is, again, just a pit stop on the way to three. OK. And of course, speaking of AI and reads on AI, Micron earnings are out. Shares are sinking right now, down about 10 percent. We're going through the numbers. We'll bring them in just a moment. In the meantime, Charlie, yes, Micron, the expectations are very high going into this print. So we'll see what those results look like. But other parts of the market perhaps have had more value to be had, given the fact that the major indexes have moved higher, but there's been a lot less activity for the most

part in recent weeks under the surface. Right. I mean, obviously, you've said it many times, Morgan, that this is a market led by a very few number of stocks. If you look at an equal weighted index, the results are a lot lower. And obviously, the names that I've traditionally loved to recommend, value stocks, are kind of chugging along up a little. A lot of the value indexes are up mid to low single digits. So there's a lot of value to be had. I wouldn't say that it's in Amazon and Nvidia, but it's hard to get in the way of those kinds of names. But lots of more industrial names, consumer discretionary names, even banks and financials trading at attractive levels.

Victoria, the S&P has just been sort of chopping around at this high level, near record levels, but the stocks underneath have been moving around a bit as well. What happens when we get the latest inflation read a little later this week? Is that, you think, going to shake things loose? Is there any way in particular you're positioned ahead of that? Yeah, I think it's going to shake things loose? Is there any way in particular you're positioned ahead of that? Yeah, I think it's going to be a good print. I think it should be, if you look at the components, we're thinking it comes in flat,

headline flat month over month. And then, you know, a nice little reprieve there in core as well. Income likely still grew strongly. I think it's going to be a good print. Markets like it. I think the Fed's going to continue to remain a little defensive,

leave their options on the table, higher for longer. But PCE likely looks like it bumps down this month if you kind of look at some of the underlying data. I think that's a good thing. We want to see this lift and broadening out of the market. We want to see some more value participation and see other sectors. But I think you're going to continue to see growth run, infotech run. If you're looking at the scorecard, about infotech is the only sector beating the S&P 500. You are seeing a lot of churn underneath the surface there at the other

493, as we like to call the S&P now. Okay. Meantime, Micron earnings are out, as we mentioned. We're ready with those numbers. Seema Modi has them. Seema? And John, it's a beat on his top and bottom line. Earnings of 62 cents versus the estimate of 51. Guidance also coming in better than expected. Revenue guidance was roughly in line with estimates. We're watching the stock down by around 7 percent here in overtime. We have comments from CEO Sanjay Mahothra talking about robust AI demand, strong execution, enabling Micron to drive 17 percent, sequential revenue growth exceeding the company's guidance range in fiscal Q3. We are gaining share in high-margin products like high-bandwidth memory,

and our data center SSD revenue hit a record high. So very bullish comments here, but the question is, was it expectations were so high going into this report, John, with the stock up over 60% this year? Does these numbers meet those expectations? Back to you. All right, Seema, thanks. Victoria, go to you on this one. The guy just being in line, maybe that disappointed some people, but the stock is off its lows in overtime. It was down nearly 10%. Now it's more in the five and a half range. Yeah, for a tech stock, I think inline is the new miss, right?

If it's not a beat and raise, that's been kind of the death knell. And we've seen a lot of overreactions to misses. And you're seeing it claw back a little bit as people kind of digest the news here. We have to remember the stock isn't NVIDIA. It's a different part of the chip market, more like an Intel. And you're coming back. And if we see that bottom in PCs, we see AI PCs driving more. We see more data centers,

you know, and they're going to get the lift that they need. But obviously, if you're not going to raise guidance and you're up 70 percent, markets are going to get a little bit wary about what they're paying for and how much growth. Again, this is a company struggling to come back to free cash flow. I'm hoping for commentary maybe on resuming share buybacks, what their capex is going to be. You know, their capex came in a little high last time. And so I think all of those factors come into how much growth and revenue and profit margin growth specifically are we going to see in the back half of this year as we see inventory destocking and hopefully the PC and smartphone bottom that will help them tremendously. OK, Charlie, you touched on it.

I'm going to I'm going to continue right there with you. And that is the banks as we do await these stress test results. Financials, we've seen net interest income under a little bit of pressure for many of the names, higher rates for longer, inverted yield curve. What do you expect from results today? Is this a buying opportunity for certain names? Yeah, absolutely. I think the stress test won't probably have headlines that are big that go to all banks. I think in general, though, the people that administer this test don't want to be made to look stupid. Last year, they missed some of the big failures in regional banks. And so I think they're going to continue to be tight on individual names. And that matters because banks have been buying back stock to try

and reduce their book equity. The most important number in bank stock investing these days is return on equity or return on tangible equity. And you can help that number by buying back your stock. And so if the Fed doesn't like that and stops you from buying back stock, that can hurt an individual name. I don't think they're going to be big headlines that apply to all banks, but they're going to be some individual names that won't be able to buy the stock that they'd like to. All right. Charlie, thanks. Victoria, thanks. I want to mention on Micron here, it is off of those lows and the CEO is going to be on. Is it Mad Money? Mad Money. Mad Money. There we go. Got to fit that promo in. Sandra Marotta are going to be on tomorrow

with Jim Cramer. Now let's turn to CNBC's senior markets commentator Mike Santoli for a look at the breadth or lack thereof in this market. Mike. Yeah, John, it actually is a day-to-day story, whether it's a broad market or one that's very narrowly focused. We've had several of those of each kind in the last couple of weeks. But here's a measure of how much individual stocks in the S&P 500 are moving on their own, in their own independent manner, relative to the index and how much they would be moving as one. So you see this is about a record low.

It's called the CBOE Implied Correlation Index, three-month, as a matter of fact, Implied Correlation Index. Without getting into the weeds, it's the market's best guess on how volatile each stock, big stock, is going to be relative to the index. So when this number is low, it means most stocks are kind of moving independently. It's not one big index move. I said a month ago it doesn't go much lower, and it's gone lower. So you can see here we're kind of getting to extreme extremes. Now, in stressful markets, that's what these were. That was the European debt crisis. That's COVID. Everything goes to one in terms of correlations, meaning it just moves as one.

We liquidate stocks. So it's kind of healthy that individual stocks are doing their own thing and moving maybe on their own fundamentals in supply and demand. On the other hand, it can create this situation where it's almost this kind of mechanical thing that's going to break at some point. Also, it's a mathematical issue. When you have a highly concentrated index, it's going to look a lot less representative of the majority of stocks on some level. Now, activity is following that single name volatility as opposed to the index volatility in the form of, here you go, 21-day average trading volume of S&P 500 individual stocks

relative to the S&P 500 SPDR ETF. This is obviously at a new high. I think the NVIDIA split had a small impact on that last spike higher, but it shows you people chasing and speculating, John, in individual names because they have movement around them and they have stories behind them as opposed to the overall index, which has been kind of just sitting there and volatility bleeding out of it for a while. But Mike, I keep hearing or at least used to hear that the market was over indexed and over ETF and that that was bad. So how can both things be true at the same time? I think long term money in terms of the regular drip, drip, drip of flows, it is increasingly indexed. So the passive indexers are winning the overall asset allocation game. And maybe that's

having some effects in terms of maybe less valuation sensitivity across the entire market. But on a day to day basis, when it comes to the marginal mover of money and when markets have been going higher, you find that the speculators want the individual names. And as I said, volume follows volatility, not the other way around. All right, Mike Santoli, thank you. We'll see a little bit later in the show. We have much more ahead on today's earnings action. But first, we have Levi Strauss earnings. We're going to go to Pippa Stevens for that. Pippa. Hey, Morgan. Well, it was a mixed quarter for Levi Strauss. Adjusted EPS coming in at 16 cents. That was five cents ahead of estimates. But revenue of $1.44 billion was a slight miss. Now, direct-to-consumer net revenue rose 8 percent, and the company also hiked its quarterly dividend by 8 percent.

For the first time, Levi's also broke out revenue numbers for Dockers and Beyond Yoga, both showing growth but still a small component of overall sales. Finally, the company announced it will begin to outsource some of its distribution work, and that transition is expected to weigh on full-year earnings. The stock now down 6 percent. Morgan? All right, Pippa Stevens, thank you. Don't miss Jim Cramer's exclusive interview with Levi's CEO. That's coming up on Mad Money tonight at 6 p.m. Eastern. After the break, an analyst tells us what he wants to hear from Micron executives as that stock pulls back despite strong results.

Plus, we are just moments away from the Fed's bank stress test results, and if you're invested in the banks, you're going to want to pay close attention. Overtime. Shares of Micron are down about 8% now, despite a beat on the top and bottom lines in the earnings report just moments ago. Joining us now to discuss Angelo Zeno of CFRA. Angelo, might this be about the CapEx plan saying, I guess in a way reaffirming that they plan to increase capital spending materially next year, or is this about the guide?

So, you know, thanks for having me. So as far as the CapEx, to your point, I mean, they alluded to about mid 30% increase next year. Everybody should have anticipated an increase in CapEx spend. In fact, it actually was kind of in line with where we expected as well as where we think consensus expectations were out there for capex spend. So I don't think that is necessarily the reason for the decline in the share price. But I do think the fact that the guidance was fairly muted in nature in terms of the revenue number, even on the EPS side of things, I think the hope was you were going to get more of a pronounced beat out there, and you don't necessarily see

that. So I think it's largely due to that more than it is the CapEx number. So what should investors sort of take away from this at this point? Is it that things are going according to plan if you believe in the overall semiconductor trade and Micron's place in it? I mean, a lot of memory necessary for AI to work correctly that you believe in this company, or is there cause to step back based on what the valuation's been? Yeah, listen, I think as far as kind of the move we've seen, obviously, in the stock price, not to mention across all of semis. Typically, you do see kind of these mid-cycle type corrections that take place where you almost have to see the stock price actually kind of catch up with some of the fundamentals out there. And maybe that's what you're seeing at this moment in time for Micron.

That said, you know, I think what was really impressive was kind of the beat that we saw on the data center side of things, kind of the tone that they're striking on the data center side of things. Clearly, there is a multi-year kind of upcycle that's going to be driven by high bandwidth memory out there that is a higher value, higher price offering out there. And you kind of saw that they, again, alluded to the fact that they are largely kind of sold out through the end of next year. That's going to also help the kind of the pricing landscape, we think, for Micron going into 2025. So as far as kind of the drivers are concerned, if you remain, if you are a bull on Micron, there's really nothing in this report that kind of changes that outside of the stock move at this point in time. Angelo, though, I do wonder, I mean, there's so many expectations baked into the broader AI trade. Look no further than all the moves we've seen in NVIDIA.

Company becomes the most valuable company in the history of the world last week and then takes a breather. We've seen some pretty outsized moves just in that stock alone in recent days here coming into the end of the quarter. I mean, have we gotten too far ahead of ourselves from an investing standpoint, from a fundamental standpoint, looking to forward guidance standpoint? Or is the growth just so fast, whether it's NVIDIA, whether it's Micron, whether it's others, that nobody can truly wrap their arms around it? I think when you kind of look at the total addressable market opportunity for AI out there, specifically as far as semis are concerned. I don't think anyone's got any idea of how big this potentially can be. And we think the potential market size of kind of whether it be Micron, whether it be NVIDIA or other kind of key

memory compute or networking plays on the semi side of things, we think has a lot more room to run. But that said, I think you have to look at this on a case-by-case basis. In terms of Micron, I think as far as the fundamentals are concerned, they're kind of picking up steam later in the game than NVIDIA is. And we think that you're going to see a more pronounced inflection as you go into calendar 2025. You also look at the valuation of Micron. Based on our calendar 2025 estimate,

only trading at above 11 to 12 times next year's estimate. So it's probably the cheapest way to play AI right now. But that said, again, I mean, this is more of a commoditized type of stock historically. But that said, you know, our view is, listen, high bandwidth memory as it gains steam going into 2025, probably going to be about 20 to 25 percent of their revenue ending the second half of calendar 2025 or mid single digits.

Now you're talking about, you know, the potential for a re-rating, we think, in this stock. So I think you have to look at these names on a case by case basis. But we do think there is significant upside left in this stock. OK, Angelo Zeno, thanks for joining us with shares of Micron under pressure and NVIDIA as well. Well, we've got more earnings to bring you. AeroVironment results are out and it is a beat on the top and bottom lines. EPS coming at 43 cents per share versus the 22 cent adjusted estimate. Revenue record for a fourth quarter, their fiscal fourth quarter at 197 million. That was better than

expectations, represented an increase of 6% year over year. For fiscal 2025 guidance, the company expecting or forecasting revenue of $790 to $820 million. So it looks like perhaps a little bit better, stronger than what street expectations had been, calling out the loitering munitions segment as a key growth driver for the company. This, of course, is drones, things like the Kamikaze drones that get sold to the U.S. military and allies, something we've talked to Waheed Nawabi, the CEO of AeroVironment, about in the past. That revenue number for fiscal 2025 would represent a nearly 12 percent top line growth for the year. You can see those shares, though, are moving lower right now, down about 9 percent. So we'll continue to go through the results.

Yeah, looks like they just meet on the guide, which perhaps, as Victoria was saying in the other case, isn't being received so well in today's market. Well, up next, Mike Santoli is going to come back and take a look long term at some surprising charts on the banks as we await the results of the Fed's stress test. Overtime will be right back. Welcome back to Overtime. We're just moments away from the Fed's stress test results for the banks. Our Mike Santoli is back with a long-term look at bank performance. Mike. Yeah, Morgan, just a reminder of where we came from before the financial crisis and then since then in terms of bank stock performance

and really what's, I guess, created the longer-term need for these stress tests. The overall bank index is trading below levels it was at in 2005. Actually, it's comparable to late 90s levels in the overall bank index. It's a reminder that they don't need to be a leadership group in a bull market. But it also says that because of the excess capital requirements and all the other things made to make the system safer, they're unable to make as high a return as they used to be back in prior cycles. Now, in the shorter term, if you look at the fundamental trends in terms of loan growth, they might have inflected higher here just in the last little while, last several

weeks. Now, this is annual growth rates of total loans and leases on the books of all banks. This is from the Federal Reserve. Obviously, very fast growth into 2022. And then we had this long decline as rates went higher and demand for credit went down and all the rest. Now, maybe we're curling higher again. And even as people wait for the economy to soften up, this is a decent sign in terms of overall bank fundamental prospects in the near term. So if you were to see some of that lending activity actually took higher, that's a good thing? Or in an environment like this, where we're still living in a much higher inflationary environment than we were just a couple of years ago, might it actually be the reverse? It seems like we're coming from a level of relatively low leverage in terms of both

corporate and consumer. And so it's not as if increasing lending is going to be a big risk factor, at least not right away, I think, as long as we're at these near full employment levels. All right. Mike Santoli, thank you. And don't go anywhere. The bank stress test results

are coming up right after this break, and we're going to have an expert panel ready to break down the headlines and the impact on your money. Overtime, we will be right back. Welcome back to Overtime. We are going to be getting the Fed's stress test results for the country's 32 largest banks in just moments. Now let's bring in our banking panel, Hennessy Funds Portfolio Manager focused on financials, Dave Ellison, and RBC Capital Markets Head of U.S. Bank Capital Strategy, Gerard Cassidy. Gentlemen, welcome. Gerard,

opportunity comes with surprises. So if there is going to be any kind of surprise here in these results, what would you think it would be? I would be very surprised if there's any positive surprises. If anything, I expect some of the banks to have higher stress capital buffers. And the reason being is that the Federal Reserve has taken a very harsh view of the commercial real estate market. And I think that's going to be reflected in many of their numbers throughout all the banks that go through this stress test. So, yes, surprises, but non-positive surprises where you buy the stocks in our view at this time. So, Dave, do you expect non-positive surprises? I mean, expecting surprises is kind

of a weird question that are going to affect these larger banks themselves. Or is there more of a read through in the language here, perhaps for the regional banks, smaller regional banks? Well, I think Gerard's right. I think the big concern is commercial real estate and the related knock on effects of that. So I think we're seeing, you know, fairly significant declines in commercial real estate in terms of some of the trades that have taken place. And I think they're worried about that. I think they're going to want more capital. The surprise is maybe going to be, you know, fewer buybacks and less dividend increases. I think the industry is still very much, you know, under wraps.

They're trying to keep this thing from blowing up again. They don't want another Silicon Valley or another you know what. So I think, you know, they're still under wraps. And I see Rick Santelli was talking about the stocks not performing for 10 or 15 years. This gray hair isn't from making money. It's from not trying to lose money. Fair enough. You know, I just I look at the financials. Right. And they've been and the banks in particular, they haven't they haven't they've been an underperformer this year.

We're going to go to Leslie Picker right now. Bank stress test results are out. And she has the details. Hey, guys. Yeah, the Fed's 2024 test led to projected hypothetical losses of $685 billion in aggregate, and the CET1 capital ratio, that's the cushion against losses, was projected to decline by 2.8 percentage points to a minimum of 9.9 percent in the test. Now, that's a higher absolute level and deeper decline than last year, even though the test was fairly similar to the one conducted in 2023. Senior Fed officials believe the aggregate stress capital buffers, which determine how much more capital banks need to hold as a result of these tests, should go up modestly. The Fed says the larger decline is due to increases in credit card balances and higher delinquency rates,

corporate credit portfolios that have become riskier and higher expenses, and lower fee income. According to Fed officials, losses from commercial real estate were similar to that of last year, so they're actually not driving the bigger decline. Those three risks, though, suggest, quote, required capital buffers should be larger, Vice Chair Bunkle-Barr said in the statement. He added, quote, while banks are well positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch. Now, that CET1 ratio saw some dispersion among the six largest banks under the severe adverse scenario.

JP Morgan maintaining the highest levels at 12.5, while Wells Fargo had the lowest at 8.1%. This year's test also included a so-called exploratory analysis, which tested for a rapid repricing of deposits in a severe global recession, as well as trading book stresses comprising the failure of five large hedge funds. Now, the Fed found banks were able to withstand these tests as well as trading book stresses comprising the failure of five large hedge funds. Now, the Fed found banks were able to withstand these tests as well. Guys, banks can start announcing their capital return plans after the market closes on Friday. So we have a couple of days to find out exactly the repercussions of these results. All right. Leslie Picker, thank you.

We're going to go back to our panel now, Dave Ellison and Gerard Cassidy. Gerard, I'm going to go to you on this one. Anything there surprise you, particularly when you have those comments from Barr about capital buffers should be larger? Not really. We were anticipating higher stress capital buffers because of, again, the assumed losses were going to be higher. And what's interesting when we get the details is for the regional banks that don't go through the exam every year, there's a group of them when you're in the category four category, you don't go through this exam every year. And the ones that did not go through last year's exam, we'll see if their stress capital buffers go higher, which we expect that they will. They also pointed out, as you just heard, that,

you know, the Fed is concerned about, higher credit losses in credit cards because of higher balances. But again, so far from what we can tell, no real big shock in the news today so far. Okay. Dave, I want to get your reaction to this, especially given the fact that, yes, you had stricter standards baked into the methodologies around these tests this year, but it wasn't necessarily that different of a test in terms of the methodology from last year when we did see the Fed criticized for taking into account lower rates in a severe global recession, even as we had had banks fail, smaller banks fail amid higher rates. Yikes, I'm not sure.

Higher rates, lower rates. I think rates don't matter that much now. What matters to them is credit. You know, they're worried about credit in a big way. And so I think they're still thinking 2008, and they want to avoid a problem that would come from a 2008 downturn in terms of real estate. So I don't think this is, Gerard, I think is right. It doesn't really change the outlook for the banks, doesn't make it a lot worse, doesn't make it a lot better. It just, you know,

tells you that they're focused on credit. And I think the analysts are and the performance of the stocks this year reflect that. At my first glance, Gerard, the biggest difference that I see in reaction here is between J.P. Morgan, which in overtime is up about a half a percent, and Wells Fargo. Leslie mentioned that one in not such a great light. That one is down almost 2 percent right now in overtime. So in essence, are we talking about some banks being in the position of needing to leave more cushion in their reserves because of the stretched consumer, because of delinquency rates and the Fed pointing that out? And how should investors perhaps consider the stretched consumer differently, if I'm reading that correctly?

No, I think you're reading it correctly. And Wells has had a big focus on growing their credit card portfolio. They were never a big credit card company like J.P. Morgan. And so as a result, as it was pointed out in just the macro of the entire stress test, there are higher card balances with higher delinquency rates. And we know that when you look at the consumer, it's the low FICO score consumer that is stretched. The higher FICO score consumers are in good shape, especially homeowners who have very low rate mortgages financially are in very good shape. But it's the renters with low FICO scores that are stretched to your point.

And I think what you're seeing in the aftermarket with the trading of the two stocks, Wells Fargo obviously is going to have a larger stress capital buffer than maybe people thought, which is why the stock isn't doing as well as JP Morgan. And so, Dave, what are the possible implications here for smaller banks, those that aren't included in this group of 32, when we consider their exposure to the consumer, perhaps even just in their local neighborhoods? Well, I think the smaller you get, you know, the less exposure you have to credit cards. Most of the credit card activities in the bigger banks, Capital One, et cetera, Discover, I think there

you just have much more exposure to commercial real estate, commercial loans, commercial business loans that obviously are very sensitive to the economy. And then, of course, you have much more sensitivity to the cost of deposits because they rely on deposits. They don't have the use of capital markets or the Fed window like the big banks do. So the smaller you get, you know, the worse it's going to be if there's a recession. I'm interested to note that, you know, it sounds like the regulators are telling you the economy is softening

and they're worried about the consumer. So they're saying, hey, the economy is softening, this is going to get worse and we need to, you know, worry about this and plan on it. So it's sort of an interesting playoff between what's what the market is maybe saying at all time highs and what the banks and regulators are telling you on the other side. Gerard, we were talking to Charlie Brinskway about this earlier in the show, and he was saying the single most important metric for the banks, particularly big banks, is return on equity. What does this mean for banks' ability to buy back stock? We are going to expect to start to see some of those announcements later this week based on what Leslie just told us. And then, of course, in two weeks, we get earnings as well. So how does it set us up from a shareholder return standpoint?

I think what we're going to find with the larger banks and the shareholder returns is we really have to see what the final Basel III endgame capital requirements are. You know, this stress test is very important, as Dave pointed out. It points out the consumer, the concern about the weakness in some of the consumer credit card loans. But the real driver of returning the capital to shareholders will come from the Basel III endgame proposal, which possibly could come out by the end of August. It's under a major revision from what was proposed last July. It's going to be much less strenuous on the banks than what was initially proposed. If that proves to be the case, when you look at 25, 26, take the earnings estimates plus the excess capital, you're going to see significant share repurchase programs by the big banks, I believe, in 25 and 26. You may not see it

immediately after this news, but we are certainly going to see it planned out for the next two years. And it's going to be very strong in our view. Dave, we are now looking right over the edge into the second half of the year. We'll be there next week with the holiday season, of course, and the broad expanse of the American consumer being so important to this economy. We've been through a period over the past few quarters where access to credit, particularly for those low FICO scores we were talking about earlier, had been or has been more restricted. Based on this, does it get perhaps tighter? And does this have implications for the rest of the economy that way? Well, I think we sort of mentioned that. I think if credit deteriorates, the banks and the credit card companies are going to be very quick to pull back. I was reminded when you were telling your question, you know, back in my early days of Fidelity, they would say there's two big, important holidays during the year where people get together and they talk about what's happening in the world in a bigger way because there isn't politics or religion.

And that's the Fourth of July holiday, so it'll be interesting to see what I hear and what other people hear coming out of that holiday week in terms of what's happening with the economy. Also, lots of fireworks in both of those holidays, and you want to keep your family safe, so hopefully everybody does that as well. Dave Ellis and Gerard Cassidy, thank you. You do fireworks at Thanksgiving?

Yeah, political often. Oh, well, okay. Crazy uncle. I don't know if you got one, but many of us do. Levi's earnings call is going to begin in just a few minutes. The stock is tanking. Let's see, down about 10 percent. Up next, an analyst with a buy rating on the stock is going to tell us what he wants to hear from management. And later, a look at what could move the market tomorrow, including whether Nike's earnings can help turn around the struggling Dow component. We will be right back. Welcome back. We have a news alert on Recursion Pharmaceuticals, ticker RXRX. That stock pulling back right now after announcing a secondary offering of $200 million in common stock. You'll recall we spoke with Recursion's CEO just earlier this week on Monday as the company hosted its investor day, where NVIDIA CEO Jensen Huang spoke. Recursion and NVIDIA are partnered in an effort to use AI for greater drug discovery.

You could see shares of recursion down about 7.5% right now in overtime. Well, shares of Levi Strauss also falling sharply after missing revenue expectations in their latest earnings release. Joining us now, Bob Durbel from Guggenheim. Bob, it's great to have you on. We've seen this denim craze. It seems to be continuing. And we know they say in the release that women and women's appetite for denim continue to drive the quarter. But we saw this miss. Walk me through the reaction we're seeing in the shares and whether it's warranted. Hi, good afternoon, Morgan. Thanks for having me on. I think overall, a little bit of the disappointment in Levi's is more on the international, you know, the foreign exchange

pressures. In the U.S., you know, the business was up 12 percent. I think the other piece of the international, you know, the other piece of the concern is that they didn't raise guidance. You know, they beat our numbers by six cents, but they held their guidance in check. And so I think the street and the stock was touching on highs. I think the street was probably looking for a little bit more on the guidance side. OK, so Levi's CFO talking to CNBC and basically saying people are generally cautious, that it's not necessarily an environment where people are buying a lot. Read through to the consumer and some of these buying patterns we're seeing.

You know, I think, you know, I think you hit on it a little earlier, but within the apparel market, the denim piece has been strong. You know, the Western trends, the utility trends, they've been strong. And it feels to me as if Levi's is in a very good position to capitalize on that momentum. You know, I think overall, from a consumer perspective, there is a lot of caution. There's a lot of uncertainty. I think the macro pieces, you know, of the business and when you look at what's happening in the world, the consumers, you know, on alert. And I feel like we're watching pretty closely, you know, around the winners and the losers. but to me i think the levi's business the brand remains very strong

you know i think they're heading in the right direction and you know yet this despite the slight missing the top line which we think is largely foreign exchange we feel like these guys are very well position well to tell me more bob because uh... i'm looking at lululemon right and they have been doing really well on that kind of direct-to-consumer premium brand approach. Levi's been on a really strong run this year and is taking a step back, certainly about a quarter's worth of a step back in the price, at least here in overtime.

But do they have enough going on in D2C, focusing on women on the premium end to sort of buck this trend of what's happening with department stores, with wholesale, as they try to lessen that as part of the mix? I think they do, John. I think when you look closely at sort of the DTC results versus the wholesale results, that's what gives us comfort around what Levi's is doing. So, you know, this quarter, DTC for Levi's was up, you know, I think 8% overall, 11% constant currency. I think the U.S. was up 12% and 7% in Europe. And so, you know, from our perspective, when you offset that against, you know, I think the adjusted wholesale business was down 4%.

I think, you know, the leadership at Levi's is, you know, changing direction is much more focused on the, you know, DTC first piece of the strategy. And I think they're gaining traction with it. But there are definitely headwinds, you know, as you think about, you know, the pluses and the minuses on the overall business, especially on a global basis, you know, with what's happening in the world. How do you feel about the inventory position? So inventory is down seven. You know, when you think about the revenue piece and where the inventories are, they

seem very clean. I think it was, you know, I think down seven, I think it was down 19 adjusted, you know, for some accounting changes, but seems very clean, getting better and pretty healthy, you know, for some accounting changes, but seems very clean, getting better and pretty healthy, you know, from our perspective. How does this set us up for Nike tomorrow? You know, I think Nike's a completely different situation. You know, I think on the Nike piece, expectations are definitely subdued when you think about, you know, some of the competitive pressures. You know, in our opinion, I think Nike's results should be in line with expectations.

But when you think about a few things heading into the second half of the year, we're actually quite optimistic around Nike. I think having subdued expectations sets the stock up well. I think that we're in a period where there is a focus on sport on a global basis, whether you think about the Copa or you think about the Euro Soccer Championships or the upcoming Olympics. When you think about running as a category,

I think we've seen some encouraging early reads on some of their new products. Women's is a focus for Nike. So when you think about Kaitlyn Clarkaitlin clark is a nike athlete and what's happening with the wnba we feel like they're well positioned there okay they're gonna have a an event you know a five-year uh analyst day in you know late fall i think that they can give us some good insight into that and then finally i think just when you look at the valuation of nike heading into tomorrow you know it's it's at a let's call it a 13 percent discount to the S 13 percent premium to the S&P.

Historically, it's almost a 50 percent premium. So when you look at it historical versus its own multiples and then when you look at especially versus the market, you know, we think there's a pretty good setup for this. OK, well, we'll see. Then if they can just just do it tomorrow. Bob Durbel, thank you. Well, up next, all the overtime movers that need to be on your radar as we count down to Levi's analyst call. And Whirlpool really cleaning up for investors today

on a report that Germany's Bosch is reportedly considering an acquisition of the appliance maker. Speaking of buyouts, MNC Capital Partners is hiking its takeover offer for Vista Outdoors to $42 per share. That's a 25% premium to yesterday's closing price. Got some big moves on earnings this hour. Micron is falling down 5% now despite beating on both lines. Revenue guidance was basically in line with estimates. Similar story for AeroVironment, down 7%, even though earnings and revenue beat. The low end of the company's full-year earnings guidance was a bit light of estimates, though.

Well, how's this for a taxing question? Can you really cut taxes and raise revenue? Up next, we will discuss what is likely to be a key point of contention during tomorrow's presidential debate. One of many. And don't forget, you can catch us on the go by following the Closing Bell Overtime podcast on your favorite podcast app. We'll be right back. Welcome back to Overtime. Another batch of economic data and earnings could move the market tomorrow.

On the economic front, we will get the weekly jobless claims, the final reading of first quarter GDP, the May durable goods orders, and May pending home sales. We will also get more clues on the state of the consumer when Walgreens, Boots, and McCormick report before the bell. And after the bell, investors will be closely watching Nike's results. That stock has been the worst Dow performer over the past year. Well, here's something else investors can keep their eyes on tomorrow. The first presidential debate where tax policy will be a big topic. Our Robert Frank looks at whether cutting taxes really does lead to raising revenue. Robert. John, good to see you.

Well, Democrats say that 2020-17 tax cuts, they cost trillions in lost revenue, and they're partly responsible for the soaring debt. Republicans say revenues hit an all-time high after those 2017 tax cuts and extending them won't add much to the debt. Well, tax collection data shows that neither side is entirely correct. In the year after the tax cuts, revenue from individual and corporate taxes was actually flat. It then fell during the 2020 pandemic and started rising in 2021 with fiscal and monetary stimulus. In 2022, that's when we hit that all time record that Republicans like to talk about, with individual tax collections topping $2.7 trillion and corporate taxes reaching $440 billion. Now, the main reason for all of that,

as we all know, was the stock market in 2021. That market was up 27%. We had the IPOs, the SPACs, record stock sales by insiders. All of that created record capital gains. Since that time, revenue has started falling back down. Individual tax collections are now flat compared to 2018, even though the GDP has grown by over 2 trillion during that period. So the best measure for this is actually tax revenue as a share of GDP. In 2018 it was 17%, now it's 16%, so it's down. Revenue did not collapse, as the Democrats claim, but it did decline relative to the growth of the economy. So it's down. Revenue did not collapse, as the Democrats claim, but it did decline relative to the growth of the economy. So all that, John Morgan, the bottom line is these did

add to the deficit, but certainly not as much as the increase in spending. All right. Robert Frank, thank you. One of those eternally debatable, I think, topics, Morgan. I mean, in a way, stimulus checks and tax cuts are two sides of the same coin. It's just a question of who gets to keep the money. The other piece of this is the actual spending piece of this, right? How large government is and how much you're spending versus the revenue you're taking in. We talk about it all the time, these record deficits, the role that's playing in the Treasury market.

It's certainly a concern when that actually materializes, but certainly a concern that many high-profile investors and bank CEOs have raised on our air just in the last couple of months. Yeah. Well, we got the debates and we got inflation. We're going to keep our eyes at CNBC on both for the economic reasons. Yeah. We get some sneakers, too. That's going to do it for us here at Overtime. Fast Money starts now.