Closing Bell - Closing Bell Overtime: More Momentum for Tech? 7/2/24

Episode Date: July 2, 2024

From the open to the close, “Closing Bell” and “Closing Bell: Overtime” have you covered. From what’s driving market moves to how investors are reacting, Scott Wapner, Jon Fortt, Morgan Brennan and Michael Santoli guide listeners through each trading session and bring to you some of the biggest names in business.

It's like the Vicks fell asleep, a steady melt-up throughout the session, pushing the S&P 500 and the Nasdaq to record closes with Amazon, Microsoft, and Apple all touching record levels as well. That is scorecard on Wall Street, but winners stay late. Welcome to Closing Dot Overtime. I'm John Fort with Morgan Brennan. Well, coming up this hour, Tesla extending its recent rally in a big way after second quarter deliveries came in better than expected. We will talk to T. Rose tech portfolio manager about the comeback for that stock and how he's positioning more broadly with the Nasdaq at record highs. Plus, Betterment just releasing its annual retail investor sentiment survey with surprising findings around election sentiment and the number of investors seeking out financial advice from social media. Betterment CEO is going to join us to break it down. And industrial stocks. They've been lagging the S&P 500 this year. Noted industrials

analyst Stephen Tusa joins us with three names. He says our best position for a bounce in the second half. Well, let's get to our market panel with the action. Joining us now is Payne Capital Management Senior Wealth Advisor and CNBC contributor Courtney Garcia and Vital Knowledge founder Adam Christofoulis. Guys, good afternoon. Courtney, after this huge first half we had for the S&P, still new highs. Give me your take on this market and why you see opportunity in Europe and bonds. Yeah, I mean, we've had a great market this year. And really, anybody who's participated in that, you're really taking advantage, despite the fact there's so much cash on the sidelines right now. So a lot of people are not taking advantage of that right now. But I think the

idea is inflation has been the big key in the stock markets. And we continue to get good data recently with whether it's the PCE numbers that came out on Friday, whether it was Powell speaking today. But it looks like inflation is still trending in the right direction, that there's now almost a 70 percent chance that the Fed will cut as soon as September, about a 95 percent chance they will cut sometime before December. And if interest rates do eventually come down, that is going to additionally be a boost for the stock markets. So you want to make sure that you're staying invested here, and especially bonds, which you mentioned. There's so much cash is on the sidelines here. And everybody's very happy with that paying 5%. But the second the interest rates go down, those are going to rate downwards. And you're going to see that safe money going back

into bonds, and especially things like new needs right now, which if you're in a high tax state like New York or California, those tax equivalent yields right now are very attractive. And you want to get in there now before rates go down. And that's something we're constantly talking to our clients about. Yeah, New Jersey, too, for sure. Well, speaking of fixed income, Adam, you point out that forces are pushing short-term bond yields down, long-term yields higher. What should investors do with that? Yeah, so you've definitely seen on the economic front, you are seeing disinflation. You are seeing the Fed rhetorically prepare the market for a rate cut. It looks increasingly likely they're going to move at the September meeting.

But I think offsetting that and what's pushing longer yields higher is the fiscal dynamics in the United States, which is really going to be, I think, the dominant macro theme towards the end of this year and all throughout 2025, where Congress and Washington will have to make some huge decisions about whether or not to extend the Trump tax cuts. You're already at a very unsustainable fiscal trajectory. This was something Powell was asked about today and talked a lot about. He said the absolute level of debt right now is OK. The market can handle that. But the trajectory, the deficits are extremely elevated. And this is at a full employment economy. And that assumes that Trump cuts will expire as planned

next year. And that's looking increasingly unlikely. So and that's creating this curve steepening dynamic where the Fed is pinning short end yields lower, but long end yields are facing upside pressure because of fiscal dynamics. I'm glad you brought that up because it's literally the question I'm about to ask you, Courtney. And it does reference what what Powell had to say in Cintra today to our own Sarah Eisen when she asked about this very topic. Have a listen. The United States is running a very large deficit at a time when we're at full employment. And it just is the level of debt that we have is not unsustainable. The path that we're on is unsustainable. That's completely non-controversial. I would have thought that this is something that should be a top level issue. And you do hear this

from a lot of elected officials. I mean, it's interesting, right, because inflation is what has been driving the narrative, particularly for the bond market, at least up until recently. But as one trader pointed out, and I know today you have a twist steepening afoot. So bullish two year yield down, bearish with a 10 year yield up because you do have this tug of war between monetary policy on the one hand and fiscal policy on the other. Your thoughts? Yeah, I think that's absolutely one of the biggest concerns is where we are in the deficit. And it's something that has to be addressed here at some point. So I think that's going to be a continuing and ongoing conversation. And what's also happening now is you're starting to see it getting more and more priced in that Trump is going to get elected in November.

Obviously, a lot can happen between now and then. But the idea is if you do have Republicans in the House, the Senate and on the presidential seat, you could actually see additional spending plus things like tariffs, whether it's in Europe or in China, which actually could mean additional spending and keep those rates higher. So that's why despite the fact those PCE numbers came in so strong last week, you are seeing those yields tick upwards. It's an interesting dynamic we're seeing. And I think it's a little too early to trade on that, but it's something that I think is going to be this tug of war now through the end of the year. It does raise the question, though, Adam, how sustainable is it? We know historically and maybe

on a lagged basis, but that equities tend to take their cues from the bond market. So what's the bond market signaling now? And have we seen a split between trading in these two different asset classes or are they going to converge at some point? Yeah, I mean, it's really interesting. We haven't really had a fiscal dimension to the narrative in decades. You know, it's always been about monetary policy, at least since the great financial crisis. But we're now entering this new era where the Fed is going to be easing policy very modestly. It's not going to be an aggressive easing cycle. So that's going to happen in the near term. That is positive. But again, for the first time, you have to go back to the bond vigilantes in the 90s, where markets have had to contend with the effects of extreme fiscal policy or fiscal proficiency on deficits and yields. And so I think that's really going

to be a dominant theme towards the end of this year and into next year, where the longer end of the curve will stay elevated. You'll have this steepening effect. And whether or not that imposes some fiscal discipline on Washington, you know, that remains to be seen. You're probably going to have to see yields go a lot higher before Congress would actually take note of it and act in response. But, you know, I do think this will be, you know, again, the dominant macro topic of conversation throughout next year. Okay. Adam Crisafulli and Courtney Garcia, thanks for kicking off the hour with us with the S&P and the Nasdaq composite, both at record highs. The Nasdaq looks like closing above 18,000. We've got some news in

the pharma space today. Eli Lilly saying its treatment for early symptomatic Alzheimer's disease has been approved by the FDA. In a study, the treatment slowed cognitive decline by up to 35 percent. It reduced the risk of disease progression to the next clinical stage by up to 39 percent. Meantime, Lilly and Novo Nordisk were under pressure after an op-ed from President Biden and Senator Bernie Sanders, which said the drug makers were, quote, ripping off Americans. Emily Wilkins has that story from Washington for us. Hi, Emily. Hey, Morgan. Well, yeah, Senator Bernie Sanders slammed Eli Lilly and Novo Nordisk for, quote, unconscionably high prices over the drugs of their popular weight loss drugs.

Now, Sanders and President Biden sent a warning shot today in a USA Today op ed saying that if Novo Nordisk and other pharmaceutical companies refuse to substantially lower prescription drug prices in our country and end their greed, we will do everything within our power to end it for them. Now, in the op-ed, Sanders noted that the cost of weight loss drugs was not only far beyond what it cost to produce the drug, but also substantially more than what consumers in other countries pay. And Sanders said he's working on new legislation to rapidly expand the number of prescription drugs that the U.S. can negotiate through Medicare, up to 50 different drugs a year. And that would be more than double the pace from what the law

currently requires. Sanders also said that no American should pay more than $2,000 a year for prescription drugs. Now, that limit is already than $2,000 a year for prescription drugs. Now, that limit is already going to go into place next year for seniors and Medicaid, but Sanders wants to make sure it is expanded to all Americans. So we'll be interested to see what comes from that legislation. The companies defended themselves in separate statements to CNBC. Both noted their weight loss drug could cost as little as $25 through insurance and other programs, and they blamed the American health care system for leading to higher-priced drugs than other countries.

Morgan? Well, Emily, I had a question about that. I mean, I hadn't heard a lot of populist disenchantment over the price of weight loss drugs. I heard some early-on upset with the diabetes community saying, hey, this is going to lead to shortages. But I wonder if there's a sense that this is going to play particularly well politically. I think it absolutely will play well politically. I mean, this is something you heard Biden call it, you heard Trump call it, you heard Democrats and Republicans all talk about the price that drugs are prescription drug

medication is very high and that the government needs to do more to get those drugs down. I mean, if you want to take this from the election perspective, seniors are a group that are known to come out to the polls and make their voices heard. And so this is a particularly particularly big demographic to make sure that they're getting right. And I think in just in general, it is a popular topic to discuss and to talk about. And so that's why you're seeing not only senator sanders on this one but also president joe biden this is certain to be a talking point uh throughout the rest of his presidential campaign uh and of course that that's leaving aside questions about the future of his presidential campaign all right emily wilkins thanks for joining us healthcare the

worst performing sector on the s p which closed above,509 today. Now let's get to senior markets commentator Mike Santoli. He's looking at big moves. We just kind of, we kind of teed it up for you, Mike, in the bond market. Yes, of course, especially over the last few days, Morgan. So here is the three-month versus 10-year Treasury yield curve going all the way back 40 years, because I wanted to show this latest jump in perspective in terms of where it usually will end up going toward the end of a cycle. That zero line is very significant right around there. So obviously, it's inverted when this is below zero. That means longer-term yields are below short-term yields. And then it usually rises in advance of or coincident with a recession. So we're pretty far away from this going back up to on inverting. What is interesting

is that you did see obviously the three month yield is not going down until the Fed cuts rates. So usually it inverts because the Fed's getting really aggressive about cutting rates. The short end yields go down and either the long term stays the same or doesn't go down as much or goes up. So I think it's a different dynamic right here because we are seeing the longer term yields go up as people reprice. Yeah, the fiscal situation, maybe inflation expectations. And so hard to know exactly how to read this or, in fact, if this is more than just noise in the short term. Take a look at the market based inflation expectation projected out 10 years. So this comes from, you know, Treasury inflation protected securities.

It's right around 2.3 percent, kind of in the zone it's been for a while. But what is interesting is it fell down toward that Fed 2 percent target and then popped back up again in the last several days. So, again, we're going to be kind of twitching around these areas for now. I don't know that the market's going to, in a resolute, direct way, start to price in all the multiple scenarios down the road. But it definitely has captivated a market that has really been susceptible to worrying about Treasury supply in bursts over the last couple of years. We talk so much about the yield curve, and we also talk about the fact that this market cycle has been so different than others we've seen historically in a number of ways. What matters more, the fact that you have a yield curve, particularly, I know we focus a lot at CNBC on the two-year, 10-year, but

10-year, three-month is another one that gets watched very closely in general. Which of those spreads matters more and what matters more in terms of those spreads, the fact that they're inverted or when you see that de-inversion? Because I've heard some people say the de-inversion is what could be potentially a signal of a recession. Well, it has historically been, and it would be consistent with lags on both curves at this point. And both have been inverted for quite a long time. And again, the de-inversion usually occurs because the economy is falling apart and the Fed has to cut short-term rates. So that's the reason de-inversion has been because the economy is falling apart and the Fed has to cut short-term rates. So that's the reason de-inversion has been an issue.

It means you've gotten to the end of that cycle and the bond market either sniffs it out or just reacts to it. And so it's a little bit different right now. To your point about this being a different cycle, the Fed raised rates 500 basis points and the unemployment rate didn't budge, basically. So that's kind of never happened before over the course of that long a time. And of course, you know, stock market making new highs and all the rest of it. So we've been a little bit out of sync with the historical patterns on some level, John. Yeah, and maybe all bets are off. Mike, thanks for laying it out.

After the break, is Tesla's comeback sustainable? The Dow is now up 30% in the past month, jumping today on strong deliveries. T. Rowe's tech portfolio manager is going to join us with his take next. And later, J.P. Morgan Industrials analyst Steven Tusa brings his three top names in the sector for the second half. Overtime is back in two.

Welcome back to Overtime. Shares of Tesla repped higher today after beating Wall Street's estimates for second quarter's delivery. See it up there at 10%. Tesla's recent rally helped it claw back from deaths hit earlier this year. But it's still down nearly 7% in 2024, while the rest of the magnificent seven, remember those, are up. Joining us now is Tony Wong from T. Rowe Price, manages the firm's science and technology fund. Tony, what does Tesla have to say? What does the model have to be on full self-driving to make you comfortable with the valuation here at 80 times earnings? Yeah, I think it's a really good question. I mean, clearly, Tesla's not just valued as an

auto company. And so I think that we really need to see the advantages that Tesla's Demstrand pass really extend. They have a really big data advantage as well as now they're extending their computer advantage. And they bought a ton of GPUs. And I think that they really need to show, you know, version 12, 13, be big jumps in what they're doing. And so stepping closer to truly full self-driving. And then finally, I think that there needs to be a really solid business plan to justify the valuation. So how do we get there in terms of actually gross profit and EBIT over the long term with robo-taxis. And so I think there's a lot that the valuation commands right here, but I think we look forward to the next few months to see that unfold.

Do you have a take yet on whether you want to see that plan be capital heavy, where Tesla owns the vehicles that are out ferrying people around, or capital light, where they get other people to own them and somehow take a payment on the services side? Yeah, you know, I think that they probably can do a mix of both, right? So you think about what's what they have in the market right now is like a lot of fleets of autonomous, potentially ready vehicles that owners could lease out to a fleet or and that would be the capital wide approach or they could start their own where, you know, they already are pretty good at making cars. So I think that they have advantage of being vertically integrated here. And so I think they could test out both

business models. I don't think it has to be one or another. And plus, they do have a lot of capital. And I think part of their strength is their capital efficiency to really drive costs down when they have more volume. And so I actually think that both paths are pretty viable. OK. I mean, we've talked so much about AI, the companies that are most levered to generative AI. And certainly those are some of your top holdings here in the fund. We've also seen a lot of software names sell off, although in recent days begin to rally again. And some of them rally pretty aggressively. How are you thinking about those dynamics? Is there room in a portfolio for

both? Is there value to be had in some of these beaten down software names? Yeah, absolutely. I mean, I think that these software companies aren't going away by any means. And so a lot of times when you get these really big secular narratives, they are overblown in the near term. And I think that, but that doesn't mean that these companies don't need to react and pivot themselves to adjust with generative AI. But I think that there's a lot of incumbency advantage when you think about the software companies like Microsoft, ServiceNow, Salesforce, Workday.

They're so embedded in the workflow of enterprise. And so I think they've really earned the trust and as it all should be able to capture value with generative AI, you know, as customers like adopt that. And so I don't think we're just too early to really call, you know, who is like definitely a shared donor versus shared gainer. And so, you know, the valuations here can be attractive, you know, at the right point. What are your thoughts on Amazon, which has also rallied pretty aggressively here in the last, call it, week, maybe month? We just had AWS's new head of cloud on with John yesterday.

Is this a name that you would be looking to increase exposure to? Yeah, I think they've done a great job. And clearly, they're the biggest cloud provider. Developers love them. And in addition, I think you've got their cloud leadership plus the retail business that has margins that can really go up a lot. I think that you saw them really build out a lot of scale during COVID. And so from here, I think you have a big potential where they're really leveraging that and showing investors what they can do around EBIT. And so I think they're a very innovative company. They hustle. And so I've been always impressed with the management team.

And so I continue to like the company long term. Tony, is AI the thing that perhaps changes the narrative in the market about the cloud from being about top line growth to being about profitability and focusing on things like energy efficiency in the cloud and just the profit dollars that you can squeeze out from having what's perceived to be at least a better AI platform for customers to build on? Yeah, I mean, I think that, you know, in terms of the business model, I think we're going to see probably folks on top line growth among the cloud providers to grow and provide really good generative AI solutions where they invest and show their clients, their customers what they can do. And I think on customers, I think that they're going to look for generative AI solutions where they invest and show their clients, their customers what they can do. And I think on customers, I think that they're going to look for generative AI solutions in terms of really strong ROI payback on the cost. But then also, more importantly, the strategic abilities of generative AI to enhance their decision making.

So I think that there's going to be both top line and bottom line benefits that clients are going to be looking for. And the cloud providers will look to really need to provide a very compelling suite of products to attract customers to really invest on their platform. Tony Wong, thanks for joining us. Up next, Betterment's CEO joins us to break down the results of the company's annual retail investor sentiment survey as stocks sit at record highs. And check out PayPal as we head to break, getting a boost as Susquehanna lifts the name to buy from neutral. With that move, half of analysts are now bullish on the stock for the first time since January. Overtime, we S&P 500 and the Nasdaq at record highs.

You'd think retail investors would be feeling pretty good about their portfolios. Financial Services for Embeddement just released its annual retail investor survey to gauge sentiment among the crowd. And joining us now to discuss is Betterment CEO Sarah Levy. Sarah, it's great to have you back on. And that's exactly where we're going to start. You've got stocks at record high, albeit perhaps a small collection of names that have powered us to those levels. Is that translating? How is it translating in the survey results and how folks are investing across your platform? So overwhelmingly, I would say the word is anxious. And, you know, when we surveyed really all four generations of investors, we were somewhat surprised to see that the election and anxiety around the election is actually overshadowing everything. And really the two

themes within that were, I believe in, you could see the polarization, right? The political polarization. If the other guy wins, I'm going to pull money from the market. And that was true of both political parties, which we found kind of interesting. The other thing is, you know, focus on inflation, right? People are feeling it in their pocketbooks and that is holding them back. And then interest rates. Everybody is then interest rates. Everybody is following interest rates. Three quarters of those surveyed are focused on interest rates and chasing yield. Interesting. And we talked about the $6 trillion in cash on the sidelines. Is that what you're seeing then, especially when you do have high-yielding assets

and money market funds and cash investing instruments that can provide that yield? That's exactly what we're seeing. And, you know, we would have thought that some of these records in the market would have spurred a little more consumer confidence. But I think the looming election is really, you know, the overwhelming factor here. And so people are sitting in cash. They like to see those yields. I think to some extent, there's not a full understanding with the retail investor of after-tax yields and how some of those big numbers translate after taxes. So I think that'll be sort of interesting for people to digest. war movement into other, you know, tax equivalent yield products and other bond products to continue to chase yield while we wait for the for the election cycle to shake out. Hey, Sarah, good to see you. Reflect with me for a moment on this is what jumped out at me from your survey, the generational impact of time in the market. If you're Gen X, a boomer, or older, and you had a decent amount of cash in the market,

even pre-financial crisis, but certainly pre-COVID, then boy, you're feeling pretty good, if you've been riding the S&P this whole time. But how much of that anxiety might be based on, OK, you're trying to buy a home for the first time, or you're trying to build up your retirement and your emergency fund and things are already expensive, including stocks. You're right. I mean, the generational it's in some ways it's predictable. Right. So first time homeowners or folks seeking homes for the first time are basically saying, I'm waiting longer. I'm sitting on the sidelines. I'm waiting for rates to come down. I can't buy that dream home that I want, you know, that I always thought I would buy at

this time in life. So we're definitely seeing kind of a delay there. We're seeing, I think, less reaction out of the older generations who, as you point out, John, have, you know, have had a nice run up and are saying, look, I understand compounding. I understand time in the market. I've benefited for that. And I'm going to stay the course. I think what you see with the younger investors is that they don't have the benefit of that history.

And so there's a lot more FOMO. There's a lot more advice being sought from social media, which to me was actually one of the biggest findings in the study was how social media is playing a role in people's investing decisions. And some of that's a little scary. I wondered about that because all kinds of experts now are on social media. I mean, we've got a social media presence on CNBC as well. So how much of that is people who are purely social media, like a roaring kitty, influencing investors? How much of it is just social media has become a major channel now for people to get all kinds of

information? That's a really good question. And I think it's probably hard for us to completely dissect the results in that way. But I think the distinction across generations was so clear that it really led us to believe that it was a broader seeking of social media and not necessarily the experts. Now, interestingly, the number one source for advice across the generations was and is financial advisors. So that to us was a great sign that people are seeking out, you know, solid advice and the right brands. But we asked about brands like CNBC. We asked about TV. And again, the older generations were looking to these brands and the younger generations are really like believing whoever is in their feed. And that to us is a little bit more concerning. Would you, I guess, just looking

back at previous years where you've done these surveys, has anything been atypical or different than what you've expected to see depending on where we are in a cycle, be it from an election standpoint or rate standpoint, or is this trending with right where you'd expect to be right now? I think it's mostly trending. I would say the two things that stuck out as a change was a sharp increase in social media. And so I think that is notable and we've got to continue to watch that. And then I guess predictable, but also a big change year over year was emergency savings and how many of the retail consumers have actually pulled money out of emergency savings just to pay the bills in this last year. And so I think that's a little bit worrisome just about how savings rates.

We talk about money on the sidelines, but that's for people who have the money on the sidelines. Yeah. Important point. Thank you, Sarah. Sarah Levy from Betterment. Thanks, John. Well, time for a CNBC News update now with Pippa Stevens. Pippa. Hey, John. The Biden administration told emergency room doctors that they must provide emergency abortions when necessary to save a pregnant woman's health. In a letter obtained by the AP, the administration reminded hospitals and doctors of their legal duty to provide stabilizing treatment, which includes abortion. This follows last week's Supreme Court ruling that failed to decide whether state abortion bans override the federal rules. The U.S. will provide Ukraine with another $2.3 billion in military aid. Defense Secretary Lloyd

Austin announced the new funds today after meeting Ukraine's defense minister at the Pentagon. The assistance will include anti-tank weapons and munitions for Patriot missiles. And Google fell short of meeting its climate goals last year. Google had pledged net zero emissions by 2030, but its annual environmental report released today said the company's emissions grew 13 percent compared to the year before, mainly driven by the intense energy demands of artificial intelligence. John, back to you. That's going to make it tough on everybody indeed. We were just talking about that with AWS yesterday, Pip, but thank you.

Well, after the break, new data from Intuit, shared first with CNBC, shows some big red flags for the jobs market in small business. Those details are next. Plus, Mike Santoli breaks down one key part of today's job openings and labor turnover survey, jolts that the Fed is watching closely. Welcome back. Intuit today releasing its small business index report for the month. It shows employment in June for the smallest businesses, those with fewer than 10 employees, decreased by 60,000 jobs, continuing in 2024's downward trend. All 12 sectors covered by the index were down, with professional and business services seeing the biggest monthly drop. And this comes after this morning's JOLTS results showed job openings in May topped expectations. Hiring also picked up. Mike Santoli's back with a look at what today's results could mean for the Fed. Mike. Yeah, John. So job openings were up, although

from a downwardly revised previous number. The overall picture is one of a cooling but still strong labor market. One of the measures is number of job openings per unemployed worker. So obviously, unemployment claims have trended a little bit higher from very low levels. And of course, job openings have come down significantly. When this was two, when basically there were two job openings listed for every unemployed person in the country, Jay Powell of the Fed basically sounded an alarm and said, look, we have too much labor market tightness, too much wage growth pressure. So here we are now. It's actually just a little bit below one and a quarter.

And it's right around the highs from before the pandemic, which was a tight, full employment labor market, but one that was sort of manageable and was not necessarily fueling inflation. So it's one of those things that is definitely fitting into that category of what the Fed would prefer to see. Maybe they want to have more confidence that, in fact, the job market is softening up. But I thought it was interesting, John, today that Powell did make a gesture in the direction of, hey, we don't want to make we don't want the labor market weakness to get away from us here. Now, Mike, I know that just because there's an open job doesn't mean the unemployed person is qualified for it. But is this an instance where if you get below one, then that indicates some, I don't want to say looseness, but at least lack of tightness in the job market overall?

Yeah, it would. It honestly would. I mean, if you look back here, well, I mean, this was a decent economy, but a slow growth one back in the early 2000s. But really, what's most pronounced is, you know, less than half a job opening for every unemployed worker in the aftermath of the global financial crisis. That was a very sluggish and slow recovering labor market, one that you don't want to necessarily see come back. And arguably, structurally, demographically, we probably won't be too vulnerable to going back there. But we'll see. All right. Mike Santoli, thank you. Industrials have hit a rough patch recently after outperforming the S&P 500 through the first four months of the year.

But up next, J.P. Morgan's Stephen Tusa on the three stocks he thinks could be poised for upside. And homebuilders Lennar and D.R. Horton among the biggest losers in the S&P 500. Citi downgrading both stocks from buy to neutral, setting concerns about a slowing housing market. We'll be right back. Welcome back. The industrial sector higher today as the S&P 500 pushed to a record close, but up just 6% near to date. The fourth worst performing sector, which names might be poised for an upside in the second half? Well, joining us now is J.P. Morgan senior analyst Stephen Tusa, six-time ranked number one in Institutional Investors All-America Research Poll.

It's great to have you on the show. We've been teasing it all hour, so I'm going to start with it. Top picks. What do you like as we have seen some profit taking from this sector after a strong start to the year? Sure. Thanks for having me. So over the last about 18 months, the big driver for the group has been multiple expansion, but underlying that has been earnings revisions, positive earnings revisions. The group's up about 10 percent this year, and as you said, it's underperformed the S&P, so it's derated a bit as economic concerns have magnified here in the last month or so. But earnings revisions have been effectively flat. The best performers have been those where

the earnings revision has been positive. You a 5% earnings revision has resulted in 30% upside in names like Eaton and Train. And for a name like Vertiv, Vertiv's up 80% on a 10%-ish positive revision. So what we're trying to do here, heading into a second half where we will characterize the corporate tone as cautious stability, we're still looking at positive earnings revisions on the one hand at the high end of the barbell but keeping an eye on valuation at the other end of the barbell uh as you know uh basically the the drivers of our of our top picks um our top pick heading into the second half would be vertive um stock has pulled back here recently on a combination of demand concerns around AI applications,

not potentially not playing out in line with the related capital expenditures that are coming, as well as some concerns around competition coming from Asia. We think those concerns are overblown, that they're going to see a very nice sequential increase in orders, which suggests dramatic earnings upside in the years ahead to the tune of 20, 25 percent. We're 10 percent above consensus today. Stock has pulled back about 15 percent. We think it's a good time to reload. The second one would be eaten similarly in that direction. An electrical that has data center as well as grid exposure where we see 5% to 10% earnings upside. That's also derated a bit. And then finally, 3M, which is much more of a value

play. Those are the three. Okay. And of course, Eaton Invertive, names that we know very well on Overtime, in part because they have been part of that AI infrastructure build-out halo effect in terms of some of the moves we've seen there, as you just flagged. 3M has a new CEO. This is going to be the first earnings that we get with him, Bill Brown, former aerospace and defense guy at the helm. We also know that 3M, like some of the other big old school industrial conglomerates, has been looking to simplify its portfolio. What do you expect with new leadership at the helm? Yeah. So first of all, I think the former management team has done a pretty good job with the setup here. They cut the dividend in the first quarter. So we've gotten that negative

catalyst out of the way. They've cut it to a reasonable place. It implies a very stable free cash flow that's just above where consensus was when they cut it. So some decent momentum in the core business. They also undertook a major $700 to $900 million of restructuring. Those costs are now flowing through. That should flow through more next year. So the setup here for the new CEO is pretty good. We expect him to continue to execute on margins. That's been a pillar of what he's done over his last couple of experiences. And he will tinker a bit with the portfolio. We think there's opportunities here perhaps to sell some businesses, maybe do a couple acquisitions here and there. Obviously, the big lever here is the PFAS liability, which is uncertain. But even assuming a pretty sizable leg two or three of the PFAS liability, we still think there is, you know, 15 to 20 percent upside here.

And that's really the margin expansion in the portfolio are really going to be two key focuses for him. on the energy space and particularly the energy requirements of AI outside of Eaton, Invertive, and those direct data center plays. We were just mentioning that Google is off pace to meet its environmental commitments. And we've been hearing a lot about how in the industrial space, there's a lot of upgrading, renovating going on to maybe meet LEED certifications, things like that. Where else can you as an investor play that gap that's opening wider between where companies want to be with energy consumption and where they are right now? Yeah, well, obviously HVAC stands out as the big driver there. About 40% of the world's energy is consumed by buildings. And obviously,

data centers are throwing off an increasing amount of heat over time, especially with AI. The three major HVAC companies that play here, A, Vertiv is the largest data center HVAC player out there. About $2 billion of their $7 billion in revenues is HVAC. So they lead the pack here. They would be followed by JCI, Johns Controls, who has about 10% pro forma exposure to data centers, and then Trane Technologies, which is high single-digit exposure. But all of those guys are seeing a fero ferocious um cycle on orders that's just started here so really would be the hvac side and and jci uh and train carrier would be uh the third

largest exposure um on the hvac front but they're further down the line when it comes to um to that exposure international play here um well i mean on the electrical side it comes to that exposure. International play here? Well, I mean, on the electrical side, it would be more Schneider, but I don't cover Schneider, so I'm not quite sure I'm going to comment on the stock here. But on the HVAC side, it really is the U.S. company. Stultz is a company out of Austria, but they're private, so, you know, not really investable in the public markets. Okay. Stephen Tusa of J.P. Morgan breaking down for us. Appreciate it. Thanks. Well, we're just over a week away from finding out this year's top state for business. And Scott Cohn is looking at why insurance could play a big factor in this year's winner. Scott.

Yeah, John, you know about the insurance crisis in Florida, here in California, but it is definitely spreading and it is affecting competitiveness, among many other things. We'll tell you what's going on and how it factors in this year's top states for business rankings. That's coming up on Overtime. Welcome back to Overtime. Insurance premiums are skyrocketing across the nation. Some carriers are even leaving states, raising costs even further. And that's why Scott Cohn is looking at the impact of insurance in the ranking of this year's top states for business. Scott.

Hi, John. Yeah, we're in Bonny Doon, California, about 75 miles south of San Francisco. And we're here because this used to be a thriving neighborhood until one of the biggest wildfires in California history roared through here and destroyed many, many of the homes. Four years later now, they have just begun to rebuild. A big reason it's taken so long is insurance. And don't think something like this can't happen where you live. This fire sparked by lightning in 2020 destroyed nearly 700 homes. Today, two-thirds have still not been rebuilt. Many homeowners were underinsured or

uninsured. And even if they can rebuild, getting new insurance is next to impossible. At least eight carriers have either stopped writing new policies in California or left the state. In Texas, Houston real estate broker Bill Baldwin says deals are falling through when the insurance companies start making demands. A new roof for roofs that are only seven years old or ten years old. They want trees cut down that are within 20 feet of the house. Oftentimes, those trees are on the neighbor's property. After disasters like Hurricane Harvey in 2017 and the 2021 deep freeze, insurance agent Lise Yu says carriers are desperate to reduce their risk. In my book of business alone, we have

over 500 clients that have gotten non-renewed in the last year. And in Florida, where the crisis began, the state's insurer of last resort, Citizens, says the number of policies has tripled in four years. 1.2 million people who can't get insurance anywhere else and rates are rising. From a site selection perspective, those high insurance rates make it more difficult for companies to recruit and retain a workforce. That's not all. This is also affecting commercial real estate, killing commercial deals like it's killing residential deals. So we factored all of this into top states this year, both in the cost of living and cost of doing business categories.

You can see how we're doing that. And you'll be able to see next week where your state ranks at topstates.cnbc.com. Scott, I'm looking forward to this and that ranking next week. It's one of those things that we wait with bated breath for every year. I mean, just to go back to the insurance piece of this, I was just saying it in the break before this. I don't feel like we've ever talked about insurance or insurance premiums as much on TV as we have this past year, in part because of what we've seen in the role it's playing in inflation, but also, to your point, because of what we've seen with natural disasters.

So in terms of this picture and this landscape, how much more has it had to factor in than it has in years past? Well, we've never looked at insurance per se in years past, but one of the reasons that we did it was we're getting a lot of data from an outfit called First Street Foundation that quantifies climate risk. And they say that 40 million properties across the country are now at risk of losing their insurance. So that's a big deal. And again, the fact that it's actually killing deals and raising costs, whether it's cost of living or cost of doing business, it really was something we could not ignore. And being in California, it's really hard to escape it, I can tell you firsthand.

Yeah, and certainly regulatory environments don't necessarily and policies don't help either, which we've seen in California, for example, with some insurers deciding to leave that market. Scott Cohn, looking forward to all your coverage here in coming days. Thank you. Investors will be closely watching the latest Fed Minutes, which will be released tomorrow after the holiday shortened trading session. Your Wall Street look ahead is coming up. We've got a news alert on Apple. Kate Rooney has details. Kate?

Hey there, John. So Apple is reportedly poised to get a board observer role at OpenAI as part of its AI deal with the AI company. It would further ties between the two companies. This is according to Bloomberg, citing sources familiar with the matter. Apple declined to comment. We also reached out to OpenAI and have not heard back yet. This would be Phil Schiller, the head of Apple's App Store and former marketing chief. He has been chosen for the role. According to this report, the move follows Apple's announcement in June. It's going to offer chat GPT on iPhones and Apple intelligence. Some context here, though. This is key. Microsoft also has a board observer seat at OpenAI, but it has also invested $13 billion in OpenAI.

But big news and reported news here from Apple. John, back to you. Kate Rooney, thank you. Super interesting, too, since OpenAI has such a small board to begin with. Well, looking ahead, Constellation Brands reports tomorrow morning shares of the beer, wine and spirits maker have significantly underperformed the benchmark index this year. The market closes at 1 p.m. Eastern tomorrow as well ahead of the Fourth of July holiday. But investors will be closely watching the latest Fed minutes, which will be released at 2 p.m. We will have full coverage of any Fed fireworks in a special edition of Closing Bell Overtime. You can catch us here

1 to 2.30 p.m. Eastern. And what's still just sticking with me, well, first, well, here's something else to watch tomorrow. As you mentioned, special edition of Overtime. Market closes 1 p.m. tomorrow for the holiday shortened day. Action keeps going as we're going to bring you instant reaction to those Fed minutes. Sarah, leave it from Betterment and the whole question, do you have a home with a bunch of equity in it and a low rate? Do you have stocks and an emergency fund? If so, this market, this economy feels entirely different to you than if you don't. And if you're older, you tend to have those things. That's right. It's the bifurcation that we continue to talk about. I'd also note we closed above $5,500 for the S&P. It took us 14 trading days to get from $5,400 for a close to $5,500.

That does it for us here at Overtime. Fast money starts now.