Closing Bell - Closing Bell: Overtime: Reacting To The Fed + Why Stocks Slid Into The Close 9/20/23

Episode Date: September 20, 2023

Stocks slid into the close, ending near session lows after Fed Chair Powell’s press conference. Jefferies’ David Zervos and BD8 Capital’s Barbara Doran break down the market retreat. Former CEA Chair Jason Furman and Evercore Vice Chairman Krishna Guha on the Fed’s decision and what it means for the rest of the year. Broughton Capital’s Donald Broughton reacts to FedEx earnings after the stock moved higher on strong EPS guidance. ServiceNow CEO Bill McDermott on its AI announcement. Seaport’s Kenneth Zener on KB Home’s earnings. 

Boy, that's a score caught on Wall Street. The grade slipped right there into the close. Session lows. Winners stay late, though. Welcome to Closing Belt Overtime. I'm John Ford, back with Morgan Brennan on set here. Coming up this hour, we're parsing through the Fed. We will talk to former Council of Economic Advisors Chair Jason Furman

and Evercore ISI Vice Chair Krishna Guha for their first reaction to Chair Powell's comments. Plus, big-name earnings are coming your way at this hour. We've got another Fed, FedEx. Also, KB Home will bring you the numbers and analyst reaction to both of those names. But first, let's get to the market reaction to the Fed. Stocks finishing at the lows of the day, selling off during Chair Powell's news conference. MegaCap Tech getting particularly hard hit. Alphabet, Apple, Meta, and NVIDIA among the worst performers.

Joining us now, BD8 Capital's Barb Duran and Jeffries' chief market strategist, David Zervos. Our own Michael Santoli with us as well. Barb, my takeaway from the Fed today was no really higher for longer. And I wonder if you think equity prices and bond yields, I mean, doing what they did, though, you know, a lot of this, if they yet adequately reflect that. Hmm. Who are you directing that to, John, myself or Barb? I was asking Barb.

Oh, I'm sorry. I'm sorry. Yeah, no, I think this moment there, more than reflecting it, because what I heard was actually very positive. Powell talked about the strength in the economy, the strength in consumer spending. They doubled their GDP for this year and raised it for next year, at the same time saying the trend of inflation looks down. Now, strong GDP is good for earnings, which is good for the stock market. I think the market, I'm a little bit surprised at the reaction because I think it's been clear for a while

that higher for longer is going to be the mantra. And what I also heard the Fed say today was maybe one more interest rate cut. So the Fed is pretty much done. And the fact that they talked about fewer cuts next year just means to me that they're not likely to overshoot. At least that's what they think right now. So I interpret it very differently than the market is right now. Yeah, maybe one more hike. David, is the market, though, now pricing in no hikes, continuing growth and no major impact from strikes, for example? I don't think so, John. And in fact, you know, in the recent weeks, it's come off a little bit. But the amount of rate cuts that were priced in

to the market a few weeks ago were still almost about 100, if not more. If you looked at the futures market between December 2023 and December 2024, the inversion in the SOFR curve or what used to be the LIBOR curve. So I think it's actually, I'm kind of going the other way. I think the Fed was particularly hawkish today. I think the move to take 50 basis points out of their forecasts for next year of rate cuts and move it from 75 of cuts to just 25 of cuts or so is actually a pretty significant move. And really, I think quite a change by the committee members in their outlook for growth in particular in unemployment secondarily and still a pretty benign inflation story. So I kind of like this market reaction

and maybe there's a little bit more discomfort to come as we go in toward the end of oil as we get into Q4. OK, I want to get into that a little bit more. But first, Santoli, I want to get your thoughts on the fact that we did end the day lower. We started the day higher. It looks like the 10-year Treasury yield is touching a fresh high going back to 2007 post-Fed as well. We know we saw a move higher in two-year yields, too. I mean, is that sort of what triggered increased selling in equities? It absolutely was all part of the same reaction, I would say. I mean, also, I'd want to get out there the disclaimers, which is that on net reactions to Powell press conferences tilt negative and the market is often very squirrelly on Fed afternoon and then you got to see the next day to see if there's a little bit of a rethink all that being said the equal weighted S&P was down a third of a percent today the heavy selling did happen in the big index stocks in the NASDAQ and yeah we repriced the Fed path in the form of the two-year note yield going up to 517. So that's a new high as well. So yep, the higher for longer message filtering

its way through. I don't think that means that somehow this profound change for equities, but besides what we thought before, look, it still didn't answer any of the questions the market is most concerned with is, can the economy and the consumer handle what's already happened in rates, what's happening in energy? And I think that's why the next move by the Fed, whether it's the remainder of this year or into next year, isn't as important as what we've already gotten and whether the market can handle it. If they're going to be going too far, they probably already did. Yeah, it sort of speaks to that steady drumbeat we've heard from Powell on data dependent. We've got FedEx earnings out. Frank Holland has the numbers.

Frank. Right now, after a miss on revenue and a beat on EPS, guidance was mixed. FedEx lowering its revenue guidance, now seeing flat revenue growth compared to a prior outlook of flat to low single digit growth. You can see shares are moving higher right now. The company also raised its EPS guidance, now 17 to50 compared to the estimate of 1750. In this report, CEO Raj Subramanian, he talked a bit about the company's transformation plan that began just about a year ago, saying in part, first quarter results improved primarily due to the execution of the company's drive program

initiatives and continued focus on revenue quality. However, he added it was partially offset by ongoing demand weakness, something both FedEx and UPS have flagged. However, he added it was partially offset by ongoing demand weakness, something both FedEx and UPS have flagged. Ground, basically their B2C e-commerce business, that was really the strength of this quarter. FedEx also buying back $1.5 billion in stock for this fiscal year. So again, FedEx share is moving higher right now, higher than just about 3% right now. After a miss on revenue, a beat on EPS, they lowered revenue guidance for the year, but raised EPS guidance. The call starts at 5.30. Back over to you. Okay. Frank Holland, thank you. Let's get back to the Fed and our panel. But first,

Santoli, do you want to get your reaction to what we just heard from FedEx? I mean, shares are popping right now, despite what was a mixed report, speaks, I think, perhaps the EPS raise to the ongoing cost-cutting efforts. Well, that's exactly it. It's a strategic management story as much as it is a macro story right now. So taking some heart in that. Not a huge buyback announcement, a billion and a half, but it's a couple percent of market cap. So that doesn't hurt either. We'll see if the reaction holds through the call. OK, let's get back, as I mentioned, to the Fed. Let's bring in our Steve Leisman, who is in the room for Chair Powell's news conference. Steve, break it down for us. Yeah, I'm in I'm in the Zervos camp there in terms of the hawkishness of it. But I will add

what Krishna Guha called it was a bullish hawkishness, which is obviously mixing animal metaphors there. But I think it works in the sense that what they did is they did boost the growth forecast. That's good news. They lowered their unemployment forecast. That's good news. But they kept they got rid of a half a point of cuts there. And yet they kept the inflation rate at the same thing. So one way to read that is they're going to need to do more with the funds rate in order to achieve the same result on inflation.

Powell told me he didn't think that that meant more persistent inflation. But I think on the face of it, it actually does, that they do see it as more persistent. He said it's more about there being higher growth. And by the way, he also conceded perhaps it means that the neutral rate for the funds is higher. What does that mean for investors? It means you could probably count on higher rates for longer even once we get past this inflation threat. Some of the members of the committee, Morgan, ended up actually raising their estimate of the long run rate more towards 3% from the previous 2.5%. So there's a lot of stuff for people to think about.

The only good news, I think, with this idea of the more hawkish outlook is towards 3% from the previous 2.5%. So there's a lot of stuff for people to think about. The only good news, I think, with this idea of the more hawkish outlook is Powell said several times he's going to go more slowly. So that means that if there is a mistake in the offing, well, perhaps he'll have a chance to take it back and not go quite so far down the path. I am worried that if they do follow through with this forecast, they may, I guess what the phrase is, is snatch defeat from the jaws of victory. That if they maintain a rate that's too

high for too long, the result could be the recession they've avoided so far and missing that soft landing. Steve, thanks. So David Zervos, this just brings to mind for me, I'm trying to get to a bottom line for investors out there, pressure, right? These higher rates are supposed to be putting pressure on the economy to get things rational, you know, slower, but hopefully not painfully slow, right? But this pressure, whether things go higher or just stay where they are for a long time, is going to have to play out. And it's going to play out probably longer than some market participants had expected a few months ago absolutely john and i think there was a bit of a tortured discussion of that today with with jay he he talked about the neutral rate and the long run rate and somehow made them different at times i think it's a kind of I think he confused things a

little bit for me and really talked about this higher neutral rate that Steve was alluding to, that some of the participants seem to be moving in a direction that's higher. There seems to be a view coming through and part of the committee that they're going to have to keep real rates a little higher for a little longer just to make sure that they can get this inflation shock out of the system. And what scares them is not the inflation. It's not what's happened with inflation. I think they're quite happy with that. It's the growth and what that means around the risks of inflation going forward. The growth has surprised them. And I think it scares them a little. And that keeps them much more vigilant in 2024. And that's what they said in the SEP today. So, Barbara, if you have stronger growth, more resilient growth, and I realize the Fed didn't

just up its GDP forecast for this year, but next year, too. Is that good for equities longer term? Yeah, I think it's very good. I mean, it isn't good, obviously, if inflation, you know, were to reverse and start creeping out. But if you notice, Powell also cut the inflation target for next year to 2.6 from 3.7. So and he said, you know, Steve just mentioned about going slowly. He also said inflation will come down over time. So what I hear is they're being patient. They don't want to overdo it. They're aware of the cumulative and lagged effects. And so they're going to be careful here and not derail this growth. So, yes, strong growth, strong GDP is good for stocks because it's good for earnings, which is what stocks go up or down on. So I still see this as a bullish call.

John, I just want to add one thing. I worry a little bit that, you know, when a guy comes in with a bad infection, the doctor goes, give him a thousand cc's of an antibiotic. And then as time goes by and the patient gets better, you need less of that antibiotic. Here's the Fed effectively pouring it on. Their real rate, if you calculate that by using their inflation forecast for next year and subtract that from their funds rate, is actually higher next year. So they're pouring more antibiotic on next year. And by the way, the Fed can't escape this real rate stuff. For 20 years, they've been telling me, forget the nominal rate, look at the real rate.

That's the policy thing. Well, guess what? Their policy gets more restrictive next year. And I think they may have to do some explaining about that. But Steve, to switch the metaphor around, what if hot inflation and continued growth is actually a fever for the patient, right? That they're trying to bring down and it's just not coming down fast enough. Or, you know, do we go into alcohol bath mode or do we just, right? I mean, they're trying to keep treating that fever so it doesn't get out of control.

I like what David was saying. And I think the issue is this. Powell has been saying for two years that bringing down inflation will require a period of below trend growth. And I'm sorry to leave your metaphor, John, but I'm not quite sure how to fit that into my answer here. But here's the thing. He has gotten the inflation coming down without the below-trend growth. And I think what David is saying is they're just scared of that. That violates the way they think about the economy and the inflation dynamic. And the fact is the inflation dynamic. And the fact is,

the inflation dynamic has been of its own making. It's its own thing right now. And it's largely resulting, I think, from those supply chains clearing up. And the Fed just does not feel comfortable going out on that limb and saying, you know what, we can have stronger growth, we can have trend growth and inflation coming down. So, of course, David, I want to get your response to that, especially since you've been talking about positioning as an investor for a soft landing for quite a while before many other market participants have now played catch up in terms of revising their S&P targets higher and the like. And one of the things you've pointed out ahead of this meeting today was the balance sheet and the role that's playing. Yeah, Morgan, we've been, you know, in a credit risk on mode.

High yield credit has been our story. You know that we've mentioned that. And, you know, obviously, I think Jeff Gundlach was pushing that in the last in the last segment and has been alongside of a number of meetings so you know we did not think that the recession story was really a viable story and that you know we were worried about equities because real rates were going to stay high for longer but the credit story still is our story i will bring the balance sheet in and you guys are all fiddling around with medical uh metaphors and a bit of, you know, antibiotics and drugs that are used to fix patients that are sick and maybe take away some of the medication. Remember, we still have a stock of QE in the system. The balance sheet as a percentage of GDP was 40 percent

prior to starting QT and is still in the mid-30s. Prior to the global financial crisis, the balance sheet of the Fed was at 5%. That stock of QE, not the flow, the stock acts like a painkiller. We have a lot in our system. That QE is grease to the wheels. It also has some socialization structures with the losses that come in fixed income that the Fed takes, the market doesn't have to take. We've written a lot about that. And we think actually the stance of policy is a lot easier. And the 525 basis points that they put in has been dulled down by the existence of QE, the stock of QE, and the failure or the desire by the central bank not to remove that QE before

they raised rates. And I think that plays a huge role in why this cycle just hasn't been as potent from a rate hike standpoint as many have been in the past. We could dive into that a lot deeper, but I saw you guys all going into the painkiller metaphor. So I'll throw out that the stock of QE is a massive painkiller that's still in our system, and it nullifies a lot of the pain that comes from rate hikes. All right, David, Barbara, thanks for joining us on Fed Day. Your hair looks especially good, both of you. Steve Leisman, the dome is looking good. Mike Santoli, we'll see you in a bit. Meanwhile, KB Home earnings are out. Steve Kovac has the numbers. Steve.

Here, John. Yeah, and shares are down about 2% despite beats on the top and bottom lines. Let me give you the results here. EPS coming in at $1.80 versus $1.43 expected. Revenues a beat as well, $1.59 billion versus the $1. billion dollars expected. CEO saying in a release, though, you know, comparisons look pretty tough. They had a strong quarter in the year ago, year ago quarter, which could be why we're seeing shares falling here. But the CEO also saying demand is strong and they're in a good position for the rest of the year, John. All right, Steve, thanks. Mike Santoli stock down about a percent. But granted, we haven't heard the call yet. That's just the initial reaction. What's your take on these numbers? Yeah, I haven't heard the call.

I mean, I think really nothing to to get too alarmed about in the numbers. It seemed like they were in the in the zone of what you'd want to see that you are pushing against. Of course, new highs on the 10 year Treasury. You're pushing against where mortgage rates are. And general sentiment, NHB survey really weak this past couple of days. So, you know, we'll have to see how that all shakes out after we know maybe a little more about what they're seeing in current customer traffic and order trends. Yeah, that could mean higher mortgage rates for longer and maybe higher incentives, which eventually might get painful. Mike Santoli, thank you. When we come back, former Council of Economic Advisors Chair Jason Furman and former Evercore ISI Vice Chair Krishna Guha are going

to give us their first thoughts on today's Fed decision. Plus, we'll tell you the one factor that Jeffrey Gundlach said could cause the Fed to hike again. And we will have much more on today's After Hours action, including what one longtime industry watcher wants to hear from FedEx management on the earnings call. Overtime is back in two. Welcome back. The IPO market coming to life this week, kind of with the second listing in as many days. Klaviyo finishing its first session higher, but off its best levels after the marketing automation firm priced above its range at 30 bucks a share. And check out Instacart,

which jumped double digits yesterday, but pulled back sharply today, briefly dipping below that $30 IPO price before closing just above it. Meanwhile, Arm pulled back today, getting nearer to that $51 listing price and way down from where it was trading on that first day of trade. And since Morgan, I was in San Jose, heart of Silicon Valley for a little less than 48 hours. I met with two CEOs in particular, a few, but two CEOs who are perhaps looking to go public within the next 12 months. And they're very closely watching the market reaction to this. It doesn't mean they will, but it's kind of like warming up on the sidelines, right? Not quite throwing on the field, but like warming up on the sidelines.

As long as things stay stable, as long as the market doesn't fall apart, it sounds like people want to get in. Yeah. We heard something similar from Gary Tan of Y Combinator yesterday, too. This idea that maybe, in fact, this IPO window is opening up and everybody is watching this very closely. I saw one market note today saying something like $74 billion of pending IPO deals that are in the pipeline. So certainly this does seem like a litmus test. But it's also key, I think, to remember that, you know, there's there's winners and losers on every side of this, because what we've seen is, you know, higher prices, high, you know, high offerings. That's a lot of demands. The IPO price is higher, an initial pop. But then if you jumped in after it started trading on some of these names, maybe you're not seeing this as positively as the

companies that took that money when the table when they went public. Yeah, not if you didn't jump right out. Yeah. All right. Well, turning back to the Fed, the double-eyed capitals, Jeffrey Gundlach on our air last hour responding to today's news conference. Here's what he had to say about the potential for another rate hike. Take a listen.

I think the probability of rate hikes is higher than what I thought before this oil spike happened. The oil spike is really going to be problematic. We already know that the base effects, the roll off of the CPI, is going to lead to very likely inflation going back up. All right. Let's bring in former Council of Economic Advisers Chair Jason Furman and Evercore ISI Vice Chairman Krishna Guha. Good to have you both on. Jason, I'm going to start with you. Your reaction to those comments from Gunlock as we have seen energy prices move higher. We do have D.C. dysfunction.

We do have a UAW strike and and labor agreements that are that are yielding higher wages for workers in this country. How does the Fed navigate all this? Look, I think the Fed right now is in or mode on rate hikes. If we get higher inflation, and that's core inflation, they're going to look through the oil stuff, then you get higher rates. Or if we get much higher growth or lower unemployment, then you also get rate hikes.

The reason they were higher for longer in today's dots wasn't that they were more worried about inflation. It was the other half. They were less worried about unemployment. That gives them a little bit more room to raise rates. Yeah, it's not so much that inflation is necessarily going to move higher, but that growth is stronger than had been anticipated as well. So, Krishna, it takes us to Steve Leisman gave a shout out to your to your note. And I do want to get straight to that, this idea of bullish hawkish from the Fed and from Powell today. So that's right. I mean, as far as the rate outlook goes, rates high for longer.

So that's hawkish. But why? Because they're pretty bulled up on the economy. You know, they are extrapolating forward the recent surprise strength that we've seen in the economy, and they are embracing a soft landing story. You know, the economics of this is pretty dazzling, right? They do believe that with rates that only come down very gradually, we can get inflation back towards target without unemployment ever going above 4.1%. Now, if you'd said that to a lot of mainstream macroeconomists, even six or 12 months ago, they would have looked at you like you were probably crazy.

Huh. So, Jason Furman, what does this mean? What does the setup mean for Q4? Really important consumer driven quarter. We're going to be there in two weeks in the quarter anyway. Amazon saying they're going to hire a quarter million people getting ready for that. And we've got strikes happening now in some pretty big industries. Amazon saying they're going to hire a quarter million people getting ready for that. And we've got strikes happening now in some pretty big industries. What needs to happen in Q4 for the economy to keep threading this needle? Look, first of all, the FOMC forecasts seem to implicitly be assuming a decent amount of slowdown in Q4. They don't give us their quarterly numbers.

They said for the year, growth would be 2.1. Given what we know about Q3, which is going to be about 3%, that probably means about 1% in Q4. So they do see a bit of a slowdown there. And you see that also from the unemployment rate rising, not nearly as much as they used to think it was going to rise, but they still have a rise penciled in for next year. In order for us to have positive growth in Q4, which by the way, would certainly be my forecast for Q4, it's going to require at least some continued strength by

consumers and that to be joined by a reversal of the declines in business investment that we saw at least up through the middle of this year. Christian, are you expecting the same kind of strong Q4? I would certainly expect Q4 to be positive. I mean, there are a whole bunch of things that could interrupt the data in the near term. Powell talked about some of these things in the press conference. The autoworkers strike, a possible government shutdown, spillovers, a resumption of student loan

repayments. But the underlying trajectory of growth does seem strong. And that, of course, is why the Fed is saying, OK, look, looks like we are maybe going to get that soft landing with only a moderate deceleration and probably a slight increase in unemployment. But if we do get that, don't expect early big rate cuts. Jason, we know it can take a while for all of these rate hikes that we've seen over the past year and a half to work their way through the economy and have full effect. When do we know? When can the Fed or the markets actually claim victory and say a soft landing has been achieved? I think it's going to be a while before we can be at all clear and declare victory. I also think the degree to which those monetary policy lags are long and variable is greatly overstated.

Monetary policy works through a number of channels. One is through the stock market. Well, the stock market's been going up lately, not down. Another is through the dollar. The dollar is going down lately, not up. Another is through mortgage rates. Most of the increase in mortgage rates happened more than a year ago. There's been another round of it lately. But a lot of what's happened in monetary policy, I think, has already worked their way through the system. What needs to bring inflation down now is less lagged monetary policy and more just the underlying dynamics of an economy that I think has room for positive growth, but certainly less room for positive growth than it had over the last two years or so. So, Chris, do you agree and disagree with what Jason's just said there?

Go ahead. Yeah. So I think there's, as always, a lot of insight to what Jason says. But I would flag up the big move we've seen recently in the 10-year yield higher. That's, of course, pulled mortgage rates and corporate rates higher and a strong dollar background as part of that as well. I actually think there's substantial additional tightening that still has to work its way through the system, more coming from that move in the long end, which is very recent. And I think there's also some suggestion that lags from financial conditions to the economy might even be a bit longer, not shorter this time around. Why? Because everybody locked in so much low cost fixed rate financing during the low rate period. It takes time for that to roll off. It takes time, therefore, for the effect of this level of rates

to bite on the economy. Yeah. To your point, the 10 year at just about 4.4 and the 30-year a little higher. Krishna, Jason, thank you. Thank you. Coming up, shipping industry expert Donald Broughton weighs in on results from FedEx and breaks down the impact on the industry from the UPS labor disputes and the yellow bankruptcy. And as we head to break, take a look at one of today's biggest winners. It's Textron soaring on news of a major order of up to 1,500 business jets from NetJets. That stock closing higher by just under 5%. We'll be right back.

Welcome back to Overtime. FedEx jumping up 4% right now after giving strong full-year earnings guidance, EPS guidance that is, for the latest quarter. Earnings per share topped estimates, but revenues were light. UPS is also moving up in sympathy here in Overtime. Joining us now is Broughton Capital Managing Partner Donald Broughton. Donald, it's great to have you on. It does seem like it was a bit of a mixed quarter and there were very high expectations going into this print. Why is the stock trading up as much as it is? Well, let's look at a couple of things that are happening. First of all, as you and I have talked about for years now, this this company, I think, is their stock is more gamed than just about anything else out there because it's it reports when no one else reports. It's seen as

a bellwether for good reason. And so it tends to move prior to the announcement. And that's already been priced in. This was a $270 stock just a month ago, and it's fallen back to as low as $250. And so there's maybe a little bit of a relief rally here. Good results, but any lightness that you're pointing to, I think it's already long well been priced into the stock. Gotcha. OK. A lot of chatter ahead of this print, too, about the yellow bankruptcy, how that was going to affect freight, the freight business for FedEx. And then, of course, the UPS labor drama that we talked about after the last FedEx earnings and market share and what that was going to mean. How meaningful have both of those been to this to this result? How permanent are they going to be?

Well, they're both meaningful. First of all, let's kind of just review the tape. A year ago, this is one hundred forty five dollar stock. And I know you and I began talking about how the Teamster contract was going to be issued, and everyone seemed to ignore it up until just the last minute. And then suddenly, they became manic about it. And I think they swung the opposite direction after not paying attention to it. Suddenly, they became overly optimistic about it. Now, when you look at these actual results, at least what we've been able to look at so far, it appears that they really did gain market share, they really did gain market share at higher yields and deal another serious blow to the UPS's ground business. And I think that'll be a sustainable. People that have shifted volume over

to them will continue to use them. You don't just switch and then switch back. Yellow, on the other hand, is another matter. Whatever happens in the bankruptcy court, even if they get triple the price for the assets, there will be nothing left for the common shareholder. So, Donald, how much should investors in FedEx and maybe its peer group think about the potential government shutdown? Does it matter at all? Not really. Not unless it lasts a very, very long time to the point it affects everything in the economy. It's really not the business they're in. They're in the business of making high-value, low-density goods move to where they need to be to make the tech economy and the high-end part of our economy move,

not cater to the government. Yeah. Well, so many forces out there that could throw a monkey wrench. I just wonder. Donald, thank you. Thank you very much. Let's get a CNBC News update with Contessa Brewer. Contessa. John, the Biden administration is canceling nearly thirty seven million dollars in student debt. That relief will go to twelve hundred former students who had attended the University of Phoenix between 2012 and 2014. We have video. It's just not rolling. They needed to apply for borrower defense discharges. That's a legal ground taken against schools that engage in misconduct. The education department said today the university deceived prospective students with false ads that misled them about job prospects.

Free covid tests coming back next week. The Department of Health and Human Services once again will open requests for four free tests from the government that can be delivered to homes free of charge. COVID cases are, of course, on the rise in the U.S., and many of those original tests have passed their expiration dates. Well, it looks like there is a ravenous appetite for banning books, and they are being challenged at historic rates. The American Library Association found that since January this year, there have been 695 attempts to censor library materials or services across the country. That's a 20 percent increase from the year before. You know, Isaac Asimov said any book worth banning is a book worth reading.

Guys. All right. Get your library cards ready. Contessa Brewer, thank you. Up next after the break, Bank of America says a long-term trend in worker productivity could be about to reverse. Mike Santoli will break down the charts next. And we are counting down to KB Home's earnings call, which kicks off at the top of the hour. We're going to talk to an analyst about the home builder's quarter and what he wants to hear from management when Overtime returns. Welcome back to Overtime. Bank of America raising its S&P 500 target today, pointing out one interesting labor trend. Our Mike Santoli is here with his market dashboard, and he has taken a look at that. Mike. Yes, Morgan. In this case, it's a very long-running

trend in worker productivity, or specifically S&P 500 company revenue per worker. This goes all the way back to the mid 80s. It's inflation adjusted just so you can get an apples to apples comparison. So what you see here is that whole 90s productivity revolution, use of technology, rolling restructurings among very large companies did increase this. So that's one measure of public company productivity going higher in a steady way. It's been more or less flatlining on a point-to-point basis since about the year 2000, since the peak of that former tech investment bubble. Now, there's another element happening here, which is the type of companies that dominate the S&P 500 was becoming more technology and growth-oriented.

But the case that B of A is trying to make is that inflation could act as a catalyst to restart worker productivity as well, of course, as AI and other technologies from this point on, which would justify higher equity valuations relative to bond yields, which was the case back in the 80s and 90s. You know, everyone's very alarmed, including Jeffrey Gundlach last hour, about the valuation of stocks compared to four plus percent treasury yields. Well, that was the norm back in the 80s and 90s to have a very similar spread between those two things. One of those reasons, perhaps, is that we did have steady productivity growth back then. So it's not just a fashion throwback to the 90s. I mean, productivity, if you see increased productivity, that would actually be a good thing for the Fed's fight against inflation in the sense that it could help right size or ease the tightness of the labor market, too, right?

Absolutely. It's kind of an escape hatch from, you know, that fix that you might otherwise be in where you have to tighten too much to choke off growth in the economy. That was really, to me, the signature move that Greenspan made that won him the reputation of being the maestro, which was in the mid-90s. He eased back after a tightening campaign in 1996 and sort of allowed the economy to become more productive without anticipating a rise in inflation. So unemployment kept going down below levels that we thought before would have sparked inflation. So we don't know if we're going to get a rerun of that, but at least it's one of those possibilities that we could see some of those factors work through. I like that he referenced maestro because, as we

know, Mike Santoli is our own market maestro. He's the maestro of the Magna Doodle. There's a movie coming out for an entirely different maestro as well, right? So we'll use that for another time. Bradley Cooper. All right. Mike, thank you. Enterprise Software Company ServiceNow just releasing an expanded platform featuring new AI tools. Up next, CEO Bill McDermott on how much revenue he thinks that could generate. We'll be right back.

The AI announcements just keep coming. Today is from ServiceNow, the fast-growing enterprise software player. This is the launch CEO Bill McDermott talked about at earnings in late July. And this one is important for investors to track because while there's a lot of jawboning out there about AI's potential to drive revenue, Salesforce and Oracle have their conferences this month. ServiceNow is leading the charge in releasing industry-specific AI capabilities. So if enterprise AI adoption does ramp the way some are hoping, this company could be an early indicator. I spoke with McDermott about how much spending customers will dedicate to IT.

But if you just look at the independent research companies like IDC, for example, they have essentially said that IT spend, the growth rate will actually double next year. So from a growth rate, which is traditional of three and a half percent, 2024 will go to at least seven percent. And some people think even more because they're believing that many GNA functions will actually be budget negative to fund and fuel the AI revolution. But if you think about platform as a service, the forecast for 2023 was 30% and software as a service was 17 percent in 2023. In 2024, it's projected that that will go up substantially. So in our case, we are a platform and we are a SaaS market leader and IT spending is clearly going up, especially in AI, which gives us a bull case. When does it hit?

I mean, for us, I'm expecting it to be earlier than others because we're actually launching Vancouver, as you know, right now. And we'll be making even more releases in the fourth quarter. And in the first quarter of next year, we have our Washington release, which is massive new product introduction and innovation into the market. So I think, you know, you're going to start to see it late 2023, but in 2024, I'm expecting a very large year. I also asked Bill how he expects AI adoption to play out across different geographic regions. I believe Europe is going to be a big platform year in 2024 and beyond. And obviously Asia and markets in Asia now have to adapt to the cloud, have to buy into the cloud and capture this great tailwind.

Because you know what? This isn't just like any new product introduction. This is like literally transforming your company. I mean, if you're an insurance company, let's completely rethink the underwriting process. If you're a health care company, let's completely rethink how we care for patients. And instead of spending all of our time putting information into a system, let the system do the work so you can spend time with the patients. And if you're caring for a customer, you know, no longer do you have to be keyboarding information into a computer.

That computer is there now with AI to serve you so you can serve your customers. So I think this is a revolution. It'll be global. U.S. is first mover. Europe is right there. But Asia is coming on strong. Morgan, if he's right, Mike Santoli's next revenue per employee chart will tick off. I was having the same exact thought. I was like, this is the productivity conversation right here. I mean, I think also it's key to this, and we've seen it even in the run-up, you know, in ServiceNow stock, 47% since the start of the year, is the companies that are investing versus the companies that are now monetizing.

And it sounds like he's more in the latter camp, or ServiceNow is more in the latter camp. The valuation reflects some of those expectations, though. So these next couple quarters, three for some of these companies, it's really going to have to get proven out and put Salesforce in that category, too. Can they actually get that growth done that they're trying to drum up in an enterprise that had been really queasy at the beginning of the year and is now ramping back up. All right, great stuff. We're just minutes away from earnings calls from FedEx and KB Home. We have an analyst with a reaction to the homebuilders results when Overtime returns. Welcome back into Overtime. FedEx shares up more than 5.5% after cost cuts and a strong

full-year profit outlook. KB Home under pressure, down about 3% despite an earnings beat. Up next, a top home builder analyst is going to tell us what he wants to hear from KB executives when their call kicks off in just a few minutes. We'll be right back. Let's get another check on KB Home down a little more than two and a half percent, despite topping estimates in the top and bottom lines. Joining us now is Seaport senior analyst Ken Ziener. Ken, welcome. So full year housing revenue more than expected, even though houses are going to sell for less than expected, they're saying. So if rates, interest rates are staying higher for longer, can KB Home keep subsidizing that to drive its business, even with prices coming down? I think so for the industry in general. I mean, they are offering mortgage buydowns.

Thanks for having me on. You know, that do cost them a couple hundred basis points of gross margin, but that is creating the demand for them. So the key question for investors on KBH's call and for the homebuilders is, are they going to be growing and what it's going to cost them in terms of returns, specifically gross margins? And I think that'll be a big focus on the call today. At what point do homeowners who don't want to move have to move, either because of a job change or something, even if rates are staying high? Right. I mean, death, divorce, job relocation tend to be the base dynamics for housing turnover,

which is quite low, and it's still staying low at that four million we do expect existing inventory to remain low and existing sales which when in our thesis housing may not repeat but it rhymes look starting in the 1962 period we do see higher rate periods which which we're in, secularly, leading to low inventory. Builders traditionally gain share as a percent of what's for sale, and public builders specifically gain share using their balance sheet and mortgage buy-down. So I think that tailwind will be benefiting KB and other public home builders. So would you buy KB right now coming off of this print, or would you prefer to put your money to work somewhere else? Well, I think, you know, KB investors will want to hear about the

gross margin guidance. The reason they beat in the quarter and raised the full year closing units is they are pivoting a little bit to pre-construction units versus their traditional build to order. And I think that's OK. I would say Lennar, who reported last week, is our top pick right now as it moves towards a capital light model where EPS equals cash flow. OK. So there's another thing that's been getting signaled and flagged among some of the homebuilders, and that's the fact that not only do you have high construction costs, you have high rates, but also land is becoming more scarce. Is that going to be a concern for KB Home too?

Land scarcity, I would say, is not an issue given the builder's own land supply that's available. You know, you might see what's actually available for development, therefore sale, impacting community count. I think we saw that a little with KBH, if I'm not mistaken. That's simply because they're selling faster. Clearly, land costs are going up. That's part of inflation. And the broader picture is real estate historically is an inflation hedge. So I think it'll all work out within their relative market share gains in the new construction industry. Okay. Ken Zener, thanks for joining us. Shares of KB Home down about two and a half percent right now in after hours trading. So

we're going to keep an eye on that. Also FedEx. One of the things FedEx puts out in its earnings call is their global economic outlook, too, since they move so many goods across so many parts of the world. China is a big market and the trade in and out of China, cross-border trade for China for FedEx. So that's going to be key, too, at a time where investors are trying to parse the rebound and the economic growth prospects there. Yeah. And the uncertainty in China. I'll be interested to see what they have to say. Something I brought back from the West Coast, a conversation with Supermicro. I want to share that with you later this week. But I don't know if you remember, they're a big high performance computing maker. So all these AI chips, they're building them

into these rack systems, and they've been selling like crazy. The stock's been way up over the past year, but can that continue? It's a continuation of the AI conversation, but not so much on the software end. All that software's got to run on something. So kind of the demand for both, they depend on each other. So it gets back to the was it picks and shovels part of the conversation. It had been a stealth mover and then kind of exploded, to your point, in terms of the earnings we saw. Yeah. It's back down again. So, you know, should people get in or not? Rare conversation with the CEO about what he sees coming next.

And, you know, this IPO market, of course, we're going to continue to track that. We're going to continue to track that. Major averages finished the day lower. That was despite starting the day with gains. And, of course, this was all on the heels of the Fed. That's going to do it for us here at Overtime. Fast money starts now.