Closing Bell - Closing Bell Overtime: Why Trillions Of Dollars Of Dry Power Are Still On The Private Equity Sidelines & How Much Higher Can NVIDIA Stock Surge? 5/18/23

Episode Date: May 18, 2023

Stocks closed near session highs, after surging into the close. That makes back-to-back positive sessions for the major indices. Ariel Investments’ Charlie Bobrinskoy and Citi’s Scott Chronert talk the market action. NVIDIA touched a 52-week high as its roll continues. Bernstein’s senior research analyst Stacy Rasgon breaks down much more room there could be to run for the high-flying stock. Betterment CEO Sarah Levy on the impact of the regional banking crisis on fintech. Raymond James’ Sunaina Sinha Haldea on why there are still trillions of dollars in dry powder among private equity firms – and what it might take for dealmaking to return. Plus, former Walmart US CEO Bill Simon on Walmart’s strong quarter and the state of the consumer. 

Well, there's your scorecard on Wall Street, but winners stay late, so here you are. Welcome to Closing Bell Overtime. I'm John Fort with Morgan Brennan. And coming up on today's show, we're going to get a read on chips and the consumer when Applied Materials and Ross Stores report earnings. We're going to bring you the numbers and expert analysis. Plus, we'll talk to the CEO of Betterment, the online investing platform with more than $35 billion under management, about her read on the stability of the banking system and the impact on Betterment's business. But now let's get straight into today's market action. Joining us now are Charlie Bobrinskoy from Ariel Investments and Scott Cronert from Citi. Scott, let me start with you

on this one. So we've got Apple at two and three quarter trillion dollar market cap. NVIDIA has more than doubled year to date. Microsoft is up near its highs. Is all of this sustainable given? I mean, I know soft landing looks like a strong possibility to everybody, but there are still some challenges heading into the back of the year, as we're seeing in a lot of these earnings reports. Well, I think there's certainly two elements to this, right? So, number one, the growth leadership of the S&P is pretty clear. We think it accounts for nearly all of the move year to date, and it's mostly a multiple expansion move, okay, much more so than an earnings move. So that keeps us focused on interest rates. And the view that ultimately we get to a peaking Fed certainly is a tailwind

for mega cap growth in tech. On the other hand, I think we also have to be aware that AI is becoming part of the equation here. And I think part of the mean reversion trade in the tech and related is positioning for some of that. Along the way, we know that not much has flowed into the equity markets from the financial advisor world. We see this in our ETF data. So we do think there's room for a catch up. But we're also of the view that 4,200 is pretty close to capping what we would say high end of the trading range. Yeah. And of course, as the markets do settle here, 4,198 is what it looks like the final number is, closing number, for the S&P 500. Charlie, I want to get your thoughts on this. We keep talking about this

narrow trading range. Most likely next direction for the S&P, higher or lower? Always hard to make a short-term call, but I do think there was a natural fear of a debt default, which I don't think is going to happen. And when that gets cleared up, that's going to be a positive. You think everybody must know that. But look at what happened yesterday to cyclical stocks when we got some good news on the debt ceiling. So I think, frankly, the other way to make this prediction is that people are still very nervous. People still think we've got a recession coming. There's a lot of negativity when growth tech and growth stocks are leading the market. That's a sign people are worried

about a recession. And so that makes us confident that when everybody is this negative, it's a good time to be in the market. I do want to mention applied materials and raw stores results, both crossing the tape. We are going through those as we speak. But Charlie, to you again on this one, given given that a lot of this run higher has been valuation driven. What do you have to believe to invest in these stocks at this point? How long a time horizon do you have to have and how much is belt tightening having to factor into that? Yeah, I always make a distinction here between the market, which people rightly quote the S&P 500, which is so strong, and the individual stocks,

which many of which are not strong. The Russell 1000 value index is basically down on the year, trading at extremely reasonable multiples of around 13 times. So in order to own value stocks, you don't have to believe much at all. You just have to believe we're not going into a crushing recession. To own the NASDAQ, to own the biggest tech stocks, you've got to believe a lot. And frankly, you've got to believe that interest rates are going to stay down in the lower level because with higher interest rates we know those tech and growth stocks get hurt and frankly those stocks have been where people have gone to be defensive people

have gone into amazon and google because they think they won't be as hit hard by a recession so if we get a good economy i think the value is going to outperform although i said that for a while yeah and of course tech is the big standout the upside stand out again today it is some of those mega cap names, but it's all in software. It's also semis, some of the smaller Internet players as well. Scott, midyear target thirty seven hundred for the S&P end of year. Four thousand. Walk me through how we get to both of those.

And just as importantly, how an investor should be positioned if you if you do see downward pressure more broadly over the coming months? Right. I think the $3,700 mid-year is getting a little bit stale, but clearly we think there's still room there for a shock. The shock that we've been thinking that could unfold would be your debt ceiling issue. We'll see how that plays out. From here, we don't think we're out of the woods. We are now starting to talk a little bit more about no matter how this plays out, you're looking at an ongoing wave of fiscal restraint. The 4000 target is still predicated on sort of a later in the year, early next year recession and interest rates that are hovering around three and a half percent. So again, that's a fair value estimate. The market can trade above fair value for periods of time when you have another force at work. Right now,

that force is, let's call it this AI element here that's going to continue to play out in the valuations while we're waiting for fundamentals to catch up. Final point on this, though, is as you see interest rates can start to move higher here, which is happening as we get closer to this next Fed meeting in June and look at a longer period of potential pause, that should begin to favor rotation back to what we'll call the cyclical part of the market. And I think that's an important element to watch going forward. Charlie, I want to go back to something that you were saying before, because I think it might be important for investors. People have gone to some of these mega cap stocks for safety and there's been such valuation growth there.

Are they way expensive, even if you think that they're going to outperform in this environment, given, as you said, that the Russell 1000, I think was the index that you were focused on, the smaller caps, is basically flat. Is it time to strongly consider rotating out, if you've been in those bigger names, if you've been in even the S&P 500, let alone the NASDAQ 100 and the triple Qs, rotating out and into those smaller caps for value in particular? Obviously, I do believe that, but this has been hard to time. Look, the valuations of the big tech companies sometimes get really crazy, and I would call them just high right now, not crazy. But they are benefiting. Remember, we all talk about interest rates being high, but the 10-year has actually come down this year. We had a 10-year at about 420. Now it's back down to 365. That's very good for growth stocks whose earnings are off into the distance. So I think growth stocks and tech stocks are

modestly overvalued. They dominate the S&P 500. There is lots, however, of value within value. The Russell 1000 value is trading at less than 14 times earnings, sort of 13 times earnings. And if we get to the other side of this recession, then those names are going to perform very well, I think. All right. We'll keep an eye on it. Charlie, Scott, thank you. Thanks for having us. Now, as we mentioned a moment ago, applied materials earnings are out, and Christina Partsenevelis is ready to break down the numbers. Christina.

Yeah, so we are seeing a top and bottom line beat. So EPS of $2 a share, that is higher than the estimate of $1.84 on revenues of about $6.63 billion. So also higher. When we're talking about Q3 guidance, that was a concern. But even their range, their EPS range of $1.56 to $1.92 is still higher than what the street anticipated. And then you also have Q3 revenue guidance coming in a little bit higher at $6.15 billion. Overall, if you break down or look at the breakdown for sales, much of this is driven by the resilience of the more mature nodes. And that is where they have a lot of the exposure, as well as the foundry business, which constitutes roughly 84 percent of total sales versus the memory business, which is really just 5 percent. We know memory has been struggling with Micron having its worst quarter ever.

But nonetheless, Applied Materials didn't provide full-year guidance, but Q3 guidance as well as this Q2 earnings report did beat. All right. Christina Parts-Nevelis, thank you. Shares are down about half a percent right now in after-hours trading. Ross stores earnings are out. Courtney Reagan has the numbers. Hi, Court. Hi there, Morgan. Yes, so for earnings per share, Ross reporting $1.09. That beats the street's consensus by three cents on revenues roughly in line at $4.49 billion. When you're looking, though, at the second quarter earnings expectations and the full year, both of those

ranges are below the street's expectations. Comparable sales for the quarter were up 1%. For this current quarter, the second quarter, they are looking at comparable sales to be relatively flat. CEO Barbara Rentler comments about inflationary pressures still impacting the low to moderate income consumers, though they're pleased with their sales and said they were in line. And she also notes there remains a high level of uncertainty in the macroeconomic environment and geopolitical environment with prolonged inflationary pressures continuing to impact the consumer. Shares of Ross stores bouncing around here a little after hours, but it looks like down just just slightly right now in reaction to these results. Morgan. OK, Courtney Reagan, thank you.

CNBC senior markets commentator Michael Santoli joins us from the New York Stock Exchange with a look at the NASDAQ 100, which we were just talking about. Hi, Mike. Yeah, Morgan. Well, that is absolutely where the action has been lately. Here you go on a three-year basis. You kind of see where it's been and what ground it has made up. We're now above the last summer's highs in August, where the overall market also peaked. But the general story here is it's recaptured about half of the declines

of last year's bear phase. So it's also the case in valuations. We've basically had the valuations on forward P for the Nasdaq 100 go from 30 down to 20. It's back up to 25. So we could talk about this being some kind of a chase and some of that fairy dust being sprinkled on the big caps here. But it also, we were at higher levels a year and a half ago before we actually had that storyline running. Now, take a look at a 10-year look at the NASDAQ 100 relative to the S&P 500. It has been in a long relative uptrend versus the broader market. In fact, you can even go back farther than this.

This is 10 years. You go back to like 06, 07, and it's been steady. But look at that overshoot that we got to in 2020 and 2021. So I'll try to draw kind of the general trend line there. And we're kind of just back in that channel, maybe stretching the upper end of it. So it doesn't look like necessarily we've had anything too weird going on on a longer term basis. Maybe it can't go at this pace, certainly for very much longer, this pace of outperformance we've had recently. But again, it's still something that's in tune with the general mode of this market over the course of a decade plus. Morgan. Yeah. I mean, we did have some we had some OK economic data.

It's been a mixed picture on a daily basis, Mike. But today, claims are better than expected. Philly Fed index was showed some improvement as well. But I think probably the standout is that we've had hawkish Fed speak. And it's sort of this higher for longer narrative that's been coming out, including the possibility from two different officials today that maybe another rate hike would potentially be warranted. Does any of this impact some of this big tech trade that we've seen playing out? Or no, not so much, because whether we do see another hike or not, we're basically at the end of the cycle. At some point, it probably would impact it. I think that the kind of pulling all those things together that you mentioned,

the things that we expected to happen are taking longer to happen. So if you were bearish and negative on the economy, it's taking longer than you would have anticipated to see a lot weaker data in the consumer, in the labor market, even in corporate financials. And also, if you were anticipating a pause by the Fed and maybe even an ease down the road, that process is also gotten elongated. And it's been hard to be very certain that we're getting the pause in June. So everything is staying in this zone of indecision or sort of caught in between the scenarios in that gap. The Nasdaq strength makes sense. Now yields are up and maybe the Fed goes another quarter point. But certainly it looks like yields are not near their highs that were well above 4 percent on the 10 year. Not that long ago. So I think so far we can kind of coexist in this zone for a while,

but it's unclear just for how long. All right. Mike Santoli, thank you. Now, shares of NVIDIA have more than doubled in 2023. Up next, analyst Stacey Rousgun on how much higher he thinks the stock can rally. Plus, we're expecting breaking news this hour as the Fed releases its latest balance sheet data. We're going to bring you those numbers as soon as they cross. Overtime's back in two.

Welcome back. NVIDIA's stocks climb continues. Another 52-week high today. It's the best performer in the S&P 500 in 2023. NVIDIA CEO Jensen Huang joined us yesterday in Las Vegas, and I asked him how he expects AI is going to fuel growth from this already lofty position. A computer that you can program and instruct with the programming language that everybody knows, human. And so we've democratized computing for the very first time.

We've narrowed the digital divide for the very first time. We put into the hands of nearly everyone this incredible knowledge machine, which we call the computer, for the very first time. Let's bring in Bernstein Senior Research Analyst Stacey Razga and Stacey, Jensen knows how to cast a vision, but isn't any of this win, is it already priced into the stock at this level? What are we at? Three quarters of a trillion dollars in market cap? Yeah. Yeah. I mean, look, so NVIDIA is expensive, right? And you could argue that people do, but at the same time, NVIDIA is always expensive. I always go back to like, you know, we've covered this

stock for quite a few years. Like the day I launched on it, which, you know, five or six, seven years ago, it was 50 times earnings back then. And as it turns out, it was not expensive. It was incredibly cheap because like the earnings was wrong, right? It was way too low. And they've had, you know, the stock is up a ton, but like, so is the revenue. And so is, especially on the data center side. I think that what you have to believe is that we are still early in the journey. I think that that argument is actually very, very plausible. Is there such a thing as a luxury stock?

Because it sounds like you're telling me this is like a designer handbag. You should never just think about the cost of materials here with this one. It's always just going to be pricey. But, I mean, even in a down economy, if that's really where we end up for a while, how should investors, chip investors, think about that? I mean, look, even today we're in a bit of a down economy. We're actually seeing weakness in overall data center spending. But they're spending on artificial intelligence. Like, they're focusing their spend there. Right?

So, I mean, Even in a downturn, the dollars are flowing this way. People, I think, are getting missing the point a little bit. Everybody's getting worked up about chat GPD, but chat GPD has only been around since November. Large language models have been around for a while, but this is the first opportunity, I think, that the regular person on the street has had an opportunity to reach out and actually touch this and use it and see what it can do. We're very, very early on this journey.

I don't know what this is going to look like in five years or ten years, but it's going to be much bigger than it is today, and it's already starting to get big today. All right. We did get applied materials earnings just a few moments ago. You got an outperform rating. I want to get your initial takeaways on what we heard. Yeah, it looks good. I was a decently solid beat and raise. They beat on both equipment revenues as well as on services. Within the equipment side, found green logic beat by a pretty good amount. DRAM was maybe a little light, but not surprising. Memory's awful. Flash

memory, NAND flash was horrendous, but again, not a huge surprise given what we know in that market. Overall, at least from the release itself, it looks good, and we'll see what they have to say on the call. Yeah, I think about Elon Musk, you know, getting interviewed on CNBC earlier this week, talking about China and Taiwan and, you know, essentially reading between the lines in terms of official policy where that island is concerned. I think about Buffett selling out of some of his stakes because of geopolitical concerns. I mean, when we talk about the disentangling of the U.S. and China and the tech supply chain and all these question marks around geopolitics, what does it mean for semiconductors?

Yeah, well, so China's a big market, right? And, you know, areas like Taiwan are incredibly important for semiconductor manufacturing, as we know. I'll be honest, I don't really understand the Buffett sale. I mean, it had Taiwan right in the name when he bought it. So I don't know what he didn't understand. But I guess he got more concerned over time. The idea of like a China decoupling or like geopolitical risk around Taiwan is a real one. And certainly semiconductor investors have been concerned and are concerned about those sorts of things. I would say right now, at least in regards to Taiwan, like China needs Taiwan semiconductor manufacturing today. They use it. You don't get access to it by

like, you know, taking over the island. Those fabs are scrap metal in six months without spare parts and services. So you've got a bit of a detente for now. But that is a risk that's there. I think over the long term, there is a concern about like a broader, just like widespread decoupling of China. Does China decide to build their own local, you know, complete ecosystems? I think it's very, very difficult. They may be forced in that direction, though, especially on like some of the older generation stuff where they're being forced to focus their efforts now. These are longer term risks that people are sort of thinking about. Yeah. Yeah. I think it came up on the in the AMD annual meeting today as well. Stacey Raskin, great to get your thoughts on a day where semi stocks in general,

big rally. We'll still ahead. We've got more after hours action when we break down Ross Stores results, plus the numbers this morning from Wal-Mart with former Wal-Mart U.S. CEO Bill Simon. Plus, we're going to talk to the CEO of Robo Advisor Betterment about the state of the banking system and the impact on her business. And we are still awaiting those Fed balance sheet numbers. We will bring those to you when Overtime comes right back. Welcome back to Overtime. Western Alliance up nearly 30 percent so far this week after reporting strong deposit growth and a possible sign of consumer confidence and stabilizing in the regional banks. Joining us now is Sarah Levy, CEO of Digital Investment Advisor Betterment.

She told us last month on the show at the beginning of the month that her digital investment advisor company was seeing inflows as the regional banks did see outflows. Sarah, it's great to have you back on the show. Do want to get an update from you. Since we have had more angst, more turmoil, we have even seen another regional bank that's basically closed down and had assets taken over. So the momentum continues, which is really exciting for our business. I think, you know, as we talked about last month, what the regional banking crisis has done is, first of all, it's shined a spotlight on both liquidity and FDIC insurance in a way that I think the average retail customer wasn't perhaps as aware of previously. And so one of the ways we have sort of sought to reassure them in that context is to help them understand. And then we took the opportunity to raise our FDIC limits

right after some of the banks started to go under to really show our customers, we're here for you. This can be sort of a port in the storm. And there's, you know, there's safety in cash right now. Yeah. So given the fact that we are potentially seeing some more stability in the banking sector right now, is that good or bad for you? And I ask that because I wonder, when people open up accounts, how sticky are they with Betterment? It's a great question. I would say it's good for us. In general, high APYs, which we offer, we're currently offering 4.5% APY, makes for happy customers, right? And so at this moment of uncertainty, I think it's not

just the regional banks. You've got the debt ceiling conversation. You've got inflation. There are a lot of macro factors that for the retail investor is causing uneasiness. And in that moment of uneasiness, we offer them diversification, including cash, which becomes part of a long term investing solution. And so I think what we like is that our investors really believe in what Betterment brings, which is a perspective that investing and saving is long-term, and they generally stay the course. Hi, Sarah. Good to see you. It's been a little while. I wonder how you're seeing retail investment behavior change and appetite for risk, as you've got people who are

looking to indicate how much risk they want to take how much they want to be maybe in high valuation stocks given what we've been talking about about you know so much attention going to the nvidia's and apple's of the world that they might feel safe, but valuation wise, maybe they're not. How are you at Betterment as a robo-advisor factoring that in? And how is the retail investors' risk appetite developed over this year so far? So I would say if we start with the risk appetite part of the question, definitely we're seeing a risk off posture. And again, back to the sort of high savings rate as the solution to that fear, folks are seeing 4.5% and saying, let me take a risk off posture. We don't offer single stock trading on our platform. So we're much more focused on a diversified long-term solution.

And so what we're seeing is actually a different sort of time horizon behavior, which is to say we have a lot of retirement assets on our platform. Long-term retirement investing is really behaving as it always has, sort of slow and steady, consistent, stick to your plan. Where we're seeing a little bit of deviation is in the shorter time horizon investing. So if you think about taxable investing as maybe I'm saving for a home or an event, you know, a wedding or an event that is nearer term, some of that money is shifting more to cash and less to to the stock market. But but are Apple and Nvidia and Tesla, are you factoring in the idea that they're more risky now because there's been such a valuation run up in some of these? Or does the risk off investor, maybe who isn't investing in small caps because they don't like risk, are they piling into things that might end up in this environment being relatively

more risky than they might think? Well, our platform really seeks to continue to push people to diversification, right? So while we do see the S&P as part of our mix, we've got emerging markets in there. We've got a bond allocation depending on your time horizon. So when we look at the portfolios that we have very few investors on our platform actually customizing down to the sort of sector or even single stock level. So, again, I think for us, it's more about do you want to be in the market or do you want to be in cash? Yeah. Sarah, I mean, you got Bitcoin Miami going on right now. You have a crypto platform as well. What are you seeing, given the fact that we have had a rally, albeit still very far from highs, in some of these cryptocurrency assets like a

Bitcoin? So we have a really interesting consumer who is pretty consistent. And so what we've seen is sort of slow and steady adoption. We launched the product and we launched diversified crypto portfolios. So again, similar to our thesis around TradFi, our feeling is play the asset class and incorporate that into a diversified portfolio. And over the long term, more diversification is better. And so that's the way we introduced crypto to our customers. We told them to keep allocations below 5% of their total investable assets. And that was our recommendation. And they've pretty much been following our advice, which is slow and steady, dollar cost average, and keep it below 5%. All right, Sarah, thank you.

Thank you. Up next, chasing profits. Mike Santoli is going to take a look at the S&P 500's current profit margin and how it compares to previous periods of economic uncertainty. And as we head to break, check out some of the stocks that are hitting 52-week highs today. Salesforce, Microsoft, Uber, Booking Holdings, and Chipotle are all on the list. We'll be right back. Welcome back to Overtime. It is time now for a CNBC News Update with Bertha Coombs. Hi, Bertha. Hi, Morgan. Here's your CNBC News update at this hour. Governor Ron DeSantis responding to Disney's decision to scrap plans to build a new campus in Florida and relocate employees to the state following the company's public feud with the governor.

DeSantis saying he's not surprised by the move, but blames the decision on Disney's recent stock decline and not on the ongoing litigation with his state. The information technology consultant accused of killing Cash App founder Bill Lee pleaded not guilty today. Prosecutors say Nima Momin stabbed Lee in the early hours of April 4th near downtown San Francisco and then left him for dead. The judge ruled Momin will remain in custody as he awaits trial. And the Supreme Court sided with tech giants Twitter, Google and Facebook today in

lawsuits that tried to hold them liable for terrorist attacks. However, the high court avoided a ruling on a law shielding Internet companies for being sued for what its users post. The outcome is a victory for the tech companies, but the Supreme Court left the door open to reconsider the issue in the future. John. Bertha, thank you. Now let's get back to Mike Santoli at the New York Stock Exchange. Mike, what are you looking at? Corporate profitability, John. Goldman Sachs has tracked the corporate profit margins of the S&P 500 companies over the last 30-plus years.

Now, before this, in the decades before the 90s, corporate profit margins kind of went up and down with the business cycle in a narrow range. But as you can see, the trend has been higher recently. Now, a lot of that is just general corporate productivity improvements, lower interest rates over this time period, perhaps lower tax rates as well. But also something different about the businesses themselves and how they're run. You see them curl down here. The story in the first quarter was they're kind of stabilizing. So this idea that they were going to go back down to like the prior average below 12 percent is not necessarily coming true yet. So here in orange, you have the S&P 500. This is the median stock within the S&P.

And then the green is interesting because it was the sector mix within the index that prevailed in 1990. That was before technology and a lot of other growth stocks really started to dominate the index. And one of the stories about rising profit margins is the businesses themselves are just different. You have these massive scale tech businesses

that are inherently more profitable. And as you can see, even if you consider the sector mix of 1990, the trend is up, although not as high as margins have been recently. And so does this change based on how much the S&P 500 has gone up, which I guess reflects people's expectation for future profitability. Does this change how investors should look at their expectations for what the index will do in the future? It probably should. If anybody believed that corporate profit margins were going to revert down in a recession to their long term, you know, trough levels, which I think some people would would argue, it seems not to be the case. So I guess you would have to say that, you know, the earnings you're getting today maybe aren't as vulnerable.

That being said, the valuations we're putting on these higher profit margins are still relatively elevated versus history. So it doesn't mean the market's cheap, but it kind of helps to explain why the fundamentals of big companies have been a little bit more resilient and people's willingness to pay up for those stocks has really increased. All right. Mike Santoli, thank you. We have some breaking news from the Fed now. Seema Modi has the details. Seema. Morgan, we have new data on the Fed's total balance sheet, which totaled $8.42 trillion. That is down slightly by $46 billion from the prior week. If we look at the borrowing at the Fed discount window, that is also down slightly to $9 billion from the prior week. If we look at the borrowing at the Fed discount window, that is also down slightly to $9 billion.

Bank lending facility program, $87 billion, which together totals about $96 billion, which is up slightly around $4 billion from the prior week. So the takeaway from this data, Morgan and John, is that the balance sheet continues to shrink, but lending is up slightly as we try to better understand the relationship between banks following the Silicon Valley bank collapse.

Morgan, John, back to you. All right, Seema Modi, thank you. Up next, Raymond James, head of global capital advisory on what's driving Wall Street's deal-making slump and whether she sees an M&A comeback on the horizon. Stay with us. Welcome back. As investors brace for an economic slowdown, dealmaking has slumped as the cost of capital has risen.

So joining us here on set to give us her perspective on the landscape and where she sees opportunity, Sunaina Sinha-Haldea, Raymond James, head of Global Capital Advisory. Welcome, welcome. Thank you for having me. So is that what we're seeing? Are we seeing dealmaking slump? And if so, what's contributing to it and does it continue? Dealmaking has slump because you've gone into an unprecedented macro environment, lower growth on the horizon, earnings recession coming through, high inflation. So corporates have pulled back in terms of their M&A activity. Private equity dealmaking is interesting because that pulled back as well because most private equity require functioning leverage markets, loan markets to do their deals.

And given the rising interest rate environment, we all know what's been happening on the lending side. So those deals have been on hold for a while, but certainly over the last 60 days, you've seen a comeback. It's almost $1.1 trillion worth of private equity capital on a clock to deploy, waiting to come out into markets and buy assets. So we're all on standby to see some of that come through in the second half of the year. Yeah, I was actually speaking to the head of a large PE firm just earlier this week who said they're sitting on billions of dollars that they have not yet deployed. What is it going to take to see some of that actually start to happen? I guess those floodgates to finally open. Well, I think you're going to see two things. The first is intrinsic

to private equity, and the first is extrinsic. The extrinsic variable is, of course, the syndicated loan market. You need to see that starting to get more active, start lending becoming easier, and that's what's really going to play through into large cap buyouts playing out again. However, on the mid-market and lower mid-market of private equity, the folks that buy smaller businesses, that's already working well. There is this shadow banking, non-bank lending environment that is very vibrant now and very much seeing itself thrive as you see the banks pull back. One thing that's intrinsic to private equity that's a big floodgate is just the fact that

investors require private equity firms to deploy capital. That's how you get the IRR and returns that private equity needs to show to raise their next funds. So they can't be on hold forever. Keith Block from SmithPoint was with us yesterday and said valuations for a lot of businesses haven't come all the way down to where they're probably going to. And I wonder, what's your perspective on why? Because economic conditions have gotten tighter. A lot of VCs have said we're not going to fund every business. We're triaging those that we expect to survive. So wouldn't that pick up a certain degree of dealmaking? Or has this rebound in the public markets in 2023 actually given some more hope in life to some of these younger businesses?

Well, all we can say is that bid ask spreads, they take longer to come back together than one would think. Right. So seller expectations still remained very high going into the back half of 22, early 23. Now you're seeing sellers temper their expectations a little bit, but not all the way. So to your point of why have valuations not come down, valuations only come down when the market starts to clear. And sellers have still said, listen, I want to hold on to my multiples. And when you see how the publics are trading 22 times forward for the NASDAQ, you can see where they get their expectations anchored from. And so that's the reason why you've had a big gapping in the market where buyers are saying,

well, I'm not buying at those multiples. And sellers have said, well, I'm not selling. I don't need to right now. That stress, that liquidity, counterparty-driven stress hasn't come through on the seller side. But that need to right now piece, is it like the commercial real estate market where you've got to wait for the oxygen to run out? Potentially. Depends on how bad the earnings recession would be. And that's the $64,000 question here. Yeah. You were talking about shadow banking and the fact that non-bank lenders are kind of stepping in here. And there's a lot of opportunity, maybe even a field day. When I think about FSOC, for example, regulators here stateside, looking at the growth in that part of lending and saying, yeah, we're going to have to

think about this and maybe add some more regulation. What does that do to this entire equation? I think it puts some guardrails around it. And that's not a bad thing. Anytime you have an industry come to critical mass as this one has, and you have some regulation come through to put some gates around it and make sure it functions appropriately and efficiently, nobody in the private lending, private credit side is averse to that. I think what we definitely have now is now billions of dollars have been raised into private credit vehicles that is stepping into the gap, being left behind by banks. Certainly when it comes to mid-market, lower mid-market private equity deals, buyouts, they're certainly functioning using that market. It's the large end that requires a syndicated loan. What do you think is the role of companies that have a lot of cash?

Just some of these big companies that also have pretty healthy valuations. They have a lot of stock currency to spend. They don't need the credit markets as much as your ordinary company. And a number of corporates are looking at this as a buying opportunity. Things that they thought were overvalued in 2021, they have come off a bit. Now, they may not have come off all the way, but this is a great buying opportunity for them. However, you do have boards saying rainy days might be coming and to shore up balance sheets, go a little bit risk off, make sure that they have enough capital to spend on their own growth, organic growth plans instead of inorganic growth plans. That's why you've seen corporate M&A activity come off for the last three or four quarters. Now, if this continues to persist and we continue to have decent growth, by the way, we've been talking about hard landings for a while now. If that doesn't come to pass,

they're going to want to spend that cash and use this opportunity to do some inorganic growth. Quick question for you. What sectors are you seeing the most dealmaking or potential for dealmaking right now? No question about it, business services. Tech-enabled services, business services, anything with an automation mode and a service mode is seeing a lot of interest and valuations being sky-high. To your point, they really haven't come off, and those businesses are still going for top dollar. You're also seeing a lot of interest in industrials,

back to old-school businesses with cash-generative profiles, recurring revenues. They're kings of this market. You're not seeing as much in consumer discretionary for obvious reasons as you go into this part of the cycle. That interest has abated. Didn't say AI. You said automation and generative, but not AI. That's rare on CNBC these days. It's great having you. Thank you very much for having me. Up next, former Walmart U.S. CEO Bill Simon on what this week's earnings from Walmart and other big retailers say about the state of the consumer when we come right back. Welcome back. Check out shares of Farfetch. The e-commerce fashion marketplace is surging, fetching a bid in after hours trading.

It's up 17.5% right now. That's despite missing on the top and bottom lines. But revenue did come in above, or I should say missing on the bottom line. Revenue did come in above estimates, climbed 8% year over year. Gross merchandise value also beat. And let's stick with retail and get another check on raw stores. The company missing on revenues, beating on the bottom line. Earnings guidance coming in a little bit light.

And check out Walmart closing higher after reporting better than expected earnings and raising its full year outlook. Meantime, Target fell today after yesterday's earnings report where it stuck by its full year outlook. Joining us now to break it all down is former Walmart U.S. CEO Bill Simon. Bill, what's, what's the core message here for investors? Let's start with Walmart because that's the big kahuna here. Big name in grocery, which is narrow margin. But, you know, in this environment where everybody's talking about narrower margins for everything, is it all advantage for Walmart here? Well, I mean, there's no circumstance where a 7% same-store sale and 17% operating income increase is not just a great result.

So congratulations to the Walmart folks for putting that up. When you dig deep into it, there's still some concerning data points, particularly when you look at the consumer. Walmart's growth came on the back of their food business, which is, as you said, is enormous. It's their largest grocer in the country and, you know, well over 50 percent of their business is food. And then when you dig into their food business, they reported, you know, low double digit inflation on their food business, which is, by the way, the same increase in their food business. So the vast majority of their growth came from food inflation. And, you know, while they're built for this time and you're seeing a trade down from higher income into Walmart and that benefits them, the consumer is still very, very stressed.

And then one other point that I think is really concerning is that two years stacked food inflation, Walmart reports 20 percent. I mean, the consumer has just taken a beating. So is there the risk of underinvestment from Walmart from here with all of this investor attention and expectation of margin preservation? Who's the competition that might build loyalty that could hurt Walmart in the future if they don't make the right choices here? Well, I mean, if you just compare Target's result yesterday and Walmart's today, they're virtually identical. They don't look identical, but they're identical when you break down the categories. Walmart had a much better report because they have a significantly higher amount of food, and so a significantly higher amount of food inflation. Their general

merchandise business, by the way, where the margin is in both companies, they were down mid-single digits, I believe, in both companies. So the consumer is still buying needs and not yet wants. And I don't think there's anybody that's going to compete with Walmart on the food side now. Their risk from an investor standpoint is, you know, the tailwind that they have from food inflation today will, just by the cycle, the business cycle, become a headwind when they have to anniversary those and when food inflation decreases. Yeah. And of course, inflation is pinching. So we're seeing it across the retail earnings that we're getting this entire week. I mean, Ross stores even just earlier in the hour reporting earnings and missing some targets and falling. And they're an off, you know, and a discount

retailer. I just wonder, there's a lot of current quarter weakness being flagged, whether it is TJ Maxx, whether it is Walmart, whether it is Bath and Body Works or Canada Goose and go down the list, even as some of these companies are raising full year forecasts. What is it? Is it seasonality? What is it about this time of the year that we would be seeing weakness now? Really what's happening, and it started in the fall and was really apparent during the Christmas selling season, was the general merchandise categories have become really difficult to move forward. The inventory levels got really high mid-year last year, so they weren't clean. They're cleaning up now, and that's costing a lot of money. The customer is still not responding to it because they're still being pinched by the high inflationary costs of food. So they're spending on their needs and not on their wants, and most of the general merchandise categories are more want

driven than need driven. And that's really what the dynamic is. That's why all those companies that you just mentioned reported softness are in the general merchandise categories. Bill Simon, thank you for breaking it down for us. Pleasure. Deere sets report earnings tomorrow morning. And up next, we're going to discuss why many investors are excited about the company's sky-high ambitions in space. Stay with us. Welcome back. Some news out of the asset management world. The Wall Street Journal reporting that Lazard CEO Ken Jacobs is preparing to step down, citing sources. Peter Orszag, who heads up the advisory unit, is expected to take over, according to that report.

And of course, Orszag is a regular, dare I say, on CNBC as well. Well, tilling space to harvest on Earth. Deere has been investing in precision agriculture, which uses sensor software and data analytics to improve crop yields. It's already selling autonomous tractors. And now, since connectivity is the linchpin of its strategy, the manufacturer is looking for a satellite communications partner. Deere began eliciting bids last fall. It hasn't disclosed deal value, but the space industry sees dollar signs with roughly 40 companies submitting bids, according to CTO Jamie Hindman. We're pretty bullish, actually, on the opportunity that the commercialization of all things space is bringing to agriculture at the moment. If you think of agriculture, it's largely a rural job, right? It's done in rural locations where terrestrial

cell connectivity is not always available. And when it is, it's not always sufficient to do the types of things that farmers need to have done in the field. And we think satellite communications is a really intriguing and really interesting technology to pursue to sort of solve that communications gap. So testing is happening now and Heinemann expects to be rolling out service to farmers by this time next year. It speaks to why Deere is a top holding in Cathie Wood's ARK space exploration ETF, the ARK, the A-R-K-X, and why precision agriculture has been spurring demand for Deere's connected machines. Bernstein's Chad Dillard, for example, says precision ag improves productivity on the farm,

which drives a, quote, virtuous cycle for higher prices, higher margins and higher multiple. This will be in focus in Deere's earnings report that we get tomorrow morning. And in the meantime, check out my entire conversation with Deere's CTO on the latest episode of Manifest Space, available wherever you get your podcasts. Definitely. And meanwhile, on the other hand, newsletter, the QR code is up on the screen. Please sign up. Subscribe. CNBC dot com slash OTOH. Tomorrow's topic, is it morally wrong for office workers to demand work from home? We're going to argue both sides tomorrow morning on Squawk Box.

And you'll get both sides of the debate in your inbox tomorrow as well. you sign up now. Of course, this is off of those comments Elon Musk made to our David Faber on CNBC this week. I'm looking forward to that. By the way, we need to talk about the fact that we're twinning here on TV. We did not plan this. We don't plan this, but we do plan on fast money. It begins right now.