Closing Bell - Closing Bell: Overtime: Wolfe’s Chris Senyek On His Bearish Market Call; Moody’s Warns On China’s Credit 12/05/23

Episode Date: December 5, 2023

Wolfe Research’s Chris Senyek out with a bearish market call; he joins the show to break down the reasons he’s pessimistic. Earnings from MongoDB, Box and Toll Brothers, plus market talk with Profit Investments CEO Eugene Profit and Vital Knowledge’s Adam Crisafulli. Gabelli Funds PM Jeff Jonas gives his top healthcare picks. Seaport analyst Ken Zener breaks down Toll Brother’s numbers and the broader homebuilding sector. Plus, our Eunice Yoon on why Moody’s issued a warning on China’s credit outlook.

Stops finishing this mixed after trading in a narrow range today. The S&P closing just below the flat line. The Russell 2000 at transport seeing heavy selling, though. That's the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Ford. And we've got a big hour of earnings coming your way. The builders and the flyers, results from home builder Toll Brothers, along with Box, MongoDB, Asana, and Air Environment.

Plus, it's nearly winter, but one bear is coming out of hibernation. Chris Senec from Wolf Research gives us his bear thesis for 2024 and why he says the consensus view on Wall Street is wrong. Stocks moving in a fairly tight range today, but the 10-year yield seeing a big drop on signals of a cooling labor market. Bitcoin having another strong session breaking above 43,000. Mike Santoli's at the New York Stock Exchange.

Mike, the 10-year dropped below 4.2% for the yield on that job openings report, but the S&P didn't rally much. What does it mean? No, it didn't, John. You did really have a reversal of the recent trend where you had some weakness in the big winners of the year in the NASDAQ and then some strength in things like transports and banks and other cyclicals and small caps. So maybe today was just a little bit of a payback, trimming around the edges type of day after multiple days of outperformance by the

cyclical areas. I do think, though, you can give some credence to the way the bond market reacted to the softer labor market data, the ISM services number, prices paid coming down. A lot of signals that the disinflationary forces, along with the still resilient economy, all out there in the open. It's plausible. We can bank on it until we get to the point. And if we get to the point when the activity becomes too weak and we can't really have a trust that we're going to avert recession, that to me is the game we're in. We had a big rally in the market. It's been consolidating it for a couple of weeks as we try to figure out what the

probabilities are for how it goes into next year in terms of this economy holding up. Even before next year, though, I mean, we had this conversation yesterday with Chris Hickey from Bespoke as well. It would seem, at least based to him, that we are sort of right on target in terms of how seasonality plays out in the market at this time of year coming into the Santa Claus rally. That is true. Most of this year has adhered pretty closely to that pattern. And what that would tell you from here is that first half of December, pretty soft, kind of choppy. Maybe you give back some of the November rally and then typically a back end loaded a

little bit of a lift in December. So we'll see if that does play out. It would make sense. It would also coincide with this period when the market wants to wait and see what the job report and the Fed next week look like before making any incremental big moves. OK, stay close because we're going to see you back here in just a few moments, Mike. In the meantime, let's bring in our market panel. Joining us now is Eugene Profit of Profit Investments and Adam Crisafulli of Vital Knowledge. Good afternoon to you both. Adam, I'll start with you. I mean, picking up on on the yields theme here with a 10 year below 4.2 percent, is this good news for stocks or does the good news or does it start to become bad news because it is raising questions about how much lower yields can fall on the back

of slowing economic growth? Yeah, I think that's still the real critical question for this market now. We've had multiple weeks of very dovish economic data. You know, the shocking jolts number today was kind of the capstone of all of that. And so yields have declined and markets right now are focusing on the dovish implications for policy and the reduction in yields, the implication that has for equity multiples and celebrating that justifiably. And now I think the question as we move into the Q forwarding season in early next year, you know, into Q1 and Q2 is how EPS is going to fare in an environment of not only lower growth, but also disinflation. You know, inflation has been an important contributor to profits for a lot of companies.

And so as that begins to dissipate along with slowing growth, there's definitely going to be an EPS impact. You know, it's not necessarily going to be catastrophic at all, but I think that's the big question for markets right now. And you kind of saw that today where treasuries rallied, you know, and stocks got a little stripped up. You saw notable weakness in a lot of cyclical sectors as markets try to answer just that question. What's the EPS impact going to be of this notable change in the economic landscape? Eugene, how are you gaming this out? And I ask that on a day where tech was the outperformer again. But before we saw the reversal today in recent trading sessions, it's really been small caps, it's been transports,

it's been banks, it's been some of these less loved areas of the market that were seeing more activity and more buying. Is that is that the expectation that you're going to continue to see a rotation out of tech and a broadening of this rally as you go into 2024 here? Value plays, if you will, or not so much? Morgan, I actually do think you're correct. I think you will continue to see the rotation into areas that were unloved earlier in the year, assuming that interest rate policy continues to ease and we don't have some kind of major dislocation that would tend to push their interest rates much higher. I think for the balance of the year, your technology names that have run so far have really created a situation where there's a little bit of confusion around valuations in the market. If you look at equal weighted S&P, you have a relatively not inexpensive market, but not expensive market.

And small caps have only increased about 8% this year, all of that in November versus, say, 35% in NASDAQ. So as long as we continue to see interest rates ease and you get a little help from the Fed, probably the first half of next year, I think that investment portfolios would be rewarding risk. If we don't see that, on the other hand, I think that you're going to see us get defensive pretty quickly. In our portfolio, we run more of a barbell strategy here so that we're not really reliant on Fed policy. But we really are watching closely to see whether or not economic conditions continue to head towards a soft landing, because that real risk here is that we have that wrong, even though that doesn't seem to be the case at this point.

OK, we're also watching closely for the earnings coming out. And Box is first. Christina Parks Nevelis has the numbers. Christina. Yeah, it's another software as a service company hit hard, missing across the board with its Q3 earnings report. EPS was two cents light on revenues of two hundred sixty two million dollars. Also light. I caught up, though, with the CEO, Aaron Levy, who said, or Levy, I should say, who said that they received less money than expected for the sale of data center equipment

as they continue to migrate to the cloud, a.k.a. pricing for the second-hand equipment market is falling. As for Q4 guidance, both earnings and revenues, also a miss, the company blaming weakness in international markets and currency headwinds, considering one-third of their total revenues comes outside of the U.S. with the majority priced in yen. So the strong U.S. dollar didn't help their guidance.

And that's why you're seeing shares drop dramatically, about 8 percent. All right. Yeah. Rough environment for Aaron Levy there. Adam, we got MongoDB and Asana that we also expect to hear from in overtime. Mongo is the top weighted name in the WCLD cloud Index, which has been up about 20%, I think, since the November 1st low. How important is a name like that in seeing whether some of these cloud names can continue to run? Yeah, I think they're important. You know, it's hard with these smidgap software names if they're beat or missed by a little bit. You see these dramatic moves, so it's really hard to extrapolate. You know, you definitely are seeing companies start to look closer at their budgets and prioritize spending. And so, you know, the companies that sell really critical products are going to benefit and others that are perhaps more on the periphery of importance. You know, they could fall by the wayside and you've probably seen that play out a little bit. You know, a buy-go later this week is going to be a more interesting play.

And then Oracle is going to be coming, you know, in the next week or two. They're also going to provide critical insight. So it's hard to kind of extrapolate some of these mid-cap names. But, you know, expectations, especially for a Mongo, like you mentioned, for the higher growth, the expectations are very high, you know, just given the move in the market. So the bar is going to be elevated. Yeah. And if you're getting Oracle, you know, Adobe is right around the corner, too. Eugene, consumer spending, you highlighted at the beginning of the year as the key here.

The consumer has held up at least in the spending front all year long, though credit is stretched. How do you bet from here if you're an investor on what the consumer is going to be able to continue to power into 24? Well, let me use the box earnings that came out as to answer your question. I think that I don't own box, but in looking through at the earnings, they're really highlighting the macro conditions being their headwind. And that's coming off a quarter over quarter period where, in fact, IT spenders were spending more money, but they pulled in the reins because they're concerned about economic conditions. I think with respect to the consumer, you're seeing the same thing. You're seeing consumers begin to trade down in terms of purchasing power. You start to

see the consumer tighten their belts just in case the economic weakness gets any stronger. So from that side of the equation, we're looking at a slow housing environment, very tight conditions, and very high interest rates. Even though interest rates are lowering, you still have weaker supply. So I think that consumer has kind of held up through here pretty strong, but they're definitely getting stretched and definitely getting weak. And that could be the difference between whether or not we have a soft landing or really have kind of much more broad based recession. OK, we'll leave it there. Eugene Profit and Adam Christofoli, thank you both. Now back to Mike Santoli for a closer look at the big drop we mentioned earlier in yields, Mike. Yeah, John, focusing in specifically on the five-year Treasury, which is down below 415 in yield.

And it also goes back a little further in time around these levels to show you the relief that we've gotten relative to where people thought rates were going to head. So back to, let's say, August levels. Also, I think significantly below where the five-year traded back in the very start of this year. Remember in February, we were trying to figure out if this really hot economic data from January was going to mean the Fed was going to have to go all the way to 6%. So that was part of that panic. Five-year also has some relevance to some other parts of the debt capital markets, corporate credit, things like that.

So there is relief happening here as people reprice the Fed and inflation down the road. Now, I want to take a look globally. Kind of interesting, the German DAX index made a new high today, new all-time high. And here's how it looks on the last year relative to the S&P 500. Basically matched it. Now, this is somewhat of a catch-up move. Over five years, the S&P has done really well. But it shows you that the rest of Europe, that's the stocks, and the rest of the world outside the U.S. have lagged pretty appreciably. Now, the German market has some sector advantages. SAP Technologies, 10%.

They have a lot of industrials, not a lot of staples, not a lot of commodity-related. But very interesting that still there's some laggard groups in the rest of the world, but Germany, not one of them, of course, a big export economy, John. So, Mike, looking at yields, whether it's the five year or the 10 year, what's the level where eyebrows start getting raised or drops? Is it below four or is there any particular level? I would think four just because we have kind of anchored ourselves to to this four handle as being kind of the likely path for a while now. I'm not sure we're going to necessarily plunge right through there. And in fact, if you start getting below four, I do think it's going to raise questions about just how quickly the economy is softening up. But even right now, I mean, you're kind of 80 basis points off the highs in 10 year yields.

That means you're at least that much off the highs in mortgage rates. It's starting to matter in terms of real, real economic activity right now. It's almost like soon you won't wish for them to be going down as fast based on the macro implications. All right, Mike. Thanks. We'll see you again in just a bit. Meanwhile, two more names just crossing with earnings. It's a rough tape for these cloud names after hours. MongoDB and Asana both down. Christina, what's going on?

Yeah, it's surprising with MongoDB. It's a data storage company, and they did beat for Q3. Earnings per share came in at 96 cents a share when the street was expecting 50 cents. So it's a 46-cent beat on $433 million in revenue for Q4. Strong Q4 revenue guidance, strong Q4 EPS guidance. So I'm going through the report, too, relatively positive. So I'll have to get back to you on why we're seeing this stock drop, which has lifted off the lows of 8% now. Switching over to Asana, which is also a software as a service company,

what we're seeing is a smaller loss per share than expected at $0.04. So the company lost $0.04 in Q3. The industry was expecting $0.11 loss on revenues of expected at $0.04. So the company lost $0.04 in Q3. The industry was expecting $0.11 loss on revenues of $167 million. That's a little bit higher than anticipated. The Q4 loss per share guidance. So again, the company is not profitable. That came in a little bit smaller than the loss, I should say, smaller than anticipated. So that's a strength. So overall, strength for the guidance and a beat on Q3 for Asana Software as a Service. But you can see both these companies just dropping dramatically. Could have something to do with Box that we spoke about earlier, too, just across the board.

Concerns about the software space, John. I'll take it. Christina, thank you. Or Morgan. Thanks. Shares of CVS getting a healthy bounce today as the company revamps how it prices prescription drugs. We're going to talk to a portfolio manager who holds the stock and says the new plan could be difficult to implement. Overtime is back in two. Welcome back. The nation's largest drug chain, CVS, announcing it's going to overhaul how it prices drugs. Starting in 2025, pharmacies are going to get reimbursed by pharmacy benefit managers and other payers based on the amount CVS pays for drugs, in addition to a markup, a set fee. This current system is not directly tied to the cost of drugs.

CEO Karen Lynch says now's the time to change. It's time for change. And, you know, if not us, who? And that's really what we're trying to do. Like, we are the leader in the industry. And if we don't make the change, who else is going to? So that's why we're really excited about the new model that we're bringing to the market.

Well, Mark Cuban, for one, joining us here on set, Jeff Jonas from Gabelli Funds. CVS is one of the top holdings in their health care and wellness funds. I mean, Jeff, we've heard this cost plus model from Mark Cuban before. Granted, he's a small guy compared to CVS, but having a big impact, it's going to be harder for CVS to implement this, though, right? Yeah, they definitely want to move to more transparency, but there's going to be a lot of hurdles here. I mean, first of all, working with other pharmacies like Walgreens or Rite Aid, they're not going to disclose their

purchasing costs to CVS. And you also have to get the other insurance companies besides Aetna to buy in as well. So this could start in 2025 and it's probably going to be phased in over several years. So if they're successful, what's the upside? Do people come to retail stores more? Do they buy other stuff? What do they get? So they're just trying to stabilize their pharmacy business. You know, the reimbursement there has been squeezed every year for decades, really, and the operating profit's declining about 5% a year. And they're hoping by moving to this more transparent and predictable model that they

can at least stabilize that and hold it flat. Okay. So let's talk Johnson & Johnson. They've had a rough go over several quarters, but it looks like they gave a conservative guide here that maybe investors can take some solace that they're confident in? Yeah, I think the business is very well positioned for 2024. Talking about 5% to 7% revenue growth and maybe $10.75 of earnings. And they tend to be conservative. I think they can actually beat that, maybe $10.85. And then they gave a better outlook for 2025, where they have a big drug going generic, Stelara. And it looks like they have a better outlook for 2025 where they have a big generic a big drug going generic stelara and it looks like they have a strong enough pipeline to offset that and continue to grow

um so i'm looking at your top 10 holdings here we've been talking so much about the weight loss drugs a how is that going to affect a j and j for example because we've been getting a lot of commentary that maybe it's not going to be as bad as feared for some of these medical device makers and other types of drug makers? And B, what would it take to see some of these obesity players actually make it into the top holdings of your ETF? Yeah, I don't think it's going to be a major negative for Johnson & Johnson. The one part of their business doing obesity surgery, bariatric surgery, probably will see a slowdown in the near term just because people are going to try the drugs first and see if they get the weight loss that they want. But the rest of the business, no, should not really see any impact over time. In terms of the other obesity drugs, we're value investors. So

buying Eli Lilly at 50 times earnings is just a little bit of a stretch for us, despite the good growth prospects that it has. Okay. Where do you see value right now, other than the names we've just discussed? Well, I do think the medical device companies like Medtronic, Johnson & Johnson, and Abbott have really pushed back against the Ozempic sell-off that they had earlier this year. So I think they're well-positioned, and I think that's the area of value. What about the GLP-1 opportunity? There are companies who are starting to talk about, hey, you need to eat healthier once you're taking these drugs or you get some really bad, saggy after effects. And they're looking at ways, you mentioned Medtronic, I believe they said this, to offer products that actually serve the customer who's using those drugs.

Are there value plays there? Yeah, I think an interesting way to play this is through the drug wholesalers like McKesson and Sankora. They're the ones who physically move it to market and get a small but modest profit off of it. So they're going to see the volume benefits. There's some speculation, too, that we could see AbbVie and their plastic surgery business get a boost because when people lose all that weight in their face, in their body, they then might want to touch up a few things. Catalan is in your notes here as a top pick.

That gets my attention since I know it's a real turnaround story at that company. It is, and I think that's why the stock is attractive now. They did have a COVID hangover from that's why the stock is attractive now. They did have a COVID hangover from manufacturing some of the drugs and the vaccines, and they did have some quality problems in a couple of plants. But they understand the nature of the problem. They're working to fix it. And you have an activist investor as well holding their feet to the fire. So I think they're going to make progress over the next one to two years. Jeff Jonas of Gabelli Funds, thanks for joining us here on set. Thank you. We've got some more earnings to tell you about.

Air environment, those results are out. The defense contractor, which makes unmanned aerial vehicles, drones, switchblade, for example, topping Q2 revenue estimates with $181 million versus expectations of $171 million. This was a 62% increase in growth year on year. That actually represented a hefty acceleration from the 40% growth we've seen over the last couple of quarters. Second quarter net income was up 366%. Adjusted earnings coming in at 97 cents per share. A big beat versus the 62 cent estimate. Backlog rising to $487 million as well. Companies increasing its fiscal year

2024 revenue guidance to between $685 and $705 million, including the acquisition of Tomahawk Robots, which takes it further into AI-enabled robotics. We're going to hear from the company's CEO, Waheed Nawabi,

tomorrow on Overtime exclusively. Meantime, those shares, I think if we brought that back up, bring that chart back up, are moving higher right now. China shares moving lower, though. Today, after Moody's cut the country's credit outlook to negative, we're going to tell you why and what that means for investors. And check out two broadband providers moving lower today. CNBC, Parent Comcast and Charter Communications both getting hit after Charter's chief financial officer said it's possible that company sees negative broadband net ads in the fourth quarter. We'll be right back. Welcome back to Overtime. Major Chinese indices under pressure today after Moody's issued a downgrade warning for the country's credit rating. Eunice Yoon joins us now with a closer look at the reasons behind

the cut. Eunice, what we saw in China trading today was concerns about the economy, about debt loads in the country. Then the markets closed, Moody's cuts. It's basically an affirmation of what's been essentially been discussed or whispered in investor circles for some time, right? Yeah, absolutely. The content of the downgrade and what Moody said isn't necessarily new, but it does reaffirm what a lot of investors have believed for quite some some time that the difficulties in the property sector are only going to weigh further on the minds of the leadership. And the financing problems at a

local level are also a big headache for the leadership. And despite the fact that the government has been trying not to really get involved and issue more stimulus, the expectation now is that there will be more fiscal stimulus, that there could be possible defaults and, of course, then possible bailouts, which would affect the fiscal position of the government. So, Eunice, in contrast, maybe to what we've been discussing about the U.S. consumer remaining strong and how that's been powering the economy, what's the Chinese consumer's position been? There was a lot of talk about how

the bounce back from COVID wasn't what was expected. Is this more assistance needed for the consumer and the whole economy? Well, the consumer is increasingly becoming important in China, but it's been slow going. And especially because the government hasn't really put in the necessary reforms in order to create more certainty for people in their lives, such as health care or pensions. That really has been lacking. So people just don't really feel comfortable. And then, of course, there's the kind of cultural norms, which is that in general, Chinese people like to save rather than spend. We have been seeing more people after the pandemic go out and spend more on travel. But in terms of other items, most people have been saving or they kind

of talk about a consumer downgrade, that it's much better to try to buy things on a budget level and in fact, quite be quite proud of getting a bargain rather than buying the new luxury handbag. The data we get out of China, at least here in the U.S., versus what the realities are on the ground, how much of a disparity is there? I mean, it's difficult to say because we do see more positive data that comes out of China. And then because it has been difficult for people to get out and travel much during the pandemic, it's difficult to say in Beijing what's actually happening on the ground in some of the rural areas. But for the most part, there is an overarching pessimism that I haven't actually

seen in the many years that I've been living in China. The expectation has always been that life is going to get better, that wages are always going to get better. You could jump from one job to another pretty quickly. But that's not the case anymore. People are really worried about what's going to happen. They're concerned about where their next paycheck is going to come from. They're worried about the relationship that China has with other countries. And then because of that, they end up saving a lot more because of that uncertainty. All right. Great perspective. Eunice Yoon, thank you. Now let's get a CNBC News update from Kate Rooney. Kate.

Hi there, John. As Israel expands its group operation, Prime Minister Benjamin Netanyahu shared his plans for the region at a press conference today. Netanyahu said the military will have to retain security control over the Gaza Strip even after the war ends. He said Gaza needs to be demilitarized and only trust the Israeli military with completing that task. Netanyahu added that no international force can be responsible for this, as he put it. A group of activist nuns just filed a lawsuit against Smith & Wesson. They are shareholders and are pressuring the gun company to radically change the way it makes and markets its versions of the AR-15 rifle. The nuns argue the company put shareholders at risk by making a gun often used

in mass shootings. Smith & Wesson has not yet responded. And British music legend Denny Lane has died. Lane co-founded the rock bands the Moody Blues and Paul McCartney's Wings. He was inducted into the Rock and Roll Hall of Fame in 2018. Lane's wife shared that he died peacefully at his home following health setbacks from lung disease. He was 79 years old. Back to you guys. All right. Okay. Thank you. After the break, Mike Santoli is going to give us a closer look at today's JOLTS data that sent yields lower. And don't forget, you can catch us on the go by following the Closing Bell Overtime podcast on your favorite podcast app. We will be right back.

Toll Brothers earnings are out. Christina Partsenevelis has those numbers. Christina? Yeah, we're seeing a beat on earnings of $4.11 diluted on revenues of $2.95 billion. That's down about 18% year over year, but nonetheless stronger than not only the estimates, but also stronger than the whisper number on the buy side that we're getting. I'm not going to compare for guidance, but from the actual earnings release, what we did see is the net signed contract value, which is important for this company.

That was up 53%, I should say, year over year. And then they also saw their backlogs of homes drop about 19% year over year. When that backlog's dropped, that means that they're clearing inventory, and that's seen as a good thing. The stock is only up marginally. And just one last thing in the earnings thing. They are encouraged by the recent 75 basis point drop in mortgages as they approach the spring selling season in January.

Spring selling in January already. Guys? I'm not surprised they're encouraged. Stocks up 1%. Christina Parts Nevelis, thank you. This morning we got another sign that the economy is cooling. October job openings missed estimates and fell to their lowest level in two and a half years. Mike Santoli is back.

He's got his take for us. Hi, Mike. Hey, Morgan. Yeah, so the job openings number badly missed estimates, if you want to say a downside surprise is missing estimates. But, of course, that's what, in a sense, the Federal Reserve wanted to see. It was almost 600,000 jobs that were not listed anymore. This is another component of that survey, which is the percentage of layoffs in a given month. So you see, it's been really low. That's the orange line here.

Rock bottom through the pandemic and afterward. It's blipped up a little bit to around one percent, but really still below pre-pandemic level. So it's not really about employers shedding workers at a rapid rate. And you see the unemployment rate, the official unemployment rate, has just barely curled higher and generally tracks this number. So if this remains subdued, we can hope that the unemployment rate also does. So we have almost that sort of perfect combination of a labor market back in balance because it's not that there's too much demand for labor,

but people are also not yet letting people go. It could change. It could be a lagged effect looking into next year. But for now, pretty benign numbers. Quits rate remains at 2.3 percent for another month. And that's still elevated versus what we've seen pre-pandemic or going back to the pandemic, right? How do you jive those two together?

It's a little bit elevated. It's been flattish in recent months. So it's sort of, you know, also just sort of treading water here. It just shows you there's something structurally tight about this labor market and folks feel as if they're going to find something out there if they do leave their job. But I think that the better news is that you're not necessarily seeing this rash of layoffs out there that would suggest that companies feel stressed. So there is still a corporate psychology, I think, that they were just so recently in a labor scarcity mode that they're not in a hurry to really pair a headcount too much more than the economic signals tell them they ought to. But they are sharpening the knives, though, right, Mike? I mean, we did have Charlie Shaw say this pool of money over here is for the severance payments we plan to make next year. That's right. No, there's no doubt. Now, in fact,

I wouldn't be surprised if the huge drop in job listings was part of that process where people get to the end of the year and say, let's really be kind of prudent about what our needs are. All right. Mike Santoli, thanks. After the break, will bears rule Wall Street next year or the chief investment strategist from Wolf Research is going to make the case. And we're going to break down those Toll Brothers numbers with an analyst who says the stock is a buy over time. We'll be right back. S&P 500 targets for 2024 already rolling in. Firms like Deutsche Bank, Bank of America and RBC estimate the index is going to top 5,000. But others don't see a rosy picture next year.

Wells Fargo expects a volatile and flattish year. Morgan Stanley says the near-term backdrop remains challenged. Our next guest sees, well, disappointment ahead. Joining us now, Chris Senyak from Wolf Research. Your base case is an 8% drop. Why so bearish? Yeah, hi. Thanks for having me on.

So we think the lagged impacts of the Fed rate hikes are going to really start to hit the economy in the first half of next year. At the same time, companies are going to lose some of the pricing power because inflation coming down is a double-edged sword. Companies won't be able to pass through the prices they had. And since earnings and the economy is priced in nominal terms, you just won't get the revenue growth that we've seen over the last two years. So we're penciling in three percent earnings growth for next year, which would give us a 230 S&P 500 earnings number. And we think that higher risk inversion will come into the markets in the first half of next year and multiples will contract

from the 19 times forward earnings the S&P trades at today to something closer to 17 times, which is in line with its pre-COVID average. Okay. A lot of that case, though, sounds like the bear case for 2023 that didn't pan out for the bears. So what happens if the Fed actually does cut around mid-year? Does that change the direction of equities? Well, just like rate hikes, rate cuts work with the long and variable lag, right? So if this is a 94-95 scenario and the Fed cuts in time and that causes financial conditions to loosen further and consumers to spend money, then we could see some upside to that. But we're not in that camp. We think this cycle has been a very different one. We don't see the Fed cutting interest rates when the unemployment rate's at 3.7%. We think, you know, you had the COVID bump, you had excess savings earlier this year, and then you had the Fed come to the rescue in March, which threw a

lot of equity and enthusiasm, including AI, into the marketplace, and he threw some physical stimulus on top of it. So we just don't see those forces which, you know, which cause economies to surprise the upside occurring in 2024. You sound like somebody who is very skeptical of a soft landing scenario next year. Are you building recession into your base case? And if so, what does that mean in terms of how you position yourself as an investor? Yeah, so as we enter, you know, next year, in a way, it's a mirror image of this year, right? This time last year, everyone's bearish. Everyone thought the economy was going to go into recession in the first quarter, and it just didn't happen, right? The consumer surprised the website because they think you had excess savings, among some other things. As we enter 2024, it feels like sentiment is off the

charts positively. We've had this performance-chasing rally that's broadened out more recently, and yet the economy is slowing. And you're seeing data points almost each and every day that things are slowing at the margin. It takes time. You don't have a big cathartic event at once, which causes stocks to price in it immediately. But we think as the economic data disappoints, the Magnificent 7, which we're viewed as very defensively now, will start to underperform. And we'd rather own the groups that have lagged here to date. Our favorite sector is Staples. We like health care. We also like utilities. And we're out of consensus in that we like energy as

well. Interesting. I mean, just to look at the staples, staples, you know, they've been hit pretty hard earlier this year. When you talk about the double-edged sword of disinflation, I would think it's going to be groups like this that will feel it first. Well, they're going to feel it from the top line, but we're thinking about it from a stock perspective and that they will be a relative, you know, outperformer and a choppy and concerned date. So, Chris, it's an election year next year, and a bad economy, a bad stock market wouldn't be good for the incumbent. That's Joe Biden. So if I guess the polls start showing that, and what are the chances that the markets start trading on the polls

and that actually messes with the direction of stocks? It very well could. I think that it's going to be an extremely volatile market next year. I don't think the market's looking to the election because, frankly, I don't think that the market really has a good feel for maybe who the candidates ultimately are going to be. And I think the market's just focused on now and year end right now. But now but you know we saw that in past elections where as the polls swing the market swings around that and you see a lot of rotation underneath the surface one of the things i am worried with their outperform on health care is that health care becomes a punching bag if you will uh for policy and that sector will likely be very volatile. So I think that the

reality is we're going to have a very volatile year. I think you have to be more nimble. I don't think it's just going to be a buy and hold type year for any investor. OK, Chris Senyak, thanks for joining us. Thanks for having me. Shares of Toll Brothers just hitting post-market highs after beating earnings estimates. Up next, reaction from an analyst who says this hot stock still has room to run. Keep in mind, it is already trading right near all-time highs. It's up 3% right now in after hours.

Stay with us. Welcome back. Toll Brothers higher in overtime after beats on the top and bottom lines. The CEO saying demand remains solid and consistent with normal seasonality. That stock is at record levels. Joining us now is Kenneth Zener, senior analyst at Seaport. Ken, it's great to have you on. I do want to get your thoughts on this print and particularly that commentary about in

line with seasonality or normal seasonal dynamics as we see it work through the company, work through the backlog. And it looks like realizing perhaps higher prices or at least prices on more valuable homes in the quarter as well. Right. I think the quarter was very good relative to expectations. They did beat margins. We're certainly part of that contributor. It's just over 29 percent. If you look to their guidance for next year, I would say it's good. It's certainly underpinning a positive bias for the stock given volume. Though the margins might be down a little bit sequentially, if I read the

guidance right. And that could be for a variety of reasons. You know, low price up, but the mix of homes, if they sell at lower price jumps, they will be selling more homes. And I think that's an important concept for their return on capital focus. I realize that interest rates have come off a little bit after spiking during the last quarter, but the fact that we're still at these elevated levels and that's expected to continue into next year, have you been surprised to see housing holding up as much as it has, even as home builders like Toll swoop in to sort of help create more supply? Not really. I mean, you know, we take a very much of a cyclical view on this. Most of our work focuses on the pre-1982 period. And when you

see a secular rise in interest rates, what we saw in the mid-60s forward, you do have tight existing supply. The job environment is still very healthy. Certainly, builders are helping buyers with incentives such as, you know, two-on-mortgage buy-downs, which Toll is doing. But it also benefits from those, you know, being a trade up more luxury oriented home seller it is benefiting from those existing sellers in a tight market they're able to move their equity over so in addition to upgrades that help its margins as well can existing home sales have been slow how much risk is there to a name like toll that those actually pick up and it causes a shift in the balance between supply and demand?

Right. We haven't really agreed with the bearish concept that more existing supply is a about to come on or B would significantly undermine margins profitability for the public builders. It just doesn't rhyme with history as we've looked at it. I think a healthier housing market, as opposed to a tight one, would not be a bad thing within a historical context. So is the gauge really strength in employment then in the areas where toll is operating? I think, yeah, I mean, it's a pretty diverse builder. I think, you know, the fact we have almost a four-handle at unemployment, still strong job growth. You know, upwards of 30 percent of its buyers are cash purchasers.

So it has a good demographic. Obviously, the stock market is not undermining confidence for its affluent buyers. You've got a buy rating, a $93 price target, stocks trading near or at all-time highs right now. Why do you buy? Well, you know, we did upgrade about half of our stocks on November 2nd on our de-inversion, rate coming down concept to give investors a view back to the 1950s, actually, on that. But at 1.2 times forward book, it's not as expensive, quote-unquote, as some other builders due to its lower returns on capital.

But if you look at this 1.2 valuation range on forward earnings, it's still at the attractive end of a 1 to 2 times historical book valuation. Ken Zener, thanks for joining us. Thank you. Big bank CEOs making headlines ahead of their highly anticipated testimony before the Senate Banking Committee tomorrow. Those details are next. And check out Apple retaking the trillion,

$3 trillion market cap level with today's pop and helping propel the Nasdaq to a positive close. Look at that. Finishing today up 2%. Yeah. Back again. Welcome back. Plenty of red on the screen for overtime earnings movers.

MongoDB beating on both lines. Strong guidance. Down more than three. Asana beating on both lines as well, decent guidance, down almost nine. Box missed on both lines. That stock is down almost 11%. I mean, what's the difference? And Arrow Environment just below the flat line despite strong numbers across the board. I guess expectations, though, play in, of course. Absolutely. And for a name like Aeroenvironment, for example, stocks up more than 60 percent since the start of the year. We have a busy day for the banks. It was a busy day today and some weakness for the regionals as Goldman's Financial Services Conference gets underway. Keycor trimmed its

outlook for non-interest income, though guidance in its other units was unchanged. Comerica said Q4 deposits will be at the high end of prior guidance with net interest income in line. Wells Fargo CEO Charlie Scharf saying he still feels good about the bank's commercial real estate portfolio. And Bank of America's Brian Moynihan addressed the consumer landscape in an interview today with CNBC's Leslie Picker. Cyber Monday, bigger than last year. Black Friday, bigger than last year, but three and a half, four percent bigger. So it's the records, but at a much more modest growth. That spending growth rate is very consistent, 2017, 18, 19, with a low growth, low inflation economy. Tomorrow, banks will be in focus again when CEOs testify before the Senate Banking Committee. CNBC's Emily Wilkins joins us now for a preview

what we should expect. Emily, what should we expect? Well, John, it's going to be very interesting tomorrow morning. The really central thing here is going to be those new proposed capital requirements for banks. That's going to be front and center at this hearing tomorrow, both in the questions that senators are expected to ask and in the testimony of bank CEOs. Several Republican lawmakers on the committee told me they want to hear from the CEOs what impact potential capital increases will have on community banks, on small businesses and on consumers. Many Republicans, like South Dakota Senator Mike Rounds, have opposed the new capital standards and see the hearing as a chance to get banks to help them make their case.

Now we have these largest banks coming in and they're being told, we want you to increase the cost of interest to the average consumer because we want you to carry more capital. In doing so, it's the average consumer that's now going to see their interest rates go up once again. Mortgage rates are going to stay up or go up even higher. How is that going to help our economy? And I want to hear from them. So that's the Republican perspective. Democrat senators say that they plan to ask CEOs on a couple of different topics, including how they're addressing climate change, de-risking their energy portfolios, and whether they're making use of a new instant payment system from the Federal Reserve. Bank CEOs are also going to

portray the increased capital as harming the larger economy, according to testimony from the bank's CEOs. Guys, should be a very interesting hearing tomorrow covering a lot of ground. And of course, this is the third one that's been done in recent years. When I think about something like the Basel III regulations, I mean, these are regulations that there's a long lead time here. So how much do we think this testimony and this back and forth with lawmakers tomorrow is going to actually affect or change some of these regulations that have been crafted and proposed and are going into effect in slow motion? It's a great question because right now, Morgan, you're totally right. This is just in the proposed

phase. They're going to be opening up for comments. We're not going to see a final one for quite some time. And really, this is the Fed. These are federal agencies that are the ones with the regulations, not the lawmakers. But of course, you know, Washington is the Fed. These are federal agencies that are the ones with the regulations, not the lawmakers. But of course, you know, Washington is its own environment. You have pressure from the banks. You have pressure from lawmakers. You have them making their case. It's not happening in a vacuum. And the idea is that banks are hoping and Republican senators are hoping that this ultimately does put some pressure on the Fed and other agencies when they do think about what the final rule needs to look like. Okay. Emily Wilkins, thanks for joining us.

And we're going to be watching that one pretty closely. ADP jobs report tomorrow as well. We get more earnings, a lot of earnings after the bell tomorrow. It's a big morning for investors who like to stay liquid, particularly Campbell Soup results and Brown Foreman, a very different kind of liquid. Well, that is going to do it for us here at Overtime. Look out for those liquid assets.