Closing Bell - Closing Bell: Rally on the Ropes? 4/21/23

Episode Date: April 21, 2023

Is this rally on the ropes – and if so – will the biggest names in the market save it or sink it? Lauren Goodwin of New York Life Investment Management and Avery Sheffield of Vantage Rock give their expert forecasts. Plus, NYU’s Aswath Damodaran – the so-called Dean of Valuation – breaks down what is at stake for big tech stocks during next week’s major earnings. And, 5-star stock advice from Capital Wealth Planning’s Kevin Simpson. He tells us where he is making moves ahead of the big week on deck. 

Kelly, thanks so much. Welcome to Closing Bell on this Friday. I'm Scott Wapner, live from Post 9 right here at the New York Stock Exchange. This make or break hour begins with the look ahead to the biggest and most important week of earnings season yet. Microsoft and Meta, Amazon, Alphabet all reporting the stocks on a big run this year. The bar is high. Here is your scorecard with 60 minutes to go in regulation. Stocks are pacing for their worst week in more than a month. Questions about the economy remain front and center. Brings us to our talk of the tape. Here's your scorecard with 60 minutes to go in regulation. Stocks are pacing for their worst week in more than a month. Questions about the economy remain front and center. Brings us to our talk of the tape. Is the rally on the ropes or not?

And will the biggest names in the market save it or sink it? Let's ask Lauren Goodwin of New York Life Investment Management here with me at Post 9. Welcome back. It has been a resilient market, right? I mean, any dip of late has been bought. Are we running out of gas? I mean, how do you see it heading into what's a huge week next week? It is so uncomfortable for investors to sit and stew in this no man's land of uncertainty, mixed data, and no good answers. But there are two things, actually, that I'm looking at next week

in terms of where the market might be going next, and specifically the equity market. One of them is actually the employment data on Friday, employment cost index, which I think is really important for this tug-of-war we're seeing about the Fed. And then, of course, you mentioned tech earnings, specifically revenues, because the market breadth in this upturn has been so focused on these big tech names. I think it gives us a huge

indication of whether we'll see up or down in the week after. You think those stocks are set up for a fall, specifically the mega cap tech ones? And if they are, does that help answer our question of whether those earnings next week save this or sink it? I think it does help answer the question. Whether the stocks are in for a doozy has to do with revenues, I believe, rather than bottom line earnings. Well, revenue growth is slowing, obviously. I mean, we've learned that in the prior quarter or two. But it's not outright contracting. And I think it's really important to see underneath the headlines how these companies are managing what the rest of the country is feeling in terms of profit margins compressing, because it's when the rest of the corporate sector sees

those profit margin compressions that the tech sector starts to see deterioration in revenues, less growth in ads, et cetera. You feel like the market overall is vulnerable? I do. Not only from the economic perspective, but also from the lack of breadth that we're seeing. I would highly doubt that I'm the first or even the 10th person to come on the show and say that without the top 10 names in the equity market, you've only got one 1.3% equity market return this year. That's really important. But it also tells us what to

look for in terms of these tech earnings. So, for example, if you're going to see the market continue to break higher, it's probably not going to be from upward surprises in tech next week. It's going to be because other names are starting to join the party up. Really? But I mean, if these names next week, you know, let's just assume the earnings come in well, that's not going to give you the ability to have another leg higher led by those names, maybe at the expense of everything else. For all of the reasons that we've discussed that they've gone up in the first place, better balance sheets, cash on the balance sheet, perceived safety and more defensive plays? I don't know. I don't know that in a market where quality and uncertainty are so consistently a part of the conversation, if investors are willing to

take PE multiples of higher than 30. I think we might have seen the hovering around that quality specific to the media and tech names already. Let me ask you this. Why has the market been able to be as resilient as it has? And I'm gathering it's surprised you, right? You've been cautious for many of these conversations that we've had. And so many are, right? Everybody can seemingly name all the reasons to be defensive and negative and cautious and sell the rips. And the market's been hanging in. Why? The consumer. It's all about the consumer. Because when you look at all the things that have been going wrong, you still have spending in this

economy. It's still 70 percent of the story. And I think it's one of the reasons why. Well, two things. First, you can get the economic call right all you want. Recession in the third quarter of this year, we'll see if it happens, but that doesn't say anything about how you need to be positioned today. And if we've learned anything in the last couple of months, it's that investors can be caught off sides by missing the upside just as much as getting out of the way for the downside. And so from our perspective, staying fully invested in this market and playing tactically, looking for those signals, again, that you might get a bigger break to the upside or downside, I think is essential. I'm looking at discretionary stocks as you're speaking about the consumer.

It's the best sector today, and it's one of the best of the year. Looks to me like it's the third best sector of the year thus far. Do you feel like the consumer is going to hang in there? Is the consumer eventually going to crack? The consumer is hanging in there right now. I feel confident that the consumer will crack, but what's it going to take? We've only seen the first signals in retail sales, for example, of slowdown in spending on things like durable sales on restaurants that, gosh, everybody just wants to get out and spend. A story that's held the economy together over the last 18 months.

But we are also seeing personal savings rate now down below the long-term average. Consumer delinquency is ticking up. So there are signs that in not only the lower signs of the income side of the market, but also the middle and upper incomes that these things are starting to crack. It takes time. If you think we're vulnerable, how vulnerable are we? What sort of downside do you foresee for the S&P 500? The median experience of the last 11 recessions has been a 21% downside on the S&P 500. And when I look at earnings pricing of 220, I think that somewhere between 180 and 200 is

reasonable. And frankly, the longer the economy holds on, the closer I think it looks to the lower end of that lower bound. And so what I've been hearing a lot is a 10 percent downside. I think we might be looking closer to that median experience historically of 20 percent downside when the time comes. But I do not think we will see that major leg down until we see employment crack. That's when we know we are already in recession. All right. Let's expand the conversation. Bring in Avery Sheffield of Vantage Rock, who is here once again. It's good to have you back. 20 percent downside from here. If I said to you the state of the market right now is blank, what would your answer be? I mean, I would I would really concur with Lauren. I mean, I think we're in this no man's land where so many stocks are so expensive that there's very meaningful downside

to them. I mean, well north of 20 percent for a lot of the most expensive stocks and some very large stocks in the market still. I do think, though, that and I think, Lauren, you probably agree with this, like that there are stocks that are priced for a recession. I mean, a lot of consumer cyclicals, just cyclicals in general in the economy, are already priced for a significant downturn, and they might surprise to the upside. And if they're, you know, yielding free cash flow yields 10% or more, you know, in a market, in a world where you can get 5%,

that still might be interesting if those earnings come in a lot better than anticipated. So you don't think recession is priced in in any way? Lauren obviously doesn't. Well, in the expensive markets, in the expensive stocks that are holding up the market, there is not a recession priced in at all. I think Lauren was as well kind of early in calling a slowdown in tech spending even last fall. And I thought that the stocks would follow that. But instead, as each incremental data point comes in that IT spending is weakening,

everyone's looking to the recovery in the back half. And now even some people are saying, well, the tech budgets are tight for this year. Maybe it's going to be 2024. We don't want to miss it. So they've already bought it. They've already bought a recovery. And so it just seems like it's hard to have upside. And we have seen some technology related stocks like an emphasis, some of the smaller players that have reported early this earning season actually sell off 10%, 20% on their reports. Now, those are smaller names. They're less popular. But for some reason, people are actually paying attention to the fact that IT spending looks like it's slowing. And if people had the same sentiment when we potentially see an extension of a downturn for larger names,

there could be very meaningful downside. And there's such large market caps, they could pull down the market as a whole. So when you said, and these were your words, so many stocks are so expensive, and the larger ones, you're talking about mega cap technology stocks that have run a lot. I mean, the start of the year where PEs were relative to where PEs are now, you guys in the back are great. They put it up the chart exactly of what we're talking about here. Apple was 21.

It's 26 and a half. Microsoft was 25. It's 28 and a half. Alphabet was 17. It's 20 and a half. So in other words, everything is above market multiple and some extraordinarily so like Amazon, it's already at 51. Now it's at 74. Nvidia 34, now 59. Meta 15, now 20 and a half. You're speaking directly about these stocks.

I am speaking directly about these stocks and especially the more expensive stocks. I mean, they have just priced in so much optimism about, you know, in the case of companies that are more AI levered, AI kind of growing to the moon. And in the case of companies that are maybe more cloud levered, cloud growth, you know, having just a small cyclical slowdown and then reaccelerating. If those disappoint and also if, you know, margins don't come through, at some point there could be meaningful downside. I mean, it seems like the investment community is prepared for a slowdown. We're talking about a slowdown. So in a way, the slowdown isn't the surprise.

So maybe investors will just continue to buy the dream. But at some point, maybe it is the second half of the year, though. If the dream doesn't materialize, it seems pretty cautious. But if things start to wobble, people might start looking over their shoulder like, wait a minute, I better take my gains and move on. How about the Fed, Lauren? What happens if the Fed makes it clear, as clear as they can in the language that they will use and during the press conference with the chair himself? OK, we hiked here in May. Now we're going to be done.

We're going to we're going to sit and we're going to wait. There are some who are suggesting that that's not a positive, the Fed pausing or whatever word you want to use, that it's a sell, it's a sell signal. And they say it like Bank of America's flow show today, sell the rate hike, strategy correct, higher unemployment and higher credit spreads are a result by virtue of what the Fed's already done. I agree completely with that perspective because the market is expecting that the Fed will do what it has said it's going to do for the last nine months. If it doesn't, it's because it sees recession coming at us like a train. And that dynamic in which I just said that investors are finding this sort of nuanced no man's land is really uncomfortable. Yeah, it is very much a no man's land. And it's going to be even more uncomfortable if the market doesn't believe that the Fed is on the side of,

you know, this economy is moving so well that inflation is challenging. Now, from a headline economic perspective, I think history could very well bear that the Fed pausing in May is fine from an economic perspective. We've seen the long and variable lags. They're taking time to roll in. The Fed could pause and wait and see. But if they are doing that, they're signaling that we are now more worried about recession than inflation. And that would be a pretty stark change in communication. Unless they're like, look, we understand inflation is coming down.

And we don't want to break anything more than tipping the SVB glass on the floor that shattered, but you didn't knock the whole case of glasses over. Maybe it's just as simple as that. Economy's muddling along, doing well enough. They don't want to break something else that could potentially be larger. And they admit that inflation is coming down. I think it's an incredibly reasonable thing to say, and it might even be a very reasonable perspective. But I wonder if that nuance is something that the market can take in a positive way. So, look, with what Avery's describing, with what we might see out of the Fed, it's very clear to me that being fully invested is important still for investors,

that we have to be positioned to capture not only the yield, but also the dividends and the free cash flow that Avery is describing, that the equity side of a portfolio provides. But quality is only going to become increasingly important as the Fed gets worried. Is the end of the Fed road, Avery, a positive or a potential sell on the news? I think it is a very hard call on the news. But I do think if the Fed does pause, what we've seen is that we have lags, but the economy is withstanding these interest rates much better than I think many anticipated. Yeah, if not most people anticipated. Right, exactly, than I anticipated. And so I do think if the Fed pauses,

we're going to continue to see a digestion of the higher rates. And that, I think, will at some point, though, push investors towards stocks that actually have a yield that competes with 5% on the short end of the curve. And I think that presents a great opportunity, again, for the less expensive, more beaten-up areas of the market with companies that actually have better-than-anticipated business models. So you actually like traditional cyclicals? Is that right? I do. Not every traditional cyclical.

No, but I mean, if you like any traditional cyclical, I saw that in the notes. I was like, that's interesting. Well, I mean, look at it. Like P&G had great results today. Earnings are up 3% year over year. I mean, we're not involved in the stock either way. But I mean, it trades at a high 20s multiple versus you can. Earnings are up 3% because it's all pricing.

Like volumes are down. Whereas you can get 5% yield on treasuries. Like their dividend yields 2%. So if you're in defensive stocks, like why aren't you just in treasuries? I feel like if you're going to be in the market, you should be in the market for where there's real asymmetry to the upside. And we have had, you know, a fair number of cyclicals in home building and actually even like areas like auto dealers. And we've talked about retail before, even areas like consumer finance. They're very cheap. And if those earnings are down and if they don't collapse, you've got pretty strong earnings yields and actually even some very high dividend yields in some of those companies that could be pretty interesting.

The other eye-opener I saw in the list of things you like, office REITs. Really? Well, I mean, the plural there should not be extrapolated. It actually might be a plural. But OK, so there's one office REIT that you like. There might be at least one office REIT that I like. And look, I think they are very particular. You have to look at the leverage.

You have to look at every building, every location. But when I was running through them, you know, I found at least one REIT that when I put through eight percent interest rates on all of their debt and occupancy even modestly declining from here was still at around a 10% free cash flow yield. I mean, these stocks are down 70%, 80% from their previous peaks. And those that are in quality markets, even coastal markets, Southern California areas to look at, they just might be cheap enough that there's interesting upside there. We will leave it there. Ladies, thank you so much.

Lauren and Avery joining us here at Post 9. Let's get to our Twitter question of the day. We want to know, which are you most closely watching ahead of its earnings? Amazon, Alphabet, Microsoft, or Meta? You can head to at CNBC closing bell on Twitter to vote. We've got the results coming up a little later on in the hour. Let's get a check on some of the top names we are watching as we head into this Friday close. Christina Parts and Avalos is here with that. Christina. Well, let's start with Lyft because Lyft is confirming that it would, quote, significantly reduce its headcount next week. This, according to an email

from the CEO. The Wall Street Journal is actually putting that number at twelve hundred employees and that's driving shares higher now, five point5% higher. The looming layoffs represent actually a big chunk of their workforce. Roughly 30% could lose their jobs as soon as next week. It's important to note that Lyft doesn't count its drivers as employees. And a Lyft spokesperson tells CNBC, quote, This is a hard decision and one we're not making lightly, but the result will be a far stronger, more competitive Lyft. And you can see shares have been down about 70% just in the last year. One mistake that cost a company big.

Shares of Everbridge plunged today, down about 8% right now, after Florida officials canceled a state contract worth millions with the software firm, after a contractor mistakenly sent a test emergency alert to Floridian phones at 4.45 a.m. just this past Thursday, angering residents from their slumber. The test alert was meant for TVs and not phones. Scott? Slight difference there.

Yeah. Christina, thank you. Thanks. Christina Partsenevelos, we'll see you in a little bit. We're just getting started. Up next, big tech earnings on deck, as you know. So what could really be at stake for that sector? We talked to the dean of valuation, Aswath Damodaran of the NYU School of Business, gives his take.

And later, five-star picks for your portfolio. Kevin Simpson of Capital Wealth planning back, making moves, gearing up for all of that. He reveals his latest trades. We're live from the New York Stock Exchange. You're watching Closing Bell on CNBC. We're back. The busiest week of earning season just around the corner. Look at that wall right there. Mega Cap Tech reporting in a big way. Alphabet, Amazon, Microsoft, Meta. The big question, though, have those stocks gotten ahead of themselves after the tech sector's rally to start the year?

Let's ask the dean of valuation, Aswath Damodaran, NYU Stern School of Business. Good to talk to you at a perfect time to do such. These stocks too expensive or not? I think at this point in the market, they're relative to the rest of the market. I don't see them expensive. And I think if you look at what's happened this year, it's really the large tech, money-making tech that's rescued the market. I mean, collectively, money-making tech, the largest tech companies have added $1.7 trillion in market cap just in this year. Without them, the market would be in trouble. And I think they can sustain the market because there are two things that are happening. One is people are

discovering how much pricing power they have. And the other is I think a can sustain the market because there are two things that are happening. One is people are discovering how much pricing power they have. And the other is I think a lot of these companies took 22 as an opportunity to dump all the bad stuff into their earnings. They said it's a bad year, might as well dump stuff. So I wouldn't be surprised if you see a lot of positive surprises coming out of their earnings reports. That is one of the bullish cases is that they took their so-called medicine before everybody else. And that's why they're the ones who are primarily talking about the year of efficiency. You know, the words, obviously, that Zuckerberg used it at Meta. That's how you see it as well.

I think they have a lot of slack. I mean, Meta had thousands of people who are doing nothing. You lay off thousands of people who do nothing. That's a direct plus for your bottom line. Most companies don't have that luxury. So I think tech companies, because of the way they've cut costs, will be able to deliver higher earnings than expected. I mean, they're big companies. You're not going to expect their revenues to grow 15%, 20% a year. That's going to be an aberration. But I think the profits can actually deliver surprises because of the cost cuts. You know, you raise an interesting point.

Yes, they are the money-making companies, and that is why they are so attractive, right? The balance sheets, the cash, free cash flow, et cetera. But at the same time, their revenue growth is decreasing from where it was. So how do I judge their valuations based on, yes, the plus of money making, but on the negative of the revenue growth declining? And I think, you know, that that's a tradeoff you have to make. Revenue growth is going to be in the high single digits, in my view, for these companies. And that's what I've been saying for about a year. So I think the market price now is caught up at that 8 percent.

At the start of last year, I think the market was ahead of itself. It was building in an expected revenue growth of 12, 15% of these companies. It wasn't going to happen. Over the course of the year, of course, the market went to the other extreme and said, these are terrible companies. You shouldn't hold them. And remember when Facebook dropped less than $100 per share, people were convinced that the end was near. So I think you get these wild swings. And at the moment, I think they're okay, given the high single digit revenue growth and sustained margins and perhaps even higher margins. I think they're OK with at current prices. Are there some who look to nosebleedy, so to speak, to you? I mean, I just was recounting the P.E. for these stocks from the beginning of the year until where they are now with our prior

guess. You know, whether it's Apple, which was 21, and I'll just reiterate it, we can show it again as I ask you this question. 21 to 26, Microsoft, 25 to 28, Amazon, 51 to 74, Meta, 15 to 20, which now some people suggest, well, the re-rating is over in that name. NVIDIA, 34 to 59. Tesla, 23 to 46. I mean, you get where obviously where I'm going with that. Does one jump out to you and you say, OK, put the brakes on. This is going a little too far. Obviously, Amazon jumps out at 74 times earnings.

But let's face it, for 25 years, we've been betting against Amazon's PE and losing. So I'm not willing to go out there and say, at 74 times earnings, you're getting junk. I mean, this is a company whose earnings are understated significantly because of the way they built the business model. So it obviously stands out. I do think Meta still has upside left in it. But remember, even if they're fully repriced,

that doesn't make them bad investments. At this point in the market where you're defensive, I think these companies with their pricing power are pretty solid defensive investments. They're going to be able to raise earnings even in the course of a recession. And I can't say the same about many non-tech companies. In many ways, you're paying for pricing power that these companies have. Interesting. How about the market at large? 18 times-ish. Does that make sense to you, given where both rates may still go and where the economy may be heading in its own right? You know what? For the last three years, I've been watching markets, and markets have disconnected from investment communities because if you listen to investment communities, you have one message,

and the market seems to have a mind of its own. I've given up trying to figure out why the market is doing what it's doing at any point in time. And part of the reason for that I'm not a market timer is, you know what, experts might tell me that this looks terrible, but given the track record of those experts in calling market movements, I'll take the market over experts every single day. Does the resiliency, though, of the market over experts every single day. Does the resiliency, though, of this market surprise you in some ways? I think in a sense it hasn't been fully tested. The rates have gone up and I've been surprised at how well it's held up. But I think the other shoe that you're still waiting to drop is earnings going down. And if that doesn't happen, then the market's OK. So I think that the next week of earnings reports and in fact, all through the rest of the year are going to be tests of how much your earnings going to suffer at companies and is the market pricing in that drop.

It's going to be a full one next week. Professor, I appreciate it very much. Aswath Damodaran, again from NYU Stern School of Business, joining us here. Closing bell. We'll talk to you soon. Still ahead, raising the red flag, the biggest risks that could plague the market as we barrel towards the second half of the year. First, though, capital wealth planning's Kevin Simpson is back. He's trimming one name that is reporting next week. He'll tell us why he's pulling back on that. We'll do it next. We got 30 to go before the closing bell. Christina Partsenevalos has the stocks we need to watch. Christina?

Yes, and let's start with shares of lithium producer Albemarle plunging right now. What, down 10%? Now the worst performer in the S&P 500 after Chilean President Gabriel Boric announced plans to nationalize the country's lithium industry, which is the metal that's used to build EV batteries. Chile plans to create a state-owned company that would produce lithium and compete with Albemarle, and that's why shares are down 10%. You're also seeing shares of HCA Healthcare actually hitting a record high today. They're trading now about 3% higher at $279. And the hospital operator topped analysts' expectations and increased its outlook thanks

to an increase in emergency room visits and inpatient surgeries. So maybe not necessarily thanks for us, but the stock is one of the top performers right now in the S&P 500. Scott, happy Friday. Yep, you too, Christina. Thank you. All right, Christina Partsinello. Up next, five-star stock advice. Capital Wealth Planning's Kevin Simpson is making some moves ahead of some names that are reporting next week. He breaks down those trades after this break. Closing bell right back. All right, we are back and setting you up now for next week's tidal wave of earnings. Stocks in every single S&P sector.

Nearly half of the Dow set to report. Let's bring in Kevin Simpson of Capital Wealth Planning. Owns a couple of the names, well, a handful of the names reporting. Good to see you again. Let's talk about some of these. McDonald's, UPS, Microsoft, Visa, Chevron. You trimmed a little McDonald's ahead of next week. Why? Yeah, I mean, it's a name that we love, Scott. We've owned for a long time. But as you were just talking about with the previous guest, multiples sometimes get a little bit stretched. And if you look at where we are in McDonald's, you're at a 30 plus multiple. And for us, that's a little pricey on the name.

So taking profits, right sizing the position. I mean, this is how you manage money in these environments. And I think that it only makes sense for us to take a little profit ahead of earnings. I love the stock. We've owned it, like I said, for a long time. And I was thinking the other day about the dividend, because you know how much I love dividends and dividend growth. Yeah. About six years ago, this thing played two dollars and fifty two cents a share. Today it's paying over six dollars a share. So from a price perspective, you know what? Kudos to its performance.

But show me a stock that's giving me a raise. And that's something I'm going to want to hold in the portfolio. I mentioned Microsoft, of course. I'm curious. I mean, it's obvious that you listen to the conversation with the dean of valuation a little while ago. What do you make of what he said, that these valuations, you know, maybe aren't as stretched as they would otherwise look on paper? Yeah, I think he brings up a good point because people will tend to pay up for growth. And if you're looking at multiples in the 20s, I mean, I'm not talking about the 70s or 80s. That might be a little tough. But at 28, a little pricey. Twenty six for Apple, a little pricey, but not unbelievably pricey. And how much don't we love to talk about AI? So can't wait for next week to hear about that. The expectations for Microsoft, every one of these companies has a relatively low bar.

We would expect them to beat, but we have been trimming along the way. And I think at some point you may get another opportunity to get these stocks a little bit cheaper. But like you said, I'm not trying to time the market. We like the position long term, and it's certainly a very high quality name for us, thinking well, well into the future. Ben, an interesting week for crude thinking well, well into the future. Been an interesting week for crude, obviously, in energy stocks. Right. We had an eight handle on on crude oil back at seventy seven dollars, a little north of that. Chevron, how's it look to you? You know, they've been weak from the standpoint of price action, but anything over 70, 75 bucks, they're just printing money.

And this isn't a stock that's going to mistakenly or blindly just go into CapEx and start spending like crazy. They're committed to share buybacks. They're committed to dividends, dividend growth and shareholder value. You know, those are all themes that we really like. It was an amazing performance to be in the energy space in 2022. They've lagged a little bit here in 2023, but I don't think the story's changed at all, Scott. I think investors have another opportunity on pullbacks to continue to build positions in these names.

That's what we're doing. You know SLB had good numbers this morning and the stock sold off so. If you see a sell off in Chevron next week it may be a great opportunity to add to it. What about visa. You look at American Express and they put a

lot more money towards their reserves for potential low losses like a lot more than people expected. So I think we're going to see something like that from Visa. They have a tendency, a history now of us getting used to them beating top line, bottom line and raising expectations. But it's a good business to be in. If you can charge people 26 percent for credit, you know, that's better than the corner loan shark. So we like the stock. We own it. And I think much like Chevron, if you see a pullback on earnings, it's an opportunity

to add to it. What about UPS? Yeah, we like it because of the multiple. You're talking about an industrial that's trading only 15 times forward earnings. If you compare it to FedEx, which we don't like as much, even though I think they're making some really good decisions there, the FedEx multiple is closer to 20. So here's a stock, again, incredible, amazing dividend growth, very resilient, a little bit lower expectations on earnings. If we do go into a recession, which is our base case, it's going to slow down what we're spending on Amazon,

certainly going to have an effect on UPS. Stock has done really well. We're long-term holders. All of these names are things you can put on your watch list for future investments. You feel like it's make it or break it next week. And how are you just looking overall for a market that look, I mean, it's been a slog, but it has been reasonably resilient. Dips have been bought. We're seeing it again now as we head closer to the end of the session here on this Friday. How do you how do you size that up? Yeah, I'm shocked by the resiliency, Scott. I mean, it's incredible. And this range bound market that we've been in for seemingly two years seems like a little bit of a calm before

the storm for me. You know, I just can't imagine it continuing to casually just to escalate to new highs after new highs. And I think from the standpoint of future calls, if we're going to listen to the bond market, if that's our big brother, if that's really smart, a 4.2 percent yield on the two year is something we should be paying attention to. Now, the Uber bulls aren't like they're looking at this narrative, the storyline where you're going to see a Fed hike, a pause, a cut. And, you know, this isn't a dramatic play where we can control the ending. We have no power in it. And I'm a little bit concerned that the bulls are expecting too much. And we may not we may not get those positive upward surprises, at least as short term as some people are predicting. I mean, the bulls may be listening to the bond market. They seem to be listening to the bond market

more than they're listening to the Fed. Right. Because the bond market is telling something that the Fed isn't. well you know the fed's got a fed's got a narrative of their own to to stick to i suppose but they can't keep raising rates to perpetuity i mean at some point you put too much pressure we saw what happened with the regional banks because of the 450 basis point rate hike last year we're definitely getting closer to this pause that's for sure my problem My problem with the massive bull thesis, though, Scott, is where do you price in these three right hikes in 2023? We're just we're almost into the summer and we're running out of time. So seems more like a 2024 narrative where

we can see the good times rolling again. But I would remain cautious for the rest of this year, for sure. No matter what the Fed does in a couple of weeks. Yeah, because they're almost out of ammunition. Like I would expect a 25 basis rate point increase in May. I think that's kind of consensus. And I think they can stop there. And maybe that will be enough. I mean, these things are really lag effects when you're looking at inflation.

And we're not talking about deflation. We don't need prices to come down. It'd be great if they did. We're just looking for disinflation where they stop going up. And maybe that can even happen in rent and energy prices. So, you know, if you're in Philadelphia and I'm the Philly guy, we're back to, you know, an economy from a Philly Fed number that's like 2008, 2020. Phillies are losing. So maybe they're maybe the Fed's job is working and having some effect. Eagles lost the Super Bowl. I mean, I'm not trying to rub it in or anything.

I wouldn't do that. Kev, I'll talk to you soon. That's Kevin Simpson, Capital Wealth Planning, joining us there. Good weekend to you. Our last chance to weigh in on our Twitter question. We asked, which are you most closely watching ahead of earnings next week? Amazon, Alphabet, Microsoft, or Meta? Head to at CNBC Closing Bell on Twitter.

The results after this break. All right, the results of our Twitter question. Which are you most closely watching ahead of earnings? Is it Amazon, Alphabet, Microsoft, or Meta? Amazon is the winner. 40 percent of the vote ahead of Microsoft. Meta down at the bottom. Stocks had such a massive run, maybe not watching anymore. All right. Up next, we're breaking down the AI battle. One Wall Street analyst getting cautious on a big name. It might surprise you which one to when we take you inside the market zone next.

All right we're now in the closing bell market zone CBC senior markets commentator Mike Santoli with us to break down the crucial moments of the trading day. Plus Peter Chikini of Axonic Capital on the biggest challenges facing

this market. Will Stein with us from Truist, why he is getting cautious on Tesla with a downgrade today. Mike Santoli, you first. We look towards next week, a lot of the biggest stocks in the market reporting, including Amazon, which is interestingly up 3% as we speak. Kind of quietly making a move, adding to a recent run that it's had. Now, of course, it had a pretty disastrous prior two years.

It was the one member of the big mega cap complex that really was a drag on the rest. It's now poking up to the point where it's challenging. It's 200 day moving average. You see that that has been where these rallies have stopped three times in the last year or so. So we'll see if this one can nose above it. It's got a nice little uptrend happening since the end of last year, and it's hard to pin it on anything except maybe neglect and the fact that people have kind of left it aside.

You are looking for, I think, things that seem like they're steady, and Walmart's been a good performer, and P&G's been a good performer. If they're defensive attributes to Amazon, as you also have the the cost cutting story that's underway. So whether it's just that or it's got to be a little bit less overowned. One interesting thing about Amazon is the sell side just chronically loves it. Even if they don't really love it, they have buys on it. And that's the case. It's expensive, but, you know, you've got to pay up for growth. And you never broke that.

Now, the price targets come down, and people are less enthusiastic about it. But just one to watch. And I think it also underscores the fact that the FANG complex, the mega cap growth complex, has not traded in unison. So you had Amazon down 20% in the last six months. You had Meta up 60%. So there's been a lot of variation in there. The others that are reporting next week, the importance to the overall market, given that we've been in a slog, we haven't been able to break out of any kind of range. We are seeming like we're here every day. Yes. You know, it's at the same level or thereabouts.

It's hard to know if that's at the same level or thereabouts, does this take us out of it? It's hard to know if that's going to somehow be the excuse. I'm a little bit skeptical of market-wide catalysts coming from individual reports because I think one of the characteristics of the market so far, you know, the last few weeks, the earnings season, has been a lot of single-stock movement and also not a lot of follow-through, right? Netflix, really bad immediate reaction. Then it recovers part of it. AT&T bouncing today. So you do see a little bit of

kind of ebb and flow in the in the reaction. I think the bigger picture question is, is the low volatility sideways churn the market underreacting to bad news? Or does it say that if even the bad news can't bring out the heavy selling pressure, that the market underreacting to bad news? Or does it say that if even the bad news can't bring out the heavy selling pressure, that the market is in this kind of benign condition? All right. So, Peter Cecchini, I mean, what do you think the market is in? Selling pressure coming, benign condition, VIX at 16 plus as we speak, to Mike's point. Yeah, unbelievable resiliency and low equity vol, especially when you when you look at the move index, for example, at 120. That's about three times what it was at the end of 2021.

So equity vol and credit vol are completely dislocated. You know, credit spreads remain pretty wide when I look at high yield CDX, 460, 470. That's a lot higher than it was when equity vol was last at 16. It does appear that we're starting to see the beginnings of middle market defaults. What's keeping the VIX so low, frankly, is just index composition and the dominance of all these large tech companies, which have prevented the dispersion that you need to get realized volatility, and that's when you see the VIX pop.

So our bet here at Exonic is on higher equity volatility as the earnings season progresses. Do we figure anything out next week in the big picture with these big cap tech stocks that are going to be reporting, along with a whole host of other companies? Obviously, as we said, every S&P sector represented next week. Yeah, you know, I think I think, you know, last time I was on with John and, you know, I think last time I was on, I was with John, and he said, you know, you don't want Apple, Amazon, or Microsoft to pull a hammy or blow an ACL. And I think, you know, there is a risk of that. When breadth is this narrow, you know, there's a lot of risk to a name or two that has been keeping the market up, failing to perform to expectations so that narrow bread net flight to safety in big tech you know it's it is not a sign of strength to sign a fragility in my opinion so that could be one clearing point

uh... and then of course you know we have the fed the week after uh... which i actually think is something of a non-event to be honest uh... because at this point it's much more about the long and variable legs of monetary policy than it is about whether or not the Fed's going to go 25. I think everyone has baked that in. It's really about how those impacts of what it's already done start to bleed into growth and earnings growth.

Peter, I appreciate it. Speaking of stocks that you don't want to see spraying an ankle, and maybe one did this week, Will Stein, and maybe that's Tesla. So how do we view this after earnings the pullback we saw stocks bouncing here by a one and one and a quarter percent or so you did downgrade it today why yeah there's a change in outlook relative to the company's pricing strategy the company's taking an approach whereby they want to run the fabs rather the the factories, at approximately full utilization. And they're going to price however they need to in order to ensure they can continue

to clear all that inventory. That suggests downward pressure for both revenue and margins. That takes my valuation down and hence the required downgrade. Even with their margins, you know, obviously so much higher than the others in the space that they compete with. You're worried about, you know, more drop in margins and more price cuts, too. Yes, it's an incredible advantage for this company. They have this operating margin padding that they can use as a weapon, well, relative to other companies. Now, I don't think they're using this as a way to damage other traditional automotive companies or even some of the other emerging electric vehicle companies. They're doing it simply to run their strategy, which is to continue to run the factories

at nearly full utilization as they're continuing to add significant more capacity. They have the Cybertruck coming later this year. They have supposedly the next gen or the so-called robo taxi coming at the end of next year. And, you know, this is the strategy. They're going to lower price in order to do that. What about momentum? The stock had a ton of momentum going into the report. Does the release slam the door on that? You know, we think that the negative news, and this was more or less told to us by Elon Musk on the earnings call, that the outlook for the next few months, approximately a year, is that we're headed for some tough times relative to demand.

And the only way that this company is going to allow demand to come in enough to allow them to continue to sell the inventory that they're manufacturing is to lower prices. You know, there was there were no mixed words about this. We're headed for some cloudy times for the next few months or likely few quarters for this company. AI is a part of this, too, the way you're thinking about what the overall impact is as, you know, revenue goes towards AI at the expense of the core business, right? Well, that's not exactly the way we look at it. You know, we tend to look at this as an AI asset primarily. There's no getting away from the fact that this is an automobile manufacturer,

but it's one of the main points we highlighted in our launch report that we really view this as an ai technology company that's an underappreciated aspect of the business we don't see a shift we see a change in the valuation of the core automotive business musk talked about this yesterday in the earnings call that one could look at this as sort of a razor and razor blade model we'll sell the raz razors, i.e. the cars, at a, you know, potentially down to break-even cash flow level in order to seed the market, increase adoption, and enable us to sell autonomous technology and other AI technology to our customers. Great for margins longer term, great for, you know, cash flows is great for that focus on ai and new and interesting things for this company yeah but it's a problem for the core automotive business

well i appreciate it very much we go back to mike santoli we're under two minutes to go in the trading week here so i mean you did have tesla as the first big nasdaq test failed it i mean in some respects right yeah Not going to give it an A. Well, I would say Netflix and Tesla, both, you did actually have adverse responses there for different reasons. But as I said, it's within a range. You know, Netflix did not end up being a huge drag. The other ones, I think, obviously carry a lot more weight, not just in the index, but because there are a little more macro tells. I don't know that Tesla is really a macro tell yet Netflix has got its own industry dynamics so it is about look at. If alphabet says something about. Add demand more broadly if Microsoft is going to talk about what CDW had to say about tech investment and all that I still think it's- it's mostly going to be. Roughly as expected In aggregate, expectations low enough, but a bad earnings season. I mean, you're still looking at a 6% decline overall in S&P earnings for the first quarter.

The degree to which we can keep it manageable in that level of decline and then not have it accelerate probably holds the key for a market that is on the headline level trading at 18 times forward earnings. It just doesn't know what to do. It's like, you know, the data yesterday was weak. Yields are down. The data was better today. Yields are up. Yeah.

Well, it partly is the data is coming in close enough to expectations that nobody feels compelled to throw a lot of money behind or against what the markets can give us. All right. Dow's going to go out with a win. It's going to be a modest one, but that's it. Have a great weekend, everybody. Morgan and John pick it up in overtime.