Closing Bell - Closing Bell: Stocks pull back, Campbell CEO on inflation, Zelenskyy’s message for CEOs 6/8/22

Episode Date: June 8, 2022

The major averages pulled back Wednesday, giving back a chunk of their gains for the week ahead of key inflation data on Friday. Holly Newman Kroft from Neuberger Berman and Scott Wren from Wells Fargo Investment Institute discuss the risks and opportunities of investing in this market. Meantime Campbell Soup added to gains on the year following strong earnings. CEO Mark Clouse breaks down how his company has managed to navigate inflation and supply chain headwinds. And Sara asks Ukraine’s president Zelenskyy what his message is for corporate leaders regarding the war with Russia.

The major averages giving back most of this week's gains, losing steam throughout the session. The most important hour of trading starts now. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look at where we stand right now in the market. We are down about 300 points. Low of the day is down 345 on the Dow. Most sectors in the S&P 500 are red. Everyone actually, that is, except for communication services. Some pockets of green there, names like Alphabet, Meta, and Netflix at the top of the list on Takeover Chatter. Small caps down 1.75%. Look at that.

It's a bigger decline. And crude oil is part of the story. It's spiking today to up 2.5%. Energy stocks are holding up better than the rest of the market but are still in the red. Real estate materials and utilities are your worst performing groups. There's the most active traded names right here, right now on the New York Stock Exchange. Didi Global up 14 percent. Some of those Internet names in China have been flying on the opening of the Chinese economy and the stimulus that's flowing there. Alibaba up 14 percent. Credit Suisse is a loser of earnings. And that was a big

source of weakness overnight in Europe. NIO continues to be among the most actively traded every day here over the past few weeks. Coming up on the show today, we will talk to the CEO of Campbell Soup, which is in the green for the year, higher today on the back of strong earnings and strong sales guidance. We'll ask how inflation is factoring into those results. Plus, earlier today, I had the chance to ask some questions of Ukrainian President Vladimir Zelensky at the Yale CEO Summit. We'll bring you parts of that conversation, including his message for corporate leaders. First up, we'll start with today's market action and the return of Mike Santoli. Mike, what are you focused on today? Well, Sarah, this week, actually last two weeks, the market has really been kind of ping-ponging on a very short table

in kind of a trading range. But interestingly, as we all wait for the CPI number Friday, the market doesn't just sit still and wait. It kind of tests the upside and downside. And that's what this little sideways stretch is right here. In effect, the S&P is trying to kind of get back up into this year long range. Forty two hundred. We're still about eight or nine percent above those lows as we absorb more than three percent on the 10 year Treasury yield, close to 3% on shorter maturities. And then, of course, oil clicking to new highs in WTI. So you could look at this and say the market's actually maybe priced in a lot, including the downgrades to earnings.

But we just don't know if it's fully reflected. Take a look at the path of second quarter earnings consensus forecast for the S&P 500. That's the blue line. This is the end of June. So that's when the quarter itself ends. This is from Credit Suisse. And it shows you the historical trend over the past 20 years that this is very normal for estimates to start a bit too high, get revised down throughout the quarter. That's when earnings season reporting starts right there. And then, of course, companies routinely, on average, beat the estimates. So by this measure, it's not that

alarming what we're seeing, even though we have some very, very loud and impactful warnings from big companies so far. Obviously, energy is helping this number this year. But we just have to see if, in fact, this is anything more than the normal lowering of expectations into the reporting season. But even with lowered expectations, Mike, people are still remarking on how elevated earnings are, given all the negativity right now around the economy and around rates and everything. Especially for the remainder of the year. So for the second half of the year, those estimates have not been coming down yet. And so that's the argument I think is taking place about whether that's going to be severely cut back in terms of what we expect to earn in the

second half, in which case the market does not look as fairly valued as maybe it otherwise would here around 17 times forward earnings. Mike Santoli, we will see you soon. Thank you. For more on what to do in this market, let's bring in Neuberger Berman, Managing Director, Holly Newman-Croft. It's great to have you back on, Holly. Thanks, Sarah. Great to be here. So what are you telling your clients about earnings expectations and how that's filtering into the overall market, another big declining day here? Look, earnings are still strong. The whole market decline that we've seen so far is valuations. And while we're continuing to position our portfolios very defensively and hold cash, we're not exiting equities and we're holding some dry powder for when it's time to go back in.

When is it time to go back in? How will you know that? You know, I think when the Fed can really start to slow the economy. We're starting to see that inflation is starting to come down. Home sales are starting to decline. New car sales are starting to decline. But this is going to have to work its way through the system. And inflation is at such a high number. We don't expect to get back to post-crisis levels anytime soon. It's going to take a few years. So we continue to maintain defensive posturing in our portfolios

and stress the importance of asset allocation, both among sectors and within asset classes. And, you know, buckle your seatbelt. It's going to be a little bit of a bumpy ride. We feel that. We've been covering the volatility. So when you say defensive posture, what do you mean? Like real estate stocks, utilities, that sort of thing? Certainly, yeah. I mean, in the equity sector, we like income-producing stocks. We think active management is really key here, and you can find that amongst all sub-asset classes within equities. What does that mean? That means companies with strong balance sheets, companies with low leverage so they're not so interest rate sensitive.

And, of course, utilities, REITs, companies that have a yield or an income stream associated with them. In the fixed income sector, we're staying short duration. You and I talked last month about munis. That's been good. Yeah, they've had a nice run. Short duration munis, you know, I think are up 2. a half percent in the last month. And we continue to like that. We like floating rate funds so that we're not subject to interest rate risk. And then we're equally underweight domestic and international equities. Remember, international equities are trading below 20 percent below their long term averages. So we

think there'll be an opportunity there. But we are overweight alternatives. We continue to be there. As you look, you said asset allocation, diversification is really key. What about commodities? Is it too late to buy some exposure? Oil keeps climbing. Yeah, I think we just saw that with Mike and his chart. Oil is high and going higher. And we do think commodities continues to have an important place in portfolios as a buffer to inflation. It's had a really nice run. But remember, over the last decade, commodities is still negative. So we do think it still has room to grow. We have commodities in almost all of our portfolios. And you said inflation,

you think, has peaked, I think you said, has rolled over? We're going to get a big report on Friday. Yeah, we are. And I think the expectation is that it's going to come down, albeit slightly, and, you know, probably still over 8%. That's a very big number. And to get to the long-term estimate of 2%, that's going to take a number of years. And the people watching your show today, they're feeling inflation. You're feeling it at the gas pump. You're feeling it at the gas pump. You're feeling it in the grocery store.

We're seeing it, you know, with retail inventory. So inflation is still a very big concern to the investor and to the consumer. Do you think the economy can avoid recession in that kind of environment? And earnings can hold up to the point that Mike just made? Well, you know, Mike's saying that they're going down so that companies can show outperformance, right? Maybe managing expectations. The Fed is trying really hard to thread a needle and it's a delicate game, right? Raise rates enough to slow growth, but not slow it too much to throw us into a recession. We're not seeing a recession this year. It's certainly not out of the question for 2023, but hopefully, you know, we'll achieve a soft landing. So you manage a lot

of high net worth clients' money. What is the level of concern, fear? What kind of sentiment are you getting from your clients right now? You know, we spend a lot of time up front on risk tolerance and goals. And remember, two years ago, if you invested at a 60-40 portfolio, it's now 75-25 because the market is still way up over the last couple of years. So, you know, we try to manage their expectations. And I believe the market's working. The market's doing what it's supposed to be doing. It's healthy. You think it's healthy? I do. It feels icky. It feels yucky. And it's never fun when it goes down. But given all that's going on in the world,

the Russia-Ukraine crisis, high inflation, China's zero COVID policy, raising rates, I would be more nervous, I think, if the market were up. The market's telling us we're in an uncertain world and we've got to make sure that we're invested appropriately to weather the storm. It is interesting that you see today in a sea of red what's up. The ARK Innovation Fund, you know, Cathie Wood's fund of sort of more speculative stocks like Oroku and DraftKings and Spotify. Do you see that as a signal that maybe the people are trying to pick a bottom? Because those are some of the names that have been hit the hardest. I think the market might come back a little bit now if we see that

inflation number come down on Friday. But we expect that we're going to continue to have a really bumpy ride for a while. Yeah. Down about 15% off the highs on the S&P 500 already. Holly, thank you. It's good to see you. Great to see you, Sarah. Thank you. Thank you. From Neuberger Berman.

After the break, hot soup. Shares of Campbell's Soup. Take a look. Handily outperforming the market this year. Getting another lift today on the back of earnings. We'll ask CEO Mark Klaus how he's been able to navigate inflation and supply chain headwinds. Next, you're watching Closing Bell on CNBC. Just took a little leg lower. We're down about 326 on the Dow, heading back towards session lows. We'll be right back.

Check out today's stealth mover. It's Scott's Miracle-Gro, shares of the lawn and garden products maker under heavy pressure after issuing a full-year profit and revenue warning because of higher commodities costs and lower than expected retail orders. As a result, Truist downgrading the stock to hold from buy, slashing its price target to 85 from 185, the stock down 8.5%. It's pretty much been on a one-way ticket lower since earlier last year. Campbell Soup shares getting a pop in today's session, adding to gains for the year. The company, which has soup, goldfish crackers, Prego sauces and other things in its portfolio, a lot of snacks to posting better than expected results in the quarter, raising its annual sales forecast on price hikes and easing supply chain constraints. Joining us now is Campbell Soup CEO Mark Klaus. Welcome back, Mark. Good to have you there.

Great to be back with you. First of all, in the sales environment, we knew you were taking pricing or higher, passing along higher prices. But I think the market was just surprised as to how much that's happening and how well it's working. Talk us through what that's been like. Yeah, Sarah. So we've been staying, obviously, very close to inflation and trying to understand in a very specific way what parts of our portfolio are feeling that pressure. And we've been trying to match that up with the

timing of the rhythm of pricing so we've taken two waves of pricing so far- designed the as I said very much match up to where we've seen inflation. We did talk about today a third wave again that's really reflecting. Very specifically within our portfolio where we're seeing additional inflation pressure, primarily in areas like wheat and flour and oils.

And so we're trying to stay right in sync with that as best we can. And of course, pricing isn't the only tool in the bag. And it's really important that we stay focused on keeping the value right on our products. And I think so far we've done a good job of trying to strike that right balance between solving for inflation, but also keeping things affordable. Are you going to continue to raise prices on items like goldfish and canned soup? Well, certainly only if inflation continues to go up. And I think right now, with the pricing that we announced in April, that's our third wave of pricing, we feel very good about where we're positioned right now. It's a tough environment to predict exactly what we're

going to see going forward. But I think that as we do move forward, we recognize that there are limits and we've got to be, again, focusing on things like our supply chain and productivity, areas where we can help manage costs so that we're not just solely reliant on price. Because as I said, getting this balance right between value with consumers and meeting the pressures of inflation, a very, very important balance to get right. So the bummer in your report, Mark, according to investors and analysts, is that you reiterated earnings guidance, which suggests that fourth quarter earnings guidance comes in 47 to 57 cents, which was way below what the market was expecting. How are you explaining that today?

Yeah, I mean, I think we remain right on track with what our expectations were for the year. Q3 came in essentially where we expected it to come in. A little bit stronger on top line as we saw a little bit of a faster recovery in supply chain, which is a great thing. And a little bit of pressure on the margin side as inflation has continued to grow. But as we project out through the balance of the year, I would say from an earnings standpoint, we remain right on track with what we expected. So supply chain is getting better. What do you mean? What's happened? Yeah. So as you know, Sarah, we've talked about it before. It's been a tricky road to navigate as it relates to supply chain. I think from everything from material availability to labor, and I think our team has just done an extraordinary job,

first really working on labor to make sure that our proposition and attractiveness for our jobs and our facilities are highly competitive. And we've done a very nice job in filling the gaps that we had, getting the plants back up to operational levels that are consistent with being fully staffed. And then we've also been able to add capabilities as we've been moving forward and adding ways in which we're able to be more nimble. Our inventory management and our planning tools are much more robust, and that's enabled us to really unlock more firepower as we both tried to stay up to pace with demand, but also begin to replenish inventories for retailers as we've

been kind of catching up over the last couple of quarters. What are you seeing, Mark, from the consumer as far as far as the health of the consumer? Are you seeing signs that they're trading down in value and product, potentially private label? How's the consumer? Are you seeing signs that they're trading down in value and product, potentially private label? How is the consumer holding up in your view? Yeah, I think we've got to be very vigilant in this particular area. And I do think there is some trading down that's occurring. I think one of the things, though, that's interesting for us is, let's take a category like soup, for example. Although there's pricing there and a little bit more pressure from private label, you're also seeing a lot of consumers trading

into the soup category. Right. So as people are compromising on maybe dinners out, they're moving into categories where we're very prevalent. And our portfolio over history has proven to be really resilient in these tough economic moments. And so whether it's soup or pasta sauce, we tend to do very well. And even if you're seeing some pricing on those products, the categories overall are still very good values for consumers. And I think that's why you see the performance of our business holding up even in the face of some of the pricing we've taken. Any ingredients you can't get or access to any kind of food stuff that you need to make product because of what's going on in the war or China or whatever in the world? You know, I think we've been pretty nimble in

adjusting where we can, making sure that we're not single sourcing ingredients, finding alternative ways to meet that demand. There are some places, though, and as we talked about single sourcing ingredients, finding alternative ways to meet that demand. There are some places, though, and as we talked about today on the call, where we're still seeing some material availability challenges. Actually, one of the places where we're feeling perhaps the most pressure is on our V8 business and aluminum cans. So not a lot of problems on the ingredient side, but some constraints on the packaging side. So we are expecting a couple quarters for that to fully recover. We're making progress and kind of checking off the list, but there's still a few places where we're seeing pressure. Do you see soup as an economic tell when soup grows market

share or gains customers? Is that bad? Does that bode ill for the economy? No, not necessarily. I mean, I think that we consistently play a role in a variety of different occasions and different economic environments. Do I think that it's more likely that a consumer might trade into the soup category a little more frequently, especially as you think about brands like Chunky, which continues to do extremely well in this environment because it's a great value. And even in days where the economy might be stronger, you still see a strong cooking behavior and other consumer catalysts or drivers for the category. I think one of the things we've been trying to demonstrate over the last several years is that the resiliency of the soup category is probably a lot stronger than people thought. And I think as we've been able to return focus and support to that business, we've seen it performing extremely well in now a variety of different environments.

No, a lot of people thought that millennials would never buy canned soup before the pandemic. That was the story on your stock. And clearly, they're eating a lot of chicken. Yeah, they're eating a lot of chicken noodle and tomato soup. I can promise you. Good to know. Mark Klaus, thank you very much. CEO of Campbell Soup.

We are on the markets. Come back a little bit. The Dow's down 250. Only four Dow stocks are higher right now. Salesforce, Nike, Caterpillar and Chevron, Goldman Sachs and United Health, along with Home Depot and McDonald's. Biggest drag right now. S&P 500 down a percent. NASDAQ faring a little better, even though we are seeing higher rates today.

The 10-year yield is back above 3%. NASDAQ's down seven-tenths. Three big-named hotel CEOs told us this week that they're seeing strong demand for the summer season. In fact, the strongest they've ever seen. But the same might not be true for another part of the travel market. We'll tell you who that might be next. And as we head to break, check out shares of Altria, worst performer in the S&P 500 today,

getting hit after Morgan Stanley downgraded the tobacco company to underweight, saying higher gas prices and weaker consumer sentiment could weigh on cigarette sales. The stock is down 7.25%. We'll be right back. A number of high-profile travel CEOs have been on CNBC this week talking about super strong demand for the summer and beyond. But the same isn't true for the cruise line. Seema Modi has the story for us. Seema. Sarah, blame the pre-departure COVID test. Channel checks from Morgan Stanley found that it is the single biggest issue for cruise travelers who are worried about sailing and then on return testing positive for COVID and being stuck on a ship. Analysts there cutting their price target on all three cruise lines,

taking Carnival from $17 to $13 a share. Now, unlike the hotels and airlines, pricing trends for cruises are moving in the opposite direction with Bank of America this morning, citing softness and pricing trends in the last month with customers booking closer to the date of departure to get a good deal. It comes ahead of Carnival's earnings later this month with all three cruise stocks down double digits this year. Morgan Stanley says the risk of these companies having to raise more capital is growing. Sarah? Wow, Carnival at the bottom of the list again this year, down 36%. Seema, thanks. Seema Modi.

Still ahead, Evercore ISI's Mark Mahaney weighing in on Spotify's very bullish revenue and profit margin forecast out of Investor Day today. That's stock on the move. Plus, I had the opportunity earlier to ask Ukraine's president, Vladimir Zelensky, questions during the Yale CEO summit earlier. He had a clear message for corporate America. The highlights when Closing Bell comes right back. Dow's down 22 to 22. Coming back a bit. We'll be right back. This morning, Ukrainian President Vladimir Zelensky spoke at the Yale CEO summit where he addressed global leaders in business and politics. I had a chance to ask him some questions, including what action he'd like to see

from American CEOs right now in the war against Russia. For us, the most important thing is to see concrete steps that you as concrete people and your companies could take. These are steps related to making our lives easier in this war. I think that this is our common war. The companies that are represented in the Russian market should leave if that is possible for them to leave Russia completely. The most important thing is that they do not only leave Russia, but do not pay taxes to the Russian financial system, because this money is used to finance the Russian war machine that is killing

Ukrainians. Given what you know about the Russian people, Russia, President Putin, what will it take to move them to negotiate or curtail their aggression? We need a powerful Ukraine to do that. We need a powerful Ukraine. A powerful Ukraine is not Ukraine as a state that fights against Russia alone, which is situating its troops in Ukraine. Powerful Ukraine is a country which is united with the European Union, with every country of the European Union, just not on paper. But I mean, as an alliance of global leaders, Ukraine is united with the European Union, it is united with the West, it is united with the United States of America, it is united with the positions of Canada, aligned with Australia, and also aligned with the countries of the African continent and with Asia.

We have to make sure that every of this continent does not have a world of its own. One CEO who was there in attendance, Chobani's Hamdi Ulukaya, the CEO and founder. He started the Tent Partnership for Refugees. It's a nonprofit network of more than 200 companies that work with refugees, helping settle them in their new countries. I asked him what steps companies should be taking to help displaced Ukrainians, even from afar. I think we have a responsibility to the humanitarian side of things, which is cash. We already asked for it and it's already happening. I saw it.

Companies are participating. But also employment, you know, short-term employment, online education, you know, distance employment. Today, Tent Partnership for Refugees has over 200 companies to support Ukrainian refugees, which is something that we have not seen before. So this level of support needs to be materializing into an action, and I see some sign of it. So we still have a lot of work to do. Hamdi actually asked President Zelensky about this issue of refugees,

and Zelensky pleaded with companies, support Ukrainians abroad financially until they come back. And he'd like to see them come back. He says they would like to come back to their country. A lot of talk today about the rebuilding and just the ginormous effort that that's going to take, an expensive effort that's going to take when the war is over. More on CNBC.com. Take a look at where we stand now in the markets. As we head into the close, we're down 214, actually seeing a little bit of a comeback off the lows. You've got two sectors now positive in the S&P, communication services and energy, which makes sense because oil popped about two and a half percent today. The

Nasdaq down about half a percent. Some strength today in names like Alphabet and Meta. Also, the Chinese internet names continue to fly. Pinduoduo, JD.com, higher. And strength in software like Okta, Salesforce, DocuSign, all higher. Tech is an underperformer, though, overall. Coming up, Wells Fargo's Scott Wren tells us whether investors should look to buy on pullbacks like this and which names he's watching. And you can tune in to Closing Bell on the go by following the Closing Bell podcast on your favorite podcast app. We'll be right back. Welcome back. Check out some of today's top search tickers on CNBC.com. Ten-year note yield right in its first place spot, back above 3%. So selling yields, selling treasuries, yields go a

little bit higher today. Amazon.com giving a little bit more back from its big rally over the last week and a half or so, down 1.4%. Tesla's popping 1.6%. Twitter's also popping, by the way, on a report that Twitter's going to share more data on Musk, to Musk, on bots, maybe making that deal more likely. WTI crude up 2.5%, continuing to make new multi-month highs here. And Apple, a little bit weaker, down a third of 1%. Again, only a few Dow stocks higher today in the rally. Salesforce, Nike, Caterpillar, and Chevron.

Up next, Evercore ISI's Mark Mahaney reacting to Spotify predicting $100 billion in annual revenue over the next decade. That stock is higher. That story plus a weak outlook for Intel and a big rally for Roku when we take you inside the market zone. We are now in the closing bell market zone. We are now in the closing bell market zone. CNBC senior markets commentator Mike Santoli is back to break down these crucial moments of the trading day. Plus, Evercore ISI's Mark Mahaney on Spotify's Investor Day and Wells Fargo's Scott Wren on the volatile market. Let's kick it off there. Major averages in the red off the lows that we had earlier this hour. In fact, the Dow was down about 356 points at the session low. Mike,

some stuff to like for the bulls in this in this sell off. Yes, we're down a percent in the S&P, but there are a number of bright spots in the session. Energy, communication services, single stocks. And now that we're off the lows, the S&P is actually still higher for the week. Yeah. And really, we're about eight trading days, Sarah, into this kind of sideways digestion mode that we got into right before Memorial Day weekend. So it's indecisive. We're in about a two to three percent range from high to low in the S&P 500 over that period. I guess you could argue it's probably dangerous to really infer too much to with too much conviction. But you could argue that with oil still on the march with obviously the dollar surging with the fact that the Fed's really back in the game and yields are higher, that the market's hanging in there OK. Clearly, a lot's going to be determined by that CPI number, which I feel like it's going to result in the peak inflation story remaining plausible, but not yet persuasive. So we'll see if even that creates any. So we've got CPI on Friday, which could be definitive. Ahead of that, we have the ECB meeting tomorrow morning. And you mentioned the strength of the dollar.

You know, Europe has been inching closer, maybe more, maybe a little more reluctantly. But it is moving toward raising interest rates, sort of setting the ground. We're expecting tomorrow to set the ground rate for rate hike in July. And I just wonder how that factors in the fact that it's a global move. Yesterday, Australia shocked everyone with 50 basis point hike. And yields are moving higher globally. We should be clear about that because there is this general sense that central banks are in this catch-up mode. And, of course, when it comes to inflation in Europe, not only is that the sole mandate of the central bank,

but it's a much purer read on energy over there because of how it's calculated. So it's not going to, you know, kind of get sudden relief on the statistical inflation numbers. So, yeah, I think that's a factor. Is it going to be a surprise if and when it happens? It's not clear. No. And it's helped the euro, actually. It's helped the dollar come off the highs there. We were looking for parity. It's the yen that's crashing. The yen is crashing again because they are not budging. They want their currency weak, and they are certainly getting it.

Look at Intel. It's one of the bigger drags right now on the Dow after the chip makers management warned at a conference yesterday that supply chain challenges have actually gotten worse than previously expected. That news prompting Citigroup to slash its full year earnings estimates. Meanwhile, shares of Western Digital initially popping today after announcing it will consider splitting its hard drive and flash memory businesses as part of a settlement with Elliott Management. The stock is now lower, though. Christina Partsenevelos joins us. Christina, Intel CFO outlined a few reasons for the warning.

What are they? Yeah, there's some headwinds that they're pretty much saying this is why this quarter is going to be a little bit tougher than we anticipated. The first one is the obvious one, Shanghai closures. Even though that's reopening, it's going to have a trickle effect. A second reason is a lot of companies are still struggling to get some of their components. We've had Intel CEO on CNBC before warning that especially chip equipment makers are struggling, and that will contribute to the supply crunch well into 2024 for that particular sector. And then the last one is a concerning one because it shows that inventory levels are starting to come down and that's because of lower consumer demand. And so

they're warning about these three things that contributed to the downgrade. And the other point that struck me as significant was that the CFO also said, expect to have good cash flow once we have made the necessary investments over the next three years, which means, of course, they're going to be spending a lot more cash in a rising rate environment. They're going to be building their foundries in Ohio just this July. I spoke to an Intel contact that said that they're going to be breaking ground. And this comes when Taiwan Semiconductors chairman just yesterday said it's a little bit more expensive than anticipated to build foundries here on U.S.

soil. So this is all coming at a time. And you can see the share price for just Taiwan down a half a percent right now. But all interesting comments coming from Intel. No, and long term inflationary too. If it's going to be more expensive to onshore, we already knew that it was going to be more, but even more than expected. Christina, thanks. Christina Partsenevelos. Intel's making a big move, Mike, which does make you wonder just how much of the changing demand environment is already priced into these stocks. It's so tough when it comes to a name like Intel, because it is hated by the street. If you're a contrarian, you say it looks cheap. Nobody likes it. It's a multi-year investment cycle. Over the past five years, it really has paid to buy Intel around 40 multiple

times. That's been the low end of the range. Sometimes you've got a chance to ride it above 60. But it's just very difficult when it comes to old tech. Value traps abound at times. So that's why it's tough when it's exposed to the slowest or most challenged parts of the chip market right now. So that's why it's a tough game, although I think you could make the case that it's way out of favor at these levels. Well, and it's also why it's underperforming some of the other ones today, not just on the warning, but the idea that it's sort of in a weaker spot.

Shares of Roku are rallying today on a report citing speculation inside the company about a potential takeover by Netflix. Julia Borson joins us. Julia, is there any truth to these rumors? Well, a source close to the situation tells me there is not truth to these rumors, Sarah. But we have to look at why these rumors are out there. And primarily, it's because the valuation of Roku has dropped so dramatically. The stock is so far off its highs. And these are two companies that are closely tied. Roku was actually spun off from Netflix back in 2009. And we have to remember that as Netflix looks to build out its ad technology before it launches an ad-supported version of the service, that it's going to look to do some acquisitions. But analysts seem to think they'd be doing smaller

acquisitions to get some of that ad tech rather than buy a big company with some of its own problems, such as a Roku. Remember, Roku does have that legacy business of selling the boxes, which is not necessarily going to be complementary to Netflix. Is Netflix rumored around right now? Is there chatter around a takeover here with that stock having fallen, I don't know, 60 percent or so in the last year? Well, there's a lot of talk about whether Netflix is more fairly valued now and whether Netflix is undervalued. But there is this broader debate about whether Netflix is a tech stock or a media stock. I mean, just look at how much it sold off.

And part of that is because the street has really reevaluate reevalued what kind of company Netflix is. This is a company that's investing in content, investing in content rights. They're going to be getting into advertising and their growth has not only slowed, but their actual subscriber base is shrinking and is expected to continue to shrink in the second quarter. So it's still a pretty big acquisition target. And with the regulatory landscape as it is, it'd be hard to imagine what type of company could buy them. But we do expect them to make some smaller acquisitions and build out their own ad tech technology so they can compete in that ad-supported streaming space. Julia, thank you. Julia Borsten, surprising, I don't know,

Mike, to see Roku jump 10% today. I guess maybe not if you look at the 80% decline off its highs. I think that's the premise right there is that, you know, a lot of the stocks that were pandemic winners that have flamed out are getting a little bit of relief right here. And even even though the Netflix rumor has now been denied and never really seemed all that plausible, the notion that Roku might be in the market for a partner that maybe ultimately was a transitional technology, kind of a tool or a feature as opposed to a long term business. I think that's that's definitely defensible as a position. I just don't know if that's what's moving it right now. And as for Netflix, it's still $90 billion market cap right now. Anything big enough to buy it, you'd think would have a hard time on a regulatory basis to

do so. Well, another winner in the ARK Innovation Fund today is Spotify, which held its second annual Investor Day today. The stock is jumping as the company outlined the growth potential for the podcast business. Mark Mahaney, Evercore head of Internet Research, was at the event. He joins us now. And, Mark, this is still one of your favorite stocks, right? Did you like what you heard today? Well, it's not one of our top three stocks.

This remains kind of in the speculative growth category. I thought you always loved it. I have. But I'd prefer to go with the more value growth names now, Amazon, Google, and booking. But that said, Spotify, the key thing that came out of today's event was gross margins. The reason the stock is corrected 60% year-to-date is in part to sell off away from this speculative tech growth area, but in part because the company's disappointed investors again in terms of its gross margin outlook for this year. What we learned today are three things.

One is that they committed to this year being the peak gross margin drag from all their podcasting investments. Secondly, they gave new disclosure on what's happening in their gross margins in their core music business. It's higher than we thought. And then third, they did commit to getting to 30% gross margins over the next three years. I think you can kind of count on that. So then now valuation becomes more interesting with the 60 percent correction in the shares. Well, I remember the CFO was on last earnings or so, and I asked him like seven times, are you the are you Netflix? The street is worried about them being the next Netflix in terms of subscriber losses and the stay at home reversal trade. Has this company successfully convinced investors that that's not what's

happening? They haven't hit the Netflix wall yet. They could do it, though, but the right numbers to think about are Netflix has, I don't know, 600 to 700 million total number of users, if you count in all the users per account. On an apples-to-apples basis, Spotify is probably more like 400 million. So I don't think that there's any particular reason why they've hit the maturation wall that Netflix has reached. They're also much earlier stage in terms of, but they are further along in terms of generating new revenue streams like advertising. Look, Netflix is now realizing they need to be a freemium business. They need to have both advertising and subscription. Spotify is ahead of them there. So that's actually one of the reasons why I prefer Spotify here to Netflix.

I'm not a buyer of Netflix here. They've gone X premium growth. Spotify still gives you 20 percent growth and you've got a gross margin catalyst. It's next year. And the question is when the market's going to bid that up. May not be till the end of this year that the shares can really start rallying. Mike Santoli, how does evaluation on Spotify look, which is still more than 60 percent off its highs? Yeah, I mean, it's it's still very much a we're just going to go for growth. And then obviously they have their margin targets, which will make the numbers work better. But based on what it's, you know, cash flows right now and all that, it's not really supporting where the stock trades. And it's not really about that. What's fascinating is from Spotify's perspective, you say, are you Netflix?

Their answer, if they wanted to actually persuade people that it's worth a bet is, yeah, we're Netflix in 2015 or something. We're Netflix before everyone assumed Netflix was the category killer and was going to be the dominant core app in streaming. And so, therefore, it would have been a great ride until you reached saturation. So, to me, you can have it both ways in terms of defining Spotify in terms of Netflix. Mark Mahaney, thank you for joining us. Thank you, Sarah. Good to talk to you. Evercore ISI. Stocks are heading south again here into the close. We're still at the worst levels of the session. We're down now more than 1 percent, though, on the S&P. Scott Renn joins us, Wells Fargo Investment Institute senior global market strategist. Scott, what do you tell investors and clients to do on a day like today? Are you a buyer? Well, I tell you, Sarah,

you have to have an outlook that's longer than three or six months if you're? Are you a buyer? Well, I tell you, Sarah, you have to have an outlook that's longer than three or six months if you're going to be a buyer in stocks here. Really, since the beginning of March, we've been reducing risk in portfolios, particularly for people who have a very short-term view or they have a cash liquidity need over the short term. But if your view is out, you know, 24 plus months, 12, 24, 36 plus months on bad days, but particularly bad weeks, and we're obviously well off the lows here, you want to try to take advantage of that. But I think you can be patient because there's likely more downside before this is all over, before we work our way higher. So how should you be positioned now? What sort of protection should you have?

Well, let me tell you what we've been doing. I mean, we've really reduced the cyclicality. So we've backed off of financials. We've backed off of industrials, consumer discretionary. We've upgraded health care and staples and utilities. We've taken money out of equities, which we had leaned hard toward for 18 or 20 months. And we put that into the intermediate fixed income, intermediate part of the curve, a less sensitive to interest rate hike. So right now we've shifted just really in the last three months from, you know,

capital appreciation mode to a more defensive, we're gonna have to ride out some rough times type of mode. Probably, you know, the market's going to be down the S&P 500 based on our target this year, probably about 10% this year. Of course, that's after three gigantic gains over the last three years, giving a little bit of that up. But then there's probably about 10 to 12 percent upside from here to the end of 2023, at least in our opinion. Why? What what turns the tide there? Well, I think what's going to turn the tide is we're going to get through the Fed's going to be very aggressive here. Clearly, we're going to probably have some of these other central banks that are pretty aggressive.

But I think, you know, that's going to end early in 2023. We're going to sort through that certainly through the first half of 2023. But I think we're going to see interest rates lower as we move back to second half of 2023. We think the 10-year yield might be three and a quarter at the end of this year, probably 275 at the end of the year before that. And we're going to be in 2024, and we don't have numbers out for this yet. But moving toward a more, you know, two, two and a half GDP number where inflation, we think it'll be three and a half by the end of CPI, it'll be three and a half by the end of next year, potentially lower in 2024. How can you tell? Well, that's the thing, Sarah. How can you tell

that CPI would be three and a half next year? We have no idea what's happening with this war. It's a long way out, Sarah. And as you know, I mean, you and I have talked enough to know that if you would have asked me 10 months ago where inflation was going to be, inflation is higher than what we thought it was going to be. The supply chain has taken longer to ease up than what we thought. And that's really what's, you know, the top level things that are causing the market problems because, of course, of what the Fed has to do in response, what these input prices are doing and things like that. So you have to project

that things are going to ease up, particularly in terms of the supply chain, particularly in terms of the Fed not, you know, being aggressive this year, but not going way beyond maybe two or three hikes next year. Those kinds of things that will set up late in 2023, the market anticipating a better 2024. Well, a lot has to go right, I guess, to your point. I think it's a more optimistic take than most. Scott Wren, thank you for joining us. Wells Fargo Institute. Thank you. We've got just about two minutes to go here in the trading day. Mike, what do you see in the internals? S&P down 1.1%.

Yeah, essentially dialing right back to where we closed on Friday, Sarah, in the S&P. So we just keep kind of swaying within this narrow range. Negative on the breadth numbers today. New York Stock Exchange declining volume, almost twice advancing volume. And this has been also sloshing around, positive to negative, day by day. Equal weighted S&P is actually underperforming today. Take a look at the two-year Treasury note yield. This has been on the march.

It's tracking oil. It's tracking the idea that the Fed's going to have to stay vigilant until we know anything different. It's basically surpassed the two and three-quarters level that the two-year note yield got up to about a month ago, actually very early May. The volatility index is very much static. It's around 24. It's kind of built this floor in the mid 20s at the moment. Realized volatility, the actual volatility of the market has been quite low in the last couple of weeks because we have just been going sideways.

But we still have a certain baseline level of nervousness around inflation in the Fed outlook. So it's sitting there. A lot of people worried about the actual volatility of the VIX index. Let's not get into the details, but that's the latest thing that, Sarah, that people have decided to worry about because it's gotten quite low to where we also saw markets kind of roll over a few times this year. Yeah, the VIX of the VIX. Thank you, Mike Santoli. As we head into the close here, we've got a split in technology actually developing in terms of performance. Strength today in Tesla, some of the Chinese internet names like JD.com, Netflix, Facebook, they're all higher today, and that's helping the NASDAQ actually outperform on the day. Amazon, though,

Microsoft, Apple, NVIDIA, all lower. AMD, the chip names moving in sympathy with Intel, perhaps. You've got one sector that is positive in the S&P 500 here into the close, and that is energy. Looked like there was going to be communication services, but that just dipped red. You've got the S&P 500 down about a full percent. The Dow Jones Industrial Average down 273. So off the session lows, but still looks like we're taking a little spill here into the close. Caterpillar, Salesforce, Nike, Chevron bucked the trend. Every other Dow stock lower. Goldman Sachs is the biggest weight down there with Honeywell and UnitedHealth. That's going to do it for me here on Closing Bell.

Have a great evening. I'll see you tomorrow.