Closing Bell - Closing Bell: Stocks snap four-day win streak, and the CEOs of Chewy & Five Below on the state of the consumer. 3/30/22

Episode Date: March 30, 2022

Stocks sinking on Wall Street as the Dow & S&P 500 snap a four-day winning streak. Cantor Fitzgerald’s Eric Johnston explains why he thinks recent earnings are flashing a warning sign for stocks and why he is bullish on commodity prices. Jefferies Chief Market Strategist David Zervos weighs in on what he sees as the biggest threat to the market right now. And the CEOs of online pet products retailer Chewy and discount retailer Five Below discuss the state of consumer spending, supply chain issues and labor shortages.

Stocks are hitting session lows right now. NASDAQ is down more than 1%. The most important hour of trading starts now. Welcome everyone to Closing Bell. I'm Sarah Eisen. Here's where things stand right now in the market. We are down for the first time in about five days. The S&P 500 down eight-tenths. Just took a little bit leg lower. The only sectors working today, energy and utilities. Everybody else is down. Technology gets hit after a very strong run we've been on. With the NASDAQ down 1.1 percent, oils popping more than 3 percent, and small caps also giving back 1.7 percent. Here are my top takeaways on some big stories today.

A great month for stocks, but also a warning sign in that rally. Utilities, Dow Utilities, hitting an intraday high, an all-time high today, up 10 percent for the month, and on pace for their best month in a year. Utilities are famously a safe haven or defensive play, steady recession-proof type stocks. If that's the best part of the market, it shows defensive positioning could be a signal more turbulence is coming. And more signs of cracks in the housing market, total mortgage application volumes falling 6.8% last week compared to the week before, including a 15% weekly drop in refinancing applications. This says it's getting increasingly expensive to buy a home. Mortgage rates are up. Prices are up.

Demand has hung in there, but the 22% slide in homebuilder stocks this year suggests demand could be the next domino to fall. And Lululemon's brand strength on full display. Just look at the guidance here. 24 to 26 percent sales growth for Q1 and more than 20 percent for the year. That was much higher than where the street was. Lulu, like everyone else, is dealing with out-of-stock items, higher costs, shifting to air freight from ships. But a strong brand and pricing power make Lulu consistently a standout in retail. It'll be interesting to see whether they can carry that strength into some new releases and new categories like sneakers.

Let's get straight to our top story and what could be the next big catalyst for the market. Earnings. A number of stocks selling off after reporting disappointing results today. And its earnings call yesterday, RH, Restoration Hardware, citing supply chain issues and the Fed. Meantime, the CEOs of Chewy and Five Below all discussing ongoing supply chain concerns. We will hear from both of them later this hour. But the question now, are these issues company specific or a broader warning for the market? Joining us now, Eric Johnston from Cantor Fitzgerald and Mark Lehman of JMP Securities, taking different sides of the debate here. Eric, I think you're the more bearish of the two. What are you taking out of earnings?

So we think that earnings overall are going to be a pretty negative catalyst for the market. And as you pointed out, we saw that a little bit today from Restoration Hardware, among a couple others. So if you look at what RH said, not only what you pointed out, but they also talked about a slowdown that they've seen in the last month. So you had them saying that. You had Taiwan Semi saying they're seeing a slowdown that they've seen in the last month. So you had them saying that, you had Taiwan Semi saying they're seeing a slowdown in consumer electronics. There's been some negative PC checks out there. And then you referenced the mortgage application data. So we think a big part of our bearish thesis is a slowdown in growth and it's going to hit earnings. And we are seeing excellent examples of that today. And we think that's going to be the trend that we're going to see during earnings season, because the consumer

right now has too many headwinds against them that although they're entering this in great shape, the headwinds are going to be just too much to not hit discretionary spending. And that's going to reverberate throughout the economy. I thought that Gary Friedman, the CEO of RH, was refreshingly honest and candid in his remarks about some of the headwinds, the softening from the war. He called out Janet Yellen, the Treasury Secretary, a number of times on the call. I think we can play for you a clip of what he was talking about.

Then all of a sudden, you know, boom, we've got a war, you know, you Russia invades Ukraine, boom, you know, you know, Yellen says interest, you know, inflation is going from four to two. And then it goes to seven and a half. And Powell says, you know, we're behind. Yeah, I mean, there's a lot of yeah, everybody thinks supply chains are getting better. I don't think they've gotten better at all. Mark, how is that not a warning for other consumer companies? It is. And I think we all know that the next few quarters and probably through the rest of the year are going to for consumer. And for the supply chain but I think it would point it out and

what you pointed out the top of the hour. Would you look at rest those performance and then you look at the lemons performance in the divergence where the stocks are today. And I think it's we've gone from. Kind of everything is great a

few years ago to everything is horrible the last three months to. Now you got to. Pick and choose you got to pick the winners and you got to really know what your company's looking at where the they're sourcing, how much is going on through Asia, how much is going on domestically.

And we're back to that stock picker's market we often talk about. But the divergence in those two stocks today is glaring. And I think that's what we're going to see through the rest of the year. And that's okay. We've had it too easy in 2020 and 2021 in terms of the stock market. We've had it too tough the last few months. And now we're back to that stock picker's market, which is just fine. What does that mean for tech, Mark? Because I usually think of you as someone who embraces the high growth tech companies, which have had

a pretty nice comeback lately, but some are wondering if that ends when the quarter ends here tomorrow. Well, you're right. I mean, we do a lot here at J. P. and we we focus a lot of technology and I think we've seen some of those big tech high flyers come in a lot through the end of twenty twenty one in the beginning of the year. But we've also see

some come a great deal off the bottom talked about some of the show Sarah so you're right to point that out. But I think again it's gonna be company specific. You talked in the last hour about different performance in terms of the

autonomous vehicle and electric. And you look at the difference of performance just the last hour about different performance. In terms of the- autonomous vehicle and electric. And you look at the difference of performance just the last three weeks or four weeks. From company like Tesla versus Rivian or the last year. And you again. Dramatic differences in terms of the

kind of companies in. Stage of development. But as a stock picker. You want to be long Tesla the last six to twelve months and you want to be careful of those names like Rivian. And so that's what I'm talking about. I think we've gone from everything's terrible be careful of those names like Rivian. And so that's what I'm talking about

I think we've gone from everything's terrible market last three months are really picking names. And if you pick and choose the winners which I've got again we try every single day to do that you're gonna be happy you did that.

Even the rate environment we're talking about because I think we've come. Through this and we've walked talked a lot about the yield curve. But I think we're all prepared for the rates to rise here. And how we're gonna play that market

and I think why that's where the market found its bottom a few weeks ago. And again, it's selling off a little bit today. But there's no hysteria today. You look at the VIX, which is trading closer to 20 than 40. That's a real positive sign, I think, for investors to play the market and play the names that we've been talking about here at J&P. Yeah, I know you like PayPal and DocuSign, but both sort of controversial. Eric, I'll give you the last word. What is your strategy, given your more defensive posture and your worries about

earnings and growth? Sure. So we think within equities, you want to be long defensives and then couple that with energy. We do think that commodity prices, no matter what happens in the Ukraine-Russian situation, are going to stay are going to stay big because a lot of the issues that come from that around less capital spending in in russia and some of the issues around wheat ukraine etc are going to remain for quarters or years post this this crisis and i think on the short side you want to be short cyclicals including consumer discretionary financials and some of the other sectors that are most levered to the economy. And then outside of equities, I think the long

end of the curve actually looks attractive. And so I think kind of a barbell approach being the long end of the curve and also being long cash, because I think that cash, even though it has a very negative real rate of return right now, zero versus 7% inflation, is going to prove very valuable in the next three to six months as we see what we argue is a correction in equities. Yeah, that is a de-risking portfolio. Eric Mark, thank you both for joining me. It's good to have you.

Thank you, Eric. About 160 right now on the Dow. As we mentioned, shares of online pet products retailer Chewy tanking today on the back of results down more than 17 percent. We'll talk to the CEO about what weighed on the quarter and the outlook next. You're watching Closing Bell on CNBC. Take a look at shares of Chewy getting crushed today. The company reporting a wider than expected loss last night due to a number of issues, including supply chain and rising expenses. Guidance also coming in short of analysts' forecasts. Chewy CEO Sumit Singh joins us now. It's great to have you back on the show.

Welcome. Nice to be here, Shada. How are you? We're looking at this double-digit decline in the stock. All sorts of misses, top and bottom line, and the outlook. Sumit, what happened? So what we saw in Q4 is what I would consider the tug, right, the essential tug between the fundamentals that underpin our business, you know, strong demand, good customer momentum, strategies intact, you know, balanced against the macroeconomic volatility that a lot of companies are facing right now. And so when you look at the core fundamentals, what gives us encouragement is to be able to look at them and say, well, the consumer is healthy, the strategy is intact,

and momentum is positive. I mean, if you look at it, we delivered over 24% year-over-year growth on top of really strong comps from last year, sort of also showcasing the underlying strength in the business model. And we're really happy with that. And on the profitability side,

there's some disruptions in supply chain and there's some near-term pressures that are transient in nature and that we're acting against, which essentially are causing some pressure in Q4. And we're already seeing sequential improvement as we've come into Q1. So just to be clear, you have seen growth moderate. You were in the 20s. Now you're in

the mid-teens. I guess the question investors are trying to figure out is whether these are transitory problems like supply chain or whether there's a slowdown in the growth story. What would you tell them? So I think actually there's continued acceleration in the growth story what would you tell them so i think actually there's you know continued acceleration in the growth story actually when you look at us pre-pandemic we were adding revenue at the rate of 1.2 1.3 billion dollars and when you normalize for the past kind of two and a half years we're actually adding revenue at the rate of 1.5 to 1.7 billion dollars in fact when you look at our guidance for this year you know we're providing a guidance of 15 to 17 percent top line on top of 24 that we delivered in 2021 and it would be actually closer to 20 if it weren't the supply chain environment that we're dealing with right now so you know continuing to add over 1.5 billion dollars of growth uh on a

year-over-year basis and high teens in my opinion is actually really strong and so we're we're bullish about our position as we've always been plus when actually really strong. And so we're bullish about our position as we've always been. Plus, when you look at the market growth, we're actually growing 1.6 times the market rate. So in that way, we're taking share. And that's also a good side of the story. So overall, we're pleased with the way

that we're delivering results here. What about churn? Isn't that going up? Are you losing customers with these price increases? Or maybe as brick and mortar stores open up? I was talking to Petco CEO Ron Coghlan earlier in the week. Petco, he was saying it's recession proof, it's inflation proof. They're seeing very strong results, nothing like what we just saw from you. So I think the results actually are really strong, delivering 24 percent

growth on top of the 45% growth that we delivered last year and taking share, growing at 1.6 times the market, I would say the results continue to be strong. Now, when you look at the pet industry, it is recession-proof. When you look at 2007, 2008, most consumer spending actually went down during that time period and pet spending went up 2% to 6% during the same amount of time. And we're actually seeing something very similar happen right now, because when you look at the core consumables demand or demand for healthcare or demand for staples and premium products in pet, it's actually really resilient.

And any kind of pressure that the consumer is feeling right now is likely hard goods or discretionary purchases, which are, of course, weighed down by the recent inflationary pressures that the consumer is actually seeing. So overall, I would reiterate that the fundamentals that drive our strategy and the pet industry overall seem to be fairly intact. And we're really excited about 2022, where the team's working hard to overcome the supply chain pressures and at the same time take care of consumers that have remained loyal and engaged with us. So there's no issue with the consumer, no issue with demand for you?

Not in terms of the consumables and the healthcare side, right? The discretionary side of the house, you know, has to remain a bit pressured given the environment that we're seeing right now. And so that's where, you know, and it's not just a pet issue, by the way. When you look at overall kind of retail, generally speaking, hardline search intent is actually down on a year-over-year basis. And what that tells you is that the consumer is sort of rationing that dollar, and the dollar is going towards kind of first priority of staples and consumables and healthcare, and then come the discretionary categories on top of that. So, you know, that's a natural impact of the environment that we're in. And then secondly, as the economy reopens up or is reopening up,

there was always, you know, the premise that a certain portion of the consumers will go back into brick and mortar, and that's also an impact that we're seeing. On the balance, when you look at e-commerce, the secular trends that drive e-commerce growth have actually remained really strong. In fact, when you look at pet, last year, pet added $10 billion in food and supplies, and online picked up roughly $5 billion of that. So that's 50% of dollars that moved towards online. And this year, projections remain between $4 and $5 billion. So that's just a 20% taper off of the peaks that we're talking about. That's really healthy demand, by the way.

So you must be very frustrated with the stock reaction, not just today, but basically for the entire last year. There are all these narratives out there that e-commerce has slowed down as a category, that you got all these new consumers during the pandemic and haven't managed to hold on to them, that the supply chain is hurting you worse than competitors. I'm telling you sort of all the arguments that you're seeing in the notes today. Jim Cramer earlier today saying that you didn't admit that there was a problem on the earnings call when clearly the stock market is saying otherwise. Yeah. So the fact that, you know, in five years or so, pet in e-commerce is supposed to get to 50% penetration,

and those trends aren't actually changing. They're actually strengthening as we kind of play through the pet category. The fact that engagement remains strong, when you look at the share of wallet for our 21 cohort, the first cohort of 21 that we now have results for, and the 2020 cohort, the second year spend for 2020 cohort, which was the pandemic cohort, and the first year spend off the 21 cohort, it's actually strengthened. So when you look at share of wallet or engagement with the platform, it actually went up 16%

to a record $430. And I think that's an important part, by the way. So there's two parts to the growth tangent. One is the customers that we add, which have actually, we've continued to add at a healthy flip. And on top of that is the acceleration that we're producing in share of wallet,

which when you combine, produces the amplified revenue impact that we continue to deliver. Supply chains, yes, near-term pressure, in terms of in-stock availability and in terms of the way the inventory is moving through the supply chain. And this is transient and shall and will pass. So in the meanwhile, the teams are doing everything that we can to overcome the pressures and deliver a really great experience to our customers. Well, it certainly helps to have you come on and explain the story. Sumit, thank you very much for the time.

I know you're also working on the vet platform and pet insurance. We'll talk about that in the future. But thank you for addressing some of the concerns out there today. Chewy CEO, Sumit Singh. Still ahead, we will get another read on the state of the consumer and the headwinds from the supply chain when we are joined by the CEO of Five Below, another big mover today, also moving south. But first, Apple reportedly working on some new technology that could spell trouble for a number of fintech players. We'll bring you the details next. Just took a look lower here on the market into the close. The S&P now down a full percentage

point. So we are looking at session lows. The Dow is down about 200 points right now. NASDAQ sliding the most down one and a half percent, at least the small, not including the small caps, which are down more than two percent. What's dragging us lower? A lot of the consumer names. Consumer discretionary is the worst performing sector right now. Technology is also not having a good session. Some of these names that have broken out in the last few weeks, NVIDIA, Apple, Amazon, giving it back today. So a little bit of a reversal of the trend. We are down for the first time in five days for the S& weeks. Nvidia, Apple, Amazon, giving it back today. So a little bit of a reversal of the trend.

We are down for the first time in five days for the S&P. We'll keep an eye on the sell-off as we head into the close. We're also following a developing story on Apple this afternoon. According to a new report,

the tech giant is working on a project to bring more financial services in-house. This could include things like payment processing, risk assessments for lending, and credit checks, and would potentially replace the current fintech partners for Apple.

Fintech companies like Block, PayPal and Green Dot all dipping lower on this report. Let's bring in Steve Kovach. Steve, how would this work? Yeah, Sarah. So what's going on here is this report says it's going to be for future financial products, not current financial products. So I know we saw shares of Goldman taking some pressure today just because of this. They backed the Apple card. It's labeled right there in the Apple card, as we know. But this is for future products such as there are tons of things they're exploring, including crypto. We've heard some like little talks about that. But look down the line. What's coming this fall, this iPhone subscription hardware plan that we've been talking about for the last week or so they're going to need to approve the lending for those

uh those iphones that they're going to do on a cyclical basis so that could be part of it and on top of that any other fintech products they want to layer on top of what they already have but it's really worth noting it's not for the current products like apple cash and apple card so you just mentioned the subscription hardware. It's sort of a rumor, right? The company hasn't confirmed anything. I know you've done some reporting on this issue. Is that what is driving the price of Apple to relentlessly higher here? It's down today. Right. But if it were up today, it would be 12 days in a row, longest winning streak since 2003 and almost at $3 trillion of market cap.

Yeah, that was one of the catalysts. I mean, as soon as that report came out last week, Sarah, we saw the stock jump on that news. And part of the reason Katie Huberty had a really good note, I think it was Monday, about this, we're talking about how this can really kill that up and down cycle of iPhone sales that we see every three years because people are hanging onto their iPhones longer and longer. Well, a program like this would let them upgrade every year. So essentially breaking that super cycle that we keep seeing in sales every three or four years.

So that's part of the optimism around that program. And I would just also say, like, look, when we're thinking about these financial products, it's not anyway, it's not as big of a deal as they're making it out to be in the shares that we're seeing pressure on. So I would not necessarily a revenue stream, but more just a way to deal with costs. And we already know they bought earlier this month. They bought a company called Credit Credit Kudos, sorry, from the UK, the startup that it's kind of a competitor to Experian that can check your credit score, kind of dip into your bank account and approve you for loans and things like that. So you can see them kind of weaving in startups that they found and teams from their startups into these kind of financial products as well.

The Apple ecosystem. Exactly. That's what they're doing here, Sarah. Steve Kovach. Steve, thank you. You got it. Apple down a little bit more than one percent right now. Shares of discount retailer five below down six and a half percent slumping on same store sales that were weaker as well as the outlook. Up next, the company's CEO on whether he thinks inflation is starting to take a bite out of consumer spending.

We'll be right back. Consumer weak part of the market right now. Down about 80, 180 points. Shares of retailer Five Below especially falling hard after trading today, after posting, excuse me, a mixed fourth quarter. The company also outlining a new long-term plan, and it's an investor day, calling it a triple-double. Five Below planning to triple the store count while doubling sales in the next few years. With us now is Five Below president and CEO Joel Anderson. Fresh off of those announcements, Joel, it's good to have you here. I think the stock is moving on the outlook that you guys gave for first quarter, for zero to negative comps and much weaker than expected earnings guidance.

What are you seeing coming ahead? Yeah, look, today was all about our investor day and outlining, as you said, the triple-double. And some of the short-term is looking at the first quarter. And quite frankly, we're in the middle right now of lapping last year's stimulus. That'll be behind us in another three or four weeks. And then the quarters get much easier as the year goes on. But certainly, I think investors right now are just looking at the short-term. We were very excited, though, to share the triple-double because we have the opportunity now to triple our store count in the U.S. and more than double our sales and bottom

line in the next four years. And what kind of growth is embedded in that five-year plan in terms of comps and the growth rate? Yeah, that was another area we spent a lot of time on. In fact, we actually increased our comp. Historically, our long-term algorithm has been about low single digits. And we outlined starting in 23 and beyond, we expect to be more in the 3% to 5% comp range. And also, we plan to open about 400 stores in the next two years and about 600 stores in 24 and 25 for a total of 1,000 stores over the last four years. Translates into about 20% annual store growth. We are still growing very fast at five.

Well, to your name, you are known for the low prices. Now that we're in such an inflationary environment, what has that meant for prices in your store and where they go from here? Look, we've had some increases, but, you know, right now, if you're in our store, it's all about Easter. And, you know, I'm holding an Easter basket here that you can still fill for five or six dollars. It's incredible value. You got fun things like peeps for a dollar twenty five and grass and eggs for a dollar. So there's still an incredible amount of value here in Five Below.

And, you know, look, we've seen in the past, whenever there's been an economic setback for the customer or inflation, they look for value. And we've got incredible value at Five Below right now. What about shortages? I know you were facing some issues with merchandise shortages or even worker shortages. Is that resolved or resolving? Well, look, I think the worst of it, Sarah, is behind us. We see the supply chain continuing to get better throughout the year here. And as far as workers go, look, we hire a lot of 16 and 17 year olds. We're the place to go for your first job. And I think that's been a real asset for us as we look for workers to come in. I'm not saying it's easy, but we have done a pretty good job of overcoming both of those.

And finally, just talk to me about categories. What is strong and what needs some help, given the kind of environment that we are in right now where consumers are dealing with higher food and gas prices? Yeah, look, I mean, we have eight worlds, eight different categories. You're standing with me right now in our Pembroke Pines, Florida store. I've got five beyond behind me. That's our new unveil of our new prototype. And there's a lot of amazing categories in there from room to tech to Easter bunnies at incredible value and you know we've we've been able to bring those to all our customers that are really looking for value across

a whole new segment that new and now section it's all about easter it's all about spring and incredible value there got it got to see a lot a lot there with you, Joel. Thank you for the tour. Joel Anderson, CEO of Five11. Thanks for having me again, Sarah. It's a great store and it's good to see you. You too. And the company's first ever investor day. Still ahead, Jeffries David Zervos weighs in on this market sell-off and the signals he's seeing right now from the bond market and the Fed. Down 161 just off session lows. S&P down about eight tenths of one percent. We'll be right back. Welcome back. Stocks are under pressure as we head into the close, though we've just ticked a little bit higher. The Dow's down 146 or so. Check out some of today's top search tickers

on CNBC.com. Tenure yield in its usual spot at the top of the list, followed today by Tesla, which is down just a tad, holding most of its gains. RH with the epic conference call where the CEO mentioned all the macro volatility. The Fed name checked. Janet Yellen, Fed Chair Powell, RH down 13 percent. Apple breaks its winning streak. And the two-year, 10-year yield spread, which has not yet inverted, is going the other way today, makes the top five. J.P. Morgan downgrading P&G. We'll talk to the analysts behind that call in the Market Zone next. We'll be right back.

18 minutes left of trading. We are now in the closing bell Market Zone. Joining us to break down these crucial moments of the trading day, Jeffries David Zervos is back, plus Mazzuho's Dan Doloff on Apple's latest move to take on the fintechs, some movement there, and JP Morgan's Andrea Teixeira on why she downgraded Procter & Gamble today. First up, though, on the broader market,

stocks are taking a pause after a multi-day rally. The Dow and the S&P 500 lower for the first time in five days. We've come back just a little bit in the last few moments, but we are looking at declines across the board, especially for the Nasdaq. Joining us, David Zervos, Jeffries' chief market strategist. David, what do you think today is? Is it a pause in the buying action that will resume higher, or was that it? No, sir. That's a tough one. I can't, and I'm trying to put together the last week or two, and then a few weeks before that.

And the puzzle pieces are pretty difficult, I think, for anyone to put together. We've got a fairly hawkish Fed message. We've got a flattening yield curve. I think it's probably moving faster than most people, including the Federal Reserve, would imagine. We've got some really strong housing data. We've got a great labor market with the JOLTS data. We had a good ADP. Everybody's talking recession, but the two most important markets, the labor market and the housing market, look like they're on fire. So it's a confusing time. It's a confusing time with Fed policy and macro. And I think positioning definitely got very oversold. We got a little bounce. Maybe this is it. And we get to kind of dodge back into maybe a 44 to 4,600 range instead of breaking back up toward unchanged on the year.

I guess what I'm asking on the stock market are can stocks rally if the yield curve does invert? We get that recessionary signal and earnings decline. I know you mentioned labor market. That's a lagging indicator. And housing, yes, it's holding up, but it is showing some signs of fading. The homebuilders are down more than 20 percent in the last month or at least this year. Yeah, the homebuilders are definitely taking a beating. And, you know, we've got a lot of input costs increases that are going to feed through and probably slow that down.

So we're coming off of an incredible run. And, you know, I think we look around at any anecdotal stories. It's certainly houses are getting scooped up everywhere, right, left and center. So I think, Sarah, I guess I come back to my main premise for the year, which is this is a year where the Fed is going to withdraw accommodation. It's going to be choppy. It's going to be messy. We're going to have a fight between those that think the Fed's losing credibility versus those that think the Fed will maintain or even increase its credibility. I think that's the most interesting macro debate there is. I think the maintain or gain credibility story is actually much more compelling, especially with where break-even inflation rates are for the tips market. But it's not a year where I think we're

going to get a runaway upside. I really don't see that. And I think more importantly, though, I think the downside, while it could go more aggressive like it did earlier in the year, there's a lot of other nice kind of tailwinds to the market that probably mean it's not as bad as maybe some of the feared in Q1. Well, to your exact point, David, CNBC came out today with its Delivering Alpha investor survey. We asked investors and strategists and CNBC contributors what they thought the biggest risk to the market was for the second quarter and beyond. And guess what? Most popular response was a misstep from the Fed. So there is this question of whether this yield curve inversion is signaling that the Fed is going to go too far with hiking rates and sink us into recession, or maybe the

other misstep is that they just don't do enough on inflation. I don't know. What do you think about that risk for the market? Sarah, I bet that if you and I were sitting in a room with Jay Powell and he knew that nothing was going to come out of it, that it was a top seat, no discussion points, whatever, that brought out. And we said, look, you could get inflation down toward 2% by the end of 2023, but you need a small recession, a couple of quarters of consecutive negative growth around 1%, just as we just had over 5% growth in the last year. I think he'd take that in a heartbeat.

So I think the bottom line is that a small recession is certainly within the realm of possibility for the Fed, a modest one, and something that I think they might even prefer to have if it meant getting inflation back toward that 2% level faster. I think the 7.9 number has them quite scared, quite nervous. And even if we are to get big drops in it fast, which may happen because of the Compson Q2, the Compson Q3 really stink on inflation. It's going to go probably back up. And it's just going to be a tough year to get that inflation number down. So all that hawkishness is there. It hasn't gone away. They could make a mistake or actually that mistake of a small recession is exactly what we need

because maybe we got too much of the medicine in 2021 and 2020 when we were going through the darkest days of the pandemic. So that's just the nature of the beat. Well, for now, they're talking about a soft landing instead. David, thank you. We're going to check back in with you before we get into the close. So hang tight. I want to hit that developing story on Apple that we told you about earlier. A new report saying the company is working on a project to bring financial services in-house. It would include things like payment processing, risk assessment for lending, and credit checks. FinTech companies like Block and PayPal dipping lower on this report. With us now is Dan Dolove. He's senior research analyst at Mizuho Americas. Covers a lot of these

fintech companies, Dan. How big of a threat is this to them? Thanks for having me on the show. Look, I think historically, I mean, I've seen this, you know, over and over again. Every time there's a big news about Apple entering, you know, something in payments, the stocks take a dip and it ends up being actually a good buying opportunity because the fundamentals of these stocks and our views of these stocks don't change. So I think it's probably more of the same now, right? You've seen that with the, if you go back, you remember when Apple went into the form factor, right, that they said that they're going to do merchant acquiring, you know, Square was down and now it's up again big. So I think you've seen this pattern before.

I expect this to be the same thing now. So it sounds like you like your space and you cover all sorts of names from MasterCard, PayPal, Robinhood, SoFi. You think it's positioned to do well in the second half. What do earnings expectations look like relative to where valuations stand? Because this group has been beat up pretty hard with some of the recent worries about the consumer and valuations. Right, I think it's a great question. I think that we've actually done a study

of hundreds of stocks, including like about 100 payment stocks. What you're seeing is that the growth or the two-year growth in payments specifically is the most attractive pretty much across like all the tech names that we've looked at, right? You know, in terms of like those subsectors. So I think that the payment space is extremely well positioned to continue to see the rally that we're seeing now over the last two weeks or so into the second half. So I think that, you know, valuations matter, but upward revision

in estimates matter more. And I think that's what you're seeing in payments in the second half. What's your favorite of the group? Square or block, as people call it right now. We've done a deep dive just yesterday into the different building blocks of the Cash App. And what we're seeing is probably somewhere in the order of magnitude of 20 plus percent upside to current consensus on the Cash App. I think the analyst day on May 18th is going to be a huge catalyst. And we kind of told you everything that you need to know in that note. So I'm super bowled up on Block these days. Well, then you quite like it today, down 5 percent. Dan Dolev, thank you for joining us on the payment stocks. At CNBC's Healthy Returns Conference today, inflation's impact on the consumer was a very big topic.

Meg Terrell asked J&J's CEO about it. Listen. We've seen volatility in the consumer demand, but we continue to see a very solid consumer business coming through. And we continue to try to deliver what is best for consumers. And we continue to try to mitigate our cost increases by improving our own efficiency and, in some cases, also having price increases. But overall, we are bullish about the potential of our consumer health business and about

our ability to navigate the inflationary pressures in a way that is optimal for consumers. You can find more great conversations from the Healthy Returns Conference on CNBC.com right now. Meantime, on that note, P&G stock is under pressure after J.P. Morgan downgraded it to neutral, also citing growing cost headwinds from inflation. Joining us now is Andrea Teixeira, J.P. Morgan Senior Equity Research Analyst. Andrea, good to see you. This call stood out to me because all of these consumer staple numbers are coming down with the rising costs and the rising inflation. But most of your colleagues like P&G the best because it usually navigates all of these

headwinds a little better than some of the others. Why do you downgrade it today? Thank you, Sarah. So basically, I've been liking it for the last almost four years when the stock was at 80, when we upgraded last in October of 2018. We still like relatively, but we just don't feel like the run and our relative basis on the valuation standpoint would warrant further re-rating on the stock. And we like names that are more exposed now to the reopening and underlying trends like Estee Lauder and Coca-Cola. Why? Because you think that they haven't seen the full benefit of the reopening of economies and airports and stadiums and that sort of thing?

Yeah, no, I think relative to, even Procter has been seeing some benefits from some of the categories like deodorants, like grooming, shaving, and also beauty, but not to the same level that we're gonna see probably for Estee and Coca-Cola, which in the case of Coca-Cola, they have 50% of their revenues in basically on premises.

So that's the reason why we like it better on a relative basis. Which is basically out of the house. So who has pricing power in this group, Andrea, and who doesn't? Yeah, no, that's a great question. And Coke is one example that has a lot of pricing power. Procter also has a lot of pricing power. That's not the reason why we took a pause here. It's just on a relative basis, the stock's

trading like at a reach multiple relative to the history. It's like three turns of a multiple, more expensive on a PE basis than the peers. And we see like more upside for, you know, names like, as I said, Estee that is still going to benefit from consumption away from home. And therefore we see more of a catalyst there. What about valuations? But consumer staples are only down one and a half percent this year because we've seen all this market volatility and increased recession concerns. And so, naturally, staples are a place to hide, a place to go.

Not as good as utilities, but still working out. So what has that done to valuations? And where do you want to go if you have increasing concerns about the economy within the group? Yeah, no, again, a great question. Because if you think about, like, the premiums, HPC has really widened the premiums. It's around 28% higher than the S&P and the average in the last five years and the last 10 years, about 20. So it has widened. It has to do also with the E getting lower because of the cost pressures. So there's some denominator effect there. We like, again, beverages are not as expensive on a relative basis to the S&P. So that's the reason why we

like beverages better. And also because they also benefit from the reopening more than the HPC names. Andrea, to share lots of good information there. Thank you very much from J.P. Morgan on consumer staples. Want to hit the pot stocks as well. They're lower right now. They've been on a tear lately, though, posting the biggest monthly gain in more than a year. Investors have been optimistic about the possibility of federal cannabis legalization and that process taking a big step forward today. The House Rules Committee holding a hearing on a bill that would decriminalize cannabis at the federal level. Frank Holland joining us with more. Frank, is it really going to happen this time? And even if it does pass the House,

what happens in the Senate? Well, you know what? The debate today at the House Rules Committee and the eventual vote that's expected to happen on Friday is both a combination of expected to be symbolic and insightful, believe it or not. Of course, in D.C., you know, politics makes strange bedfellows. You're going to have to follow me on this one. There's a lot of thought that, of course, the Moore Act, which would decriminalize cannabis and also open up some banking and consumer package good options, is going to pass from the Rules Committee to the full House for a vote and then get stalled in the Senate, as you just mentioned. But Cowan analyst Jared Seiberg and a lot of other industry experts, they're really watching closely at the debate and the eventual vote to see how many GOP congresspeople actually vote yes or speak in favor of cannabis

legalization. There's a general thought that the House could flip from Democrat to Republican control next year, but the Senate would stay under Democrat control. Under that scenario, there's a thought that the Republican-controlled House would come up with a cannabis legalization bill that would be palatable to the Senate Senate and it could actually pass in the next session But this year generally considered dead on arrival when it comes to cannabis reform just because according to most calculations You would need ten GOP senators to vote in favor of this bill to avoid a filibuster So talk to me Frank about the stocks. It has it just been on hopes of movement in Congress for the U.S.? Is it deal consolidation, Canadian fundamental?

What's moving these stocks? Because they've been so wild, especially for retail investors. Well, excuse the pun, definitely high hopes. It's a lot of hope, but there hasn't really been a meaningful path forward so far. But you have to remember, these are giant industries. Here in the U.S., cannabis sales are expected to be at $30 billion this year. Up in Canada, there's different projections, but somewhere between $4 and $5 billion. These are very big industries with the potential to be even bigger with legalization. Now, the stocks that have the biggest upside here are the U.S. stocks. They're called multi-state operators or MSOs. They have their own ETF, the MSOS, while mostly Canadian operators

in the MJ ETF have seen the biggest gain. So a lot of cases, people are getting very excited about the Canadian operators because they're on major exchanges, they're better capitalized. But in general, the U.S. operators, they have a bigger moat. They already have state licenses. When there's meaningful reform, they will have a leg up to be able to bank, borrow money at much better rates than they have in the past and scale up their businesses much faster. Generally, it's considered that Canadian operators would have to go through some type of regulation, regulatory process to enter the U.S. market. Got it. Frank Holland, thank you very much. Learned a lot there on the pot stocks. Let's bring back David Zervos on the markets. And

David, we've seen a little improvement, actually, in the last few minutes. We've got staples, health care, utilities and energy higher. At the top of the hour, it was just energy and utilities. We're going to get the Fed's preferred inflation gauge tomorrow. I think we're going to get jobs on Friday. What are some of the big questions out there? Because it feels like the Fed members have been very vocal, including Fed Chair Powell, about what their mission is right now, what they're willing to do about it. So what are the questions that could sway the market in one direction or the other? You know, I think it's always important to see the PCE data. That's what the Fed watches. But this, you know, the headline

CPI has just been a very ugly blemish on their record over the last two years. So, you know, even if it comes in a little bit better than expected, sir, I don't expect the rhetoric on inflation to dissipate. I think they want to be strong. I think his nod toward Volcker and his pivot away from being labeled as someone like Arthur Burns or Bill Martin, it's a very strong maneuver by Jay. And I think he's going to keep up with it.

And I think he has every reason to keep up with it, given where we sit in the marketplace. So again, it's just a, you know, we got to wait for QT. We've got to wait for a little bit higher rates. We see how the market reacts to all of that over the coming quarters. But, you know, I'm reasonably optimistic that we're not going to get anything too tough. And even if we do get a recession, I think it's going to be a pretty mild one and something that may be a little bit cathartic and helpful in the long run. So I'm not particularly... No, I got your outlook, but I'm curious what you think it means for bonds, ultimately.

We're seeing some buying today, 10-year back down to 235. Where does that go? You know, I think that my path is this. They're going to jack short rates up, and the long end is going to stay pat or go lower. They're going to invert this thing. And then by the end of the year, they're going to go,

you know what, we're kind of sick of pushing short rates up. Let's move the balance sheet a little faster. And they're going to start to accelerate the way they move the balance sheet lower through either asset sales or a faster cessation of proceeds reinvestment. And I think the market's not really in my camp, and I'm happy about that. I like to be an outlier. But I think the long end is definitely in their crosshairs, and the fact that it's not going up in yield is going to frustrate them and cause some pivots toward the end of the year in how they move rates, short rates versus the balance sheet. And that will be a fun plot.

That will be fun for the curve. David Zervos. Got it. Thank you very much from Jeffries. David Zervos. Got it. Thank you very much from Jeffries. David Zervos, chief market strategist. Crude oil up 3% as we head into the bell right now. S&P 500 down seven-tenths of 1%. We were down about a percent just about a half an hour ago.

So we've come off of the lows. Energy, utilities, healthcare, and staples are all up. Consumer discretionary is the biggest drag here in terms of sector performance, technology, financials, real estate, all weaker today. The Dow is down about 91 points, again, recovering here as we head into the close. That's a pattern we've seen. We've been closing at session highs. Looks like we're going to be lower, but not as low as earlier. UnitedHealth adding the most to the Dow. Home Depot subtracting the most. The Nasdaq, the worst performer of the big three. That's going to do it for me. I'm closing bell. Have a good evening, everyone.