Closing Bell - Closing Bell: Stocks stage late-day rally, Ken Moelis on recession risk 05/25/22

Episode Date: May 25, 2022

Stocks finished the day broadly higher, with momentum picking up late in the session following the release of the Fed minutes before cooling a bit ahead of the close. Richard Bernstein from Richard Bernstein Advisors breaks down the inflation outlook and where he recommends putting money to work. Investment banker Ken Moelis discusses whether or not he thinks the US is heading for a recession, and what it means for the deal-making environment. And analyst Mark Mahaney breaks down the big highlights from Twitter and Meta’s investor days.

stocks are solidly higher on wall street with the nasdaq taking the lead for a change at session highs as we head toward the close the most important hour of trading starts right now welcome to closing bell i'm mike santoli sarah eisen is on assignment in davos take a closer look at the markets here the s&p 500 now up one percent building on modest gains earlier in the last hour or so after the fed minutes from its last meeting a few weeks ago. Did hit. Nothing new in there. Incrementally hawkish. Seems like more or less as expected. Got out of the way. And you had stocks able to get a lift off of that.

You see the New York Stock Exchange, most actives, a pretty strong bounce in snap after its devastating loss yesterday. Dick's Sporting Goods, after guiding down with a good conference call, up almost 10 percent. NIO, Carnival Corp., and AMC Entertainment, some story stocks in there in the most active. Coming up on today's show, we'll hear from Wall Street dealmaker and investment banker Ken Mollis from Davos with his thoughts on whether a recession is coming, the current environment for M&A, and the ways that tech companies are being revalued. We begin with the Fed just releasing those minutes from its May meeting last hour. Steve Leisman joins us from Washington with the

big takeaways. Hi, Steve. Hey, Michael. Yeah, Fed officials in the Fed in the May meeting were agreed they should move the funds rate expeditiously to neutral. And there seemed to be good agreement that they may eventually have to actually raise rates above that level to slow the economy in order to fight inflation. Minutes to the meeting say, quote, a restrictive stance on monetary policy may become appropriate. The Fed funds, the Fed raised rates 50 basis points at that meeting and expected them to do so at least two more meetings in a row. Officials overall had a fairly downbeat view of the inflation outlook. Tight labor market, wage pressure were expected to continue.

New pressures were coming from the China lockdown and the Ukraine war. Prices were being passed on to consumers. And there was a risk of inflation expectations becoming unanchored. Overall, they said the risk to inflation was to the upside. Against that backdrop, Fed officials generally saw decent growth, saying they expected the economy to rebound from this quarter from negative growth in the first quarter and that consumer spending should remain robust. But they acknowledge the difficulty ahead, saying it would be a challenge to both bring inflation down and keep the job market strong. The minister suggested some support for a pause in rate hikes once the Fed is neutral or around two to two and a half percent. We'll be throwing these questions tomorrow to San Francisco Fed President Mary Daly on the exchange at 1 p.m. in the exclusive interview.

Mike. All right. We'll need to certainly tune in for that, Steve. Thank you very much for more on the action in the markets. Let's bring in Richard Bernstein, CEO of Richard Bernstein Advisors. Rich, good to see you. Obviously, today we have a little bit of relief, a relatively calm rally. Very different in tone from the volatile tape we've had in place. And, you know, some of the things that you've been kind of looking for for quite some time have absolutely been reflected in this market this year. Right. You have defensive stocks, vastly outperforming cyclical ones, energies beating tech by 75 percentage points this year. I guess the question is, can that continue? Or do you think that the market has kind of reached a spot where it's taken account of the things you were looking for?

Well, Mike, thank you. Thank you for that. There are things that I've gotten wrong, too, but thank you for pointing out all the things that we've gotten right. But I think, look, I think that what you saw a little bit today with tech rebounding and things like that is kind of a hope. I don't like to use that word, but kind of a hope that we go back to the environment that we were in before the pandemic. Right. There's a lot of investors who are really hoping that this is just a bad dream, that inflation is temporary, that we'll wake up tomorrow and somehow it'll be 2018 all over again. And you saw a little bit of that today in the market action.

Personally, I don't think the probability of that happening is even reasonable to even consider. I think the economy has changed meaningfully and semi-permanently. And so I think you're probably going to see late cycle and defensive stocks continue to outperform here. Can late cycle stocks outperform for an extended period of time without the cycle ending? That seems to be one of the other questions here. I mean, are we just counting down the ticks to ultimately a recession? And what does that mean for the market? Well, on the first part, in terms of recession, I think our view is the recession is farther out in the future than most people think. You know, when one considers that the real Fed funds rate, Fed funds rate minus inflation, is still almost historically negative. But yet every recession in the last 50 years has been preceded by a positive real Fed funds rate.

So we're historically negative. It's usually preceded by a positive real Fed funds rate. So we're historically negative. It's usually preceded by a positive real Fed funds rate. It seems to us that the Fed is kind of hunting elephants with a pea shooter here. And therefore, the recession is probably farther out in the future. But that being said, let's say we're wrong on that and recession's closer in than we think. One has to remember that inflation is a lagging indicator. And so what generally happens is late cycle stocks hang on into the early stages of the recession and then defenses really kick in. So, you know, our portfolios are really constructed with an eye towards that late cycle with over the past several months increasing weight in defensives, as you mentioned before. Well, let's talk about, you know, that elephant that the Fed is hunting inflation. You say it's you suggest it's going to be around a while more structurally, not going to ease back toward, you know, the mild levels of 2018.

But how high for how long? What does it, I guess, mean for overall stock market multiples, too? Right. You know, Mike, I think it's I think it talk about 8% or 7% or 6% inflation. But I don't think as an investor that's really the way you want to think about it. You want to think about secular inflation, right? What's inflation going to be over the next year, three years, five years, or even 10 years if you really are a long-term investor? There aren't many out there anymore, but if you're really a long-term investor, that's what you want to think about.

Long-term inflation in the United States is about 2.5%, and most consensus forecasts right now are between 2% and 3%. So what you have to do is you have to make a bet, will inflation be higher secularly than 3%? We think it will be because of these structural changes that are going on right now. But most portfolios are still constructed for the environment we were in, which is basically sub-2% inflation. And that's where we think the opportunity lies, is that people are waiting to go back to that sub-2% environment. Right.

So implicitly, people are waiting for the kind of big growth stock leadership that dominate the indexes, perhaps, to come back into favor, I guess. And before we let you go, Richie, you do have some thoughts about fixed income and its role right here. Now, just in the very recent few weeks, bonds have started to provide some diversification benefit. Yields have come back as stocks have struggled. But what does it mean longer term if, in fact, inflation is the most present threat for fixed income in a portfolio? Yeah. And Mike, I think this is the way it's going to hit most people's portfolios, if we're right, right? Nobody has a copyright on being correct.

So if we're correct and secular inflation is higher than people think, fixed income is really an issue because during the 1960s and the 1970s, both decades, fixed income treasuries were the worst performing asset class. They gave you low returns and high volatility. In fact, it was safer, sort of in quotes there, it was safer to be in small cap stocks. Small caps gave you higher returns and lower volatility than fixed income, something that people today could never imagine. So it means that fixed income investing is going to change. Most fixed income managers have simply ridden the wave of lower inflation and secularly falling interest rates, and that covered many mistakes through

time. What we're envisioning here is an environment where managers have to be much more tactical, and realistically, fixed income is going to have to become active management, something that we haven't had to worry about in 40 years. So that could be a very sizable change in the fixed income market. Yeah, I guess over time, active managers in fixed income have outperformed those who've tried to do it in stocks. But we'll see if folks buy into that, Rich. Thank you very much for the time. Appreciate it. Mike, great to see you. All right. And up next, one of Wall Street's best known dealmakers weighs in on this wild market.

Volatility in the short term always causes pause. But volatility also causes opportunity. Sarah Eisen's interview with Ken Mollis from Davos is straight ahead. You're watching Closing Bell on CNBC, the Dow up 300. Let's check out today's stealth mover generac the residential and commercial generator maker is one of the best performers in the s&p 500 after northland capital markets initiated coverage of the stock with an outperformed rating and a 370 price target implying more than 70 percent upside the firm citing generac's dominant market share and its fast-growing clean energy business,

the stock up about 8% now, though still down by more than half from its record highs. Sarah Eisen sat down with Mollis and company's founder, Ken Mollis, earlier today at the World Economic Forum in Davos for a wide-ranging interview. She began by asking him if he sees a recession coming for the U.S. economy. It's funny, recession is kind of one of those words that you have to fit a gigantic, chaotic global economy into a word that I guess is defined very specifically. And I think it's a bad word. I think what we're going into is a revision.

The whole world is revising their business plans, energy policies, supply chain, probably global politics, and more, even the food situation. So there will be tremendous revision. I don't think we're going into a recession, meaning we'll go to negative growth. But I think we're going to have volatile change. But we are seeing some pretty intense market volatility. Look, when you have a major revision in almost every part of your business,

you have to rethink your supply chain, your cost of capital. There's all sorts of things you have to revise. And technology, remember, and technology is behind all of this. So everybody has the business they have, and most businesses have the business they want to be. And they're in transition or revision into that, and that leads to volatility. But I don't think it's going to lead to recession. What about your business, which is very tied to the capital markets of dealmaking? How has all this volatility impacted you? So volatility in the short term always causes pause, but volatility also causes opportunity. And the thing that usually kills the M&A or the

deal market is availability of capital. So in 08, 09 and in prior deal markets that have stopped, you just couldn't get capital. Capital is fully available now. In fact, I even believe the high yield index, which is kind of the transaction index of financing, has gone down less than the investment grade bond index. So although capital is being repriced higher, which will change valuation, it's totally available. And so I think we'll be in a moment here where people have to figure out the right price based on new capital, but it's available. And I've never seen CEOs, boards, business as aggressive as they are, including private equity. As aggressive on deal-making?

Yeah, they're aggressively... Right now, in this environment? Well, they're aggressively thinking through their business structures. They're aggressively thinking through what they want to be in five years. You're right. On this, whatever it is, Wednesday in May, they're not... It's too volatile to move, but everything... Most people are rethinking their business model and are aggressive in planning for the future.

Well, it is and it isn't. We're still talking about multi-billion dollar deals just this week. We've learned that there are talks between Broadcom and VMware, which you're not involved in, but you have been involved with Broadcom in the past. We're still seeing deals get done, or at least in discussion. Yeah. Well, capital's out there. And if you have a business strategy that you want to execute on for the next 10, 20, 30 years, and you have access to capital, you're going to go forward. But how long do we have access to capital? Because interest rates are going up, and they're going up aggressively.

Versus where we were. But from zero. Sure. From zero. But it's been a while since we've seen this kind of move. A 2.75 10-year, 3% 10-year used to be considered something you would hope for. We've only been in the interest rate environment we were in for about three years. And so, again.

But is there a level that impacts financing? Yeah, there'll be. It's not really a level. There'll be a level that causes capital to become unavailable. I don't think we're getting there, but yes, there's a level that will cause... You don't think we're getting there in this cycle? No, I don't think we're getting there.

Why? It's a dynamic world, they're changing quickly. I think the best, I think high oil prices will shrink the economy as well as the Fed. I think the Fed is serious about this. I really believe they, you know, I don't know Jay Powell personally, but I don't believe he wants to go down in history as the Fed chairman that allowed inflation, which has been under control for 40 years, to come out of the box. You know, I don't think he goes to bed at night going, I hope I'm remembered as that guy.

So I think we're going to be serious about it. Whether he waited too long is subject for debate. I think even he would admit that. Yeah. So I think that'll come under control and capital will probably be repriced higher, but it's available. There is a lot of tough talk lately from the antitrust authorities. How has the regulatory environment changed in your view as it relates to getting these deals done? Yeah, I think there's a gut feeling now that we used to do a lot of, you know, everybody'd study the indexes and the consolidation,

and there's a gut feeling now that all that's going to be secondary. Big equals bad. And so you can do a lot of your own assessments, but I think there's a real concern of getting a little too close to the big is bad problem. Speaking of deals breaking, Twitter, which you're also not involved in, think that'll get done? I'm going to stay away from commenting because I've been involved in these transactions where the, you know, the... But never with Elon Musk, right? No, never with Elon Musk. But, you know, I've been in these transactions where everybody goes, you know, can they get out of it? Can you get in it? And I will tell you, at least one of them, it came down to a comma. A comma. A comma. And we debated for days whether the comma was in the right place in the material adverse to out section

of the document. I think we thought about bringing in an English place in the material adverse to out section of the document. I think we thought about bringing in an English major in case we had to go to court. I mean, this is true. So without being totally immersed in the document and the strategy, it's very hard to know what the outcome will be. Good for the lawyers, I guess, is the upshot. Yeah, these things are usually, if it goes that way. Look, as of right now, I think it was the general counsel of Twitter who had a good comment. He said, there's no such thing as a deal put on hold. So, you know, we're making a lot of speculation. And as of right now, I assume they all think they're progressing with the deal. Does Elon Musk and this whole Twitter deal change the playbook at all,

or is it just a unique case because of who he is? I think it's just publicized, it's popularized M&A now. I think everybody on Twitter is an M&A attorney and an M&A expert. It's not that different other than it's an individual. And so people tweets about it. It's not that different, other than it's an individual. And so people are following it. But look, this goes on. It's just that nobody cares. When it's two corporations, it doesn't make the evening news. Well, it is a technology deal. And that's been a sector that's really been ripe, and we've seen valuations come down.

Is that one industry where you expect we'll see a lot more this year? Yeah. It's part of what I said about, you know, again, I was talking about the revision economy instead of the recessionary economy. Look, we've had a revision on valuations, pretty violent revision. And again, I've been doing this 40 years now, a little over 40, and we went from valuing companies on earnings. 20 years into it, we started to value them on EBITDA. And the last three, we valued them as multiple of revenues. And by the way, what's interesting, it was the same

multiple. Just went from earnings to EBITDA to revenue. Where is that now? Because that's not working in the market. And I think we're going back to, right now you're seeing a revision to cash profits. Right. And that's why I think what's so interesting, people are going to have to revise their business models to generate profit as well as growth. And they're going to have to balance. And that's not impossible. I think in a world where growth was being valued at infinite multiples, you got what you incentivized, which was growth without profit. The market is now telling people we need some profit. We need to see demonstrated cash flow. And I think you'll see revision of business models.

Sarah also asked Mollis about the political environment. He said the midterms will likely result in a gridlocked government that will ultimately be a, quote, huge positive for business that would fit with history, the period after midterms, one of the strongest for the stock market anyway over the electoral four-year pattern. Let's get a check on the markets. Hovering near the highs, the Dow is up about 265 right now, not quite 1%. S&P 500 up 1.25%. It's up about 5% from last week's lows, last Friday's lows, still about 2% below last week's high. So kind of getting traction at the bottom end of the range. NASDAQ composite up 2% and the Russell 2000 participating as well up two and a quarter. After the break, a burger boost.

Shares of Wendy's are jumping on news that a major shareholder is pushing for a deal. We'll bring you the details next. And later, analyst Mark Mahaney with the headlines you need to know from three big name tech shareholder meetings today, including Amazon, Twitter and Meta. Wendy's getting a big boost on news that a major investor is pursuing a possible deal. Leslie Picker has that story for us. Hey, Leslie. Hey, Mike.

Yeah, a new filing revealing that Tryon advised the Wendy's board that it intends to seek participating either alone or with third parties in a potential transaction. Tryon saying that that could include an acquisition or tender offer. And the firm says it has retained financial legal and other advisors to help them evaluate a potential transaction. Tryon holds nearly 12 percent of Wendy's and three board seats, including one occupied by Nelson Peltz, who serves as chair. Peltz holds another 5%, and Tryon's president, Peter May, owns another 2.5%. Wendy's said in a statement, quote, consistent with its fiduciary duties, the board will carefully review any proposals submitted by Tryon partners. Tryon first invested in Wendy's 17 years ago when the firm was first founded. It orchestrated a merger

between Wendy's and the parent company of Arby's in 2008. Ultimately, Arby's was sold to private equity firm Rourke Capital. But I think we have a chart going all the way back those 17 years, going back to December when he first invested in the stock, including today's jump, Mike, is up 5% since then. Wow. Yeah, it's not been any easier. And I guess when you own that large a stake already, you're not happy with the valuation. You know, selling and walking away is probably not an attractive possibility. So I guess they need to try to find some catalyzing deal. Yeah. And, well, it seems based on the filing that they would be the catalyzing deal.

What I wonder is if filing this 13D elicits other potential bidders to come to the fore and say, oh, yeah, Berk or Wendy's, you know, that's something that I've been interested in as well. Now that I know that it could be potentially in play, maybe I'll, you know, take a peek at it. I do wonder if that effect will come from this as well. Yeah, it wouldn't be surprising. Less than a $4 billion market cap on Wendy's. We'll have to see how that goes. Leslie, thank you very much. Thank you. Up next, Evercore ISI's Mark Mahaney on the takeaways from Amazon, Met holding their annual shareholder meetings this afternoon. Shares of each in the green today, but of course this comes after steep declines from their 52-week highs, all more than 40% lower. Joining us now, Mark Mahaney, head of internet research at Evercore ISI. Mark, good to talk to you.

I guess a lot of times shareholder meetings not necessarily generating a ton of fresh news, but in the meta meeting there was a little bit of news, but in the meta meeting, there was a little bit of a ruffle in the shares lower in Facebook when, I guess, Mark Zuckerberg just said, look, we're going to be losing money in the metaverse for the next three to five years. Those headlines seem to have an impact. It's recovered, but is that something that is in contrast with what investors already expect? I don't think that's in contrast. Now, I thought the real news earlier this year was when he sort of committed to kind of tapering down expenses if there's going to be a slowdown in revenue. They weren't going to spend irregardless of the revenue.

I don't think anything he said today changed that message. And I think he talked about metaverse profits out in 2030. From the beginning, to his credit, he's talked about this as a long-term investment. You know, call it five to ten years out. Frankly, that seems about right. It's like an option value. That's how we all as investors should think about this. It's either going to expire worthless or it's going to be worth something. We're just not going to know for a while.

So don't buy Facebook shares or Meta shares for the Metaverse. Buy it for the core business. And if you make a little money on that option, play great. but it's not going to expire. That's going to be at least five years down the road. And what is your read through out of Snap's results into the core business at Meta at this point? You know, Mike, we're just doing channel checks by the minute on this. The first read we had, we sort of took Snap at its face value, that this was a,

not surprisingly, there's macro pressures out there, and that's really what caused what seemed like a real inflection point in Snap. As the data points come in, there may be some things that are company-specific here. Snap does have, you know, relatively substantial exposure to brand advertising. That's going to get hurt much more than performance marketing. And performance marketing is the power alley definitely of Google, but it's also a power alley of Facebook, too. So my first read was that this was a pretty clean read-through for Facebook. And as we go into this more and more, it's probably a little less than we in the market at first thought. So if Facebook's going to stay depressed on the Snap News, I think that's a

great buying opportunity for long-term investors. But emphasis on long-term, Mike. Yeah. And when it comes to Twitter, management did not address the pending deal, Elon Musk's deal to acquire the company. But I wonder what you think the stock would trade to in the absence of a deal. I know you haven't been terribly excited about Twitter as a stock, you know, preceding this as a standalone entity, but clearly anybody's estimate of where it would go to if the deal were falling apart is part of the equation for what you'd pay for it now. Yeah. So, Mike, I think I'd do the same thing you would think about, which is I'd take it right back to where it was and then you'd adjust it down for the trading off in the market that's occurred since then. The one fundamental piece of news that we have, there's two pieces. One's non-news, one's real news. They did put out their March quarter results and those were roughly in

line-ish. But the user numbers, the MDAU numbers that are now somewhat controversial, those were better than expected. So this stock has always traded off those. My guess is that, you know, you'd adjust down a little bit for the market sell-off. But I think Twitter, because of that March quarter results, the user numbers that really matter to the stock would probably have outperformed them, honestly, post that. And then the other piece of news, by the way, is whether or not, you know, we've got a bot issue here. I just think this is a, I don't think this is a new issue at all. This is somebody looking for an excuse to negotiate down the deals. This is an example of what you try to teach your kids. Do your homework before you do a deal. I don't think homework was done here. This is a longstanding issue.

And I don't think there's a major pot issue at Twitter. Yeah. Well, it's good color. Thanks, Mark. Appreciate it. And here's where we stand in the market. Still solidly higher. A little bit off the highs from earlier. The S&P 500 has stopped just short of that 4,000 mark, but it's still up a little over 1.1 percent. The Dow up 258. NASDAQ and Russell still outperforming. China's COVID lockdowns reportedly delaying Apple's iPhone development schedule.

The impact that could have on the stock and the company's bottom line. That is later on Closing Dump. Welcome back. Check out some of today's top search tickers on CNBC.com. The 10-year yield back in the top spot, followed by Tesla, Dick's, Apple, and Snap. And speaking of Dick's Sporting Goods, the stock making a dramatic turnaround during the company's earnings call this morning. Up next, find out what is behind that rebound of that story, plus Apple's development delay and a countdown to NVIDIA's earnings when we take you inside the Market Zone. We are now in the closing bell Market Zone.

Crossmark Global Investments' Victoria Fernandez is here to break down these crucial moments of the trading day. Plus, Courtney Reagan on a big intraday rebound for one retail stock. And Needham's Raji Gill on what he's expecting from NVIDIA's earnings. Stocks broadly higher this afternoon, the NASDAQ outperforming the major averages after selling off yesterday. S&P 500 up some 1% at this point. Victoria, we've seen 4% to 5% rallies before, as recently as just a couple of weeks ago. Obviously, we've seen even bigger ones on the way down. Anything about the action suggest to you that after a near 20 percent decline in the S&P that this one might stick? Or how are you approaching it? Yeah, so, Mike, I don't think we're seeing the bottom yet.

And I don't think people should think just because we've had a day here, a pretty substantial rally, that they should be all in. I mean, there's still some other things we want to see before we go all in on that capitulation idea. So we want to see the VIX move higher. We want to see put-call ratios move above one. Trend readings, where we talk about the breadth of the market. All of these things, financial conditions tightening a little bit more than where they are. These are all things we want to see before we think the bottom's in. That doesn't mean there's not going to be volatility.

We think there's going to be plenty of volatility and opportunities for people when names come down that they can nibble or when names are up to go ahead and trim those names. I think that's how you should approach the volatility we anticipate. And we think maybe later in the year, when things settle down with inflation and with yields, maybe then we get a better feel for a solid momentum move. Yeah, a lot of folks waiting for a lot of those tactical indicators to line up.

Moving on to the big retail move over here, Dick's Sporting Goods staging a huge comeback today. The company beat earnings estimates but issued a weaker than expected outlook that initially sent the stock sharply lower. But the stock then rallied during the earnings call. Courtney Reagan joins us. So, Court, what was said on the call that seemed to spark this turnaround? Obviously, the stock had also been pretty weak from its highs going into the report before this. Yeah, absolutely, Mike. And you know that better than anyone about the stock performance. I mean, look, initially, when we got the earnings results, the first quarter was very good. And then it gave this

full year forecast that was very dire with not a lot of information. But on the call, CEO Lauren Hobart, pretty much right near the top, sort of clarified what they did with the guidance and why, saying, in part, we believe it's appropriate to be cautious, to be clear. We expect our performance will continue to meaningfully exceed 2019 levels. So basically saying, look, we don't know what's going to happen out there. We're watching all of these macroeconomic developments and things largely outside our control, just like everyone else. We're going to do our best. We expect things will do well. By the way, our consumer has not started spending

differently. We still expect things will go well. But just in case, we're going to throw out this very cautious guidance. And they use the word cautious multiple times over and over again on that call. Yeah, it's interesting because there has been a little bit of a thread running through even some of the disappointing retail earnings court about, you know, traffic isn't really the problem. Even the top line consumer spend volumes are OK. It's some sort of the margin issues. It's the inventory stuff. And it seemed as if on the Dix call, they did say they felt as if the recent margin gains over the long term should probably be sustainable. Yeah, absolutely. And I thought that that was very, very interesting. The company has done a lot of work on the product that it offers in store, solidifying the vendor

relationships with those really big, important national retailers like Nike. It's really elevated its own private label products and they sell through fairly well. And so all of that merchandise margin, they believe, is something that they've spent years building up and it's not something that is going to be easily erodible. And so they sort of put their stake in the ground and says we instead we expect that to continue. I also do think it's notable that revenues are up about 40 percent since before the pandemic. So even though this quarter was down year over year, the business itself looks quite different than it did just several years ago. Yeah, quite a bit bigger. Victoria, chain retail, I mean, there's some ugly charts there. They all, or a lot of

them, look really cheap if you believe the earnings. Is this an area that would interest you? So we do have some exposure to a lot of the names in the retail. We have exposure to Dick's Sporting Goods. And I think something they're doing, which we can look at maybe for some other retailers, it might be a little more specific for them. You know, Dick's is opening up their house of sports. So they're offering a service component with putting greens, rock climbing walls, all of these things, trying to take advantage of some of that service component instead of just the goods. But I think it comes back to what you were mentioning earlier, Mike, that the consumer demand is still there. It was just the margins that were really getting hit. And some of the higher end retailers like Ralph

Lauren, that's a name we've purchased recently. The high end consumer is still quite strong. So we think you can look in that area of retail. That's been a steady theme. And Courtney, thank you very much. Meantime, earlier today, Sarah Eisen spoke to tech investor Jim Breyer at Davos and asked if he's buying any beaten down tech stocks amid this recent sell off. If we take a company like Microsoft on weakness, I will continue to buy. I will continue to add and hold for years. What we really need is conscious leadership, leadership that understands left brain, right brain and this new set of challenges coming out of covid. Sati is not only a brilliant technical strategist, but a great leader. So, Victoria, I mean, Microsoft's certainly not performed as badly as some of the other very large NASDAQ names. It's down,

you know, high 20s percent. It's maybe not so cheap, but it used to be a lot more expensive six months ago. It's in a lot of the quality portfolios. How would you approach this name here? So I absolutely agree with what James was saying. I mean, we own it in our large cap strategies. We've been nibbling at it as it has come down, adding to our position that we have. And if you look in our model at the risk adjusted upside potential for Microsoft, whether you're looking 18 months out, three years, five years, it really has strong numbers there.

So I think it's one of these, like you mentioned, one of these longer-term holdings to have in your portfolio. You want to have exposure to that tech space, Microsoft being one that hasn't come down quite as much as others, but I think it's going to give you some stability. And look, if yields start to calm down, which we think they are, then that should give some support to some of these tech names. Are there any others? I mean, whether it's an Alphabet, which really has been hit harder and arguably looks cheaper relative to its history. Is that one that's on the radar too? Well, actually on our radar, we kind of like some of these old school tech names. So you look at a name like Intel, even Texas Instruments. These are some areas where we've been buying as the names have come down.

Obviously, you look in the semi space and we have, you know, like a Qualcomm that's in there as well. So really trying to spread out and have some diversification within that tech sector. Well, we'll stick with the tech sector. It's been a very choppy session for Apple after a report that China's COVID lockdowns have delayed its iPhone development schedule. Apple reportedly telling suppliers to speed up development in an attempt to get back on schedule. Meanwhile, Loop Capital cutting its price target on the stock to $180 from $210 over concerns that Wall Street's expectations for iPhone shipments during the June quarter may be too high. Steve Kovach joins us with more on this.

Steve, so I guess the question, should investors really be surprised by this iPhone development delay? It seems to me historically it's not always been profitable to trade on news of production issues with Apple. Yeah, that's right. Maybe if they've been asleep for the past two years, Mike, they'd be surprised by this. But Apple has been really clear in their warnings about how these COVID shutdowns are impacting their business. We heard on the earnings call last month that a $4 to $8 billion negative impact based on these Shanghai corridor shutdowns. And then let's zoom back to 2020 when the pandemic first hit and lockdowns were affecting production in the country. We know that caused the iPhone 12 to launch about a month later than it typically does. Now, Apple likes to launch iPhones at the

end of the September quarter and has that December quarter as the first full quarter of new iPhone sales. What we saw in 2020 was it happened towards the end of October, and that kind of threw off comps and things like that. So it is something to pay attention to when you're thinking about the last two quarters earnings of the year. But for the most part, they were able to do in 2020 at least get the phone out, even though a month late. So they may see that again, but it sounds like they're more prepared this time, Mike. And all the talk about production, Steve, I mean, implicit in the worry there is that demand is not going to be a problem, I suppose. I mean, is that a plausible assumption that whatever they can produce, they can meet their volume targets? That's what we

keep hearing. I know in the retail sector, we keep hearing weird things about consumer demand. But when it comes to high end smartphones, Qualcomm CEO was at Davos today just saying that demand is through the roof for these really expensive phones. And we heard the same thing from Apple. So, yeah, despite everything that's going on, inflation, supply chain problems, the things we keep talking about, people are still willing to pony up for these $1,000 phones. Part of that is because carriers are giving great deals and effectively giving them away for free. But still, the demand's there, Mike. Yeah, I mean, the upgrade cycle has absolutely been smoothed out. Victoria, you know, Apple has really retained more of its gains, you know, during the pandemic than a lot of the

other stocks here. Maybe not that cheap. How would you screen it out at this point? So, Mike, we see this as very similar as we do Microsoft that we were just talking about. It's one of those tech names that needs to be a long term holding in your portfolio. And we've treated it similarly. We've been buying it a little bit. We were underweight. So we were buying it a little bit when it was down and definitely a name that we want to hold in the portfolio. But I mean, you look at first quarter revenue, phones were almost 58% of Apple's revenue. So they need to be able to produce those. If my timing is right on this, I think they need to start production by the end of June in order to hit that September deadline that Steve was talking about. But I'm not as confident that demand will be there quite as much. Dan Pickering was on earlier and was talking about he thinks gasoline prices are going to stay close to $4 a gallon for the rest of the year and for an extended period of time.

That might start to bite into some demand on these higher-priced items. But yet, at this point, like we said, the consumer is still holding strong. For sure. And, Steve, thank you. Meanwhile, NVIDIA rallying ahead of reporting quarterly results after the bell today. But overall, it has been a rough year for the stock, down more than 40 percent in 2022. Joining us now is Raji Gill, Needham Managing Director of Semiconductor Equity Research. And Raji, tell me about the setup here. There's been concerns about things like the gaming sector demand, the crypto perhaps, and then data center. Maybe it's a little bit in

question, but, you know, the valuation of NVIDIA really has been compressed relative to where it's sat for the last couple of years. Yes, I agree with a lot of what you just said. The setup, I think, is fairly good. I think they're going to have a good meet and raise quarter. I think any kind of, however, any potential upside or additional upside could be capped on the gaming side. Gaming demand has slowed down in part because of some of the lockdowns in China. They generate probably about 20% of their gaming revenue from China. So I think that's having some impact. Some of the premium

pricing they used to get in terms of their gaming GPUs, I think the pricing premium, the gap is starting to kind of narrow it down a bit. And then you also kind of have the Ethereum kind of collapse in the price. It's hard to gauge exactly how much percentage of revenue NVIDIA is generating from Ethereum, but we estimate it could be anywhere between kind of, you know, 2% to 3% of overall sales. Those are some of the headwinds on the gaming side. Having said that, the data center business, which is more than 50% of their revenue,

is growing 80% year over year. That actually is the highest gross margin a part of their business, probably 70% plus gross margin. If you hear the commentary out of Google or Facebook or other hyperscaler companies, they're spending a significant amount of money on CapEx, on AI and machine learning. That has not slowed down. And NVIDIA is kind of the primary beneficiary for cloud CapEx spending,

as well as enterprise spending. Anything in particular that you'd be looking out for in the results on the call that might give you know, give you a little bit of pause right here? I ask because, I mean, it is well below its highs. I think you're still carrying a $400 price target that assumes it's really going to recapture a lot of that valuation premium. So what might be the potential hiccups? Well, I think the hiccups are the headwinds in gaming, mainly related to kind of macro factor, particularly in China, or particularly if there's a slowdown in overall demand gaming. I think that the Ethereum cryptocurrency risk is something that they can control versus, say, three years ago, but it has something.

We need to get more insight into how big of an impact that could have, that will have this quarter. I do think, though, the core kind of thesis around data center and data center growth is that thesis has not changed at all. And I think the growth is going to continue to be extremely strong. You know, you have to understand, I mean, this stock, the multiple has compressed 50 percent. The stock is trading at a five year low, yet their earnings are going to grow 30 percent this year. You know, plus or minus, even if you have some slowdown in gaming, their earnings are going to grow 30 percent. So this is all about a reset in the multiple. Nothing really to do with multiples.

And you can make that argument across semis. We've seen multiple compression, yet earnings growth is going to be, on average, probably mid-teens. So NVIDIA is going to hit hard because it's considered a higher valuation chip stock. Sure, absolutely. I mean, it's down about 29 times forward earnings. So I guess it was 60 not that long ago, to your point. Raji, thank you very much. Victoria, you talked about old school tech. I mean, NVIDIA kind of a standard bearer for new tech.

What's your thought on that one? NVIDIA, and we like it. You know, we think it's a good... Yeah, we have exposure to NVIDIA, and we like it. You know, we think it's a good. Yeah. Yeah. We have exposure to NVIDIA and we like the stock. The concern is obviously going to be the crypto mining and the gaming, as was mentioned. But I think the AI is where the future is for this company. It's where we're really going to be looking to see how they report and what that part of their business looks like going forward. So we continue to hold it in our portfolio.

And in terms of your thoughts on the market here, you know, we do see NASDAQ bouncing a little more today than the rest of the market, but obviously it's in a deeper hole. A lot of times, you know, the former leaders are not the ones that lead you out of a downturn. What do you think makes sense in terms of the growth versus value or growth versus cyclical trade right now? Yeah, so, you know, value had been leading for a while, especially starting at the beginning of the year. And we've seen that differential really start to come together a little bit. So we've taken some of our value names off. We've added a little bit within the growth space, but we're still pretty balanced between the two.

We do like some of the cyclical names. We like some of the credit card names like an American Express or a Discover Financial. We talked a little bit about Ralph Lauren, so we like some of those retail names. But we really think you need to be pretty balanced because of the volatility that we expect. We want to see yields move a little bit higher and then start to level out. As we mentioned, we think that's going to help the equity market calm down a little bit. And we do think inflation is going to start to come down this summer. That should give a little bit of reprieve to the Federal Reserve. We had the minutes come out earlier this afternoon. And so then it

gives you a question as do we still see the 250 basis point hikes and then go to 25 in September or what that looks like? So I think we have volatility to look forward to, but have a balanced portfolio to handle that. Yeah, market seems OK with Commery yields this week. Victoria Fernandez, thank you very much. As we head into the close, the S&P 500 up almost nine tenths of one percent, just a little bit off of its highs. You look at advancing versus declining volume. It's well more than four to one, close to five to one advancing volume. That is strong. Two year note yield has leveled off. It's actually around 2.5. It implies that the market has taken one quarter point hike out of the expectations based on where it was trading just several weeks ago. And then the volatility index has also ebbed somewhat. We're still hanging around the high

20s and the 30 level as we head into the close. The NASDAQ composite up a percent and a half. S&P 500 looks like it's going to go out well under that 4,000 level, but above the highs for earlier in the week at about 0.9 percent. That does it for Closing Bell. Let's send it over to Scott with Overtime.