Closing Bell - Closing Bell: Stocks Storm Back, Fed's Brainard On Rate Hikes And Dollar Downer For Tech 06/02/22

Episode Date: June 2, 2022

Stocks staging a huge comeback on Wall Street. The Dow swinging 700 points to snap a 2-day losing streak, despite new concerns about rising interest rates. Fed Vice Chair Lael Brainard says it's hard to see a case for pausing rate hikes in September. Fmr. PIMCO Chief Economist Paul McCulley & Ally Chief Markets & Money Strategist Lindsey Bell discuss what that could mean for the market and the economy. Microsoft lowering its guidance because of the strong dollar. Jefferies Brent Thill reveals which other tech stocks could soon warn of currency headwinds. Guggenheim's Michael Morris explains why he slashed his price target on Netflix. And Reckitt Benckiser's Robert Cleveland discusses what his company is doing to help solve the ongoing baby formula shortage in the U.S.

Another volatile trading session here on Wall Street with the major averages staging a pretty big intraday comeback. Most important hour of trading starts now. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look at where we stand in the market. Trying for our first day of gains in the last three. First day of gains for the week and now actually almost flat on the S&P 500 for the week with the S&P up 1.25%. The NASDAQ zooming 2% right now. A lot of the hardest hit areas of the market are working really well. Consumer discretionary

is the best performing sector right now. That's thanks to names like Under Armour, Etsy, Bookings, Expedia. The ARK Innovation ETF, for a sense of what's working today, up eight percent. You've got double digit gains in names like UiPath and Roblox. Some of the, again, slammed parts of the market right now. Look at the sector heat map right now, and you can tell where the strength is. It's pretty much everywhere except for energy right now. Energy, the only sector that is red. There are the leading ones, consumer, communication services, materials, technology, and industrials.

Stocks are rallying right now, but earlier they took a leg lower when I spoke with Federal Reserve Vice Chair Lael Brainard on Squawk on the Street. Here's what she said when I asked whether the Fed would consider pausing those steep rate hikes in September. Listen. From where I sit today at market pricing for, you know, sort of 50 basis points, potentially in June and July. From the data we have in hand today, seems like a reasonable kind of a path. Further out, getting to September, it's a little harder to say. We're going to have four more prints on the labor market by then,

four more prints on monthly inflation, which I'll be watching very closely and a host of other data. So I don't have a really clear sense yet of where we'll be in September. But if we don't see the kind of deceleration in monthly inflation prints, if we don't see some of that really hot demand starting to cool a little bit, then it might well be appropriate to have another meeting where we proceed at the same pace. If we are seeing a deceleration in the monthly prints, it might make sense to be proceeding at a slightly slower pace. Right now, it's very hard to see the case for a pause. We've still got a lot of work to do to get inflation down to our 2% target.

But what if we do go into recession? How would you respond? Well, of course, policy is not on a preset course. It's going to vary and respond to the data. So, you know, in the world where we see data coming in with gradual deceleration of inflation and a moderation in demand, you could see continued pace of tightening that might be similar to current market pricing. If we saw downside shocks, of course, we would respond accordingly. But of course, there are risks on both sides. And if you saw risks to the upside, we might need to move a little faster. So we're going to be data dependent.

Let's bring in former PIMCO chief economist, Paul McCulley and Lindsay Bell from Ally Invest. Paul, my big takeaway is that she and she historically is not super hawkish. She's usually actually more dovish and worried about the economy, is not worried about the economy, is not worried about the market sell off. She's worried about inflation and doesn't see at this point any reason to even talk or think about a pause in September. It's a pretty strong message to the markets that they are going to keep going. What's your interpretation? I think your read is very correct, Sarah.

They're on a mission to get to neutral over the next year, which is around two and a half percent. And incoming data is suggesting they should stay on that mission. They've already advertised what they're going to do at the next two meetings, which the marketplace has already priced. She blessed that. And she said, we've got four more prints between now and September, and we will see. So I think essentially she was reaffirming what Chair Powell has already told us and what the committee as a group is singing, I think, in harmony. So I don't think there was a great deal of news in what she said today.

And she simply pushed back on this notion that they would pause and pre-commit to that at this stage. Well, I think that's newsworthy, considering Bostick of Atlanta sort of mentioned the idea of a pause. Made it very much seem like that's not consensus and it's not what the core of the Fed is. Brainerd did. So, Lindsay, if you look at the market reaction, we saw a dip on that news after the Fed, again, Waller over the weekend and now Brainerd today telling us that they are going to be more vigilant on inflation and they're not worried about what's happening in the markets in the economy. And yet we're able to brush that off and stage a pretty nice comeback rally. So does that tell you that it's sort of peak hawkishness priced in already?

Yeah, I mean, I was going to say exactly that. If you look at the Fed watch, the CME Fed watch tool, this is pretty much what's priced into the market. We've already got the 50 basis points in June and July. And September, it's kind of a split decision. Is it going to be 50? Is it going to be 25? And what she said is we need a little more clarity to make that decision. And that's going to come with time. And so I think that the market, you know, after digesting her commentary with you, which was a great interview, it really, you know, people are just like, there's a lot of bearishness already

priced in. There's a lot of aggressiveness, hawkishness from the Fed priced in. We're going to be in a wait and see mode. That doesn't mean volatility is going to go away. And I do think you're going to continue to see investors have these knee jerk reactions to individual data points, different speeches, different commentary. And we're entering the slow summer months right now. So there's a lot of things that we're going to have to digest. And we're not going to have a lot of good fundamentals to grip onto. It's going to be a day-by-day, month-by-month type of thing. Well, what about earnings, Lindsay? You're sort of the earnings queen. What have we learned from the recent spate of earnings? Because it feels like it's a lot of mixed messages on

the strength of corporate America and profitability, on the strength of the consumer. What would you say are the biggest takeaways that you have right now? Yeah, I mean, again, talking about that pessimism that's in the marketplace, it's the rhetoric, the narrative right now is that earnings estimates need to come down. Margin pressure is coming. It's here. We're going to see compression in a significant way. And you're just not seeing that from the consensus estimates. And sure, we've gotten some warnings from some specific companies because it's not as many

companies downgrading their outlook as the market feels. Some big companies like Walmart and Target and things like that have talked about the pressures that they are feeling, but then other companies, they're not seeing that same picture. And what we see from an operating margins perspective, while I do think there is possibility that margins are going to compress a little bit, I'm not so sure that we're going to get this dramatic decline that the market is anticipating or investors are anticipating. So we're looking for operating margins to reach historic highs in 2022. That might not be correct. We could see some pressures. We could see some pressure for margins to return to more historic pre-pandemic levels of around about 15 percent. Right now, we're at 16.3 percent in the first quarter. So while the market and companies have been able to manage through this environment,

I don't think necessarily a little bit of pressure is the worst thing, especially after valuations have come down as much as they have. So a lot of it, Paul, will depend on what the economy does. And it's sort of unknown to what extent the economy is cooling. That's the word that Brainerd used today. We got a weaker ADP report on jobs. In fact, declines for the second month in a row for small business. Weaker factory orders, but better manufacturing this week. We've got a jobs report tomorrow.

What's your sense of what's happening with the underlying economy coming off of a negative first quarter growth number? Well, I think the negative first quarter really doesn't matter. That was a statistical fluke. But away from that, I think the economy is, in fact, slowing from a very rapid place. And that's not a problem. That is a solution. If the economy wasn't slowing, if it wasn't credible that it was going to continue to slow, then we would have a problem. That is the solution to the elevated inflation problem. So I don't look at it as a nefarious

thing at all. And I don't see high recession risk now at all. I do very much agree that we will see some pressure. Jamie Dimon just said we're going to have a hurricane coming. I don't know what a hurricane is to Jamie. That's a new one. Back when I was a young man, we used to call recessions bananas. I don't know if this hurricane is a banana, but the economy is clearly slowing. And you look at the global picture, as Jamie does, we have a lot of challenges. But I will defer in trying to fine-tune what a hurricane means to Jamie.

No, it sounds like you don't agree. Lindsay, Paul, thank you. We'll leave it there. Appreciate it. By the way, we are near session highs. We're up about 270 or so on the Dow. The high was just above 300. The low was down 300.

So just another crazy 600-point swing in the Dow today. Up next, a top executive at Reckitt discusses the company's strategy to help ease the U.S. baby formula shortage in this country and why it is waiting on FDA approval. Plus, find out which tech stocks could be next to issue a currency warning in the wake of Microsoft's lower guidance today. You're watching Closing Bell on CNBC. The baby formula shortage is getting worse. Numbers released today show more than 73 percent of baby formula products were out of stock nationwide as of Sunday. The U.S. government began flying in formula from overseas to try to alleviate the shortage.

This comes after an Abbott manufacturing plant shut down in February, exacerbating the shortages caused by supply chain challenges. On the other side of the break, we are going to talk to an executive from Reckitt who was in that meeting. They run Mead Johnson. They now say they control more than 50 percent of this market with the Abbott shutdown. We'll talk to him on the other side of this break. Taking a look at the Dow right now, we're up almost 300 points near the highs of the session with every sector positive except for energy. Consumer discretionary in the lead with beaten down names like Under Armour and Etsy leading the way. We'll be right back. Welcome back. Let's bring in now Robert Cleveland from Reckitt. His company makes

Enfamil, the baby formula that many of us have used. Robert, I know you've been meeting with President Biden and several lawmakers to try to alleviate this shortage. The president said yesterday that he wasn't aware of this issue and how acute it was till April, but that you guys in the industry knew as far back as February. Why the gap? What happened there? Well, we live in this industry day in and day out. I visit the shelves personally pretty much every week. We talk to consumers constantly. We're always looking at our market share data. We're just very, very close to it. And so it's natural we would understand the consequences of the recall announcement probably earlier than anybody else. So we're all living with that now and we're seeing the impact of it.

I saw that you have 54 percent market share right now in the U.S. since the Abbott closing of the plant. How is that possible? Well, prior to the recall, we had about a 34% share. We're the second largest manufacturer in the U.S. And so we were the ones who were most able to step up, increase production, run our plants 24-7. We've managed to deliver about 30% more to the market than we were a year ago. And the absence of a major competitor has put us in that position. And it's a position of special responsibility. We take it very seriously, especially with the safety and quality of our products and making sure that's maintained while we try to feed as

many infants as we can. You know, they're big market share numbers. And I feel like to put them in context, Robert, we should shine a light on what this industry is in America and why we've had this problem that it's really three companies, you and Nestle and Abbott Labs, which control the market. Ninety eight percent of formula in this country is made in this country. How did we get to this sort of oligopoly position where one plant removal is leading to such a challenging crisis? It's not really the word I would use to describe it because the nature of infant formula is that it is a near pharmaceutical grade manufacturing process. The specifications we have to make it under are very, very tight because these are infants who rely on it for their sole source of nutrition.

So really the only thing that keeps somebody out of the market would be their inability to produce it at scale and safely. And we have been doing that for a long time. And I think that's why you see us as a major manufacturer in the market. There actually are a number of other entrants. And as you saw with the, or might've seen with the White House yesterday, there was a new company that's entered the market who believes they can also safely produce. And here they are and they'll compete. And perhaps the numbers you just showed will change. Right. So, so foreign entrants finally being allowed in this market. What, what would you say you need from the FDA next? I know you're, you're producing at a Singapore plant and trying to ship it in, a Mexico plant as well.

Are they giving permission to do that quickly enough? Yes, we have world-class facilities in Singapore and Mexico. We typically produce for Asia and Latin America with those. But we're in a position to bring product to the U.S. We've submitted the paperwork to the FDA. We're literally ready to start production almost on the hour as soon as we get that approval. And we're just waiting to get it. As soon as we do, we'll jump right in and we'll be able to bring that product to the U.S.

and put it on the shelves quite quickly because it will be under the Enfamil brand, where we already have distribution on shelves and consumers already know the brand. So we think we're in a unique position to be able to address the crisis with those options. There are reports, Robert, that your parent company is looking to actually sell this business. And I'm curious, I don't know what you can say about it, how it's going with a sort of lack of clarity on the regulatory front about ultimately how it's going to shake out and whether the whole market is going to look very different on the other side of this crisis? You know, we're publicly traded. So just as a matter of policy, we don't comment on any rumors in the marketplace on things like that. But I will say everybody here, the mission, the focus, everything we're doing every day is about

putting as many feedings to shelf as possible. And again, that special responsibility of being in a leadership share is something we're taking very seriously. That's really our focus right now. How long is it going to take for the shortage to work out, assuming we get some of the approvals that you need? It's a little hard to predict because, of course, we have to wait for the approvals. We're going to need some support from the Fly formula program. We're waiting for details on that and then you have Abbott scaling up and then the additional request the FDA is looking at. But I think it will still be some

weeks before we see significant change at the shelf. Infant formula again is something the manufacturing is it just takes a lot of skill and a lot of quality and a lot of safety, and it moves at that pace because of it. Yeah, no, we want it safe, but we need more. Robert, thank you for joining us. Keep us posted on those efforts. It was a pleasure to be here. Thank you. Robert Cleveland from Reckitt.

Take a look at Microsoft shares making a big comeback in today's session. This comes on the back of the tech giant lowering its earnings and its revenue guidance this morning, citing headwinds from the stronger U.S. dollar, strongest dollar we've had in two decades. Joining us by phone now is Brent Thill, senior analyst at Jefferies. And it's interesting to see that the market brush it off because Jim Cramer was there when this happened. He was saying it's FX. It's not, you know, investors should give them a pass, should buy on this news because it's not something they can control. And it's not like they were speaking about demand weakening or anything like that. Do you agree? Absolutely. I'm actually calling in from our software conference in San Francisco where we're hosting Microsoft right now.

And they clarified that this has nothing to do with fundamentals, that this is all FX. It really has nothing to do with the underlying business. We've been hosting almost 90 software companies at this conference, and I would say the majority of them are saying that demand is still pretty good. Clearly, there's some concern over the macro and the consumer weakening, but enterprises are still spending. So for now, things look okay, but ultimately we're keeping an eye on this, and most of the companies are still saying, hey, if it's going to happen, we're going to see fundamental weakness in the back half of the year

into 23. But so far, so good. Not seeing it. And Microsoft just spoke at our conference. All right. There you go. Breaking news. Sending the stock a little bit higher. Brian, who else should we be? For some reason, it came as a surprise to the market, even though the dollar has been strengthening for months now against the major currencies. So who else is at risk of lowering guidance because of this? Well, you know, the big established global companies, I mean, Salesforce.com highlighted this. Mark Benioff was clear about, you know, this impact. And so I think the majority of the industry is under duress because of this.

But, again, I think most investors are going to look at the core underlying fundamentals rather than FX. And that's what we're seeing is there's been a scare is that weakening. We're not seeing that so far at the magnitude that the market has been expecting. So stocks are starting to find floor and rebound. We've talked about the great valuation reset, software trade at 19 times forward revenue, and now it's trading mid to know, mid-to-high single digits, so a much more palatable investment opportunity. Venture capitalists like Tomo Bravo or private equity like Tomo Bravo and others have been clear on M&A and coming in with bigger deals.

So I'd say ultimately right now we're seeing the backdrop of demand, you know, not as bad as feared. And the FX headwinds are, you know, largely this morning, Microsoft's down. I think everyone was worried about, is this more of a fundamental issue? And they clarified at our conference, there is no fundamental concern from what they see so far yet. Maybe that's helping some of these other names. Datadog is up 15% right now. Okta is up 10.3%. I know they have earnings. And these stocks are still down 40% to 60% year to date, Brent. So is what you're saying that some of the moves in these cloud names are overdone because the fundamentals aren't weakening that much? I think so. Again, we met with Datadog

yesterday, and they're like, we're seeing nothing. We're seeing no fundamental slowdown. The majority, call it 75% of the companies we've met with at this conference, have said they're not seeing a slowdown. This is what they say, right? And our view is, like, if you're going to see the weakness in software, you're going to see it in the back half of the year into 23. So I think we're going to see a little bit of a rally given how bad the sector has performed, right? Energy has massively outperformed and all of our PMs have moved into energy over software. And I think it feels like the group has been overshorted and overhated. And we're seeing, I think, ultimately signs that, you know, maybe demand's not as bad as stocks are implying.

And so you're seeing a little bit of a relief rally. We're not out of the woods yet. We certainly think that things could soften, you know, going forward. But, again, you know, from what we can tell on the real-time check coming off of over 90 companies at our software conference, we're not seeing the big fundamental slowdown that everyone was expecting. So just a multiple compression then, really. Brent, thank you for joining us. Really valuable to get your take, especially from that conference with the updates. Brent Thill from Jefferies. Major averages climbing here into the close, reversing losses earlier in the session. Bank of America out with a new note today saying now may be a good time to buy stocks.

Mike Santoli taking a look at his dashboard today. And it turns out they were right, at least for today. Just by this one indicator, Sarah, it's moving in the right direction. Now, what's the market been doing since, you know, less than two weeks ago? It's up 9% from the intraday low. It's been feeding off of negative sentiment that's been built up for over the past few months. So that's present in hedge fund positioning, investor surveys, all the rest. Now, this B of A sell side indicator measures the recommended equity allocation by consensus of Wall Street strategists. So this is what the strategists are telling their clients to do in terms of how much stock to hold in their portfolio. And what you see right here, it's got down to 55%. Now, that qualifies as on the low end of the range. And this has

contrarian implications. When this is low, it means that there's been a buildup of fear, of defensiveness in the market. And usually the market over a 12-month period tends to do well. By about 90 percent of the time in the past, it has done well. What's fascinating, though, is we're not near the sort of bearishness we saw in 2011 or 12 or even 2016, 17. So it's getting in that direction, but you can't say that it's some kind of, you know, bright flashing green light. So maybe not capitulation, but just do the error of bounds? I mean, you know, I think we did stop short of being all out terror, capitulative at the lows. You don't always get it. I mean, I can remember in 2018, people saying we're going to have to retest those lows.

I'm not sure people were scared enough. It happens all the time. And, you know, I'm still sort of wait and see mode in terms of whether that low was a real good one. But a lot of things did line up in the way of sentiment and positioning to allow for this rally. I feel like the market is taking these comments from the big bankers pretty well. Jamie Dimon, for instance, totally changing his tone and sounding bearish. Waldron today of Goldman Sachs striking a similar note. When they, you know, they have a pretty good handle on the economy and the money moving and they're turning so bearish.

Yeah, but none of them are saying things are worrisome at the moment. They're not seeing today's activity as being somehow tipping us into. It's what's to come. It's what's to come. And when you talk about storm clouds or a hurricane, everyone's had an umbrella open for months. That's what's been happening in the market. You're just going to run with it. Mike, thank you.

We'll see you in the market zone. Guggenheim slashing its price target on Netflix by $85 over near-term costs associated with an ad-supported offering. The analyst behind that call joins us later on Closing Bell with Netflix popping today 5.5%. Thank you. Check out today's stealth mover. It's Hormel Foods, one of the biggest underperformers in the S&P 500, down 5%. The maker of Spam, Planters Peanuts, and Jenny O Turkey, beating Wall Street's earnings estimates, but cutting its full-year profit guidance, citing logistics challenges and avian flu concerns weighing on the business. Take a look at where we stand overall. We are still near the highs of the session, and we've still got a pretty broad-based rally.

It's holding on here into the close. First up day in the last three, S&P up 1.4 percent. Every sector green except for energy, utilities utilities and health care are underperforming. It's the consumer names and the communication services and materials names that are outperforming with the Nasdaq popping 2.2 percent. In fact, the S&P 500 is almost about to go positive for the week, wiping out two down days. SoFi is a big winner today as well. And Wall Street is buzzing about the fintech's move to expand trading hours, the impact that could have on the market and retail investors. Straight ahead. What is Wall Street buzzing about today? SoFi announcing extended trading day

for users by nearly five hours. Kate Rooney has the details. Maybe good for SoFi? Is it good for retail traders, Kate? Yeah, well, SoFi would argue that it is. They say they're expanding access and expanding hours. Investors can now trade from 9 a.m. to 8 p.m. Eastern versus the typical 9.30 to 4. Executives say the current market hours can be inconvenient, as they call it, since they're during peak work hours and might leave people outside of the East Coast behind. SoFi really framing it here as leveling the playing field.

And CEO Anthony Noto says members' lives don't operate nine to five, and we've certainly learned that over the past two years. The incumbent brokerage firms, so Charles Schwab, Fidelity, Interactive Brokers, do already offer extended trading hours. And Robinhood was really the first major fintech to do this. They talked about the same thing, people going back to work and being preoccupied during market hours. It also comes as retail trading has slowed significantly. SoFi makes a smaller percentage of its revenue from trading compared to Robinhood. But trading does tend to drive engagement on a lot of these fintech platforms. And those two certainly compete for the same customer base. Sarah.

Kate Rooney. Kate, thanks. Market likes it. SoFi outperforming today. Mike, though, we should note that there is a different liquidity pattern when it comes to after-hours trading, and it could be more risky. I mean, as Kate mentioned, it's already available through other brokers, but if you're trading on news and things that break after hours and earnings, you're just it's a recipe for getting into an illiquid market. That's sort of easy to get chopped up because you have all the kind of, you know, the algorithm based traders. You have the professionals that are trying to to cash in on these on these quick moves. You're not going to outmaneuver them. So if the question is, oh, I was at work all day.

Now I want to enter some trades I've been thinking about. If it's not really about news driven stocks, no big deal. That's fine. You're going to get more or less the same price you'd get during the day. But if it's about trying to jockey for advantage against the pros after hours, it's just not a formula for success. But they would argue it does democratize the process more because it gives you the shot like everybody. Oh, without a doubt. And that's that is the ethos of, you know, of those firms. So far, Robin Hood. Mike, thank you. See you soon. It's been a pretty rough year for Lululemon, but the stock is rallying today ahead of its earnings after the ballot. Top analyst discusses whether this stock could be about to break out that story. Plus, the analyst behind a big

price target cut on Netflix today when we take you inside the market zone with the Dow up almost 300 points. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here, as always, to break down these crucial moments of the trading day. Plus, Guggenheim's Michael Morris cutting his price target on Netflix. And Oppenheimer's Brian Nagel previews Lululemon earnings for us. First up, stocks rebounding after losses earlier in the session. Major averages currently at session highs right now.

We've got a 2.3% gain on the NASDAQ 100. There's the Dow at 310 points. Third time's a charm, Mike. We've seen these intraday comebacks. They didn't quite last into the close in the last two days, but this one looks more solid, more broad. What does it tell you? Yeah, and it got back to Friday's close, so essentially more or less flat for the week. I do think the three days when we did see that kind of intraday traction, the market kind of declining,

pretty good excuses to continue lower, just didn't do it today. Of course, Microsoft, oil, you know, Lael Brainard's comments, all those things could have served as a convenient excuse to maybe have this rally fizzle. It hasn't so far. I think that's usually the mark of a market where big professional fund managers feel a little bit underexposed to stocks. They feel underinvested given the fact that we're up a fair bit off those lows. I still think we're in the range that even the bearish traders were saying, look, we could rally up to $4,250, $4,300 on the S&P, and it would still be a bear market rally. But we're getting close to that level where you'd have to make that call as to whether this is something that's just to be faded or to be changed. I agree. There's a ton of bad news in this market already. Brainerd, JP Morgan, Goldman Sachs comments all today. You could have easily seen the market fall on all of that. Not happening. We've got some breaking news right now in the Social Security Trust Fund. Elon Moy with the details in Washington. Elon. Well, Sarah, good news from the Treasury Department.

It says Social Security will be able to pay full benefits through 2034. That's one year later than previously projected. Even better, Social Security disability insurance will be fully funded for the next 75 years. And Medicare Part A will last through 2028, two years longer than previously estimated. And Treasury officials said all of these programs still face long-term funding challenges, but called this outlook resoundingly positive. That improvement is the result of a stronger economy that's bringing in higher payroll and income taxes and a decline in disability rates. Sarah. So it's a change, right, Ilan? It was supposed to be depleted in 75 years. Yeah, that's the first time since 1983

that disability insurance will not be depleted within 75 years. And it really is just a testament to the surprisingly strong economic recovery. That is good news. Elon will take it. Thank you. The Federal Reserve officially kicking off its other tightening program on top of higher interest rates this week, just yesterday. Earlier, we spoke with Federal Reserve Vice Chair Lael Brainard. Her first interview on TV since being confirmed by the Senate, discussed her outlook for the

economy. Listen. Well, we're certainly going to do what is necessary to bring inflation back down. That's our number one challenge right now. You know, we are starting from a position of strength. The economy has a lot of momentum. The other factor I think that's very positive is that business balance sheets and household balance sheets start this process from a very healthy position. So the question from that, Mike, can they pull it off a soft landing? Because she was mentioning all the strengths in the economy. We're about to get a double dose of tightening. And I think the balance sheet, we probably don't talk enough about it, which really started to shrink this week and really in earnest in September.

What the impact that's going to have, what impact that's going to have on the economy and the markets as well. It's very, very unclear. You know that I'm not somebody who thinks that it's the actual quantity of money on the balance sheet that is really a determining factor here. It should happen in a relatively mechanistic way. The deficit's down a lot. The Treasury has lower net issuance needs. It's not as if they're going to be outright selling, forced selling of bonds. So it shouldn't be a big deal. Plus, the last time we did this, there were those problems in the overnight funding markets. Repo capacity was not high enough. That seems to have been fixed. And that's what kind of really threw a wrench in the works in 2018. So that should be

OK. But it doesn't change the fact it's a slowing economy. They're trying to tighten financial conditions in multiple ways. And we still have to very much wait and see. And it's a few months of suspense about how exactly this is going to play out. I'm going to quote you on that. Shouldn't be a big deal on Q2T. It shouldn't. Thank you. Shares of Netflix take a look.

Rallying today after Guggenheim reiterated its buy rating on the stock, saying that the addition of an ad-supported option will lift long-term revenue prospects. Guggenheim does predict, though, that the transition will raise near-term costs for Netflix, and the firm cut its price target from $350 to $265. Let's bring in the analyst who made the call, Michael Morris, entertainment and media analyst at Guggenheim Security. So you still think it's a buy, Michael, and your price target is higher, but it's a little bit of a different economic model for Netflix going forward.

Explain. Yeah, absolutely. I would separate the two things here. The price target change really is not unique to Netflix. It's indicative of a fresh look, I think, across the industry that not just us as analysts, but the entire investment community has to take with the prospect of higher interest rates and a greater focus on near-term profitability as a core valuation metric. But I want to make sure that we stay focused on what I do think is a very promising and

economically expansive opportunity for the company, and that is rolling out an ad-supported tier. The company already referenced that on their most recent earnings call, but we put some more specificity around when we think it will happen and how much of a contribution we think it can make to the company. And we think it's one of the most exciting things in the media and streaming business that's going to happen over the next six to 12 months. Stock is down 70 percent from the highs. So do you think that Wall Street just doesn't appreciate the opportunity that is the ad supported funding? Because from my perspective, you mentioned the

higher interest rates. Yes, they're getting a valuation reset, but the fundamentals have been weak as well with the subscriber loss. Absolutely. I think that, you know, keep in mind what we're trying to do is make good decisions going forward and not necessarily dwell on the mistakes that have been made, but learn from them. In the case of the stock coming down, I think a big part of that is a realization that the market had about the limitations of the long-term growth for the premium or the subscription-only tier for the business. If you look back two years, say, pre-pandemic, there was a view that there were 800 million global broadband households that really represented an addressable market for this business.

There was not a lot of competition. It looked like there was a tremendous amount of runway. And then even entering the pandemic, there was a lot of mixed signals with respect to how much demand was pulled forward, how much was true underlying demand. Over the course of the last two to three quarters, what we've seen is really strong indications of maturity of the business in the context of its premium tier. Some of that can be competition. Some of that can be streaming fatigue. There are a number of reasons. But the bottom line is the move from the ultimate highs of the stock to where we were previously really had to do with the market digesting the maturity. The change that we made today in our valuation has to do

more with interest rate, the interest rate environment and our valuation parameters. But we still see about 30 percent upside for the shares from here. So what do you think, Michael Santoli, of Michael Morris' view that inclusive of the broader ad tier, the company will see revenue approaching $75 billion by 2030, and there's a buying opportunity here? It's very interesting now to view it as the opportunity where the majority of the future subscriber growth is going to come to. Obviously, the market's going to need it proven to them that it will provide an acceptable average revenue per user, that these are going to be sticky enough subs and it's going to be a thriving business. The stock finds itself in a bit of a growth purgatory spot.

People definitely have given up to some degree in the long term growth story. Only a quarter of all the analysts are recommending it right now. It's got what looks like a fairly reasonable valuation at this point in contrast to how it's traded in the past. So I think it's a wait-and-see type story, but very interesting now that people have, to some degree, turned their back on the story. Michael Morris, thank you for joining us on The Note today

and expanding on that from Guggenheim. Check out NVIDIA. It's a big winner today. The chipmaker hosting its shareholder meeting and announcing supply chain issues could improve in the second half of the year. Christina Partsenevelos joins us. Christina, NVIDIA joining other tech companies in a slowdown for what? What are you hearing about the supply chain? So actually it's a slowdown in hiring.

So NVIDIA reiterated that they will be slowing down their hiring for the rest of this year. So they're joining the likes of Uber, Peloton, Microsoft, Netflix, Instacart, you name it. The list continues with big tech companies that say that they're going to be slowing down hiring. The second point on the call was to your point, Sarah, about supply chain issues. They believe that supply chain issues will start to ease in the second half of the year. Well, we are in the second half of the year, starting a day ago. So they believe it's going to be better for gaming products, especially ahead of the holidays. And then lastly, crypto mining. They believe that although crypto mining has decreased, it's still not a meaningful

or significant contributor to their bottom line. Keep in mind that GPUs, these graphic processing units, are used in crypto mining, but they wanted everyone to know that it's not a huge portion of their business given how volatile crypto prices are. And you can see the share price up over 6%, but down about 33% on the year. So, sorry, Christina, thank you for clarifying.

So it's a slowdown in hiring. Yeah, so that was the... Sorry? Are they freezing? Are they cutting? No, they just... Just trying to get a sense of what these tech companies are doing right now and whether that matters for the overall economy. Good question. They just said slowdown, and that was the only terminology used. It was a short, quick comment from the CEO, and this is something that came out in the earnings as well.

Unlike other companies, we know that there's been some layoffs and there's going to be some cuts. In NVIDIA's case, that's not what he said. He said that they hired a bunch of great talent, a lot of talent over the last little while, which is why they're going to start to slow down. And that was separate from the supply chain issue. Got it. NVIDIA helping the NASDAQ, helping the tech stocks rally today. Thank you. And we are near session highs right now with a doubt more than 330 points. Let's hit retail because Lululemon is set to report Q1 results after the bell in the green today. But the stock has been part of the recent market swoon. Shares are down about 25 percent this year. Joining us now is Oppenheimer

and Company senior equity research analyst Brian Nagel. Brian, how does this setup look? What do you expect? Well, good afternoon. Look, I'm optimistic that this report from Lululemon, which we'll get here in about 20, 25 minutes or so, will help to alleviate some of these concerns. But you're right, Sarah, the stock has been weak. But behind the stock price weakness and some of this near-term choppiness in these results, I think you have a very strong brand. A company that's developing well in its core markets as well as overseas,

I think we'll get more indications from the company today when it reports its results that the issues, whether it be the supply chain or maybe demand issues in China, are transitory, and behind that, that the company is actually developing quite well. How does Lululemon do in an economic slowdown, which we know we're going into in some sense, right? The Fed is raising interest rates. We're seeing global slowdown. How strong can that brand hold up without them having to do markdowns or seeing weaker sales? Well, look, I think it's exactly what you alluded to.

It depends on what type of slowdown we go into. If it's a modest pullback in spending, I think that Lululemon should perform quite well. I mean, there's a very committed consumer base willing to pay up for these products, pay up for the quality, pay up for the fashion. In a modest pullback in consumer spending, that would probably not be hit that hard if we were to fall into something deeper like a real recession then then look then we've got to be honest i mean lulu lemon sells a premium product a more expensive product and you got to think that demand for at least some time could be heard and nike holds up better in that environment

nike's broader so it's you know look, look, Nike would also, because what we've seen with Nike, and I've talked about your show as well, is Nike's definitely pushed price points higher. Now, Nike sells a much wider selection of products. They're more into footwear. So arguably, they have the ability to allow consumers, if they so choose, to trade down. That's not so much the case with Lululemon. All right. You've got a $440 price target on Lulu. So we need to see a big jump. Brian, thank you. We always get a pretty big move in one way or another, Mike Santoli, on Lulu earnings. Will that tell us anything about the consumer? I think it'll tell you something about whether this theme of the reporting season

that higher end customers have been holding up better. Retailers that have been catering to them have tended to see less of a fall off in demand, maybe fewer inventory issues. So we'll see if that holds true. The stock, interestingly, trades almost in parity with Nike in terms of the forward valuation. Arguably, Lulu has a lot more runway in terms of growth and market share and store count and all those things that you might want to see. So it is at an interesting spot, but down, you know, what, 30 or so percent from its all-time high. It's actually 37 percent.

It's actually held up somewhat better than a lot of the high valuation consumer plays have. So, you know, we'll see. It looks like it's at a pretty neutral point in terms of tactics. Just want to show you what's happening in the broad market. The Nasdaq up two point seven percent. We're up more than 400 points on the Dow for 24. So a buying spurt here into the close. That's the opposite of what we've seen in the last few sessions. We've got every sector green now, except for energy, which is lagging down about four tenths of a percent on that OPEC news earlier, which sent oil prices a little bit lower. Consumer discretionary is your best-performing sector. It's up 3 percent. Materials

up almost 3 percent. Communication services, two minutes to go in the trading day. Mike, what are you seeing in the internals in this rally into the close? Yeah, the consumer discretionary, that's a lot of Tesla and Amazon helping that out. But it is a broad rally. If you look at the volume split, it's about 80 percent upside volume. That's very strong. Came after two days when it actually was a little bit negative, digesting last week's gains. Take a look at semiconductors relative to the market over the current quarter, the quarter to date. And it's catching up again. So semiconductors are a good bellwether. They've now more or less closed the gap just so far this quarter.

And so that's a decent sign. Naturally, NVIDIA is helping that out as well. The volatility index kind of cracking below 25. That's been a rough floor, basically at about a four or five week low in the VIX. This can, in the short term, create a little bit of a self-fulfilling prophecy as a lot of these systematic traders see lower volatility. They raise their equity exposure. So we might be in a little bit of that re-risking chase phase right now as this rally has not really come in for people since it started about 10 or 12 days ago. Yeah, whether it was, they could have blamed the bad news on the Brainerd comments sounding very hawkish when it comes to no pause in September right now on rate hikes or

the Diamond comments or the Waldron comments from Goldman Sachs about the storm in the markets, but ignoring it and rallying into the close. Up 4.22 on the Dow. Every Dow stock, most of the Dow stocks are higher, I should say. Salesforce is actually the biggest contributor to the game, second day in a row, follow through from earnings. Boeing, Home Depot, Visa, Honeywell, also adding big to the Dow rally. 1.85% gain on the S&P 500 right now. Consumer discretionary leading, as Mike said. Amazon and Tesla will help. But you've also got Etsy up 8%, Under Armour up 7%. The Nasdaq also having a very strong day as technology comes back up 2.7%. And small caps join the party as well.

That does it for me on Closing Bell. Have a great night. Into overtime with Scott.