Closing Bell - Closing Bell: Tech Earnings on the Horizon 7/17/24

Episode Date: July 17, 2024

From the open to the close, “Closing Bell” and “Closing Bell: Overtime” have you covered. From what’s driving market moves to how investors are reacting, Scott Wapner, Jon Fortt, Morgan Brennan and Michael Santoli guide listeners through each trading session and bring to you some of the biggest names in business.

And welcome to Closing Bell. I'm Mike Santoli in for Scott Wapner. This make or break hour begins with the gears grinding a bit in the great rotation trade of July 2024. A thorough shakeout in semis on some policy concerns and continued retreat from crowded mega cap leaders is meeting profit taking in the white hot small caps to create some broader weakness. Here's your scorecard with 60 minutes to go in regulation. The S&P 500, you see they're down about one and a quarter percent and has dipped back below 5,600 to levels seen for the first time just about a week ago. The NASDAQ, though, is the real center of the weakness, down 2.5 percent, was down 3 percent earlier thereabouts. The Dow is actually up about half a percent and above the 41,000 mark for the first time. Thanks mainly to Gainesville United Health and J&J. They both had results in the last couple of weeks, but defensive names in general also getting a bit of a reprieve today.

Small cap, Russell 2000, outperforming slightly but still lower after a blistering one-week run where it was up about 12 or 13 percent. And the Vicks, reflecting some of this choppier tape, rising to a three-month high just under the 15 mark, basically matching the highs of May. That takes us to our talk of the tape. What do you do with this little flutter in the tape and where does it leave the soft landing trade? Let's bring in Lauren Goodwin of New York Life Investments, Keith Lerner of Truist Wealth and Peter Cchini of Exxon at Capital to talk about that. Lauren, so many things going on in the last week. It's actually refreshing.

We have a lot of these kind of storylines that are changing. Soft landing trade on top of a we can see our way to a Fed rate cut trade on top of a maybe Trump trade, all pushing in a similar direction. Has it caused you to sort of rethink where you'd want to be positioned? Only on a tactical basis. This is a market, a Fed pivot market, two, three months before we expect a cut exactly as we'd expect to see it.

A lot of uplift in areas like small caps, other areas of the risk market where capital's really unlocking. But the reality for the market is that we've already been in a soft landing for the next nine months. And so as we look to why the Fed is cutting rates and the market starts to catch up with that reality, might be a couple months from now. But we expect that the economy is still liable to slow. So portfolio balance is really the name of the game here. And we can talk

about politics all day. But of course, that layer is important as well. When you say the why the Fed might be cutting is significant, you suggest that it's in response to slowdown fears or a slowdown underway, as opposed to just, hey, inflation's back toward our zone and it's time to be less restrictive. Right now, it's the latter. The data is really not reflecting a stressful amount of slowdown. And that's why I expect that in the next couple of months, we will continue to see improvement in risk assets overall in breadth of areas like small caps. It's a risk on rally. But that's what happens only when the Fed is cutting at a moderate pace. If we do start to see the labor market deteriorate, which I expect will happen as we get towards the end of the year, that's when you would start to see the market reacting to, oh, no, the Fed's cutting. Bad news is bad news,

as opposed to what I expect to be more constructive in the near term. Keith, what's your read on just, I guess, the tactical rebalancing of this market that's happened in such a dramatic way? Obviously, the scene was set by just exactly how narrow and crowded the top of this market was for so long. And we've got this snapback effect. But where does that leave us right now? Yeah, well, first, great to be with you, Mike. It's been an interesting period. You know, we downgraded tech at the end of June because we had the best relative performance relative to the S&P on a one month basis since since 2002. And then as you mentioned, we had a condition heading into last week. That means the most oversold condition for small caps

in the average stock we've seen in about 20 years. And the spark, as we all know, is that light CPI report. So I think where we are today is I still think this kind of rotation to small caps, the equal weight has further to go. The rubber band was stretched so far that even right now, if you look at where we are, small caps are still trailing by a wide margin. Small caps are actually still below where they were at the end of 2021. So I think it has longer to go because of position. And I also know we're going into more of a seasonal week period for things like semiconductors and tech. But I think more broadly, the market will start to chop around at the headline level. And we're going to expect to see more of this as we move into the back half of July and into August. Ultimately, we still think this market has legs.

We think the bull market's intact. And ultimately, we think the money will rotate back into tech later this year. But at this point, I think investors have to be somewhat patient on that trade. Yeah, Peter, it's a pretty decent reminder today that, you know, the market doesn't necessarily owe you a place to hide and absolute returns on a short term basis. If one thing is not working, it doesn't mean everything else offsets it and works. But what's your read on not just what's driving it, but whether it was more than just mechanical and what the fundamental message might be. Yeah, there's really a place to hide, Mike. I agree with you on that. I agree with Lauren, and this is a pretty typical market action into what the market initially expects to be, an infallible Fed that can manage the economy into a

soft landing. The market will typically trade up across the board. There are obviously some differences this time around, given the AI narrative, but typically rallies into the first cut. And then as the read-through is, is that the economy is slowing, and that's actually the reason for the disinflation, as opposed to a Goldilocks scenario where you have disinflation and optimal growth relative to inflation, the market sells off. So typically when the Fed is deep into its rate cutting cycle, markets tend to sell off. I don't think we're there yet. I do think it's three to six months away. And our view is that into the end of the year, the Fed is going to cut pretty hard. I would also say that this massive rotation into small caps, with small

caps up 10% to 12% in four days, is also a result of the fact of what Keith said, which is that small caps have been sideways for quite some time. S&P volatility has not been realizing, meaning that anyone who has tried to use the S&P as a hedge has lost a lot of money. And so people were tending to use the Russell as a hedge proxy, especially for credit portfolios. And as a result, a lot of people were wrong way positioned. And when the Russell started a rally on retail participation, which has been which has been massive on a historical basis, a lot of people got squeezed in the Russell. And I think that's really primarily what's responsible for the rally. Yeah, there's no doubt that there was very extreme short positioning in those index futures in the Russell leading up into this period. Although I guess, Lauren, I do wonder how much we want to

refer to or rely on the historical playbook for the kind of Fed tightening cycles, Fed easing cycles hasn't necessarily played to script recently. Right. I mean, this bull market started when the Fed was still tightening. Usually before the Fed actually starts to tighten, you get a little bit of a honeymoon period where the market thinks it's a good thing that it's happening. We didn't get that in 2022. So I just wonder at this point right now, either you can say it's going to be like the mid 90s and that was the absolute perfect Fed soft landing that Peter refers to and you had no hiccups at all, or it's something different. It's just its own animal. I mean, every cycle is its own animal to a certain extent.

And when we're looking at a cycle that comes off the back of a historic pandemic and historic policy support, we should absolutely expect to be taking themes rather than exact lessons from the past. But I think the themes are likely to apply here. What we're looking at is an environment where the Fed is likely to begin its rate-cutting cycle when the economy and the labor market are still okay. That's an environment where risk assets can perform well on average, which, again, I do expect is likely to be the case heading into September, including in credit, not just in the equity market.

But where we've also seen a pretty consistent story historically is when the labor market starts to weaken, or importantly, when earnings start to weaken, the market's likely to respond to that. So rather than guess exactly what the Fed will do or the economy will do, I'm looking at unemployment claims. Are they ticking higher? And I'm looking at how are earnings expectations looking, not just the beats, but really like how is the future expectations for earnings playing out? Both of those are still intact. So for me, that's the constructive market signal. And, you know, Keith, it's easy to fixate on the small cap index. It's had the most dramatic move. It obviously was the most depressed and that was stretched pretty far to the downside. But it's really not just that. It's like kind of everything but secular mega cap growth that has

gotten some relief. Right. The equal weight S&P still outperforming today. It's actually barely down at last look. Financials are up today. Big ones, too, not just the small ones. So is it really just about, you know, a little bit of the pressure being taken off the average stock here as we have an unwind in things like meta? I know you don't necessarily want to talk about the specific stock, but this is not a semi. This is nothing specific going on with meta. It's down 15% off its high. Yeah, no, I believe it's a lot of Mike. I mean, we have to remember, not only meta, but the three top stocks in the S&P were each over three trillion, which was more than the entire S&P. I'm sorry, the entire small cap index. So as you take a little bit of money out of these concentrated areas and you move them to other areas of the market, I mean, that's a lot of energy to move stocks that have underperformed.

And I think the other thing, Mike, all year long, people have been talking about this broadening rally coming, right, all year long. And all year long, they've underperformed. So once folks in the market start to see that trade working, they don't want to be left behind. So I do think it's a little bit coming out of an overheated area, going towards the broader market, which is healthy. I will say, again, later in the year, and I think probably more in the fall, I think money will ultimately come back to tech. But I don't think this corrective or relative underperformance cycle is over yet. But this cycle has really been different, but it's also the main theme

is artificial intelligence technology. And I think, you know, for that to change in a meaningful way, that will likely be the next cycle. So again, we're being patient. We think money comes back. But in the interim, I still think there's more to go

to these other areas of the market because they're still relatively cheap. Even small caps. I mean, they're still at the lowest relative valuation since we've seen since 2000. That six month underperformance was also the lowest since 2000 as well. So probably more more to go here. Yeah. Although, as I keep pointing out, the great relative performance of small caps after that period in 2000 mostly came because big caps fell apart. It wasn't just because of small caps going higher, but obviously maybe some differences here. Peter, you know, as people go down the checklist and say, OK, the market looks like it's in modest pullback mode.

Is there anything worrisome going on elsewhere that we should be aware of? Right now, earnings estimates look OK. And then credit. People will point to it and say, hey, not really showing a lot of stress. It seems like that's kind of giving its blessing to the broader soft landing or macro space. What's your read on that? Well, you know, as John Galbraith might say, finance has a very poor memory, right? And yeah, there are some differences this cycle. And deficit spending is probably the biggest. So I think the cycle has been extended and prolonged. But the things, to your question, that we typically see as we go into a default cycle are with us.

Speculative-grade default rate is actually creeping up towards 5 percent. And that's versus high-yield spreads, let's call it at 320. That is a massive disconnect. You know, when we look at the 2016 rally, you know, Fed funds rate was at 320. That is a massive disconnect. You know, we look at the 2016 rally, you know, Fed funds rate was at 0.25 percent, default rates on a trailing basis were at two and a half percent, and spreads were at 500 basis points. So, you know, you have to ask why these disconnects exist, especially when you're seeing the economic surprise index surprising to the downside for months, for a number of consecutive months. We're seeing the economic surprise index surprising to the downside for months, for

a number of consecutive months. We're seeing consumer companies continuing to talk about an accelerating weakness in the consumer. We saw that in the five below revisions lower today. So there are a number where, you know, we look at, we do a lot of structured credit here. You know, we look very granularly at remit data for alternative consumer finance companies. And delinquency data doesn't look great.

It was improving for a little while. And really the trend is for, especially for subprime consumers, the trend is not good. Delinquencies are actually rising. So there's a lot under the surface that's being masked by tighter credit spreads, which are being supported by equity market sentiment. OK, so in other words, you're suggesting you think there's a rising chance or a high likelihood of a hard landing and the credit markets are essentially either blind to it or they're underpricing it. Yeah, I think it's underpriced right now. And, you know, that's that's how we in this business

are able to make outsized returns is And, you know, that's how we in this business are able to make outsized returns is by, you know, understanding conceptually when things are, you know, not priced correctly. And I think that's probably one of the most interesting mispricings right now is high yield credit versus interesting parts of the structured credit market where you can get, you know, 10 percent yield. You're looking at much lower yields in high yield credit with no collateral and so um i i do think the credit market is the place to look and to lauren's point i think we need to see continuing claims pop up above 300 000 and then we'll sort of be you know we'll see the whites of the eyes if you will and that'll be time to buy volatility yeah that'd be uh initial claims i know you mean there for above 300 000 a week yeah

um lauren in terms of how you would navigate the bond market in this scenario, I mean, obviously, if you think the Fed's cutting, cash isn't going to be quite as attractive. Where would you look to move? So while I agree and have said that I believe the economy is likely to slow from here, another reason why we may be seeing credit not pricing a disaster is because the structural quality of credit has changed, especially for publicly traded U.S. credit over the pandemic. It's been Fed programs. It's been well-capitalized balance sheets. And so I expect we may not see spreads widen quite as much in the event of a market drawdown. But importantly,

as the Fed starts moving, this isn't just a Fed cutting cycle, this is a Fed cutting cycle off of rates we haven't seen in a really long time. And so I expect that we'll see capital moving into short duration credit, including high yield, but also investment grade and municipal bonds to lock in higher rates.

And that's a move, especially with a maturity wall that's two or three years away, that makes a lot of sense to me. For investors that aren't as interested in a particular call on duration, I happen to be aligned with that, with the yield curve inverted. It just doesn't make a ton of sense. You can balance short duration credit exposure with the long end of the municipal curve. It's not inverted. But perhaps just as important, if we're expecting this major Fed transition, there's been other areas of the capital markets, including the private markets, where deal flow has been completely locked up as a result of

just concerns about where this market is going. When we start to see the Fed actually move, we are likely to see deal flow in private equity, private credit, even real estate start to unlock over the next of the course, over the course of the next six months as well. So I think this is just the beginning of a very big move in capital. Gotcha. And just quickly, Keith, you did mention you expect it to be a little bit choppier here. Is that based just on, you know, the seasonal effects, the fact that you get a pre-election, nerves hitting the market, positioning? What is that based on? It's based on part of that. But also, if we think that the technology sector, which also tends to peak in July and it's a bit extended in our work even still, if that's the top heavy part of the

market driving thing, it's going to be hard for the market to make significant increase at the headline level. So I think more of the action is going to be in the internals, which we have been seeing. And again, it's often two steps forward, one step back. Last point, Mike, after a strong first half, we tend to add the gains with about a 90% hit rate by the end of the year. But we also see at least one or two corrections along the way. And that's what we think we'll see as we're moving to, you know, the August, September period.

Yeah, 38 all-time highs in the S&P year to date. We're ahead of the game a little bit on that. We'll see what happens from here. Lauren, Keith, Peter, thank you so much. All right, let's send it over to Seema Modi for a look at the biggest names moving into the close. Hi, Seema. Hey, Mike. Shares of Elevent slipping today.

The health insurer issuing its earnings guidance for the full year that came in slightly short of estimates. The company also facing a drop in Medicaid enrollees. You're looking at the stock down nearly 6%. And then Johnson & Johnson. That is the second best performer in the Dow today. Shares are higher after the pharmaceutical giant posted a top and bottom line beat in the second quarter, citing improved performance in its cancer drug. Shares are up 3.6%.

42 minutes left. Mike. All right. Seema, thank you for doing the math. We are just getting started. Up next, when the chips are down, the Nasdaq having its worst day of the year as the semis sell off on new reports of growing political pressure. We'll ask Alger's Dan Chung how he's navigating the recent volatility and where he's finding opportunity in the tech trade. Now, we're live from the New York Stock Exchange. You're watching Closing Bell on CNBC.

The Nasdaq sliding as investors rotate out of this year's big tech winners. Semis pulling back. The SMH down almost 7%, having its worst day since 2020 on worries of U.S. restrictions on China exports. Joining me now is Dan Chung, Alger CEO and CIO. He's also a portfolio manager for the Alger Capital Appreciation Fund, which is ranked number one on the 2024 Wall Street Journal winner's circle list. Dan, good to see you. Thank you, Mike. So this move in Semi is obviously headline driven, but it comes in context of, you know,

we're just seeing a little bit of an unwind of this trade in mega cap growth stocks that's been hitting the Nasdaq for a while. Has anything changed in your view in terms of what might drive growth in these areas and what's worth playing now? I don't think anything's really changed. in your view in terms of what might drive growth in these areas and what's worth playing now? I don't think anything's really changed. It's the same drivers, cloud computing, investments in artificial intelligence, digital business and marketing, genomics and healthcare. So all of these trends are long-term trends still in place. And in terms of this particular kind of semi-equipment export, I mean, we've been dealing with this for a while, right?

I mean, there's like specific product numbers that can or can't be exported. Certain machines can or can't be serviced. One generation of chip is okay and one's not. It seems like that hasn't necessarily impacted a lot of the companies necessarily. So is there a reason to think that the uncertainty around this can last for a while? So I mean, these are politically sensitive companies for good reason, because they are the most vital part of the semiconductor industry. ASML in particular is unique.

They have already given up quite a bit of revenues because of the restrictions and exports to China. And I think the political football will continue around this. But I think we should all understand we still have more trade than we don't have trade with China. We still have more trade with many of our partners around the world, even as we argue about the political ramifications. So I think these companies are going to end up doing incredibly well one way or another over multiple years.

And this noise is creating a buying opportunity or will potentially create one pretty soon. You know, you mentioned the AI, of course, being one of the principal themes, and what we know for sure is this massive urgent investment cycle. We see the CapEx numbers by all the companies. You see the revenue from NVIDIA and elsewhere. But there's this undercurrent of what's next, where's the payoff, where's the killer app? Are we sure that the companies investing in all this are going to get paid back on it?

Is that filtering into your thinking at all? Absolutely. I mean, we're bottoms-up fundamental stock pickers, and they're going to be winners and losers. And it's too early to say, really, you know, for most companies, whether they're going to be winner or losers. There are some companies, of course, that are leading, companies like Microsoft and NVIDIA.

I think their positions are unassailable. I think Amazon, as a user of AI to improve its efficiency, is kind of unassailable as well. But there's a lot of others where it's a little less clear. Software, in particular, has a lot of companies where they could be winners and they could actually be losers. Yeah, you've seen some, you know, I guess some uncertainty around some of those franchises, right, in software, business software, where it's, you know, you wonder if they're going to be disintermediated.

Are there others that you feel as if got it figured out in software, aside from Microsoft? Well, got it figured out. I think one area is cybersecurity. Yeah. This is absolutely an area of critical importance. So companies like CrowdStrike in particular, securing cloud computing, applications running on the cloud. There's no doubt that, unfortunately, AI will be applied both for and against us on both sides of that battle. So that's going to be an intense battle. We've already seen major hacks this year and data breaches. And so investment there will certainly continue. The companies that are leading today are likely to benefit from AI as they use it, but also because

of the urgency with which businesses and governments need to implement it. One of the reasons it seemed that you did get such concentrated outperformance by a lot of those, you know, big NASDAQ names all year was this sort of scarcity of conviction that you have multi-year earnings growth ahead of them, right? I mean, there's a handful of companies where you can be really sure, and then the rest of the market, not as much. Outside of tech, where have you been finding that?

I mean, because you obviously don't only own tech. Right, actually, I mean, we had a great year, obviously, but only 40% of our outperformance came from tech. 60% came from pretty much equally healthcare, consumer discretionary, and actually industrials. And it's really a stock picker's market. So in healthcare, for example, companies that are using genomics and computing to improve cancer detection. So Natera has been one of our favorites for multiple years. Surprisingly, in the industrial sector there's a

renaissance in both things like renewables but also for example railroads. Railroads are getting a lot of investment after a long down cycle of investments so a company like Westinghouse Airbrake did very well last year. And then finally the consumer, a lot of noise about the consumer but one thing we know about the American consumer is they love new things, they're constantly looking for good deals, so things like online gambling and DraftKings did exceptionally well. Amazon, of course, did quite well, but also the maker of Hoka running shoes and Uggs, Deckers. So, you know, it's a pick your spots, look for the growth. And, you know, this market, I think, has plenty of room

to run. So you're a believer in the draft kings. They're going to get big enough in scale to really be very profitable? Well, they have pretty successfully become a one and two in most markets. And meanwhile, if you think about online betting and sports betting in particular, I mean, this is a great add-on to the entertainment of watching sports, which we all love pretty much in one form or another. That's right, yeah. I look at it as sort of...

The leagues need it, the networks need it, everybody needs it. Right. And the ability to bet on, with in-game betting on in particular places is actually quite exciting I think in terms of... Literally infinite, yeah. ...consumer's entertainment value. Yeah. Got you.

Dan, great to see you. Thank you. Thank you, Mike. All right, we are getting the first look at sales data from Amazon's Prime Day event. Kate Rooney joins us now with those details. Hi, Kate. Hey, Mike. So it's day two of Amazon Prime Day, and that two-day event,

Adobe is now out with some numbers on how it's going so far, and Amazon is on track right now to break some records. Consumers so far have spent $7.2 billion in the past day. That's up 11.7 percent from last year. It marks the biggest e-commerce day of the year so far. Mobile spending is also strong, contributing $3.5 billion of that total dollar amount. Biggest categories so far, electronics up 33 percent if you compare that to an average shopping day. Headphones and Bluetooth speakers having a moment, up 164%.

TVs up 83%. And then fitness trackers as well, up 81%. They're also capturing a lot of the back-to-school shopping right now, spending in that category up 210% if you compare it to a normal sales day. And this is products, think of things like backpacks, lunchboxes, stationery, for example, and then overall spending for kids' apparel up 159%. We'd also note, like, more buy now, pay later spending. So those installment loans, also called BNPL,

accounted for 7.5% of sales. That's up 17% or so year over year. And then Adobe does expect it to drive about a billion in total sales for this two-day event. It would represent roughly 18% to 19% growth from a year ago. These two days, Adobe is expecting about $14 billion in total spending. Wall Street is watching this closely for a retail sales bump for Amazon in the quarter, plus some adjacent areas are expected to see a rise as well.

J.P. Morgan and Bank of America expect a bump in advertising revenue around Prime Day. They say it's also going to drive those Prime subscriptions as well, that membership base, Mike. Interesting. Yeah, 11.7 percent overall growth at a time when inflation has calmed down. It's still pretty significant year over year, Kate. Thank you very much. All right. Coming up, rethinking the pullback potential as stocks retreat from record highs and the market leading mega caps all move lower. Canterford Shelds's Eric Johnston is back, and he's bringing a warning for investors looking to buy today's dip. He'll make his case here at Post 9 next.

Closing bell. We'll be back after a brief break. Welcome back. The recent major market rotation into small caps taking a breather today. The Russell 2000 set to snap a five-day win streak, the longest stretch of daily gains above 1% since 1979, I believe when the index was created. Here to share whether the rotation can find its footing again, Canterbury Sherald's chief equity and macro strategist, Eric Johnston. Eric, good to see you. Great to see you. It's funny, a lot of folks were calling for this type of rotation, seemingly very few were positioned for it because the moves have been extreme. Where does that leave us? Yeah, so people have been calling for it for a long time.

And I think that over the course of the last six months, a lot of investors have been using small cap and more of the equal weight portfolio as the short part of their book, using it as a hedge. I think also from a retail perspective, a lot of that interest has really been in the mega cap stocks, where a lot of the dollars have gone. So we have the situation where you look back to the CPI last Thursday, heading into that, the IWM was dead money, people had it as shorts, and that was the group that was best positioned, at least theoretically, from a Fed cut. And that CPI, as we know, is what made September now a lock. And that all went into motion.

You've seen the 11% to 12% rally that you've now seen. But I think if you take a step back and you kind of look at why has the Russell 2000 gone sideways for now two and a half to three years, worth the same price as we were two and a half, three years ago. Earnings for the Russell 2000 was $76 in 2021. 2024, the estimate is $74. Earnings have gone exactly sideways. And the reason is they obviously don't have the AI exposure, clearly. And then number two is they are levered to a tighter Fed policy environment, right? And so, and we don't see that environment really changing, right? They're going to start cutting in September, but you're going to have restrictive Fed policy for, you know, at least very restrictive for the next six to nine months and some sort of

restriction for far beyond that, which we think will ultimately keep a cap on the group. Aside from actual small caps, what about the rest of the market just outside of the big trillion dollar club winners that had dominated the upside all year? I mean, do you feel as if it can become a little more of an inclusive market or is it just time for a general pullback? So I think, yeah, when you go to like sort of the other, you know, 494 on the S&P, I think it can be a more inclusive market. And certainly the outperformance that we've seen in mega cap tech versus the rest of the market, I think that, you know, gap will shrink. But I think as we look out six to 12 months, I think the ultimate outperformers will continue to be the mega cap names. It's a theme that we've been all over in terms of the large cap and mega cap secular winners

that until we really have that economic sort of cleansing, that they are going to be the leaders in the market. And I don't think that the events over the last five days or what the Fed's going to do in September is really going to change that. Obviously, on a tactical basis, there's a lot of nuances in there on a tactical basis, but that's kind of our more medium-term view. I mean, referring to an economic cleansing, I mean, you basically mean a genuine downturn in the economy that's going to flush some things out, or is it just a reacceleration somehow? No, I think a further slowdown.

So right now, the economy is slowing at a slow pace. And one of the things that we're looking at is what are the causes of the slowdown? And are those causes going to change in the coming six to 12 months? And you think of the causes, restrictive Fed policy. So I would expect the Fed funds rate to be 300 basis points, you know, above the inflation rate for the next six months and will likely decline to 2 percent over the course of the next year, but still in restrictive territory. And the consumer is still battling high prices. Right. We have an inflation rate that's down to 2 percent, but we're still well above trend. That's causing a headwinds for the consumer, albeit being offset by the fiscal situation, right, where we're spending $2 trillion that we're jamming into the economy every year. In addition to that, the wealth effect, right?

Higher stock prices, higher home prices have absolutely helped this economy. And so until that changes, that'll be another buffer for the economic outlook. But we are slowing and we don't really see a change to that path. It's just a matter of whether it picks up or not. And so looking out the next couple of months, obviously, we're going to be dealing with whatever the election, you know, sentiment swings are, whatever we're going to try to handicap in terms of that, you know, even if it doesn't matter over the course of a cycle very much, it matters a lot in the near term. And then, you know, the defensive parts of this market, or the ones that have been defensive, are all these like 30 times earnings, you know,

secular growers. So is that what you would say? Just take shelter there? Yeah, because I think that, you know, we're entering a period where, I think it was mentioned earlier, that, you know, from a volatility perspective, we're entering a trickier part seasonally. Yeah. And, you know, and when we do have, we're going to have a lot of events around the election. And we're also, you know, trading at a very high multiple. And when you're trading at a very high multiple, you never know what is going, that's going to come at you that is going to cause, is going to cause an issue. And you're just much more vulnerable at 22 times earnings

than if you were at 18 times earnings. Which is where the S&P is, right? Correct. And so I just think that, and I would also say that, we've done a lot of, from a technical standpoint, a lot of backtesting around when the RSI and the S&P has gotten this high. And it got to 81 on July 10th. It's only happened 12 times in the last 50 years.

But in those 12 cases, the returns were not friendly. We were down three weeks later in 10 of the 12 times, and we saw a drawdown of about, average drawdown was about 3.5% over the next month. And then if you look at just returns when the market's been strong over the course of the first six months, over 10% we used as a threshold, which happened this year, you typically do see a drawdown.

In fact, 10 of the 18 times since 1970, you've seen a drawdown of 5% or more from that June 30th price. So we are just, you know, these things are out there. We're susceptible from a number of different perspectives. Yeah. Usually maybe a stronger finish to the year, but definitely not without some payback along the way. Exactly, that's correct. Eric, good to see you. Thank you. Great seeing you. All right, up next, more on today's market sell-off, including some of the biggest movers as we head into the close.

We'll be back after this break. Just over 16 minutes until the closing bell. S&P down 1.3%. Let's get back to Seema Modi for a look at the key stocks to watch. And Mike, VF Corporation catching our eye up 14%. Eyewear group Essilor Luxottica announcing an agreement to buy VF's Supreme brand for $1.5 billion in cash. VF Corporation is now up more than 20% so far this month. And then there's GE Vernova down about 9.6%. The company telling us it's investigating a blade issue on one of its wind turbines

located off the coast of Martha's Vineyard. And it's working with relevant authorities to contain and remove any debris. You'll see shares are on track for its worst day on record. And earnings from GE Vernnova are out next week. Mike? Interesting. A lot of giveback on a very strong spin-off stock since it came independent. Thank you, Seema. Still ahead, coming in for a landing.

United Airlines set to report earnings after the bell. Shares gaining more than 5% just this week heading into the print. We'll get you set up ahead of those results. Closing bell will be right back. Small caps slipping from a 52-week high today and currently on track to snap a five-day win streak, but the charts could be signaling further highs ahead. CNBC Pro is out with a new piece looking at the technical setup for small caps. For the full story, head to cnbc.com slash ProPick or scan the QR code on your screen. Up next, the weight of the world. New weight loss drug data sending roast shares higher and putting some pressure on industry leaders Eli Lilly and Novo Nordisk today. That story and much more when we take you inside

the Market Zone. We are now in the closing bell Market Zone. Angelica Peebles brings us the latest on Roche's moves in the obesity drug market, plus two earnings reports we're watching in overtime today. Kate Rooney on Discover Financial, and Jeffrey's Sheila Cayalu on what she's watching ahead of United Airlines. Angelica, interesting stock moves today in response to this Roche data. Yeah, we're seeing a lot of moves today. And that's after Roche saying that its experimental obesity pill helped people lose 6% of their

body weight after four weeks in a phase one study. Now, these are some of the best results we've seen so far. And there's a ton of interest in obesity pills since we only have shots available right now. That's why you're seeing Roche up so much and even big names like Lilly and Novo down today. This is the second set of promising obesity results that we've seen from Roche this year. The first one was for a shot that works like Lilly's Zepbound. Both the experimental pill and the shot are from Roche's almost $3 billion acquisition of Karmat Therapeutics. Now, it's important to remember

that these are only phase one results. Roche will need to do years of research before this pill could reach the market, if ever. But even that prospect has something, you know, it's giving the stock such a boost today and it's hitting other hopefuls like Structure Viking and Zeeland. Mike?

And it is interesting, Angelica, that we do see Lilly down and Novo down on a day that otherwise farmers pretty strong in this defensive trade. Maybe just shows how extended those stocks were on all this obesity drug excitement. Yeah, and these stocks have obviously had such a big year that, of course, it's reasonable to have even something that seems pretty early hit them today. But I think it just speaks to the appetite here, no pun intended, for any developments in this space and how especially a pill might affect the ultimate market here. Absolutely. Market definitely wants to see more options here. Thank you very much, Angelica. Kate, looking at Discover coming after a bunch of bank earnings.

Yeah, Mike. So Discover has actually been in sort of this limbo until this Capital One deal closes, if you remember. It agreed to a $35 billion merger with Capital One that is pending regulatory approval, but could close later this year or in 2025. And then earnings today, we are expected for EPS at least to slow. Forecasts are for about a 13 percent drop when it comes to earnings. Investors are watching the regular bank things that we saw last week, things like net interest income, net charge-offs, which were higher, but stabilizing when you look at the largest banks, and then loan loss provisions as well. Delinquencies for its card network could be key and could have some read throughs to Visa and MasterCard next week.

And then earlier today, Discover also said it agreed to sell its private student loan portfolio to Carlyle and KKR for $10.8 billion stock, up about 7% on the week. Shares are higher by 25% this year, trading above the price Capital One agreed to pay, which is around $140 per share. That was a premium when the deal was announced back in February, Mike. Yeah, it's interesting trading dynamics there with this sort of arbitrage. Kate, thank you very much. Sheila, UAL after the close, feels like you're not necessarily thinking it's going to be an exuberant outlook, but what are you expecting? I think the only thing that could help them is probably the obesity truck is lowering fuel costs. Yeah. I think airlines are in a pretty bad spot right now. We saw that from Delta's print and then save

pre-announcing last night. What we're seeing is I think a case of consumer weakness at its best. Delta's implied main cabin pricing was down high single digits year over year. Spirit implied was down 11 percent. So we have United down 1.3%. That looks a little light. American's probably going to be a lot worse than that, as well as Southwest, which is a worse spot given what parts of the U.S. market they serve and how much U.S. exposure they have. So pretty bad story on the pricing side. Now, how does that fit with, you know, record TSA volumes? Is it really just a pricing issue? It's pricing and airlines are right now saying it's

because we have too much capacity in the market, up 5% in Q2 versus last year's levels. So we're flying 5% more aircraft in the U.S. But we know Boeing has planes delayed. So what if Boeing actually gets its act together and there's more capacity in the market and you have these low cost players being irrational and not restructured in the market. So I think it's more of a case of consumer weakness, although you're not seeing it on other travel stocks like hotels and cruise lines. Sure. UAL does have very substantial international exposure. That should be a help right now, if I'm not mistaken. I mean, what are the key things to look for in the report and the outlook, do you think, for United?

So United, I think, is the best positioned airline, one, because of its premium seats above more so than anybody else, with the exception of Delta, and its international exposure, of which 20% is Europe. And Europe is really transatlantic because wide body capacity is still pretty tight. We're seeing pricing power there, although we expect it to come off a very high comp last year, up 25% on price year over year. So international exposure, more premium seats. And it's coastal hubs in the U.S., very much New York, San Francisco focused versus Delta.

That's kind of getting eaten up by the lower cost carriers in the southern part of the U.S. and the Sunbelts. I mean, it's certainly a challenging setup, I guess. And, of course, the stocks have struggled a bit in the last few months. But, you know, you look at UAL, it's like under five times, you know, expected earnings. I know that's not always exactly on face value, you know, in terms of cyclical earnings. But what does that imply in terms of what we think this company can earn in the next couple of years? Yeah, we have a buy on United and Delta. Both of them are printing mid-teens margins. So despite this pricing deterioration in the market, they're both pretty good companies trading at a 70% discount to the market.

Like, that's what they're trading at. And they've argued for a re-rating. You know, historically, they've traded at a 50% discount. So I think that there's still room for a re-rating. But the current market position is not helping the cyclicality of these airlines. They're viewed as cyclical. Pricing power in the market doesn't really exist, but premium is still holding. It held with Delta up 10% year over year. So we'll see what United says, but I think it's going to be the best print out of the airlines, but overall, not a good, not a good to do. Now you had said, oh no, what if Boeing gets

attacked together and starts delivering planes, which I know you also cover Boeing. What is the likelihood of that at this point? It'll happen one day. I'll be on the show and it'll happen. Right now, Delta's betting that U.S. capacity will be up 3% year over year in September. So the market will rationalize pretty quickly. But let's say Boeing does get its act together, actually delivers the planes they say they will, that number will change by two points, so up 5%. So I think in 2025, eventually Boeing will deliver more aircraft. Southwest will get the planes it needs,

the right ones potentially, like the MAX 7. So I do think you're going to see this problem persist in the airline industry for at least the next six to 12 months, because Boeing's going to improve its delivery rate off of really COVID levels today. And United's, I mean, what you would characterize as its Boeing problems, I mean, is it kind of already got workarounds? And where does that all sit? I mean, in terms of its expected deliveries

or what it's going to do with those orders? It's cut CapEx a ton, and that's why it's generating really good free cash flow this year, because the aircraft they wanted, the MAX 10 is delayed. It's not certified yet. It probably won't be certified till 2026. And so that's helping them generate free cash flow this year and next year. The reason they want those max 10s is if you think about New York markets, we're flying 40% more people into New York City versus pre-pandemic levels. So there's no way to get that number

higher. Gates are full. You've got to do it with bigger planes. Yeah. I support the idea of no more. All right. Coming into New York. Sheila, great to talk to you. Thanks so much. Appreciate that. As we head into the close, you see the S&P 500 still sitting on a loss of about one and one third percent. It's down under the 5600 level. NASDAQ still the downside leader, off almost 3% on the day, with Semi leading the downside. Valchonin actually is going to go out above 14. That's a multi-month high for the Vets. That's going to be what the closing bell will send it into overtime

with Morgan Brennan and John Fitts.