Closing Bell - Closing Bell: Tech’s Moment of Truth 4/25/23

Episode Date: April 25, 2023

Will the impending reports from the giants of the Nasdaq ease or exacerbate investor worries? Lo Toney of Plexo Capital, Malcolm Ethridge of CIC Wealth and Nicole Webb of Wealth Enhancement Group give their expert takes. Plus, Ana Arsov – Co-head of Global Banks at Moody’s – weighs in on First Republic’s huge drop. She tells us what this might mean for the broader banking sector. And, PIMCO’s Erin Browne breaks down one key part of the market that she thinks could hold up during a downturn.

All right. Welcome to Closing Bell. I'm Mike Santoli in for Scott Wapner. We are live from Post 9 at the New York Stock Exchange. This make or break hour begins with an end to the calm. The first 1 percent daily drop in the S&P 500 in more than a month appears underway on a fresh round of economic slowdown concerns and mixed earnings results. You see the S&P 500 down almost a percent and a half at the daily lows right now. That leads us to our talk of the tape and tech's moment of truth. Will impending reports from the giants of the Nasdaq ease or exacerbate investor worries? Here to help us answer this question and more is Malcolm Etheridge of CIC Wealth. He is also a CNBC contributor. And Nicole Webb of Wealth Enhancement Group here

at PostNet. Welcome to you both. Malcolm, I'd love to hear you read quickly on today's action. We've been almost complaining, at least some of us have, about the lack of movement in the indexes. We have had this low volatility period today. Familiar, but I guess reminders of a slowdown fear out in the economy, consumer confidence taking a hit. And then a mixed bag of earnings seems to have jolted the markets along with those bank concerns with First Republic. So is it just a blip or is it the start of something worse? Yeah, Mike, I don't think the calm will continue throughout the rest of this week. I think we're probably going to get whipsawed around over the next three days throughout each trading day as new earnings continue to come out. And especially after you hear about the Microsoft and Alphabet movements, 40 percent, I think, of the S&P is

scheduled to report before Friday. So I definitely think we're going to get some movement one way or another before the week is over. That said, Nicole, on balance, the reports are coming in in aggregate anyway, better than expected. The S&Ps are basically a couple percent off the highs for the month. So it's not as if it's really rushing lower. And again, it's not particularly new that we are worried about a slowing economy. So how do you think the market is absorbing it? And I guess the regional bank stress is this other thing that's nagging at psychology. Yeah, and I would also add that we had the news break this morning that we think that tax revenue was off about 35 percent on the heels of no capital gains last year.

So that pushes that debt conversation a bit further or closer into the future as opposed to further away. When we couple that with some of the yes, the consumer is not yet balking at the fact that we have passed along higher and higher prices, inflation remains so sticky, the labor market is being resilient. So that brings us to that Fed meeting in May, the likelihood that the 25 basis points does occur. And then where do we go from there? So to some degree, is it just kind of the sell off of looking backwards, which is what we're reporting on now, positive, but going forward, we haven't seen expectations rise to the downside,

but we're hearing a lot hangs on the consumer and their ability to keep spending. That's true, and it's been a theme. I mean, PepsiCo up 2% today, and they're basically saying, look, consumers are paying the price that they've set, the higher prices on their products. McDonald's, hints of some slowdown, at least in terms of size of ticket. And then GM with very good numbers and then a little bit of hesitation about the outlook as to whether it's sustainable. And I have a little bit of hesitation about the way that GM reported on the consumer, talking about adding these new packages, more and more add-ons, the average

price of cars sold being above $50,000. And we're also seeing for the first time in a long time defaults on auto loans. So when you bring all of that together, again, there's just some of these spending patterns that erode that savings component as we look forward to higher for longer expectations, bringing down the profits over time. And where do we kind of play that out? To your point about McDonald's, though, there is some positive news in thinking about ad spend, some of the search premium revenue coming forward.

So, again, looking to tonight's earnings calls, you know, we might see a revision to the upside there on the heels of not just AI, but some resilience in business. Yeah, and Malcolm, I do want to, you mentioned that with Microsoft and Alphabet reporting today, obviously, it might be a bit of a swing factor for the overall index. But you did sell Alphabet this morning. Is that on a specific concern about the quarter? Well, not necessarily a concern about the quarter, even though Alphabet has, I believe, the last four quarters in a row missed on earnings, which can't be good coming into a softer quarterly report. But it had more to do with the fact that I don't see how they managed to sustain this war with Microsoft over

generative AI in the chatbot wars without cannibalizing their main business, which is search. And so to me, the only thing that keeps Alphabet alive is being able to talk about some other business unit like maybe cloud computing or something like that as sort of carrying the water, so to speak. And we all know that revenue is expected to be down or at least flat at Amazon Web Services as well as Azure right now as far as cloud computing is concerned. So it can't be all that good for the third player in that space either. And so to me, I just don't see any positives to be owning that name right now near term. Gotcha. It is down 1.3 percent at the moment. Let's also bring in Low Tony of Plexo Capital to talk more about exactly

that low. It's great to have you. It seems as we get ready for these reports, a few themes are going to be the pace of cloud revenue growth on one side for Alphabet and especially for Microsoft. And then you have the AI question as to whether it's a source of excitement or a threat. And then just the general macro fear of, you know, PC and business investment in technology. So what most stands out to you as kind of the animating force of the reports that are about to come? I think those are all right. I think, you know, we'll get a good feel for what the advertising health looks like in that market from Alphabet and Meta in particular. And what we're looking for is, OK, we want to see that there is a consolidation that happens usually in slowdowns.

So seeing the ability for Alphabet to hold court on performance and then get some indication of the brand marketing through YouTube, that will be interesting. Of course, Meta has much more of their revenue base tied specifically to advertising. So I think some of the things to look for are, are they still at meta still facing headwinds from the macro as well as from platform changes by Apple and Android on the mobile side. And then, you know, a bright spot for meta might be what's happening with reels. And, you know, I think on the AI front, it will be positioned as a positive, maybe to be able to offset any potential, you know, not that exciting news on the cloud side. I think in particular, when we look to Microsoft, you know, this is a big opportunity for Microsoft to be able to take some of that share from Alphabet, Google, which we haven't seen before. Right. So this is a little bit of an existential moment for Alphabet. If, you know, one analyst said for every single point of share that Microsoft can take away from Google, that

represents $2 billion in revenue and 10% in earnings. So we'll be listening closely. Alphabet recently consolidated the DeepMind team from other bets and merged it with their internal team, just showing the seriousness of this moment. Yeah, it's gone from being kind of in the lab to in the business at this point, I guess. And, Lyle, I guess the other piece of it is the cost-cutting theme, which, of course, almost all these companies have made a priority. You've even had some say, we saw a flurry of job reductions, and maybe we're even through it. So I wonder how much help from margins might come from this point on. Yeah, you know, look, one of the metrics that we used to look at maybe, you know, over a decade ago was revenue per employee at these tech companies.

And I think what's ended up happening is, you know, we've just had such explosive growth over the past decade for big tech. And historically within Silicon Valley, there's always been this competitive land grab of the best talent available, even if that talent was not necessarily required to drive the growth of these businesses. And as a result of that growth, it would sometimes mask the impact that these employees were having. And I think when we look back to spring of 20, when there was a little bit of uncertainty and then the rapid rise and the tailwinds from all the activity online, we saw these companies massively higher. And the secret on the street was, hey, these employees really weren't doing that much. But when we talk about efficiency by reducing workforce,

I think what we're really just doing is returning back to the norm. And the ability for these employees, even with reductions, to still maintain the business is clearly apparent. But hopefully, we'll see some drop to the bottom line as a result of the cost cutting. We really need to understand, though, from Alphabet, you know, what is going to happen? Are there going to be further cost reductions on the employee side? They have also paused some of the real estate development for the larger products, projects, excuse me, and then also done a little bit to reduce the employee perks. But, you know, Meta has been the most aggressive in reducing the employee workforce. That's right. And most of that savings is certainly headed for the bottom line for Meta. We'll see that this week.

And, Nicole, to kind of wrap it up on an investment level, these stocks, many of them, end up in a lot of the filters for quality balance sheets and returns on equity, all the things that people say, this is the moment when you should be looking in that direction. So, in other words, they've qualified as defensive plays. Is that correct at this point? Because they also do have the higher valuations. And you see on a day like today, you can have a little bit of a ripple of doubt run through these stocks about growth rates and it hurts them. Yeah. And I think to some to some degree, people who put their toe in the water for the first time during

covid don't understand the cyclical nature of these businesses. But at the same time, Microsoft has now positioned itself more as an enterprise utility, being able to stack on top of the office suite of products, bringing in security measures, now the overlay of AI. When we look at Alphabet, you know, I think about the data they have on humans globally, more of it, so if they were to apply that to a large language model, I think that the possibilities are infinite. That is a business shift for them

from pushing your eyeballs towards something to now how do we monetize the data we have and utilize it in an AI functionality. So is that interfacing with YouTube between you and I to create the specific advertisements in front of us that would actually then move us to purchase? So again, there's a lot more to unfold there, but I don't disregard Alphabet for being behind.

I think for them, it sometimes is just a scattering of, well, how do we reorganize our train of thinking, take the data we have, and progress forward. Malcolm, if you don't think that Alphabet necessarily has the answer at the moment for some of these competitive issues, where else might you be looking, I mean, in terms of what the market has delivered in terms of potential opportunity on this pullback? Well, I think about a name like a Spotify, which I do own personally, I should say, but after reporting their earnings and showing that they have managed to right the ship since

maybe a year ago when we saw founder and CEO Dan Ek plunk down something like $50 million of his own capital out of his pocket to sort of signal to the market the bad is all out and we've actually managed to turn our focus back to helping people enjoy streaming and helping people enjoy listening to audio more so than trying to put all of our capital behind superstar talent and so forth. They've actually changed the business successfully and shown it through their earnings numbers this morning. I think a company like that is actually going to manage to buck the trend of reduced spending and at least manage to continue to maintain its positioning while they add a few more paid subscribers each quarter and not having to worry so much about ad-supported

revenue. And it's just a nice little add-on or sweetener to the package. So I think about a company like that that has a little bit different business model and isn't so reliant on ads, ad spending at a moment when we see the most dominant companies in ads as far as Alphabet and Meta having slowdowns in that particular arena. Yeah, certainly on the report, the streetlights, the Spotify numbers up a big year to date. We'll see if it can keep following in that path of Netflix, which seems to be the model there. Malcolm Lowe, Nicole, thanks so much for the time today. Thank you. Appreciate it. Let's get to our Twitter question of the day.

We want to know, will investors be more bullish or more bearish after tech earnings? Head to at CNBC closing bell on Twitter to vote. We'll share the results later in this hour. Let's now get a check on some top stocks to vote. We'll share the results later in this hour. Let's now get a check on some top stocks to watch as we head into the close. Christina Partsenevelis is here with those. Hey, Christina. Thank you, Mike.

Well, the Food and Drug Administration plans to grant accelerated approval for the first drug for a rare genetic form of ALS, also known as Lou Gehrig's disease. Biogen makes the drug called Qualsodi. Despite uncertainty of its effectiveness thus far, it's still going ahead with approval. Biogen said it would price it in a range similar to other ALS treatments, which can cost well over $100,000 annually. The stock, though, is lower, about 3.5% pending approval for another Alzheimer's drug, and their earnings came out this morning. Egg producer CalMain seeing its shares down almost 5% right now.

Analysts at Stevens downgraded the name with a lower price target of $60 a share, which is still higher. It's trading right now at $49.58. And the reason for that is they say the pricing environment for eggs and chicken isn't the greatest and said, quote, it's best to move to the sidelines now. You can see shares, yep, down 5%. Egg prices coming down. Mike? All right. People were waiting for it.

Here it is. Thank you, Christina. We are just getting things started here on Closing Bell. Up next, the road ahead for UPS. That stock's sinking on the back of its quarterly report. CNBC caught up with UPS's CEO. Her exclusive comments are ahead. Plus, First Republic shares tumbling to an all-time low. We'll tell you why and hear from Moody's co-head of global banks, where she sees the regionals heading from here. You're watching Closing Bell on CNBC. First Republic shares falling to an all-time low today after new reports that the bank is weighing up to $100 billion in asset sales and sources telling our own David Faber that

regulators are considering their own plans to save the bank. This follows First Republic's deposits dropping 40 percent in the first quarter. Joining us now is Anna Arsov, managing director and co-head of global banks at Moody's to talk about what this industry is facing right now. Anna, when it comes to a First Republic, I suppose what options are on the table for the bank? And I guess how applicable are these issues across other regional banks? Great point. I mean, we've been monitoring the industry, obviously, very actively over the last six plus weeks. And First Republic was, unfortunately, one of those banks that caught in the significant deposit outflow. Roughly 50 percent of deposits have left institutions since that fateful March 12th, March 11th weekend.

So the issue is why strategic options are difficult for these banks. It's because they have significant available for sale and HTM health maturity losses. That means that whoever buys, if they buy it as a living bank, if you will, they have to bulk capital into the institution. So therefore, what has happened is a very constructive for the time solution where the large banks have a consortium. They have infused

$30 billion of deposits to bridge this deposit outflow that has happened. And I assume there is a reporting, as you just noted, that there are some strategic options that are waiting, such as asset sales, et cetera. I cannot, as you know, comment on speculation, but certainly what we know from other issues is that once a bank ends in a situation where they have to significantly structure, that at least weights on your profitability if nothing else. That weights on your culture, on confidence of your clients, confidence of your employees, and particularly for a wealth management focused institutions as we know a lot of those bankers are very attractive for

position to go somewhere else. So the key is to watch what kind of retention is there and attrition, if you will, from both clients and banks in light of this environment. Now, I guess the market has, since the events of March or early March, moved on to a thought, well, there's a selective handful of institutions that seem to be in a tough spot. Systematically, not that big of an issue. Yes, there's going to be deposit flight, but it's not leaving in a rush. And the larger banks seem to be net beneficiaries.

So can we get some comfort that that remains the case? Well, I kind of bifurcated, and I think the regulatory environment in the U.S. is, to a certain degree, responsible why there's a bifurcated story. The large banks, absolutely. We just finished the results of the large, you know, universal investment banks. And the story is very strong. We have very strong profitability in a bank of, again, very strong deposit franchises that's delivering profitability at higher rates.

Asset quality is keeping up. Yes, there's some reserve built, but they can still only afford it with the profitability and diversification they have. And we think that they are a nice buffer, if you will, for systemic risks. It's a very different story than 2008, when the large banks were not necessarily, or not all, were in such a strong position. And they were very, an old regulatory move, if you will, post the financial crisis, Dodd-Frank was really focused on these institutions to make them stronger, more resilient, which has happened. And it's the case. And they're benefiting.

And the market is benefiting from that. But then on the other side, as we know, there was something called tailoring, which left certain institutions in a less stringent regulatory environment. So no real LCR-focused rules, lower capital rules, et cetera. So that has allowed for some banks to take increasing asset liability management risk. And the governance around asset liability management risk is certainly inconsistent. And I want to draw attention that not all regional banks and not all small banks are having the same issues.

They're very well small banks who are sub 25 billion who look actually very good on this. But they're also banks who are above 100 billion who have increased ALM risk. So it's not one story. What we did, just from a rating agency perspective, is we did take a rating action on Friday affecting 22 banks. So there were 11 downgrades. But to mention that these downgrades were actually for six institutions that were the most impacted that happened post that weekend of SVB failing, plus two institutions that were already on negative outlook.

And if I can draw the attention of just sort of what is the theme, the theme is higher level of uninsured deposits, more deposit outflight than average regional bank, lower capital than the median, and for some, high exposure to commercial real estate. So that's the theme that we're focused on, we're rating actions, we're really focused on. Yes, and the market certainly has been trying to separate those out as well. We will certainly give a look at those that were named. Ana, thanks so much. Appreciate the time today. Thank you for having me. All right. Well, it has been an ugly day for UPS shares on the back of its earnings. Our own Frank Holland spoke exclusively with the company's CEO, Carol Tomei. He joins us now. Hey, Frank. Hey there, Mike. As you mentioned,

I spoke with Carol Tomei. She's very confident that the volumes will reaccelerate for UPS in the second half, actually guiding that 56 percent of profit will happen in the final two quarters that include the holiday season. However, based on today's stock performance, investors are focused on the declines in U.S. volumes that accelerated during the quarter. But UPS says stabilized in April. Tomei says macro factors are a headwind. We saw retail sales in the United States take a marked decline in the month of March, and we saw that in our business as well. There's a real change in consumer shopping behavior, moving from goods to service,

spending more of their wallet on things like food. Nine percent of household budgets is going to food now compared to seven percent just a couple of years ago. Tomei said negotiations with the Teamsters also impacted business. The union is just about two thirds of the UPS workforce and is seeking pay increases and other concessions. That contract expires at the end of July. Tomei is confident here, too, that there will be at least a handshake deal in place by then, but admitted the uncertainty impacts sales.

There's no guarantee in life except for death and taxes. So it would be naive of us to think there wouldn't be some volume diversion, and there has been, but not much. We saw a decline, as you mentioned, in our average daily volume in the first quarter. So UPS is also beginning to use artificial intelligence on pricing models to adjust to supply and demand. It's something that Tomei calls both exciting and a bit scary. Mike, back over to you. And Frank, those negotiations underway with the Teamsters union and I guess some of the

other comments that Carol Tomei had about volumes and consumer behavior. What are analysts saying about what it's going to mean for profit margins? Because it seems as if that's what some of the focus is today with the stock decline. Yeah, absolutely. I mean, and certainly it is a concern. Not only the Teamsters making more money, but volume declining and the potential for pricing power being lower as those volumes decline. I was just reading a note from a city analyst, Chris Weatherby. He believed that

some of the reaction in the stock was overblown. The real question is how reliable is the forecasting from UPS? They really do believe that volumes are going to accelerate and also that some of their volumes are lower because companies are just nervous about this Teamsters contract and the possibility of a work stoppage by the union. And that for companies that really need reliable shipping, especially on that second half of the year for the holiday season, that they may be looking elsewhere and taking their volumes elsewhere. Got it. Frank, thanks so much. All right. Here's where we stand as we head into the close. Dow is down about 276 points. You see the S&P 500 just barely lift off the lows. It's

down 1.3% on the day. NASDAQ and Russell 2000 have been the underperformers all day. Up next, PIMCO's Aaron Brown betting on one key part of the market might surprise you. And later, McDonald's on a record run and getting a post earnings pop today. Actually, no, pulling back two thirds of one percent at this hour. We'll break down what's ahead for the stock and what the company's CEO is signaling about the state of the consumer. Closing bell back into. Stocks pulling back broadly today as shares of First Republic tumble, sparking new fears about the banking sector. My next guest sees more downside ahead for the market.

Let's bring in PIMCO's Aaron Brown. Aaron, it's great to have you here. We have a day when some of the economic slowdown risks are more front and center than they have been some other days. The consumer confidence numbers, UPS results and some more of these regional Fed bank business surveys that really have been rather weak. I guess the big question is now that we have seen this rotation toward defensive sectors and bond yields come back in, is the market correctly priced for what's to come in the economy? I don't think it is. I mean, keep in mind that the market

on a year-to-date basis is still up 6.25%, and stocks are trading and flirting with 4,100. You know, we're not seeing, you know, significant levels of fear in the absolute level of stocks, nor in valuations. They're still trading at, you know, 18.5 times forward multiples,

so still trading, you know, fairly rich. I think that, you know, certainly today is a significant hit on a one day, you know, look back basis. But when you take a larger step back and look at where the market's trading today, there's really a lot of complacency that's still priced into stocks. I know that you were looking at the unusually low realized and implied volatility levels in the market coming into today and thinking that it was a pretty good bet to maybe essentially play a potential rise in volatility. We got some of that today. Do you think that we're in for something worse or is this a routine pullback? No, I do think that you'll likely see over the course of the next couple of months as we start to see debt ceiling really come front and center and disgust in the market. As you start to see the economy roll even harder, I do think that volatility sub 20 is pretty remarkable.

And I would expect to see that you would be trading in a more normalized 20 to 30 range over the course of the next six months or so. So, you know, from here, I would be betting on volatility moving higher. There's a lot of risk on the horizon and the market's really not priced for that risk. Given that's the case, it's interesting that you still are pretty warm toward the big global banks. Why would that be the case here? So I think that the large cap banks, what we call as the globally systemically important banks, are going to be the beneficiaries of some of this pullback that we're seeing, you know, across deposit flows, across lending in the smaller banks. You know, ultimately, we now have a significant number of assets that need to be sold

by another bank. And who's going to be stepping in to buy those assets? It's going to be the larger banks, the capital providers that are able to step in and really take advantage of dislocations in the market and dislocations in the banking sector. And I think that these large, globally, systemically important banks are going to be the ones that ultimately are going to be the winners, you know, three, six, 12 months down the line. So I like stepping in in periods of weakness like today in, you know, the large cap banks. I think that you'll be a beneficiary in the medium to long term. Sure, today, you know, you take a P&L hit. But, you know, ultimately, they're the winners of capital outflows from the small banks and the winners of some of these asset sales that are

going to be taking place over the course of, you know, the preceding couple of quarters. Also, I'd like to hear your thoughts on China-geared plays at this point as well. You have had a comeback in Chinese equities. They've now come down maybe 4 percent this week and 7 percent on a month-to-day basis. But I wonder what the rationale is behind thinking that they have some room. So there's a lot of fears right now priced into China. You know, the first is that there's concerns about the macroeconomic slowing from here. There's concerns that at the Pottle Barrel meeting upcoming that you're not going to see additional measures of stimulus priced in. And also when you're hearing

from companies, you're seeing some gains that, you know, in the China reopening story and companies talking through earnings, they're starting to see some light at the end of the tunnel. But, you know, certainly given the pace of the run up that we saw at the tail end of last year, you're not seeing earnings, you know, come out really, you know, blockbuster earnings that, you know, are suggestive of a new regime yet for China. So I think that the consolidation that you've seen, as you correctly noted, over the last month or so is a little bit on the back of all three of those factors. Going forward, though, the real-time data that we're hearing out of the casinos, out of the airline companies, out of the hotel and lodging sector, out of the food and beverage sector in China is all extremely positive.

And you even heard that from U.S. companies really levered to China today in this morning's earnings reports. I do think that China is going to be the country that outperforms with respect to growth over the coming year. And we're really, really in early stages, early innings of this trade right now. So if you don't want to step back and own China companies outright, then own U.S. companies that have big footprints in China. And some of the consumer staple names, some of the luxury names are really front and center for that trade. Yeah, it's interesting having those two huge economies in such different points in

their cycle. See how that plays out. Aaron, great to talk to you. Appreciate it. Aaron Brown from PIMCO. Up next, we're tracking the biggest movers as we head into the close. Christina Partsenevelos is back with those. Hey, Christina. Hi. Well, we've got hundreds of job cuts at one company and price hikes at another. I'll explain all the details next. 21 minutes until the closing bell. Let's get back to Christina Partsenevelis for a look at the key stocks to watch.

Christina. Well, we know right now CNBC has confirmed the gap plans another round of layoffs. This time more than 500 positions after already cutting 500 corporate jobs just last September. The goal is to make the company more nimble. But you can see shares reacting 6.5% right now. Companies are still flexing their pricing power. PepsiCo raised prices 16 percent year over year in its latest quarter. Yes, volumes did fall, but only 2 percent and

margins were still up. The company boosted its outlook for the year and shares are up 2.2 percent, one of the best performers on the S&P 500 and also hit a 52 week high. Mike? It certainly did. One of the rare ones today, Christina. Thank you. Last chance now to weigh in on our Twitter question. We asked, will investors be more bullish or more bearish after tech earnings? Head to at CNBC closing bell on Twitter. We'll bring you the results right after this break. S&P 500 down at its lowest for the day, off about a percent and a half at about a two-week low as well. Let's get the results of our Twitter question. We asked, will investors be more bullish or more bearish after tech earnings?

Majority of you, 57 percent, saying more bearish. Up next, your earnings rundown. We're just moments away from Microsoft, Alphabet, and Chipotle results in overtime. That and much more when we take you inside the Market Zone. We are now in the closing bell Market Zone. Samir Samana of Wells Fargo is here to break down today's sell-off and what could come next. And KeyBank's Eric Gonzalez reacts to McDonald's quarter and shares what to watch out for in Chipotle's earnings after the bell.

Plus, Steve Kovach on Microsoft and Google's big bets on AI heading into their reports. Welcome all. Samir, finally got a little bit of a deeper pullback today in the market, just really a couple, 3% off the recent highs. But what's your read on what's driving today and whether the market, with its defensive shift that's been happening under the surface, has already kind of figured out we're in slowdown mode in the economy. Yeah, Mike, I guess first things first, I mean, I would say we're not surprised at all by the move today. I mean, we literally just pulled more money out of equities last week,

starting with small caps and moving up to mid caps and then even a little bit out of large caps and moved over into fixed income because we just couldn't figure out why the market was trading at 41.50 with all the risks that were out ahead of us with all kind of the negatives that we foresaw. So from that standpoint, I think it's all the usual suspects, right? It's been the leadership thus far. So you've got tech, you've got energy, you've got financials all kind of coming back to the forefront with respect to how do they work in a market that needs to discount a recession. And, oh, by the way, you've got these risks like the debt ceiling still kind of lurking out there. Sure. I guess the counter to that would be for all of the choppiness in the economic data, we've still been clicking around a 2 percent real GDP rate. You have nominal growth better than that.

The Fed looks like it's poised to pause relatively soon, unless you think that's not going to happen next week. It's not so much that. I mean, we do expect two additional hikes, so we are a little bit out of consensus. We don't think they're done next week. I think that being said, if you look at history and kind of use it as a little bit of a guide, you know, it never repeats, but it does rhyme. History tells you that the market doesn't bottom until after the first Fed rate cut, not the pause, not the, you know, last hike. It's after the first cut. And even then, it's quite a ways after. It's almost nine months after. So, again, if you think that the first cut isn't until the first part of next year, like us, you're probably looking at a true bottom probably sometime in 2024. Well, that does make sense based on how history has acted.

On the other hand, we could go back a year and a few months, and I could say history says that stocks go up in the first year after the Fed starts hiking rates. And until earnings peak, usually the market can keep climbing. So I guess the counter to that was, are we out of step with the cycle as historical patterns would tell us? Yeah, no, it's a great question. I think you have to look at valuations, right? If you have valuations that are cheap enough to where you can overcome some of the things that, you know, maybe history says aren't all that great, fine. But the tricky part is right now you're trading at almost 20 times earnings and that's peak earnings. So you've got a market that's still counting on 2023 coming in around 220.

So pretty much right in line with last year. And you've still got the market paying close to 20 times on that peak earnings number. The tricky part is there's just no margin for error for this market. And so aside from preferring fixed income at the moment, within the stock market, are there places to get some shelter? I think you can still participate within kind of the larger cap, higher quality areas. We actually do like tech, energy and health care. So, you know, some of the pullbacks in tech and energy should be viewed as an opportunity. We also recently added to develop markets we we took it from the

most unfavorable to a neutral. We think as the year progresses people will view kind of the world outside the especially developed markets as being just as high quality. But trading at some really nice attractive multiples you know I

go back to what I said a few minutes ago. If you can get those valuations in the low teens like if a trade that. That to us means that you're at least getting paid to take the risk while you wait. Gotcha. Samir, appreciate the update. Thanks so much. All right, McDonald's topping earnings estimates today, higher menu prices driving revenue growth.

But the CEO did warn inflation could impact consumer spending in an interview on Squawk on the Street earlier. Net still by the end of the year, we're going to be looking at, I think, probably high single digit inflation on a full year, which is certainly much elevated than what we've been used to over the last, you know, kind of prior period where we typically would be in the low single digits. So that is pressuring margins. We're trying to be very thoughtful about how quickly we pass on this pricing to consumers. Eric Gonzalez covers McDonald's with a buy rating, just raised his price target to $320 a share. Eric, what's your read on the modest pullback in the shares today? They have had a pretty good run, but is there some concern about the sustainability of this comp growth?

Sure. Thanks. It's great to be here, Mike. And thanks so much for having me. You know, the bottom line here is that McDonald's delivered another strong quarter that included double digit same sort of sales growth in each of the three major segments. You know, in the U.S., comp growth was 12.6 percent. This was well ahead of consensus date, but perhaps more in line with what our clients were expecting. If there's one dark spot, I'd say is probably that food inflation didn't moderate quite as much as we would have hoped. This caused some contraction in the company-owned store-level margins. But, you know, this was more than offset by other parts of the P&L, including the franchise margins. And most notably, the company said that franchisee cash flow improved year over year in the first quarter. This came after declines last year. So overall, it was a really strong result. And then the comments we just heard from the CEO, that's not causing you to adjust what you think they can deliver in the later part of this year?

Yeah, sure. Look, the company suggested that there were some macro challenges that were surfacing. This included a downtick in items per order, so fewer people having fries with their order, an uptick in pricing elasticity, suggesting customers are being a bit more mindful of their spending habits. But, you know, we believe the brand is well positioned to outperform. They've proven it in the past. And should economic conditions continue to deteriorate further, we think they would outperform their peers. Yeah, that is the tricky part. If macro is causing McDonald's to slow down, people like McDonald's, the stock, in a slowdown.

So it's hard to read. Talk about Chipotle a little bit as we look into the numbers. What are you expecting from them, and how do you feel the stock is positioned? Yeah, sure. So for Chipotle, we're expecting around 9% same-store sales growth in the first quarter, store-level margins at the low to mid-24% range. That's consistent with how they guided back in February. With that 9% comp, we're looking for low single digit positive traffic, perhaps offset by some

negative mix, which has been the trend in the past few quarters as people shifted from group orders back to those individual store visits. But really, the key here is how the brand is performing in April. The stocks had a really nice run up year to date. It's up 29 to 30 percent at about 10 to 11 percent in the last month a lot of this reflects the optimism that traffic's accelerated in recent weeks perhaps to that mid single digit range so remember this is a stock that took this is a company that took prices up 25 to 30 percent since the start of the pandemic and we have seen some pushback from consumers most most recently in the second half of 22 with the guest counts going negative in the third and fourth quarter so you, you know, with the stock near 1,800, we think the company needs to show that it's maintained

some pricing power by driving same-store sales growth without additional price increases. You know, and based on the work that we've done, we're confident that it's happening. Yeah, I mean, you still, you have a price target on 1,870, right? So it's pretty close to where we're trading right now. The question has always been a very high premium valuation on the stock. Do you think that it can sustain it here? Yeah, we do. Look, it's still within its historical ranges. And this is a company that has an opportunity to drive margins from the mid-20s

upwards towards the mid to high 20s, called 27%, 28%. They've got a lot of white space in North America. They're talking about a 7,000-store opportunity. And the cash-on-cash returns on the new units are lot of white space in North America. They're talking about a 7,000 store opportunity. And the cash on cash returns on the new units are some of the best in the industry, particularly when they open those Chipotle lanes, which sales are about 15% higher and have 1,000 basis points better on the cash on cash returns, call it in that 65% to 70% range. So, you know, really exciting white space opportunity. And we think the premium valuation is justified for a company that really doesn't have a major direct competitor. Yeah, I guess a good reminder, we're nowhere near saturation levels of Chipotle stores. Eric,

thanks a lot. Appreciate the time. Absolutely. Thank you. Quick programming note as well. Don't miss a first on CBC interview with Chipotle CEO. That is coming up in overtime. Let's get over to Steve Kovach, a head of reports from Microsoft and Alphabet. And Steve, we know AI is going to be a theme. Exactly how do you think it's going to come up in the calls today for these two companies? Yeah, Mike, monetization. So these are the two leaders in AI. Neither of them have yet to actually make any money on this. But as far as getting products out the door, Microsoft is the perceived leader because it's actually putting stuff out there for people to use.

We know about the Bing AI search. They're already starting to sell it to some customers in their Office 365 suite. That means using it in Teams, Outlook, and apps like that. And so far, Google, they only have this experimental chat bot called BARD that you can sign up and try and play around with, but they don't have any monetizable product that they can put it into yet. So any hints from Google or Alphabet when they're going to start putting that into search, when they're going to start putting this into Google Docs, they've said they're going to do it. And I would note that also their I.O. conference, that's their big developer conference every year, they're having

that next month. So maybe we'll get some of those announcements then. But I guarantee you on the call, it's going to be when are we going to start seeing this come out in your products? And Steve, I guess we're at that stage right now where simply showing momentum toward having products with AI might be enough. But it's still remarkable to me that Microsoft with a two trillion dollar market cap and all of these actual real time, you know, real here and now profits coming in the door every day is trading on this basis. So do you think that this is just a phase or this is going to be the the driving story for these stocks for a while? I think it comes down to search, Mike, because, look, there's this.

Remember last week we were talking about that report in The Times from Samsung just, you know, considering even ditching Google as its main search engine and its devices. That was enough to send Google shares down like two or three percent. And so it's this idea that maybe Microsoft, with its early lead here in AI, can kind of eat into that. Now, it hasn't proven out yet, but just the idea that some people are excited about it, that's enough to move the needle for sure. You know, I've seen some commentary that given this arms race that you have out there among these big companies, everything seems to move in the direction of, well, you should love NVIDIA more, right? I know that that's on the hardware side of things. But the fact that these companies are

forced to spend so heavily and pay any price to build up their capacity here, I just wonder what it's going to mean margin-wise. Yeah, that's another thing I expect to come up on the call. How much are you guys spending on this? Just to answer these queries you put into these chatbots is very expensive to do at scale. And so the question is, you know, Google kind of claims they have a way to do it kind of faster and cheaper and more efficiently than Microsoft can. So that's why we also see these companies say we're going to explore making our own chips so we don't have to buy those super expensive chips from NVIDIA. We can do it all in-house. So, yeah, that's going to be another

question. What's the margins on this? How much are you spending and when do you expect that to pay off? For sure, that's going to be a question today. All right. We'll be listening. Six minutes from now. And we'll be certainly coming back to you, Steve, for all the details. Appreciate that.

As we move into the close, less than a minute to go, we do have a percent and a half loss on the S&P 500. This 4070 level, which is basically where we're bumping along right now in the S&P, is one that's been in the sights of traders for a while. It was sort of considered to be a first possible area of support in a normal pullback. It goes back to the lows in the early part of April, and it looks like we might finish exactly there. We have seen an uptick in volatility.

The VIX has gone above 20 for periods of today, but it has settled back, so it's still up more than 2.7 points. Treasury yields lower on the day as we did have a fair bit of slowdown related news in the economy. You have the 10-year. That's about 3.38. And we are going to go out with a 345-point drop in the Dow Jones Industrial Average, the worst date in about a month. That does it for Closing Bounce.