Closing Bell - Closing Bell: The Case for Small Caps, Jobs Data & Geopolitical Tensions 10/7/24

Episode Date: October 7, 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.

All right, welcome to Closing Bell. I'm Scott Wapner, live from CNBC Global Headquarters today. This make or break hour begins with the direction of this market. Most say up, but maybe a bumpier road than some had gamed out. We will ask our experts over this final stretch what is in store. In the meantime, let's show you the scorecard with 60 minutes to go in regulation. Not a pretty picture here. In fact, the selling has picked up over the last 20 minutes or so. We've been lower all day long, but now we have 1% declines across the board. Part of the reason, take a look at yields. They are up yet again today.

10-year, 2-year, 4% or above. Oil rising as well. Another major hurricane heading towards Florida. The Middle East, of course, is still a flashpoint. We are on edge about both, not to mention earnings about to begin and the road ahead for the Fed. If not for a strong NVIDIA day, the S&P would be down a bunch more, I tried to say, than it is. There's NVIDIA up near 3%. It takes us to our talk of the tape.

Are stocks still on solid footing? Let's ask Dan Greenhouse, Solus Alternative Asset Management's chief strategist. He's with me here on set today. Do you feel like they are? Because we felt a little unstable over the last week or so. Yeah, we've had a real good run. I think the oil story that you alluded to at the outset is something about which we should be aware. WTI, we just had the chart up on the screen, was just $70.

Now it's $77. Obviously, a lot of that is going to be the geopolitical risk premium associated with what's going on in the Middle East. And that's obviously something to be aware of because retail gasoline prices have been trending down for some time now, obviously providing a bit of a boost to a consumer that's already doing quite well. If these higher oil prices stick around, that may throw a little bit of a wrench in the works. I mean, so we're debating the road ahead for the Fed. I've got yields up, maybe more so than people thought they would be since they cut by 50 basis points. I've got the Middle East is a problem, obviously. Now I've got another hurricane that I'm really concerned about

because it's on the heels of the other one, which has already wreaked havoc. And, you know, it's done in and of itself some damage in the markets, too. What am I supposed to do with all that? I thought the trend was still up. I thought I was supposed to keep my eye on the ball and focus on the fact that we're cutting and the economy's good. Do I need to figure out some different things now? No, I don't think so. I think both of those stories still remain in place. Obviously, the human tragedy of the hurricane that already hit and the one that's on the way is separate from markets. And obviously, our hearts go out to everybody affected and soon to be affected. But from a broader economic standpoint, not much changes

in the wake of either one. The story in the Middle East is a different story because that's what's really driving up oil prices. Now, the positive side of things. And what do I mean by that, of course, is that the ever present threat for now is that Israel chooses to use this moment to strike either a refining facility, a production facility, something in Iran, which takes some of Iranian barrels off the market. Some of that can be filled by Saudi and broader OPEC spare capacity, but it's something that's a more immediate issue for markets. What do I do with the fact that yields are up? I'm not sure people had gamed out that, okay, the Fed is going to cut by 50 and they're going to continue to cut and yields today are going to be higher than they were before the Fed is going to cut by 50, and they're going to continue to cut, and yields today are going to be higher than they were before the Fed cut?

Yeah, well, listen, in both cases, at least certainly in the short end, the issue right now is that some of those additional cuts that the market had overpriced are coming out. You had Brian Belsky on in the halftime show, and any number of people have made this observation as well. The market was way ahead of itself, the Fed fund futures market, the euro dollar market, way ahead of itself in terms of pricing the number of cuts that was likely to come. Not because the Fed wasn't signaling that. In some cases, they were. But just the broader strength in the economy, everyone's been waiting for that to wane. And consistently, we've not seen it wane. And in fact, obviously, the most recent jobs report bore out the idea that the economy is doing fine.

So yields are going back up as a result of that. But I would stress that's for the right reasons. It's good. Yeah, I mean, yes, it's good because they're going up for the right reason. But in the same moment, does it threaten the bullish case? Well, what it does do is, how do I want to phrase it? It leads to the diversification that we've seen and the rotation that we've seen. If you look over the last three months, and obviously that's broader than the most recent Fed meeting, the only sectors that

have underperformed the S&P 500 is tech, communication services, and discretionary. And the only reason discretionary is underperforming is because Tesla and Amazon are the two largest holdings. You said it leads to the diversification. Does it hurt the broadening out or the cyclical trade because yields are actually going up now? No, I don't think so. Remember, the whole idea behind lower interest rates and tech names, long duration assets, is the more, in terms of like a discount cash flow model, the more of your dollars that I'm discounting further out, the value of those are higher in a present value sense. But for Google, for Meta, for Apple, et cetera, et cetera, they make so much money right now. It's not really a rate. The Mag 7 is not really a rate play from that story. It's the more esoteric. It's the more speculative tech names where you see terminal

value. This is a little accounting-y for the audience, but those names get more attractive in a lower rate environment. But I mean, it's not great for, you know, let's just say the small caps, for example. No, it is not. Which, you know, we've been looking for something to give them a boost. You say, well, you got to wait for the Fed to cut rates. Fed cut rates. They're, you know, small caps are the biggest underperformer today. No, that's right. Not just today, by the way. They have not done well. For quite some time. Mind you, I will say it again. I think viewers at home should be paying much more attention to mid caps than small caps. We pay a lot of attention to small caps on the

network. We spend a lot of time talking about the Russell, the S&P 600. But again, I love this. I don't think anyone out there watching this can name more than three stocks in the Russell 2000. But people use it as, I don't know if it's a litmus test or what, but they use it as a central part of their broadening story. It's like the ultimate part of the market broadening is like, OK, you go down the cap spectrum. And when you finally get the Russell and the small caps participating in the rally, that's a sign of true market health. When we've been sitting here wondering where this trade is going to be.

Yeah, but I reject the notion that you need small caps for true market health. And this is a point I've been making with you for some time. Why do I need small caps to rally for the market to be better? Why can't it just be the rest of large caps? Because for the vast majority of investors out there that are watching, yes, some are in mid-caps. There's a bunch of names we know in mid-caps, Abercrombie & Fitch, Williams-Sonoma, Dick's Sporting Goods, et cetera. But the vast majority of investing is done in the S&P 500, basically. And when you look at the disparity in market cap between the largest names, which are obviously measured in trillions, and the smaller names, which are measured in tens of billions, let's say, I don't know that I need

companies at 500 million market cap to rally for me to feel good if I'm getting that rally, which you are, in the 10 billion,, the $50 billion, the $100 billion companies. Sure. But last quarter, you had the equal weight outperform the cap weight. You did. You did. As the mega cap tech stocks took a back seat. That's right. And as I just mentioned, over the last three months, eight of the 11 sectors outperformed the three that did. Right. But my point now is, though, if the market is going to be a little more on edge and yields are going to go up and then, you know, maybe that broadening trade is going to be in a little bit of trouble. If you still have some weakness when the mega cap stocks and their performance, that's how you build a tough market case. Yeah. Listen, it might be. Listen, I'm not suggesting that there's going to be one, but that's how you build one.

Listen, right now, with what's going on with oil prices, a lot of what's happened with yields has been the drop in oil prices. This is a really good relationship between fluctuations in oil prices and fluctuations in inflation, therefore yields. And the fact that oil is up seven bucks in a minute and a half is not a good thing from a yield standpoint. So that's part of it. It's part the Fed. It's part oil. But if we step back for a second here, obviously right now, as I mentioned, part of the worry is that Israel is going to go and bomb some facilities. If that doesn't happen, some of this is going to get corrected. Some of the oil move is going to get corrected, which is going to help dampen some of the yield move. But in the short term, could you see some fluctuations in the equity market as investors who had rotated out of

mega cap into some of the other names as a result of, or at least concurrent with the drop in yields as if do they rotate back? Yeah, maybe. All right. Let's bring in Jordan Jackson now, JP Morgan asset management and young Yuma of BMO wealth management. Gentlemen, it's good to see you. Jordan, I'll turn to you. Are we focusing too much on what some would consider to be noise and not enough on the big picture of rate cuts and strong economy? How do you see the market here? I think we are being a little bit myopic here. I think the trajectory is still for the Federal Reserve to continue on its easing cycle, obviously, over the course of this year and over the course of next year. You know, the move higher that we've seen in yields as of late, as we've talked about, has really been the markets taking off about 50 basis points worth of rate reductions through 2025. And this is on the back

of the data. Now, I'm a little bit more concerned that the data is going to be very volatile, very choppy. Some of the hurricanes may impact some of the employment numbers that we get over the next couple of labor market prints. So I think we will need to try to look through some of the noise and get back to the fact that, again, the Fed is biased towards wanting to cut rates. They're cutting rates in an environment in which corporate earnings are actually growing through the fourth quarter of this year and into next year, and we'll get a good sense

after we get some of the big tech companies reporting over the next couple of weeks. But we continue to see a pretty robust backdrop for earnings, a pretty robust backdrop for growth. Right now we we've got about 2.2 and a half percent growth penciled in for the third quarter and gradually trending growth through the end of this year towards normal 2 percent. You know, all this suggests taking a step back that the bulls have it and we can continue to see a market that that that grinds higher. Young you. Is that how you see it? Is this just a noisy something that needs to

be tuned out a little bit and focus on the big picture? Or do we have more issues here we need to deal with that we didn't necessarily think we would? I think, Scott, it's great to be here. We do think it's mostly noise. We do think it is warranted that those longer-term yields are rising. We do think the risk is to the upside. And on days or weeks when those longer-term yields or the 10 year treasury yield rises we do think the market's going to have a bit of a pause or somewhat of a pullback because it wants to see where the ultimate landing point is for that because we do think growth is going to come in strongly right now a lot of the rally that we've had over the past couple of months has been driven by the expectation of lower interest

rates and the cutting of rates. And with some of that getting priced out, now the question is, where do those longer-term yields end up? And once we get past the election, I think we'll see a greater focus on the debt and deficits. We have China stimulus that's likely to be coming as well, and even potential for tariffs. So I do think we have upside risks, those longer-term yields, which could mean a bit bumpier path. But again, taking a step back, looking at the bigger picture, we have strong growth. We have a Fed that, although it's going to cut rates probably more gradually than the market's expecting, is going to cut rates and take it to sub 4% on Fed funds by mid-year. So overall, the backdrop's favorable, but it's not going to

be a straight line here. Yeah, I mean, you're not the only one who thinks that either, you know, what this move in yields potentially means for stocks. I asked Jeremy Siegel of the Wharton School about that on Friday. He's obviously bullish, but he's taking notice. I want you to listen to what he said. I can certainly see six thousand on the S&P by year end, but it's going to be contending with higher yields. I think I think the 10 year is eventually going to set down. I don't know if we're going to get there in two months, but closer to 4.5% from where we are today. Okay. So, Dan, is that a problem? I mean, Siegel, he's obviously still positive the market,

but he's taking notice of where yields are. We're not at 4.5%. We get at 4.5%, we're still going to see 6,000 on the S&P? Yeah. There has intermittently been a focus on yields, a myopic focus, to borrow a word earlier, on yields as if equities cannot rally in a higher yield environment, in this case, 50 basis points higher, not in the big context of things that much. But I think it's important to remember that the relationship between yields and equities is a moving target. It's not always higher yields, lower equities, lower yields, higher equities, or even sectorally, it's a bit of a moving target. And it's important to remember that there are instances, and I think we're living through it now, where higher growth is engendering higher yields, in this case because

of what the Federal Reserve is doing, and that environment can be good for equity prices. But part of the bullish story was Fed cuts, maybe the 10-year, you know, I think people had scored it closer to 3.5% than 4.5% on the 10-year. So in the near term, at least, I don't necessarily care what history suggests about the relationship between yields and stock performance. If you thought that yields were going to be coming down, and now, in fact, they're going to be going up, and you've had to recalculate that over the last 20 to 30 days, doesn't that change the calculus for stocks? Well, first of all, I reject that. History is always important to understand in the context of

relationships, et cetera, et cetera. They can there's you can have regime change, but knowing how equities perform in certain environments is always helpful. But that said, people who would argue that long term rates have to go down have to go down because the Fed's cutting rates are making short term rates. Sure. The Fed funds rate is very closely related to short-term rates up to, let's say, the two or even the five-year. But the 10-year is a whole different story. The two-year is at 4%. Yes. But listen, not a lot of the IG companies are borrowing for two years. But that said, it's also important to remember that the 10-year is 4%. It is not 8%. It is not 10%. It's not 5%

as it was. So rates are lower than they were. And in that environment, equities can do fine. And I forget my opinion. It's happening. We're still basically near a record high and the 10 years 50 basis points up. And again, that's in the context of oil prices, which I think are driving a big chunk of it. I reject the idea. I don't think young you were suggesting this. I also reject the idea that after the election, something's going to be done about the debt and the deficit. This is just obviously something we're going to have to wrestle with for quite some time. Yeah. Young Yu, I'll just I'll just come back to you. I mean, you heard what Jeremy Siegel had to say. Maybe equities can withstand a move higher in rates. But but if anything, it's a it's a change of calculus,

I think, to where many saw yields going in the wake of what the Fed is doing. Well, we do think equities can withstand those higher yields around the mid-4 percent range. If you were to take that to mid-5 percent, I do think the calculus changes pretty meaningfully, but we don't think it's going to get there. But the difference is when you have a move up in yields like we're having today, the perception, at least, is very immediate. Whereas the growth aspect that we actually expect to be quite strong in the 2025 and throughout 2025, we expect the impact of Fed cuts to really have a stronger effect on the economy than people are anticipating and that growth to really come in. But that has to prove itself. That has to prove itself over time. So the impact of the yield is more immediate in that sense. And that's what can move around markets on a day-to-day basis. But again, if we step back, we do think that growth is going to

be forthcoming. That's ultimately going to be what drives markets higher, along with yield levels that are reasonable and digestible by the market is where we think we'll be. Jordan, the other question is around earnings, which, you know, I know there's optimism around, but expectations have been slowly coming down for the current quarter or the past quarter, the current quarter, and then into 2025 when, you know, the numbers start to get large. People are looking for almost 15 percent earnings growth. I think maybe 15 percent is a touch optimistic for sure, but I think double digit earnings growth? I think maybe 15% is a touch optimistic for sure. But I think double digit earnings growth for next year is completely reasonable. This is a backdrop, again, where the Fed is cutting rates. And so perhaps interest burden is going to be lightening up a little bit.

Perhaps the Fed, relative to other central banks, may be cutting slightly a little bit quicker than some of the other central banks. So maybe the weaker dollar story continues to play out over the course of next year. This bodes well for multinational earnings, which a good portion of S&P 500 companies derive their earnings from overseas. Oil remains to be the big wild card. Certainly, we could see upward pressures on oil prices. But given the amount of spare capacity that OPEC has, that certainly could keep a bit of a lid on how much oil prices move higher and maybe even buy as oil prices lower, assuming we get past some of this uncertainty in the Middle East by the beginning of next year. All that bodes well for input costs for airlines, transportation, industrials, et cetera. And so you put all those together, there's sort of a nice trifecta there where earnings could be well-supported into next year.

And you look at profit margins across the Magnificent Seven, they're at around 24%. They continue to grow. There's scope for profit margins to expand further as well for the rest of the market. And so I know we could be a little bit more focused on the bad things to worry about. And we should be, you know, as investors to hedge against some of those risks. But there's every single year, there's always something that sort of clouds the market.

And the market has been pretty resilient and continues to march higher. So we don't want investors to miss out on that. It has. We're not that far from highs, obviously. So, Dan, one of the other issues with the broadening trade, the best sector over the last quarter was utilities. There's obviously a lot of money flowing there because of the AI trade. Jonathan Krinsky, just before we came on the air, put out a note which says, time to fade the Utes. Historically stretched and ripe for a correction, says you could get 7% to 10% correction. You could not only point to that group, but you could look at some of the other

outperformers over Q3 and say, well, they went a long way in a short period of time, so now they're looking a little expensive. What do you make of his note and that bigger story? Listen, I'll leave the technicals to John. He's great at that, even though I trained him, but we'll discuss that with him later. But listen, I think, you know, like Joe was on at halftime, he brought up Affleck. Look at some of the insurance names. They've gone straight up. Some of the consumer-focused names have gone straight up. I mentioned, and everyone, you talked with Brian at halftime about McDonald's and Home Depot, back to all-time highs. There's been a big move in the third quarter. There's no doubt about that

in a broad array of names. Could you get a bit of a correction, maybe around the election or, more importantly, a disputed election? You could absolutely get some additional volatility, perhaps even to the downside. But at the end of the day, getting back to the conversation, what matters for investors is growth, it's earnings, it's the economy, it's the consumer. And all of those things still look pretty good. Obviously, you've got near-term headwinds, as Jordan alluded to and I mentioned in the oil market. Obviously, there's near-term worries about whether portions of the market are overvalued or overbought, and you could get that correction. But unless something changes in those other

really important core issues, the bias has to remain for now to the upside. You weren't taking any credit for Krinsky's success. I take credit for his entire success and his entire career. Good. I'm glad you clarified because that's what it sounded like to me anyway. Young you, I'll give you the last point. You can wrap it up. I mean, we haven't even talked election risk if you think there is any at the moment. Well, there's certainly a broad range of potential outcomes here, and we probably won't know the results immediately after the election as well. So I think there's some uncertainty that could

be priced in the market. I think ultimately what's going to come out on a policy basis is going to be more narrow, certainly more narrow than the candidates' broad platforms, and the impact on the economy probably less than people are anticipating, certainly less than some of the sort of broader or more extreme considerations that participants might be scared about. So overall, we think the economy's going to weather the election outcomes, the policy changes that take place. We think the underlying fundamentals are pretty resilient here in the economy. But we do think, again, that there's potential for upside

pressure on longer-term yields in the wake of the election. We don't think, as your speaker there said, we don't think either party is going to really want to deal with the deficits, but we think the market's going to have a renewed focus on the debt and deficits, which could lead to upside pressure on yields when we do have to fund all of these big programs that we have and all the spending that's taking place in the economy. So we see that as a theme in 2025, one that could perhaps occasionally cause some bumps amid this strong growth trajectory that we expect. All right, guys, we'll leave it there. Young you. Thank you, Jordan, as well. And Dan Greenhouse, thanks for being here. Thank you. Jonathan Krinsky will give you a shout. He will.

All right, let's send it to Pippa Stevens now for a look at the biggest names moving into the close. Hi, Pippa. Hey, Scott, you mentioned NVIDIA, which has overtaken Microsoft to once again be the second largest company by market cap. Now, it is higher after fellow chipmaker Supermicrocomputer said it's shipping more than 100,000 GPUs each quarter. The company also announcing a cooling solution for data center clients aimed at lowering power costs. Those shares are up 15%, making it the top stock in the S&P. And Arcadium Lithium is surging after the company confirmed

it was approached by mining giant Rio Tinto about a potential acquisition. Now, the talks are non-binding and no specifics were given. Reuters did previously report that Arcadium could be valued between $4 and $6 billion, though shares up 34 percent. Scott? All right, Pippa. Thank you, Pippa Stevens. We're just getting started. Up next, speaking of technicians, Chris Ferron. He breaks down what the recent jump in yields could in fact mean for this market. We're live from our global headquarters today. You're watching Closing Bell on CNBC Dow Dow off about 400.

Stocks are under pressure today as interest rates climb near two-month highs. But our next guest says the recent run-up in yields may be overbought and is heading for resistance. Joining me now on set, Chris Verone of Strategas. Tell me more, because that seems to be the issue at hand that we need to focus on. Yeah, I think the question is, you know, what's the dominant trend in yields? And I would say that it's largely still down. I mean, yields peaked a year ago at roughly 5%. We failed at a lower high this January, February. We did it again this spring, this summer. Nothing prevents them from

rallying back to 415, 420. But how aggressive do you want to get on the short side of the bond market up there? I think that's where you start looking for some value. And listen, I think in particular, you had a lot of bond proxies very, very overbought into this. You saw the utilities run basically all year. The REITs have run all year. Let them correct. Let them come in. Where do we want to step in and buy weakness?

I think that's the next thing we should be focused on. Let's focus on yields before we do some of the other spaces. And I want to ask you about utilities because I referenced a note that was out within the last hour. What if higher for longer is going to become a thing? And maybe we weren't so convinced it was because the Fed cut 50 basis points, and we know they're just beginning. However, what if it's a problem? Higher for longer.

So I'd watch a couple things in this regard. I'd say, number one, if it really is higher for longer, and we're talking about a major new up leg in yields, they've got to punch through 425 decisively. What're talking about a major new up leg in yields. They got a punch through 425 decisively. What if it's a stay here leg? I mean, this leg, I think, was unforeseen by many. So let's just assume that yields now, let's say they stay here.

You know what's curious, Scott, about this leg being unforeseen by many? I might push back on that. When you look at what yields do around Fed cuts, believe it or not, they tend to go up. They tend to bounce. Think about the 95 cut, right? That was their mid-cycle slowdown. That was your non-recessionary rate cuts. Yields were falling into it.

They cut on July 5th of 95. They rallied for 12 weeks and then resumed lower. So we've seen this before, particularly in the kind of soft landing, no recession threshold. So I don't think we should have been as surprised. 425 is the major kind of downtrend line. Underneath there, I think you play by the same rules we've played by all year. Ultimately, rallies and bonds are opportunities to get long. Above 425, all bets are off. What about equities? I think the primary trend is up. I think we're consolidating in that uptrend, maybe 5,400 on a pullback here. I don't think it's the end of the world. But what I care

about is look at the status quo, right? What's been driving this market all year? Financials, industrials, and a very benign credit environment, right? If the status quo has to change, I think we need to see deterioration in those groups. And I think it's too early to make that your base case. It's an election month. VIX is breaking out here a little bit. I think you can get a consolidation or a pullback, but don't forget the underlying trend. 80% of S&P stocks are above the 200-day average right now. That's a pretty healthy framework under the surface here.

Do I need the areas that broadened in Q3 to continue to work if mega-cap tech is not going to carry the load? I think mega cap tech is remarkably split, right? When you look at- It is. Microsoft basically on the lows, Nvidia breaking out. Apple's been stuck in a range, Alphabet lower. Amazon weaker, right?

You can go name by name by name by name. I think what's important is you keep the pro cyclical, pro economic groups involved in this market. The industrials have been leadership for all two years of this bull market. So if the call is going to change, I think the most reliable leader of that whole two-year run would have to weaken. We haven't seen it yet. On volatility, I would also note you get worried about vol when credit conditions also weaken. So we've seen VIX rally here, but we haven't seen underlying credit conditions weaken.

Those two are siblings. When they both go at the same time, you get uncomfortable. That's not been the case here. Let me lastly ask you about the utilities call, because a competitor of yours at another shop came out with a note just before we came on the air and said fade utilities. They're historically expensive, historically stretched. There it is. It's Jonathan Krinsky, BTIG. Says you could get a 7% to 10% correction in that group. Do you look at this the same way? Yeah, I think that's certainly reasonable. And John's a great analyst and a good friend.

Let these come in. The longer-term trends in these stocks are still up. Let's not lose sight of that. But they've had an incredible first nine months of the year. I think especially this time of the calendar, October through December, they don't have good seasonality to begin with. Let them come in here. You know, what's interesting, when you look at globally all these utilities, I think what's been really underappreciated the last two or three weeks, the Chinese and the Hong Kong utility stocks have been massive

underperformers. You've seen this complete migration away from anything defensive in that part of the world, and it's bearing itself out in these Utes as well. I mean, utilities, and everybody knows that they've done really well. But when you look at the sector performance, the outperformance by tech and comm services is barely above the utilities. It's up 25% as a group year to date. Tech's only 28. It's pretty remarkable. In some respects, tech strength has almost been overstated this year to an extent. I'm not sure many know the EMQQ, which is the emerging market triple Qs, is actually outperforming the actual triple Qs this year. And you can kind of do this. I mean, gold is up more than the triple Qs this year.

So at a minimum, there have been these very concurrent stories running alongside tech that I think deserve equal amount of attention from our part. Chris, we'll see you soon. Great to see you. Thanks for coming out here. That's Chris Ferron joining us today. Up next, Morgan Stanley. Sherry Paul reveals the sectors that she is betting on. Part of the market she says she's adding to right now.

Tell you what it is when the bell comes right back. I'm from a small country in Latin America, Costa Rica, and when you grow up in such a small country, you realize very quickly that you need to do a lot with very little. So for me, I have made scrappiness and creativity a big part of my work, and actually I think they're my superpower today. I bring a lot of the Latin values with me to work every day. That includes being really positive, vibrant, and approachable. And that energy really sparks the team.

All right, welcome back. As we're read across the board today, stocks are struggling to keep momentum from Friday's record-setting rally. The Russell 2000 down a percent. My next guest says now's the time to strategically add to small caps. Joining me now is Morgan Stanley, Sherry Paul. Welcome to our programs. Good to see you. Thank you, Scott. Be more specific, strategically. What does it mean when we talk about small caps? Because I think it's a good point of debate right now. Yeah, well, thank you again for having me. It's why I wanted to lead off talking a little bit about small cap, because technically when the cost of capital gets cheaper, which with the Fed sort of pumping the brakes at 50 b cheaper, which with the Fed sort of

pumping the brakes at 50 bps, we saw that little pop in small caps, we're still in a slowing economy, albeit not slowing as quickly as maybe people had anticipated. And so, you know, the trend for small caps is still getting teased out because they're so dependent on domestic consumption. Although from a selective standpoint, they appear to be pretty ripe for some M&A. You know, I can't help but think of higher for longer. And as we, you know, we talk about rates ultimately going down because of what the Fed's doing. How do we think about the prospects of higher for longer as yields have been going up and it's obviously weighing on this trade? Well, the good news is, is that look at how great the economy is

doing with these high interest rates we've been living with now for the past few years. And so the most important thing I think investors need to know is that we're going lower on rates. I think it's less important like how much and when other than the trend and the theme for rates is going lower. What I think we need to see, though, to get like a real bump in small cap is like a real turn in the economy from a consumptive standpoint, which is challenging about that. And for the small cap trade is that while markets and economic data are in parallel universes, they're operating in different time zones and markets are forward thinking while the economic data is printing what's happened in the past. So I think it's really crucial for investors to be forward thinking, which is why I continue to

recommend big cap. And what we're telling investors is get like sort of a small cap return on a big cap balance sheet by strategically placing money across sectors in the S&P on a very selective basis. But over-weighting and under-weighting right now is going to be the key in a market cap dominated type return that we've experienced in the last two years. I think that broadens out over the next year. And it sounds like even when you talk about large cap or going up in the cap spectrum, you're not focusing solely on mega cap tech. It's just broadening, but large. Yeah, broadening, but large, because remember the thematic that's been the underpinning of this sort of tech revolution has been AI. And the

broadening out of that theme now is that we go from innovators to installers. And as we see that broadening out, particularly around industrials, which is a thematic of ours in our portfolios, we should see that productivity enhancing, you know, cost reduction kicker. In addition to the theme of rates going lower, which is why we're recommending financials, which boosts the M&A activity and mortgage, you know, mortgage business for financials. And then obviously staples, which sort of speaks to the theme of a slowing economy, maybe a bit of a more cautious consumer um which makes a lot of sense plus you pick up a great dividend and it adds a little lower volatility to a portfolio i mean at the same time how do you currently feel about large cap tech i feel strongly about large cap tech and i i've been in i've been the voice of large cap tech for

the last you know three or four years um i think it's a theme, which is different than an idea, right? An idea is, wow, I wonder if this singular idea actually has legs, whereas a theme is a consensus building thematic that we have some consolidation and now some momentum behind. And that squarely sits within software and hardware, particularly if you take a look at what corporations are going to be doing with these enormous cash balances that are getting pay cuts as rates go lower. We should see a pop in investment, research development, and basically an upgrade in corporate systems. So that should be a boost. But it's a longer-term thematic. It's a longer-term game. So the time horizon for that should be at least 12 to 24 months for investors. Is there a thematic case to be made for healthcare outside of GLP-1?

Well, yes, we have an aging population, so there's that thematic. Plus, we have these innovative drugs that have come to market, not to mention the fact that with AI and the ability now to build large brain analysis around DNA and epigenetics and the advancement of biotech and vaccine and therapeutics, I think all of that bodes well for health care. Not to mention that from a leadership standpoint, this is a sector that has a real strong bias for supporting their investors through dividend and dividend increases. So it's a core part of our income strategy and our portfolio in addition to innovation. And lastly, just about earnings in general, since we're going to be talking a lot more about it starting Friday with the banks, and you've obviously made the case for why you like the financials. Do you think earnings expectations are realistic for the remainder of this year and into next? I think they're directionally correct. As a portfolio manager, I'm looking

for directionally correct, not perfect. And so if you're sitting in a money market account in a declining interest rate and then taking a look at what the opportunity set is in these capital markets, given the setup and the grab bag of the positive framework we're dealing with. And I would be pivoting into stocks over cash in a directionally correct earning cycle. Sherry, we'll leave it there. Thanks for coming on. We'll see you soon. That's Sherry Paul. Up next, we track the biggest movers into the close. Pippa Stevens is back with that. Hi, Pippa. Hey, Scott. Two activist investors have two new targets sending those stocks higher. We've got the names to watch coming up next. We're 15 from the bell. Let's get back now to Pippa Stevens for the stocks that she's watching.

Hi, Pippa. Hey, Scott. Pfizer shares are in the green after activist investor Starboard Value took a roughly $1 billion stake in the company, according to People Familiar. The firm has approached Pfizer's former CEO and ex-finance chief with plans to mount a turnaround at the pharma giant, according to The People. And sticking with activists, air products and chemicals on the move as Mantle Ridge amasses a more than $1 billion stake in the industrial gas supplier, according to a person familiar. The firm wants to discuss strategic plans, including CEO succession, as well as capital allocation, the person said. Now, both of those stakes were first reported by The Wall Street Journal. Scott. All right, Pippa, thank you. Pippa Stevens still ahead.

We'll tell you why Disney shares are dropping today. It's coming up on The Bell next. We're now in the closing bell market zone. CNBC senior markets commentator Mike Santoli here to break down these crucial moments of the trading day, plus Steve Kovac on two big tech downgrades today and Julia Boorstin on what's putting pressure on shares of Disney. Mike, I'll turn to you first. Your thoughts on this market. We have this pileup of familiar challenges that I think are all right in front of us right now. Obviously, it's the yield move. It's the repricing of the Fed. It's the geopolitical backdrop. It's the season. As much as the prevailing view is October, you got to expect some choppiness. You have to expect maybe some downside tests.

Why are you going to put on more risk coming up on the election? As much as you want to fade that, because it seems like it's such a consensus view and say, hey, the most surprising thing would be if we actually ripped right higher from here. It's really hard to do. It's really hard to strenuously oppose that idea that it's just a little bit too many impediments to really going out on a limb at 21 and a half times earnings and deciding to buy this market with both hands. You are seeing still selectivity. It's not a washout entirely, even though we're down 1% of the S&P. I will point out, too, the lows for today were just above the July highs in the S&P.

We've been defending this area just below 5,700. We haven't made much headway. The average stock's outperformed, but so far kind of keeping in this upper range of the year to date. How are you thinking about the rise in yields and the relationship to stocks? It's really interesting. At some point, probably not too far up from here, it starts to press on stocks a little more aggressively. I think right now we're back at early August levels in the 10 year Treasury yield, right? Just above 4%. You know where the S&P was there? 5,500 or something. So 200 points lower. In other words, it's totally compatible with the market being okay if it's for the right reasons, if we're just kind of pricing out more urgent Fed

rate easing. One of the issues, Steve Kovach, today are these big downgrades, Apple and Amazon. You want to take us through that? Yeah, let's start with Apple here, Scott, because it was downgraded at Jeffries from buy to hold. And it was an interesting note because a slightly different take on artificial intelligence than many on the street already have. In fact, Jeffries says expectations are too high for the iPhone 16 demand. And now this doesn't mean they say the Apple won't benefit from artificial intelligence. The analysts here are saying it's going to take another two to three years, though, for the iPhone hardware to be powerful enough to run more impressive AI features than what we've seen so far. And then Apple may be able to charge a subscription for those.

By the way, Bloomberg says the first round of Apple intelligence launching on October 28th. Now, let's move over to Amazon here because Wells Fargo downgrading that stock from overweight to equal weight. Analysts are pointing to multiple headwinds facing Amazon, including more competition from Walmart's fulfillment marketplace for third-party sellers, expecting advertising profits to moderate,

and investments in the Project Hyper satellite internet service could hurt operating income. And it's been a crummy start to October here for Amazon. Shares are down about 3% so far this month, Scott. Yeah, Steve, thank you, Steve Kovach. I mean, Amazon, Mike, has been down, I think, eight of nine days, something like that. Just hasn't been able to find a lot of traction, but it is finding negative notes because we've seen a flurry of them recently.

It starts to feel safer to challenge these stocks' valuations right here or the next catalyst. It's clear that the analysts were kind of truing up their models and going to the company and saying, is it OK if we price in some more margin expansion here? Do you really think you're going to be in harvest mode? And they're getting the signal that's saying, nope, we're still spending. Margins maybe don't have a lot of upside. With this move in Amazon to the downside today, only two of the MAG7 are outperforming the S&P on a year-to-date basis. That's NVIDIA and Meta. So the rest of them, again, it becomes safe to underweight them or not necessarily have that

much commitment to them. So this has been going on really since June, where these stocks have kind of been seeding the spotlight to the rest of the market. It doesn't mean there's anything bad going on. It just means that they're kind of, you know, need more time to grow into the valuations they got by the middle of this year. Cautious note today, too, on Microsoft. So we'll keep our eyes there. I will say we've still got 90 plus percent of analysts recommending Amazon. So it's not as if they're completely abandoning it. Julia Borsten, talk to me about what's happening with Disney. Well, Disney shares are trading down about 3 percent%, presumably reacting to concerns about Hurricane Milton impacting the park. Disney telling me that Walt Disney World

Resort is open and we are monitoring the storm. Meanwhile, Comcast, CNBC's parent company, which of course also has a park in Orlando, is also seeing its shares trade down now, down about 1.5%. Now, there is another factor that could be impacting these media stocks. Barclays downgraded Netflix to underweight, which then shares the streamer down two percent. That analyst saying the valuation prices in more than a doubling of the subscription base from the present level, saying that that does seem unrealistic. And of course, Scott, we're seeing both Disney and Comcast also bet so much on streaming. All right, Julia, thank you. Julia Borsten, you just heard the animation there, two minutes. Inflation data, like this week, I don't know,

may not hold the same kind of weight that it once did because we feel like we've a little bit moved on. And then earnings in earnest on Friday. Interestingly on CPI, you know, the argument's been made today that it's now back to being a little bit of a live report, right? Because you have the sensitivity to yield to the idea maybe the economy is not decelerating the way we thought after the jobs report. I don't think really there's a reason to rethink the idea that it's still pretty subdued. It's going to be under two and a half year over year.

But you can see the market looking for excuses to get a little bit anxious about various things. So, yeah, that's something we have to watch more than we maybe thought we did. And then earnings for sure. And, you know, markets traded pretty poorly in the beginning of these earnings season in the last couple of quarters. I think expectations have certainly been brought down enough, down by like three percentage points over the course of the third quarter. So it seems like the bar isn't that high. But bank stocks never trade that well as a group off of earnings. And I'm wondering, because you say that, and we had this conversation a little earlier with Chris Ferone, that this market needs the financials to continue to perform. So maybe there's a little bit added weight there for a group that, as you said, doesn't normally tell

exactly what's going to happen with earnings. No, that's very true. I would say financials outside of core banks have really been carrying the weight of that sector earnings. No, that's very true. I would say financials outside of core banks have really been carrying the weight of that sector. At times, it's been Berkshire Hathaway and his Visa and MasterCard, and it's the sort of non-bank, fintech-y type things that are inside that index. But there's no doubt about it in asset managers that they will matter. And the credit situation is what Chris was talking about, too. There's going to be a window on all of that. All right, we'll see you tomorrow, Mike. Thank you.

See all of you as well. We'll go out red. Bells are ringing, as you see here, decidedly so on the Dow. I'll see you tomorrow.