Closing Bell - Closing Bell: Year-End Reset or Major Red Flag? 12/30/24

Episode Date: December 30, 2024

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

And welcome to Closing Bell. I'm Mike Santoli in for Scott Wapner. This make or break hour begins with stocks finding some traction after a morning skid brought the major indexes with insight of their December lows. The S&P 500 was off more than a percent and a half at its worst before those dip buyers showed up. You see now it is off about six tenths of one percent. NVIDIA has been instrumental to the intraday recovery, rising at one point above that 140 level that the stock's been chopping around for months. It is still up one and two thirds percent at the moment. The early index shakeout following Friday's one percent plus loss came as Treasury yields eased lower after weeks on the rise. A hint that some asset allocators shifting from stocks into bonds after equity sharp outperformance all year might have been at work near the open.

Still, the 10-year Treasury yield remains above the 4.5 percent threshold it recently surpassed the day after this month's so-called hawkish rate cut by the Fed. Which brings us to our talk of the tape. Is the choppy market action simply profit taking and rebalancing at the end of another strong year for stocks? Or is it sending a more cautious signal about the economy in 2025? Here to take on that question is Mohamed El-Erian. He is Allianz's chief economic advisor. And always great to see you. Welcome, Mohamed. Thank you, Mike. So here we have obviously a very strong year for stocks, sure, skewed toward the very largest. And this rise in Treasury yields, which I guess has been perplexing to some, it has really taken flight since the Fed started cutting rates. It doesn't seem specifically about inflation expectations. And the big question is, can the real economy handle it?

I mean, that's what stocks care about. What's your read on that element of the market action? I think the real economy can handle it because rates are going up for one good reason and a couple of less good reasons. The good reason is growth. U.S. continues to outpace the rest of the world. You see that in the rate differential in 10 years between the U.S. and Germany. That's now 220 basis points. That's quite high. There are two issues. I think inflation is more sticky and the Fed is going to tolerate more sticky inflation. And also there's a concern about issuance. But on balance, the economy will be able to handle this if we don't get a policy mistake.

And what would a policy mistake represent right now? I think a lot of folks were looking for evidence that that might be one of the market's concerns after the Fed really did reduce its anticipated rate cuts for 2025. But you wouldn't necessarily expect to see longer term yields going up if we were pricing in a potential policy mistake that would bring on recession. Yeah, and I think the weight behavior has a lot also to do with the notion that inflation may be sticky. I cannot stress how important it is for policy not to undermine U.S. economic exceptionalism. That has acted as a shield for U.S. markets, for the U.S. economy, from a lot of headwinds coming from the rest of the world. Europe is essentially in recession.

China cannot balance its reforms with its stimulus. Geopolitics has gotten more complicated. So we've had this incredible shield for the economy, for the markets of this exceptional economic performance. And we need to maintain that. And this is where the policy issue comes in in a big way, Mike. What policies are you really discussing there aside from what the Fed does? I mean, are we talking about what happens under the next Trump administration, whether it's taxes and tariffs, or do you mostly mean monetary policy? So at first, I mean monetary policy. It's important for the Fed not to be overly restrictive. And that means it will need to tolerate a slightly higher inflation rate because there's so many structural

changes. And then for the incoming administration, there's going to be a race. On the one hand, you have deregulation, you have liberalization, which is going to get turbocharged by a lot of corporate activity and by what I think are significant productivity promises associated with AI and with life sciences. And on the other side of that race

is the risk of excessive tariffs and the risk of undermining the labor market. So a lot will depend on this race and the hope for the markets and the hope for not just the U.S. economy, but the global economy, is that that race is going to be won by what are pro-productivity, pro-growth measures.

You cite U.S. exceptionalism, which is really visible in so many different ways. Obviously, the outperformance of U.S. equities versus the rest of the world, which has persisted for a very long time, which seems largely but not entirely about our large tech stocks, which are doing that investment and sort of creating the sort of AI infrastructure that you talk about. Does it does it feed into any potential imbalances, though? Is it only a good thing for U.S. assets if, in fact, the U.S. continues to separate itself from the rest of the world? And that is the big question, the issue of dispersion.

Look, the U.S. has outperformed not in terms just of markets, but in terms of the economy. We have consistently come at the top or near the top of the G7 growth league. And that's impressive for the size of our economy. Moreover, the U.S. is the only G7 economy right now seriously investing in the growth engines of tomorrow. And the market has understood this. And you see this in relative pricing. You see it in what's happened to the. And the market has understood this. And you see this in relative pricing. You see it in what's happened to the currency. The euro is at 104. Now, the hope is you get convergence from below. The hope is that China and Europe get to act together on the

policy side and converge with the U.S. That's the hope. The fear is you get convergence from above. And that is what would happen if, like we discussed earlier, we get the policy mistake. On the whole, I think you should bet on continued dispersion going well into 2025. Yeah, I guess all that is the tricky part, which is figuring out what we should expect in the way of market returns. I do want you to listen to a point made by Professor Jeremy Siegel this morning about whether after two very strong up years in the S&P 500, we should maybe moderate our expectations. As time has gone on, I think the probability of a correction next year, which is defined as a 10% drop in the S&P is getting higher. I'm not saying it's a sure thing. Nothing is a sure thing in the market. But the major forces to propel things

upward, I think, have already been built in. We still have, you know, we talk about 22 times earnings on 16, 17 percent gains of earnings, which is also far higher than historical. So I see a little bit more risk on the downside. And I'm a bull on the market. I'm long term. I'm not saying sell. But I see more risks. Yeah. So, Mohamed, I mean, obviously, you know, most years have some kind of a significant correction. But how does that sound to you in the way of whether there could be almost too much of a good thing priced up front in the U.S.

market? Look, after you have a 24 percent year for the S&P, 30 percent for the NASDAQ as of now, which followed over 20% last year, you have valuation levels that will make people more cautious. And I think you see this in the flows, interestingly. You see a lot of people take money out of equities, put them into fixed income, get high-quality carry, and you can get high-quality carry right now of 5% to 7% in the fixed income market, but I completely understand why some people right now would rather take money out of equities, put it into fixed income, get high carry, and wait. Right, because now there, of course, is that alternative. Mohammed, stay with me. Let's bring in Barry Bannister of Stiefel and Ed Klissel of Ned Davis Research into the conversation. So, Barry, I know you've you've had your eyes on the prospect of some kind of a correction next year.

What's the cadence of how you expect the next several months to unfold? Yeah, I agree more with the clip from Jeremy Siegel a minute ago rather than the triumphalist exceptionalism argument, the risk-free yield, the 10-year treasuries, as it gets closer to 5%, does have the tendency to cause a correction or pullback in the market. Valuation is just very high. And we see a number of negative surprises in the next year, such as unit labor costs driving core PCE closer to 2.7 for the year. Fed's not going to be happy about that. What specifically would drive the unit labor cost move? After every recession, 13 since World War II, since 1940, early 40s, you get a really big pop in productivity. Now, it's cyclical, not what we

call secular or the long-term up-down waves. And that happened from 22 to 23 because 2022 was a recession. If you look at real or inflation-adjusted terms, income production, sales, fixed investment, all went down. Only labor stayed strong because of both labor supply and job openings exceeding the number of unemployed people to fill them. But as that has rolled over on a year-over-year basis, the productivity coming down combined with productivity falling faster than wages should cause unit labor costs to be sticky and the core PCE inflation closer to 2.7, which the Fed won't like. Interesting. Yeah, I mean, the idea that it was kind of a stealth recession, stealth kind of earnings soft patch,

is something that does have some explanatory power, I guess, in terms of how the overall markets have behaved. Ed, I know you generally want to stay in tune with the broad trend. At the same time, you maybe look for some soft spots in the trend in terms of keeping the market on a shorter leash when we have had most stocks down for a few weeks. How do things look to you right now? Well, for the most part, the market looks in pretty good shape. There's been a lot of talk about how the mega caps have outperformed, and that's true. But the average stock has also done just fine. The equal weight S&P is up around 10%, as is the Russell 2000 for the year.

Now, what we've seen over the past few weeks are what technical analysts would call divergences. Things like percentage of stocks above their 200-day moving average, this kind of longer-term view, has gone down over the last few months. The advanced decline line of running total stocks are up one day, down one day. That peaked last month. Percentage of stocks at new 52-week highs. That actually peaks out well before the market, but the last high for the cycle was in July. So a lot of these divergences resolve themselves to the upside eventually. So when the calendar turns to 2025, we get past some of this year-end positioning. We'll see how it shakes out. But the longer this stuff stays, Michael, the more we have

to worry that this is actually the market starting to price in some of those concerns that Barry has mentioned. Is there a way to quantify or characterize, you know, where exactly that tips over into the market sending a signal that there's something more afoot? When you look at a few different indicators, like your percentage of stocks above their 200-day moving averages, that gets, you know, in the 35%, 36% range. We're still well above that. We're in the mid-50s at the moment. Also, we look at sub-industries and uptrends. That's also around 60. That gets in the low 50s. That's a little bit more problematic. So there are some levers that you can look at to say, OK, now we've kind of crossed the Rubicon line and the market's primarily in a downtrend versus what you can still see at this point is is an uptrend.

Mohamed, you mentioned earlier in terms of the Treasury yield move that, you know, obviously inflation seen as perhaps being a little bit less cooperative. Maybe it's going to be sticky around these levels. But it seems as if the yield increase recently is not really explained by the inflation piece. So is it your interpretation that we're again having this situation where buyers of Treasury debt are demanding more compensation because of, you know, the whole, you know, government financial situation? Or is this just what we should expect in a high nominal growth economy? I think it's the latter. I mean, it is striking, Mike, that we've had $600 billion go into fixed income this year, a record level.

It's been the huge sucking sound. The U.S. is attracting a ton of capital from the rest of the world into both the equity market and into the bond market. Why? Because we look so much better than the rest of the world. And yet, bond yields since the beginning of the year have moved up 65 basis points in 10 years. The ag, if you had invested blindly, passively into the ag, you would have made 1%. So what you're getting is that the fixed income market is attracting people who are looking for all-in

yields. However, those all-in yields are moving up because of what's happening on the economy. Now, why? I think one is policy. I think the market has finally understood that we will be lucky if we get two cuts next year. We're more likely to get one, and we may get none at all. Two is the market has understood the inflation issue. And Barry's right. The PCE is not going to please the Fed. And the hope is that the Fed will tolerate high inflation for a while. And three, the growth dynamics, as Ed said, are still robust.

So that, I think, has come together to result in those yields. And it wouldn't surprise me, Mike, if we trade in the full 75 to 5 for quite a part of next year. Yeah, on the 10s, I think you mean there. Barry, in this type of environment where you feel as if maybe rates will apply some valuation pressure, how would you navigate it? What would you look toward in terms of places that can be relatively resilient there? One of the concerns we have right now is that as wages slow and inflation stays sticky, then real or after inflation wages in the back half are going to fall. And that would bring down the consumption side of the economy. At the same time, housing is in the doldrums and government is not likely to respond.

So you have a weaker GDP numbers in the back half. These mid-cycle, late-cycle slowdowns are very common, but they typically do cause the S&P to slow or correct. And that's our view. We are at a 5,500 target for the S&P. We're in the defensive food, waste stocks, beverage, tobacco, health care equipment, things like that. Gotcha. Yeah. So mid-cycle 2015, 16, years like that. Sideways choppy, but not a washout, at least if that type of history holds. Barry, Mohammed, Ed, appreciate the conversation today. Thank you. Happy New Year. Thank you. We are tracking some big moves in the energy space. Let's send it to Pippa Stevens for all the details.

Hi, Pippa. Hey, Michael. Nat gas is surging as much as 20% at one point today, breaking above $4 and hitting the highest level in nearly two years before easing back a bit now at $3.90. Now, part of this is because this is now the front month contract after the January delivery one rolled on Friday, so it is a bit

of a catch-up trade, but that does also coincide with updated forecasts showing the coming weeks could see extremely cold weather across the U.S. and more heating demand means more gas demand. Now, on the back of that move, energy is the only sector in the green today, led by gas-focused driller EQT, which is up 5 percent. Cotera up about 4 percent, with other drillers like Devon, APA, and Diamondback all up more than 1 percent. Mike? Yeah, getting an early start on that January buy-the-laggards trade, perhaps, as well, Pippa. Thank you. Let's send it over to Christina Partsenevelos for a look at the biggest names moving into the close. Hi, Christina. Hi, Mike. Well, I know there's been a lot of chatter about

the AI trade unwinding because large language models may be hitting limits and smaller models are getting better, possibly decreasing the need for AI GPUs. But if you were to lump all of the AI winners, even those that are negative today, like Broadcom, ARM, Marvell, Taiwan Semi, and as well as NVIDIA, throw that into the bunch, their average return on the year is still 107 percent, far outpacing the broad chip ETFs as seen by the SMH, which is up about 41 percent and the SOX up about 14 percent. NVIDIA, though, has been moving sideways for the last two months, but it is the top NASDAQ performer today after the information reported that the parent of TikTok, ByteDance, plans to

spend up to $7 billion on NVIDIA's AI chips outside of China. This is next year in 2025. And speaking of NVIDIA, chipmaker Broadcom, lower today, but still lower about 2% lower, dubbed the, quote, next NVIDIA, with management promising sales of AI products will gain 65% in the fiscal first quarter of 2025. Broadcom still in the trillion dollar market cap club, even though it's down about 2%. And then lastly, another mover today on Semi. It just can't seem to catch a break, down almost 3.5%,

one of the worst performing chip names. No news catalyst per se today, but the slowdown in EV sales really disproportionately impacting on Semi, given its high chip content in electric vehicles. Mike, there's your chip roundup. All right, Christina, thank you. Back to you again in a bit. We have a news alert on Fannie and Freddie. Diana Olick has the details. Hi, Diana. Yes, and it is coming from X. Investor

Bill Ackman, who is a major shareholder of Fannie Mae, has been tweeting about the possible emergence of Fannie and Freddie from their conservatorship, which they were put in during the Great Recession. I want to read you a couple of the quotes from his posts on X. He says that what makes them particularly interesting today versus any other time in history, there's a credible path for their removal from conservatorship in the relative short term, that is, in the next two years. He says a successful emergence of Fannie and Freddie from conservatorship should generate more than $300 billion of additional profits to the federal government. Now, that's why you're seeing the stock surging right now. But I'll tell you, I did an interview very recently with Mark

Calabria. He was the head of the FHFA, which is the conservator of Fannie and Freddie. And he was the one who, with Secretary Mnuchin in the first Trump administration, tried to get the two out of conservatorship. He told me they shopped around a plan that they wanted to get an explicit government backstop for the two, which are, of course, the biggest backers of mortgages in the U.S., and they could not get that. And then, of course, the pandemic happened and it all got sidelined. He says this will not be a first-year priority for the Trump administration, but maybe a second or third year priority. He says that there are ways to get them out of conservatorship because, as Ackman is saying in his posts on X, they have gained considerable capital.

I want to read to you a quote from that interview. He said, I think the concern is that there are underlying problems that are being missed, that is them being in conservatorship. We have a mortgage finance system that works really well on the upside, but is it prepared for a downturn? And again, while I'm optimistic about the overall state of the economy, are we putting the taxpayer at risk? Now, that's his argument for taking them out of conservatorship. But I also spoke with Mark Zandi, who is very opposed. He's from Moody's Economics. He's very opposed to them coming out of conservatorship because he says, why fix something that isn't broken? In fact, he says says i think it's unlikely that fannie and freddie will be released from

conservatorship it just doesn't make economic sense so you see there's going to be a lot of arguments on both sides of this it's going to depend on what the new treasury secretary thinks whether they can get any kind of explicit government backstop from congress and whether the two are well capitalized enough to take them back into the private market. So a lot to be going on here. Not going to happen in the first year for sure. Back to you. No, for sure. And small, volatile stocks moving a lot on these on these hints out there. I know there had been hopes under a new Trump administration there might be a path out, which, as you say, Diana, though, would seem to require either a government backstop or just more capital.

Exactly. More capital for sure. They are unlikely to get that explicit government backstop. But then you have lots of arguments claiming that they are already backstopped, just like the banks are with the FDIC. Yeah, implicitly, if nothing else. All right, Diana, thanks so much. But we are just getting started here. Up next, Parker's playbook. Trivariate's Adam Parker is back and breaking down how he thinks investors should be navigating

today's volatility and the year ahead that's after this break we're live from the New York Stock Exchange you're watching closing bell on CBC. The major average is rebounding off session lows, but still under some selling pressure today. As stocks struggle to benefit from historically positive year end seasonality. Joining us now to break down the 2025 set up a CNBC contributor, Adam Parker of Trivariate Research. Adam, great to see you.

Thanks a lot for for coming on. As we get to the end of the year, I'd be really interested in your thoughts thematically on whether any of these trends that have been so entrenched will continue or are ripe for reversion next year. So you have passive over active. It's been really hard to beat the market. You have large stocks over small stocks. You got growth over value. You got U.S. over the rest of the world. All of those things seemingly at extremes, yet it seems tough to bet against them at this point. How would you come down? Yeah, I mean, I take, you know, each one one at a time, Mike. And thanks for having me. Happy New Year, by the way. Look, I think the U.S. versus the rest of the world. You know me, Mike.

I just think the U.S. has a superior set of assets. And so unless it's a huge change to the corporate constitution of the other countries, I like the U.S. the most. Growth versus value is tricky, right, because there really aren't that many mega large cap value stocks in the whole universe. It's hard to even be a diversified manager. So if you're trying to beat the S&P, you probably have to own two thirds growth to beat the S&P. So I think that trade's probably entrenched too. I thought last year had Q3, if you look at Q3 of 2024, it had huge breadth. I mean, the number of companies that beat the market by 20% or more over that time frame was the highest it had been since 2020. And before that, it was the tech crisis.

So I think we had good breadth. People just whined about the MAG-7, but we still had plenty of stocks that were up a lot. So I think they'll have a little bit of a rotation. I think most investors I talk to think there will be, whether it's into laggards in health care, maybe where there's more onerous assumptions, maybe embedded in those stocks and other parts of the market, maybe industrials where industrial activity has really been in a recession and industrial earnings have really been down and maybe they're troughing and can grow in the second half of 25. And as you know, the market leads that. So I think you'll see some rotation, but I don't think it's going to be

a wholesale change to the dynamics of of the U.S. or growth. And do the earnings forecasts that are now set up for next year feel like they're firm enough? I mean, you know, through your work, does it feel as if, you know, we can reliably expect 10 percent-ish growth for most of the S&P? So if you look at, as far as I'm aware, bottom-up earnings estimates from the analysts have existed since 1978. On average, on January 1st of any given year, the analysts' bottom-up expectations are for 14% growth, and the actual growth's been closer to 8%. So the market can absorb downward revisions as long as it believes earnings are going to grow in absolute terms. I don't think people really believe. I think the Q4 2025 numbers are 17% year over year versus Q4 right now. I don't think anybody needs to believe that those are achievable, Mike. It's just more

whether results can be steady, that you can have earnings worth accelerating in the second half of next year. That should be enough. I think there's kind of a shorter term 2025 view and then a longer term view that you have to think through. But I think 8 percent is a reasonable long term earnings growth assumption for the S&P. I know that you you set out a bunch of, you know, kind of conundrums or vexing questions about the market to clients recently, including one that was, you know, when is it OK? When is it going to be time to fight the Fed? And I find it interesting right now, because what would it even mean to be fighting the Fed at this point? Right. Usually that means, look, if the Fed's cutting, don't get in the way of that. They usually get what they're looking for.

But right now they're kind of cutting, but less than expected. And maybe the rates are going to settle above what we thought. How does that filter into the process here? Yeah, I do think if you look at the things that were part of the bull case a year ago, when we did our kind of, you know, bullish outlook for 2024 a year ago, we thought, you know, the Fed accommodation is going to be there. It's going to help you on the front end. And, you know, you don't want to fight the Fed to fight the Fed. But what we learned in the last cycle, if you think back to the last cycle, tech stocks got killed

in 2022. Everyone's favorite, NVIDIA and Meta, were really bad stocks in 2022. And if you were a genius, you covered your shorts basically this day two years ago and got maxed long on Jan 1 of 2023. And the reason you did that ex post was because the Fed was closer to being done hiking. And so you could kind of envision the end of the hiking cycle, right? And so that was the end of the, you know, kind of multiple compression. Well, if we take that logic and sort of flip it on its head and say, okay, well, I don't want to fight the Fed while they're cutting at least the first half of the cycle. But as we get closer toward the end of the accommodation, maybe I can fight them. I think the answer is kind of now, right?

Or it's getting close to being now that you're not sure if they're going to do another 75 or 100 bips or that's it. And so I think you don't have as powerful of a bull case from the Fed side as you did six months ago. Yeah. I mean, there are ways out of that, as I keep mentioning, you know, 95 into 96 Fed only cut like 75 basis points, went on hold for a long period of time. Productivity revolution, tech bubble, all that stuff was still ahead of it. So look, we'll see. I mean, obviously it's one of five or six. Yeah. It's one of five or six points. I'm just saying if you laid out five or six points a year ago and you said, well, I have the Fed on my side as one of my five points. Sure, I agree with that. I'm just saying that one point is less powerful.

But per your point, Mike, all we need in the first six months of this year is a big U.S. equity, Walmart or McKesson or some company with lots of revenue to tell us that they did something with predictive analytics that enabled them to, you know, in the past where they would have hired a lot and they didn't this time, and then you'll get that second wave up of all the AI trade again because people will say, well, that's what we've been waiting for is productivity proof cases. Yeah, that's maybe phase two, if that's what we're looking for. Right, right, and I think that's going to happen. Yeah, happy New Year, Mike. Great to see you, man.

You as well. Thanks very much. Enjoy. All right, we have a news alert going to happen. Yeah. Happy New Year, Mike. Great to see you, man. See you next year. You as well. Thanks very much. Enjoy. All right. We have a news alert from the U.S. Treasury right now. Emily Wilkins has the details. Emily.

Hey, Mike. We are now learning that a China state-sponsored actor was able to hack into a third-party software services provider that the government and the Treasury does use for tech support. And they were able to access some unclassified documents. software services provider that the government and the treasury does use for tech support and they were able to access some unclassified documents this is according to a letter received by nbc that was sent to the senate banking committee letting them know about this hack we have limited details exactly at this time but of course with the concern about the hack the concern of what was saw the statement does say that the third party service has been taken offline and there is no evidence indicating that that threat actor,

that Chinese state threat actor, has continued to access Treasury systems or information. But of course, another serious example of a Chinese state third party actor being able to find their way into a U.S. government users and the U.S. government systems. Guys? Emily, thank you very much. Up next, finding opportunity in retail. The XRT gaining more than 10% this year. So what could be in store for that sector and which names should you have on your buy list?

We'll discuss after this break. Welcome back. Retail stocks selling off today, underperforming the broader market, capping off what's been a hit or miss year within the group. Here to share how the sector could fare in the new year, Bernstein's apparel and specialty retail VP, Anisha Sherman. Anisha, great to have you. It is often a sector that kind of has its sort of hot and cold running themes. I wonder how things are set up right now in terms of income tiers, where consumer fatigue is showing itself, and what concepts seem best positioned.

Yeah, thanks, Mike. So in 2024, we saw the higher income consumer fatigued. They had just seen the return of student loans. Their credit card debt was up. Their pandemic savings were depleted. And they just had this big run of kind of revenge spending in 22 and 23. And they were done. And so we saw a lot of trade down through this past year. Luxury underperformed. High-end fashion underperformed. We're now coming out of that gap year. So I'm much more optimistic on that higher-income consumer into 2025. Sentiment looks good. We just did a 3,000-person survey that we do every year, and the sentiment year over year looks stronger. And they have a low base to comp off. They've had a wealth effect this year from the strong market.

They're expecting some rate cuts to come. and their pandemic savings haven't gotten incrementally worse year over year compared to the other income groups. So I would be playing the high income consumer into twenty five. I think they're going to have a better year than they did this year. Yeah. High income consumers, I guess it's it's they always have the capacity perhaps to keep their spending up. But it's a matter of desire. And you see consumer confidence levels rise to a fair degree. What retailers are in the way of that potential strong spending? Yeah, I mean, any retailer that draws from that slightly above mid-income consumer. So someone like a TJX, you know, their brand's TJ Maxx and HomeGoods. They have a six-figure income average household. That's the kind of retailer that could benefit from an expansion in the higher income wallet where it's more discretionary product, more nice to have product. Another one

in high-end sportswear, someone like an On Holdings. In affordable luxury, it's someone like a Tapestry that owns a coach and Kate Spade brands. So these are brands that are slightly above the mid-income consumer, and they are looking forward to getting another wave of growth from that higher income consumer getting more constructive into the new year. TJX, it feels like it's the stock for all environments, or at least it's presented that way. I mean, it's had another great year up almost 30 percent. It's obviously got the premium valuation. When people are value conscious, it seems like a beneficiary.

Can that always be true? Or, I mean, do they simply that that versatile and broad a customer base? They have a very broad customer base and very strong execution, especially with the high income consumer. I think the scenario in which a TJX does not do well is if we see 800 basis points of rate cuts tomorrow and, you know, everyone chases low quality growth names. Right. That seems less and less likely now, kind of given the messaging that we're hearing. So that's an environment where a stock like TJX does not do well. I don't see that being imminent. Right. And just a final quick word on on tapestry. So this is as a kind of go it alone. Their brands should should be back in favor type of story? Yeah, I mean, their main brand coach, which is over 75 percent of sales and over 90 percent of profit, is on a run this year.

They've been improving their brand equity. They're resonating with the younger consumer, with the Gen Z consumer. And with that slightly higher income cohort wanting to spend more into the new year, that's another tailwind for them. All right. I know one Gen Z consumer I'm related to who got a coach bag this, so I can, my channel checks confirm. Anisha, thank you so much. Appreciate the time today.

Thank you. All right, up next, Microsoft has spent tens of billions this year in a big push to build out its AI infrastructure, but when will it actually pay off? The details after this break. Closing bell, we. Be right back. Coming up on 16 Minutes, until the closing bell, let's get to Steve Kovach, who joins us to break down one of the biggest factors weighing on Microsoft. Hi, Steve.

Hey, Mike. It's capital expenditures, of course, and Microsoft ending 2024 spending at least $53 billion on CapEx, nearly all of that for AI infrastructure. And that's before we get to the $20 billion expected to be spent this quarter alone. Microsoft implied to expect around $20 billion in these capital expenditures each quarter going into 2025. The risk? Investors losing their patience for a return on this massive spending. CEO Satya Nadella and CFO Amy Hood on recent earnings calls said the AI demand is there and Microsoft will keep spending to meet it. In the meantime, though, don't have a clear view of how well Microsoft's suite of AI products are selling. Microsoft has said it's on track to generate $10 billion worth of AI-related sales this year, but a lot of that is coming from the Azure cloud business.

As for the rest of the AI stuff, Copilot Plus PCs, they launched this year, but without the marquee AI feature called Recall. Also, no clue how well Copilot for businesses are selling after more than a year on the market. I've also heard a few CTOs say 2025 will be the year they assess if Copilot is worth that enormous cost. And then there's OpenAI. Its losses are now bleeding over to Microsoft, its biggest benefactor. Microsoft said it expects OpenAI's losses to shave a couple cents off its EPS in the December quarter. Mike, that would be about $1.5 billion. Yeah, and worth noting, of course, Microsoft stock's been kind of sideways for many months here, maybe reflecting some of those concerns.

A lot of the gains at the beginning of the year. All right, Steve, thanks very much. Still ahead, consumer discretionary stocks sinking in today's session. So what's behind that drop and the names being hit the hardest? That's coming up. Closing bell. Be right back. We are now in the closing bell market zone. Home builders sinking this month. Diana Oleg has the details. Plus, Courtney Reagan on the sell-off in the consumer discretionary sector.

And CNBC Senior Markets Correspondent Bob Pisani breaks down these crucial moments of the trading day. Diana, obviously been a rough road contending with rates for homebuilders. Yeah, for builders, it's all about mortgage rates, which moved a tiny bit lower today for no particular reason other than that they jumped so much last week. But we're still over 7% on the 30-year fix, and that's the top of the range in what has been a very volatile year for rates. As a result, the home construction ETF, ITB, is down close to 17% month to date, on pace for its worst month since March 2020, which of course was the very start of the pandemic.

Builders have been buying down mortgage rates, but it's really hitting their margins now. All that said, on the existing home side, we just got the read on pending home sales in November this morning, up 2.2% month to month and up 6.9% from November of last year. That's the fourth straight month of gains. This count is based on signed contracts, so it's people out shopping in November when the average on the 30 year fixed spent much of the month over seven percent before coming down in the last week of the month. The Realtors chief economist claims consumers are now used to the higher rates. If you believe that maybe seven is the new five. I don't know. Yeah, I guess I guess at a price for the house, you can get used to the higher rates. We don't know. Yeah, I guess I guess at a price for the house,

you can get used to the high rents. We'll see how that goes, Diana. Thank you very much. And Courtney, I mean, homebuilders and housing related stuff are part of consumer discretionary, but not certainly the full story. Yeah, sure. Obviously, a lot of consumers will look at sort of their financial balance sheets and look at their homes as sort of their biggest asset. And if we look at consumer discretionary as a sector, it's not the worst performing sector of the day, but it is among the laggards. Consumer discretionary, worse than the broader averages as well for most of the day. So losers within consumer discretionary, or at least let's say within retail, you're seeing most of retail's subsectors like the discounters, the department store specialty, they're lower. Five below,

Macy's, Kohl's, Foot Locker, Copri Holdings. Those are among the worst performers in those retail subsectors. Certainly seeing more declining retail names than gainers when you look across at least my watch list, much more red than green, though without real significant fundamental reasoning, I guess beyond worry about possible 2025 headwinds, namely those tariffs that we may see coming down the pike. Now, we're still in this long tail of the holiday season this week, technically speaking. Investors, though, in retail stocks really probably waiting for early, albeit voluntarily released holiday sales results that if and when they come, usually eke out in the early weeks of January. But we did get some early spending numbers from MasterCard for the holiday season, and they show that retail sales ex-autos grew 3.8 percent

through Christmas Eve with strength in apparel, electronics, and jewelry. But Mike, overall, as you know, the U.S. consumer has really held up in the face of stubborn inflation and still elevated price levels. The consumer discretionary ETF, the XLY, just outperforming the S&P 500 year to date, at least right now, up about 26 percent compared to 24 percent, though the more narrow XRT retail ETF well underperforming the S&P 500, up just about 10 percent year to date. Back over to you. For sure. And of course, Tesla being down almost 3 percent outside of retail doesn't help the consumer discretionary move either. Courtney, thanks very much. And of course, Tesla being down almost 3 percent outside of retail doesn't help the consumer discretionary move either. Courtney, thanks very much. So, Bob, I know you were watching as I was a couple hours before the open today when you really started to see the equity futures take a dive.

Bonds got a bid. What's the read after the most of the full session here? I think the important thing today is don't read too much in today's session. There's a lack of buying interest, not selling pressure. And people dislike it when I say that. But look at the volume today at the NYSE. 400 million shares as we go into the last minute. On a normal day at the NYSE, we'll get about 700 million shares. So there is no particular catalyst to create selling pressure here.

There's just a lack of buying interest in the market overall here. So we had a little bit of relative outperformance today from the laggards on the year. Energy was kind of flattish. Real estate did a little better. Metals and mining had a terrible year. They did a little bit better, maybe a little bit utilities. But, you know, Mike, let's not kid ourselves. Growth has just killed value this year. The growth, S&P growth's up 40 percent, S&P value's up 10 percent. And I've been saying this for the last couple of days. We keep waiting. The eight largest stocks in the S&P 500 are all growth stocks, all tech stocks. You've got to go down.

I think Berkshire's 9 or 10. That's the classic value stock there. Then you start getting to a little more. You've got JP Morgan down there. Lilly's up there, but not quite. Lilly, you've got Exxon there. You've got Procter & Gamble. You've got Johnson & Johnson.

But look at the relative valuations here. Most of the growth stocks, you're in the 30s on the forward multiples. You look at Johnson & Johnson 10 times, Exxon 13 times forward earnings, JP Morgan 17 times forward earnings. All of these stocks, the relative valuations are much more appealing. And yet there's no, we keep waiting for some of this rotation. You and I have been reporting this all year. That doesn't happen. And we've been waiting for a decade. Well, it happened, I guess it's happening, these little bursts, but they haven't really lasted, right, for a couple of months at a time. Now, going into next year, as you know, the bull case for the rest of the market is earnings growth is supposed to broaden out beyond the very largest stocks.

So whether that's the magic or not, we'll have to see. Materials up 18 percent, expected earnings growth in 2025. Health care up 17 percent or so. Yeah, and these are relative valuations are there. The attractive valuations are there, whether it'll make it or not. And it looks like our Santa Claus rally is still fizzling. It's the fourth day of the Santa Claus rally, folks. There's seven days, so it's not over.

But we're negative here. 59-74 was where it started Tuesday morning. We're below that right now. So we're down. If this was down, this would be the second year in a row the Santa Claus rally failed. It didn't work last year either. That's right, which is interesting in the sense that, in theory, it was supposed to be somewhat predictive of whether the next year was going to be a good one or at least at risk of a big downturn. Obviously, Santa Claus rally doesn't

work last year. Here we are, the S&P is up 24 percent with a day left of trading. Yeah. And remember, that's up 25 percent with 10 percent earnings growth. So what we've seen largely here is a multiple expansion, roughly 10 percent. Last year, this time you and I were talking about 19, 19 and a half times forward earnings on the S&P 500. Now we're at 22, essentially. That's a 10% expansion of the multiple. And there's the differential between the 10% earnings growth and the 25% earnings growth. For sure. The top three stocks in the market are more than 20% of market cap, and they traded like 32, 33 times earnings. So you're paying up for the biggest and what's perceived to be the best part.

Thanks very much. As we go out here, we are significantly off the lows of the day, but still down 1%. This will be the first time you had two down 1% days in the final five trading days of the year since the early 1950s, I believe. And it does appear that's going to happen. That's going to do it for Closing Bell. We'll send it into overtime with Morgan Zayn and John Ford.