Closing Bell - Market Leadership Set to Shift? 7/5/23

Episode Date: July 5, 2023

Can stocks make their peace with rising bond yields and further fed tightening? And what might all that mean for stock market leadership? Trivariate’s Adam Parker gives his expert market take. Plus, Chris Verrone of Strategas believes the road ahead for rates could determine the market’s direction. He explains. And, Meta is taking on Twitter with its new app. Julia Boorstin breaks down what this might mean for the company’s bottom line.

Welcome to Closing Bell on this first full day of trading in the second half of the year. I'm Mike Santoli in for Scott Wapner here at Post 9 at the New York Stock Exchange. This make or break hour begins with investors struggling to sort out mixed messages from the minutes at the latest Fed meeting. The major index is churning with moderate declines most of the day as small cap stocks pull back a bit more sharply. Later on the show, top technician Christopher Roan of Strategas is charting out the second half. He reveals what he thinks could determine the road ahead for stocks. But first, our talk of the tape. Can stocks make their peace with rising bond yields and further

Fed tightening? And what does it all mean for stock market leadership? Here to discuss that is Adam Parker, founder and CEO of Trivariate Research and a CNBC contributor. Adam, good to see you. Thanks for having me. So why don't we start from the top down here before we get into kind of what the market was really up to in the first half. I know you've done some work on that. Fed minutes kind of give us the message we got from Powell in the press conference of we paused. Majority, of course, unanimous saying we're not going to do a rate hike this time, but we're leaning in that direction. We're going to try to be more patient about it. But then you had some people saying we still think the economy is vulnerable.

So you have these kind of push-pull dynamics within the Fed. You have Treasury yields, the 10-year, you know, almost to the highs it was before SVB, two-year as well. Is that a comfortable level for the equity market? You know, it's a very strong, statistically significant relationship between Fed fund futures and the multiples, the price earnings for equities. And so you would think that if it's hawkish relative expectations, that would be bad for the market. Lately, there's been this almost negative skew where they get hawkish, the market doesn't really go down. But if they say anything remotely dovish, the market rips higher. So that's usually a good sign the market wants to go higher. It's very hard, though, you know, 44, 49. It's hard to sketch out 10 percent upside to the market from here and say, OK, I can believe in 5000 based on earnings and multiple. So I think

you need if they get dovish in reality, it's because their earnings in the economy are worse. So, you know, we started the year bullish in the first half, more cautious in the second half, and I'm kind of sticking with that call because I feel like the risk-reward is more maybe up 10, down 10 now than it was maybe six months ago. Yeah, so bearish in the second half, or at least feeling like there's some payback to be had.

I know you looked at, you know, this this leadership talking about stocks that have been relatively impervious to what's happening with yields the big mega cap names that everyone has been fixated on have been contributing a lot of the upside what has the market been rewarding specifically when it's been adding tremendous amounts of market cap in that area? You know, sometimes I think we all are guilty of it's like a 20-variable problem. We try to isolate the ones so we can understand it. But I made this chart, and I'm like, ah, maybe this is the one, right? When CPI went up, when inflation went up, it hurt the margins of every company except for the biggest 50,

except for the mega cap growth stocks. So if you look back, the gross margins of those companies didn't really go down the small caps mid caps they got kinda killed so you know at the end of the day that relationship you can see it the blue line there like the big companies didn't get their margins hurt so i think the case for the market being maybe bullish the more optimistic view would be

okay well some of those headwinds to the small and mid cap companies, the commodities are down. Inflation starts abating. Those are the input costs. Maybe the market could broaden by some of these guys participating as the margin pressure abates. That'd probably be the bull case to get you the 10 percent higher. But, you know, I wouldn't say that's the base case. Yeah. These guys meeting like everything, everything but the biggest 50 days that have seen some margin hits taken. Right. But in terms of those mega caps, so the market is rewarding the durability of profitability in a sense. Forget about, oh, it's all about real yield. It's all about the cost of money or the Fed, whatever. Everything fits into it. But I also feel it's

interesting because if I look at a chart like Apple and I just see this crazy linear 45 degree angle of ascent we've had till recently, it's pulling back today. It shows you that the market is just migrating to this, not as a company with all these different variables that it's sorting through on a day to day basis, but it just wants to own this category of asset. Yeah, look, it's three trillion round numbers. You know, it added, we noticed in our work, there's only 20 companies in the U.S. that are even bigger than $300 billion. So if Apple goes up by 10%, which it almost did in June, it adds Home Depot's size company in one month. The 31st biggest company. Yeah, it's massive. So you just, to me, if you're trying to index your

portfolio against the S&P 500, you just, to me, if you're trying to index your portfolio against the S&P 500, you just have to kind of manage your risk around these biggest six or seven names. I don't really think you can know something about Apple that's not in the price that you're going to do research and you're going to understand something. I mean, it's the most covered security in the world. And who knows, maybe a trillion of the three trillion value is their data and some potential intelligence they can get from the data. So how do you value that? Outside of that group of stocks, which you have made the case, they essentially form a core of, you know, the market knows what there is to know about these

things. They seem to be much more resilient against the economic shocks than others. But below those, what are the things that are emerging right now in terms of where earnings revisions look better or where you feel like there's the opportunity to pick in a more smart and distinct way? You know, in a six-month view, I think there's a chance that the oil market tightens a little bit. You know, we've been wrong recommending that this year after two great years of recommending it. We've been wrong. There's been more supply from Russia and Venezuela, a little bit of weak demand. But I look at the estimates. They're 29 percent lower for energy. I think the broader estimates of the market have to come down a little. And I think there's a chance you could have estimates come up in six months for energy

and the stocks are cheap. So I sort of stick with that call. I think the risk reward on the energy looks good. Also, probably all the metals that go in there. Every day there's another story about how we're going to be short in the medium to long term, nickel, copper, et cetera. So I still like those complexes a lot. I think everybody likes health care because they think it's cheap and probably has relatively more achievable estimates. The bottom investments are for 9% lower earnings in 2023 for the health care sector than in 2022, whereas the broader market is up a half percent. So I think those are probably the better risk-reward sectors. I think the worst are probably retail, where, you know, shrink's a huge problem, financing's deteriorating. So I think that's kind of how we're positioning in the barbell.

Yeah, weird part of the cycle for consumers to get excited there, I suppose. Let's bring in John Mowry of NFJ Investment Group and Victoria Fernandez of Crossmark Global Investments into this discussion. Good to have you both. John, this really tees you up pretty well. I know that you've been pretty excited about a lot of the big index type stocks coming into perhaps this part of the year. Now you feel like there's a little bit of a different risk reward equation elsewhere in the market. I do. Thanks for having me on this afternoon. So a couple of things I would say, you know, we had three down quarters in a row last year. The first quarter was negative. The second quarter was negative. And the third quarter was negative. And now we've had three up quarters in a row. And unfortunately, the way that the geometric compounding works, we're not back to flat. But all to say we have had a significant

rally, particularly in the tech names. And I totally agree with Adam's comment that the profit margins being more resilient allowed those to be able to recoup those losses faster. Plus the fact the Nasdaq trailed the S&P by 1,000 basis points, peaked the trough last year. So all that set up very well for a massive tech rally. And then you got the AI cherry on top with NVIDIA's earnings and the multiple compression there. When I look at technology stocks, though, particularly semiconductors, those are now trading at the highest multiple in a decade. And if you look at that relative to defensives, for example, those have one of their worst years on record. So the utility space was trailing the market significantly. It had its worst year in 35 years relative to the

NASDAQ that had its best year, start of the year, on record. But I would argue that even though defensives are getting cheaper, investors should be looking at small and mid-caps. The small and mid-cap space has not participated in this rally whatsoever. And again, to echo a comment that Adam made, which I thought was very astute on that CPI, those small and mid-caps were not able to pass through some of those inflationary pressures to the same degree. That being said, now you have the dislocation in valuations and you have a situation where you could see earnings start to recover in the small and mid-space. So I would argue that investors should look to those areas as well as utilities and banks. I think these areas have

been massively dislocated. You have not seen the charge off spike in the banks like many might have expected. And net interest margins are still holding steady. And if you look at REITs, for example, that's another area that I think is overly discounted. And you may be wondering, well, what if the Fed raises 25 bps more? My comment, if they're going to raise 25 bps more and that causes you to not be able to roll your debt and refinance at an appropriate level, you've got way bigger problems. Yeah. Well, certainly that would be the case. You'd have bigger problems. I guess the big question is how much they've already been discounted. Victoria, how are you surveying things right

now? I suppose the market as a whole has been able to say, OK, yield's higher. Maybe the Fed has more to do. That's OK if the economy holds together. And, you know, you also have those dynamics of, well, strong first half of the year makes the trend pretty friendly for the second half. So I know you've been defensive. Are you rethinking it? Well, I wouldn't say we're rethinking it, Mike, but I think we are looking at some of the signs and saying, you know, is it really different this time? Historically, when you've had some of the red flags that we've had so far this year, the leading economic indicators down, what, 13 months in a row, your inverted yield curve. We have a consumer that may start to weaken as you have the student loan issues come up. We're seeing cracks in the labor market. These are things that typically tell us that the market

should be pulling back a little bit, and we're just not seeing it. And so you do have to take a step back. Our investment committee last week, we said, are we just being too stubborn in our view? And as we look at all of the factors, we go, yes, there is some strength in the economy, but there's still a lot of stuff waiting on the sidelines that we think is going to work its way through. So we're not saying come out of the market. We're not saying be 100% bearish, but we're saying you need to be cautious. You need to have some exposure to some of these names that the guys are talking about. Some of the tech names, some of the more cyclical names, have those in your portfolio. But I also think you need to have some exposure to some more staple names or some more value names in case you see the market pull back a little bit.

Healthcare, you've been talking about healthcare. I think that's a great place to have it. McKesson is a name that we've added recently, even Elevents Health. But I also think you can find some tech that's maybe not as expensive as those big seven that you've had out there. For us, you can look at something like an Adobe or an Oracle where the PEs are much lower. You know, obviously, one of the things we're looking at is this is the third quarter in a row that the majority of the gains in the S&P have been from PE expansion. And at some point, we think you're going to have to pay the piper and that's going to come back. We're worried about that. Adam, it's an interesting

kind of framing difference between saying, you know, the market hasn't pulled back the way you would normally expect, given the fact you have this overhang of potential leading indicators of recession. On the other hand, it's been such an unbalanced market that a recession, so to speak, has perhaps rolled through parts of the equity market. Right. Yeah. I mean, one thing I worry about or, you know, that we're maybe forming an agreement on that makes me worried. I don't really know if valuation is going to be a great signal, because if ultimately what the market's discounting for semiconductors is multiple years from now, the answer to every AI paper at the end is, you need more compute, so semis work, or whatever.

So my point is, I don't want to be long businesses that are disrupted by AI, short those that benefit. And the market's taking the valuations up and down, you know, respectively, so I'm just trying to find where I think the businesses have better estimates of achievability and better margins. And I do think that maybe the upside skew to the market is just that more companies are going to see some margin expansion than the current bear rhetoric. So I'm not like in the bear den at all.

I think there's things you can own, but it's just not as good as it was in January before, you know, everything ripped higher. Sure. And John, you know, you mentioned before that you felt as if there's, you know, companies you would look toward that are smaller, that are maybe more neglected, that I guess you'd hope could withstand a little more from the Fed right here. Do you expect the economy as a whole is going to be able to keep chugging, even if the Fed says we have to force inflation down from four to two? Well, it's interesting. If you annualize the last three months of the CPI, we are at 2.3. So we're already almost there. I mean, we've been down in the CPI numbers every single month since June. And this is a really big month we have rolling off.

I mean, June was the peak of the CPI at 9%. When you roll off this month, it's going to continue to move lower. And don't forget that, you know, one third of the CPI is shelter. And two thirds of that is odor equivalent rent, which is kind of done in a wonky way where they call people on their phones and see what they can rent their house for. So it's a little bit strange in a world of AI that we're still doing that. But I digress. All to say, I think that if you look at the medium and small size companies, you do have a situation where you've got earnings multiples at trough levels, price to book multiples at trough levels. And in many cases, which is what gives me so excited, you've not

had a deterioration in the earnings. Some of them have come under a little bit of pressure, but others have not. I mean, life science and tools is an example of an area that has been really pressed down in valuation. You've got Agilent Technologies trading at just 20 times earnings down from 37 times earnings. That's a company that's trading below the COVID March multiple. So you can see I'm getting excited. That's an extreme discount, and there's been no deterioration in the earnings estimates. They've continued to produce really favorable results, and they just have teamed up with a group to expand their AI and machine learning

and their tools business. So I think healthcare is an area that can benefit from the AI frenzy, but I don't want to pay stretched multiples. I'd rather look to where we see better dislocations in those valuations. And we see them in the small cap space. Victoria, I'd love to get a word on the fixed income side of things here, because credit holding together fairly well to this point has been one element of the bull story for equities as well. You're right. There have been a few stories, right, where people were saying,

oh, this is going to do the tightening of financial conditions for the Fed. It's going to do the work for them. Credit was one of those areas, along with banking and housing. And we've seen all of these turn around a little bit. You look at credit spreads right now. Last week, credit spreads moved in from the short-term to long- term maturities and across all of the value levels from AAA all the way down to BBB spreads tighten. So it's actually working against what the Fed wants. And it's telling us that right now the credit market seems pretty stable. Now, in high yield, we have seen leverage ratios go up a little bit, but they're still below their historical norms. So it's not flashing a signal right now that there's a concern. I think we will see some widening as margins get compressed a

little bit. I think when we talk about the earnings, we're going to see margins get compressed as pricing power declines, but we'll have to see how that affects corporations. Also, lending standards leads corporate profits by a couple quarters. We're seeing lending standards tighten. Let's see if that flows through to revenues and margins. If so, we should see some widening in credit. But for John, Victoria, thanks very much. Appreciate it. Good to see you. Thank you. All right. Let's get to our Twitter question of the day. We want to know what's the next big catalyst for stocks. Is it Friday's jobs report, CPI next week, earnings or something else? Head to at CNBC closing bell on Twitter to vote. We'll share the results later this hour. Let's get a check now on some stocks to watch as we head into the close. Christina Partsenevel is here with those. Hi, Christina. Hi, Mike. Moderna shares moving higher as the company struck a deal to develop mRNA drugs in China. The U.S.-based biotech

company will research, develop, and manufacture medicines exclusively for China, despite the rising tensions between both countries. You can see Moderna up almost 2 percent. Coinbase, though, falling after Piper Sandler downgraded the stock to a neutral rating. The analyst cites the uncertainty around Coinbase's revenue forecast, and Piper Sandler also added that it expects Coinbase to report its lowest trading volumes in over two years. Shares are down 1.5%. Mike, back to you. Christina, thanks so much. Well, we are just getting started here. Up next, charting the second half. Top technician Chris Verone is flagging one part of the market

that could determine the road ahead for stocks. He makes his case after this break. And later, a big thread threat. It looks like Meta is taking on Twitter with its newest app. How the launch could impact the company's bottom line. We are live from the New York Stock Exchange. You're watching Closing Bell on CNBC. The yield on the 10-year Treasury hitting its highest level in four months today as stocks come off their best first half in years. Our next guest believes the road ahead for rates could determine the market's direction in the second half. Let's bring in Chris Verone, head of technical and macro strategy at Strategas. Chris, good to see you. I know you've been focused on yields for a while. They've now at this point sort of bumped up against the ceiling, maybe gone through it.

What are the implications and what do you figure they had? I think it's a really big deal. I mean, we've essentially been chopping in yield since the equity market bottomed in October. It's called from 390 on the high side to 350 on the low side. We just ran out of real estate on the chart. Now we've decisively, I think today, pushed through some of these big levels. So in terms of determining what this may mean for stocks the back half of the year, I certainly want to sleep on it. I do think there's an irony. It's happening in a week where no one's at their desk, too, right? Always big stuff happens. We went back and we looked. When you've had really strong first halves in stocks, the years that come to mind are 95, 98, even 87. If you look at the second half of the year, rates continued to fall in 95 and 98, and they went the other way in 87. So just looking at that

as some type of a roadmap, I do think, you know, you start pushing 420, 430 on yields, which was the high back from October, you got to begin to wonder that that start to put some pressure on stocks. Yeah. And just to spell it out, I mean, 95 was this, you know, you'd melt up in stocks. 87, of course, we know what happened when rates got too high, we had the crash. So you have real yields also going higher. So a lot of these things that feel like they might be pinching around the edges. In terms of the types of stocks that have worked and not worked, does it change the equation?

You know, what's interesting, today's the first day in a few weeks where you have yields up and defensive showing some signs of life. Yields up doesn't particularly worry me when pro-cyclical groups are leading, and that's largely been the case over the last several months. Today's the first day of a little hint of a change there. I always want to be on guard when you have rates up, which should mean stronger economy, being accompanied with defensive groups, utilities or staples or health care. That's not the best mix.

It's one day of it, but I think it bears watching going forward. It reminds me a little bit of the summer fall of 2018 where rates were running away and leadership started to skew more defensive. That's a message that, hey, maybe the market's a little uncomfortable with rates here. So we'll watch that. It's only been one day. I think on balance, the leadership of this market is still largely driven pro cyclical, whether it's industrials or discretionary. But we got to just put that on a little bit of watch here. And then in terms of outside of those areas of leadership, in terms of the broader FANG world, it seemed like it was sort of underbelieved and under-owned six months ago. Now, after piling on all this market value, where does it leave us? Yeah, you know, I'd watch a couple of things here. I'd say, number one, you mentioned real yields. There's been a pretty good relationship between

real yields and growth value. It broke down a little bit over the last several months. I just wonder, with this breakout in real yields up through 165 on real 10s, does the growth value relationship start to stall, which it actually has quietly over the last two weeks? I mean, look at Microsoft really hasn't participated the last two weeks. Google hasn't participated the last two weeks. I just think that bears some watching moving forward. The trends are still up. Sure. They've ridden the 50 day moving average all year. I'd make that the starting point. Do any of these names start to violate the 50 day? It's been support all year. I think it's a big litmus test going forward. And if you just look at the S&P 500 and how that's set up, what sort of pullback, as most people would probably anticipate, would seem routine?

And what would be a little more cost for concern? I think routine is to the 50 here. Call it 4,200. 50 has been good support basically since March. Even during the kind of the depths of the March banking events, 50-day held, I think that would be starting point. Underneath that, you begin to wonder, hey, is this something more serious? But this market's really not really about levels for me. It's about character. And it's largely been pro-cyclically driven this year. We start to see a change in that. I think it then begins to beg the question whether the character of the tape is changing.

Look at the UK. The UK is an area where rates have run. Ten-year gilts are back to the highs where they were last September, October. That's a market that's legitimately starting to weaken here. So let's use that just as a little bit of a guide to understand how higher rates may impact the character of this table. All right. Chris, good to catch up with you. Thanks so much. Good seeing you. Thank you. All right. Up next, weighing recession risk, CIC Wells Malcolm Etheridge is back. He's seeing some serious downside ahead, but it is not

all bad news. He'll break down his forecast for the rest of 2023. And later, chip stocks sinking as we head toward the close. We'll tell you what's behind that leg lower. Don't go anywhere. Closing Bell, we'll be right back. Welcome back to Closing Bell. Stocks are lower across the board today, although the S&P just barely. The latest Fed Minute showing most officials expect more rate hikes ahead. And my next guest believes the Fed will continue to hike until the 2 percent inflation target is within reach. Let's bring in Malcolm Etheridge of CIC Wealth. He's also a CNBC contributor. Malcolm, good to see you. I guess the question would be, how much more would you expect the Fed might have to do to get that 2 percent inflation target within sight?

And to what effect on the economy? Hey, Mike. Yes. So I think that the Fed chair, Chair Powell, has made it clear that he is absolutely committed to seeing this 2 percent target reached as as far as the the cpi number is concerned and so i think it pretty much means that it's a win not an if as far as additional hikes are concerned later this year i think they've already telegraphed two is the number that they already have on the table and are anticipating uh gets them to that target even though they've also told us don't expect it to necessarily mean that we show up with a 2% CPI target, say, in September, all of a sudden after the second rate hike in the same month. But they expect to let it play out from there because they think that's where the terminal rate should be. So I think we should at

least set our sights on two hikes this year, probably in the third quarter of this year, and then we'll see how long it takes to get back down to 2 percent from there. But that too is pretty much baked in, I think. You know, it's fascinating that we're at this moment where there's on one side plenty of folks who have great confidence that the gravitational pull on inflation is strong. And you can look at the leading indicators. It seems like we have a beeline in the coming months, at least toward 2 percent. Others are saying, look, the economy is running too hot here. You have stock market up. You have wage growth still strong. It's getting sticky around the 4 percent level. Where do you come down on that? I mean, do you actually think it's

going to be a struggle from here or a relatively clear path to get inflation lower? So I think what we end up seeing is that it does take a lot more work and more time to get that number down from something with a four handle down into the twos. It's sort of like for anybody who's tried to lose significant weight. Right. The first 20 pounds are probably the easiest. And that last five is what really persists and takes the most work to get rid of. But I do think also Powell has kind of shown his hand and said that it's going to take about two more going to take about two more hikes before they finally see the numbers that they want to see. I think it's really just a matter of how long will rates stay as high as they do at that

terminal rate before they finally peel it back and say enough work has been done and we can kind of just wait and see from here. But I think also he's tipped his hand in saying that their plan was to tighten until something broke. And I think no matter which side you fall on, we can all sort of agree that not enough has meaningfully broken to this point that would signal that they're going to back off of the gas pedal and allow us to coast from here. So we should all be seeing that at least two more hikes are what's going to come. It's just a matter of how long do they hold on at that terminal rate at that point before they decide to start initiating cuts and

easing off a little bit. Powell does seem prepared to try to let time do some of the work at some point here. What does it mean for you in terms of the playbook? Is it just sort of, OK, now just position as if there's a slowdown coming and be defensive? Or are there other things to do? Yeah, I think it depends, obviously, on where you are as far as your investing time horizon is. But I also think that this market that we've had so far through this year, the first half of the year, has really been a gift to those who really need to take a gut check here and see if they should be positioned as aggressively as they currently are. I read a

piece in the Journal this morning that actually was highlighting the fact that far more boomers are allocated 100 percent to stocks or something close to it than they probably should be at this point. And I think for anybody who's been looking for the exit ramp, not sure if you want to leave the party yet, I think the market being up significantly the way it has on this tech rally has really presented you with a second chance to get out of the market, not necessarily all the way, but at least get some of your portfolio tilted toward lesser risky assets, maybe CDs, for example. I've been seeing clients buying way more CDs the last six months at our firm than I have at any other point in my career.

It doesn't hurt that the 12-month is paying something north of 5 percent right now. So if I'm talking about a risk free rate of 5 percent plus versus I'm out 15 percent so far for the year, do I really want to keep on chancing it? I think that this is a really good time for anybody who knows deep down in their heart they should not be allocated as aggressively as they have been to sort of start to take profits here and get out of the way. So you're not in the position of trying to talk people away from that 5% plus cash option at this point, even if they don't have a lot of stocks, you feel like it's a good moment to rebalance in that direction? Well, like I say, it depends on where you are in your investing time horizon, right? But if I'm a retiree or someone who's soon to be, maybe I'm a couple years out from retirement, is there really that much of a benefit having my portfolio 100% allocated to stocks? Which means that if the market does, in fact, go in the direction that I think it is, I think we're going to see a recession before this year is out. If the market does, in fact, go in that direction, that means that I'm going to have to start selling things at a loss the moment I step into retirement,

where I could look back at a June or July of 2023 and say there was my opportunity to de-risk a little bit, diversify my portfolio a little bit better, and take that bird in the hand, that 5% CD that pays me to wait and see. Yeah, makes sense there. If you're at that stage, not to try to squeeze out just a little more, Malcolm. Thanks very much. Appreciate the time. Talk to you soon, Malcolm. See you, Mike. All right. Up next, we're tracking the biggest movers as we head into the close. Christina Parks-Nevel is standing by with that. Hi, Christina. Hi. Well, contract negotiations between UPS and union members have collapsed. We discuss if a strike is on the horizon. We'll have more right after this. Coming on 21 minutes until the closing bell.

Major index is sitting on modest losses. The Russell 2000 down almost 1% of the S&P is barely below the flat line along with the Nasdaq. Let's get back to Christina Parts Nevelis for a look at the key stocks to watch into the close. Christina. Yeah, and I'm watching Wolf Speed shares. Right now they are rallying. Double digits of the company signed a 10-year deal to supply chip wafers to Renasys, a Japanese semiconductor maker.

The deal is reported to be about $2 billion, that's what the company told me, and Wolfspeed's silicon carbide chips will be produced at the facility it's building in North Carolina. You can see shares are up 12%. Meanwhile, shares of UPS are falling as negotiations between the delivery company and the Teamsters union are appearing to hit an impasse. The current UPS Teamsters contract expires at the end of July, which is very soon, and the group of over 340,000 workers already overwhelmingly voted to authorize a strike if a contract is not reached. Shares are down 2%.

Mike, back to you. Christina, thanks again. We are also keeping an eye on Metashares, that social media giant taking aim at Twitter with its newest app, Julia Boorstin, here with the details. Hi, Julia. Well, Metashares are now up three and a quarter percent, hitting a 52-week high today on optimism about a new app that the social giant is getting ready to roll out. It's called Threads, and it was set to debut tomorrow, but the countdown clock on Threads.net says it's launching in three and a half hours, and we'll be watching. Now, investors seem bullish on the potential to leverage Instagram's reach to

its 2 billion users to attract some of them to a Twitter alternative, which could be a new growth driver for Meta. Now, Threads is described as a text-based conversation app, and it appears to look a lot like Twitter. It's designed to leverage Instagram's popularity by enabling those users to quickly follow the same profiles they follow on Instagram and to use their Instagram handles. Now, for Twitter, Meta's Threads comes at a time when the company is particularly vulnerable, on the heels of Elon Musk setting limits to the number of tweets that users can read. Plus, there are questions about how many of Twitter's users will opt into paying for the company's Twitter blue subscription service. And threads appears to be free. Mike. Yeah, certainly an opportunistic play here, Julie. I wonder if we have any read on what Meta is going to consider success with this rollout.

You detail all the advantages they have in terms of kind of on-ramping Instagram members. But in terms of revenue, I mean, Twitter had like five or so billion dollars in revenue when it was a public company. Meta's got like one hundred and twenty five billion. So I just wonder what you think they're they're seeking in terms of success. Well, I would say that Meta has a long track record of rolling out products first and looking to monetize them later. The first thing you need to do is build an audience. Make sure you have a place to put ads. Then you add ads to the product. Meta has had various situations where it's tried to create new apps or products, and they've just failed to take off. One was Bulletin, which was sort of a sub-stack alternative,

and there are various other ones. So sometimes these attempts to copy other popular features on other platforms just don't work. But I think in this situation, the confluence of various factors, including the fact that Twitter is struggling and the fact that they're not building this as a standalone app, but really using this, really using the popularity of Instagram to try to get some of those Instagram users to try this new platform. They may be better positioned this time around. But I think at first what they're going to be looking for is users and engagement on the platform, and then they'll monetize later. Yeah, I guess Reels would be another instance where a lot of people said, well, they're really going to have a shot here

and it seems to perhaps gather some steam. That one definitely did work. Yeah, absolutely. All right, Julia, thanks so much. Last chance now to weigh in on our Twitter question. We asked, what's the next big catalyst for stocks? Jobs report, CPI, earnings, or something else entirely? Head to at CNBC Closing Bell on Twitter.

We'll bring you the results after this break. Let's get the results of our Twitter question. We asked, what is the next big catalyst for stocks? Was it the jobs report, CPI, earnings, or something else? Well, you see there, earnings, the winner with 40% of the votes. I guess we have another couple of weeks before the big one. Up next, driving the action, Rivian well off at session highs despite posting strong delivery numbers. We'll break down that move and get a pulse check on the auto space when we take you inside the market zone.

We are now in the closing bell market zone. City's Scott Cronert here to break down these crucial moments of the trading day. Plus, Phil LeBeau on the big numbers out of GM and Rivian. And Christina Partsinevelis on why the chip stocks are sinking today. Welcome to you all. And Scott, love to have your take as we embark on the second half of the year. It's an interesting kind of nuanced combination of observations you have here. On the one hand, you've been looking for the potential of a recession maybe later part of this year,

consumer looking squeezed, and yet you're preferring some more cyclical areas of the market versus defensives. How does that square? Well, I think the way it squares is that, you know, if you look at the S&P and the sort of three clusters that we define, growth, cyclicals, and defensives, your growth cluster, which is the mega cap three clusters that we define, growth, cyclicals, and defensives. Your growth cluster, which is the mega cap growth AI component, if you will, is up about 38%. Cyclicals up only 2%, defensives down 2%. So, you know, there are a couple of discussion points here. One is how hard to chase growth. And here we prefer to be exposed, but look for pullbacks to be more aggressive. For new money, we're more comfortable putting it to work on the cyclicals over defensives, either on the premise that the recession timing gets continued to be pushed out and or you get to a Fed pivot potential as you

move further into the year, both of which we think can help that cyclical component of the market. Yeah, it's almost as if there's a chance that, can sort of run out the clock on the bears on the economy to some degree here if recession keeps getting pushed out. I do also want to get to your work that you've done on general earnings resiliency, because you have seen earnings forecasts kind of flatten out, maybe bump down in the last couple of weeks. But why do you think earnings don't have to go down as much as we've gotten used to in prior cycles? Well, given prior cycles, we're usually looking at recessionary effects as more of a shock situation to investors and to C-suites. And, you know, we've been talking about this recession for at least a year now and we think between investor expectations and management expectations we think both are better prepared this time going into a potential downturn than they have been in the past

and we think the tools with with which they're managing whether supply chain effects lack of inventories going into this and so forth all set up for a much lesser earnings downside risk than most would expect. So our earnings resilience theme is essentially just that, that companies are able to manage this downturn more effectively than previous. Ultimately, investors respond with a premium paid for companies on the other side of this. Gotcha. Circle back to you just a second. Scott, Phil, though, I want to get you on this move we've seen in Rivian today. Well, we'll talk about Rivian in a second, Mike, because this really started on Monday,

but it's all of the auto stocks. And what's really in focus here is what we've seen with regard to Q2 deliveries and June sales. Start with General Motors out today with Q2 deliveries, much better than most people were expecting. For the second quarter, up 18.8%. Look at this. The average transaction price actually increased in the second quarter versus the first quarter by more than $1,400, while incentives and inventory were flat. That speaks to the demand that is out there. If you take a look at shares of General Motors, the Q2 industry sales, according to GM, they believe that it hit 16 million as a sales pace. It's been a couple of years since we've seen a quarterly sales rate of 16 million. Also take a look at Toyota. June sales up 14.9 percent, including trucks, over 17 percent increase relative to a year ago. And finally, as you mentioned, Mike, Rivian. It was up on

Monday in a shortened trading day, also up today. Not as much as it was earlier in the session, but still up on the day. Why? Because on Monday, they said that they are still planning to produce at least 50,000 vehicles this year. That reiteration of the prior guidance, that's enough for the people who believe that Rivian is getting that traction that it needs to grow. Interesting. Now, obviously, Rivian is an early-stage player, but the numbers from GM, from, as you mentioned, Toyota and Tesla even, it just suggests the pie getting bigger than people thought it would at this stage, almost as if, you know, autos are no longer as sensitive to interest rates and things we got used to for so long. And I think that's the surprise in this. The auto loan interest rate environment, Mike, we've talked about this. These rates are anywhere between 6 and 10 percent, depending on what your

credit rating is like. I mean, they're much higher than they were a year ago. That is not slowing down demand. And even, you know, where we do see a little bit of erosion on the lower end of the market, there's still some growth there. So it's interesting to see how long this will continue. I think by now people thought these interest rates would slow down demand. We are not seeing that yet. Yeah, for sure. It's a story across the economy at this point. Thank you, Phil. Christina, let's explain what you can about this this move in chips today. Well, semiconductors once again caught in the middle of tense relations between the United States and China. The Chinese government has announced new export restrictions on two metals used for semiconductors and solar panels.

As of August 1st, buyers of gallium and germanium will have to apply for permits with Chinese if they want to work with China. And the Chinese state media is saying these controls are a way of telling the United States and its allies that it will not be squeezed out of the global chips supply chain. Shares of rare earth materials producer MP Materials, so that's a rare earth one, are up, look at that, over 5% since it's based in the United States, and they could stand to benefit if the tensions continue. While chips also playing a role, there's a part of the supply,

a smartphone supply chain, you're seeing several of these names lower. Corvo, Skyworks, Qualcomm down about 2 to 5 percent lower just because of the rising tensions. And the measures come as the Biden administration is reportedly preparing to expand its own restrictions, not only on the sale of advanced semiconductors to China, which would impact, and we've talked about this with names like NVIDIA and AMD, but now may include cloud computing services that use AI chips. That means companies like Amazon, Microsoft would need to seek U.S. government permission to do business with China. And that means a tense environment just ahead of Treasury Secretary Janet Yellen's trip to Beijing.

Mike? Yeah, so, Christina, it seems as if the chips have benefited from big policy measures in one side, with the Chips Act. And we have this construction boom in chips. And then they're a kind of a political football that gets kicked across the Pacific every once in a while. Where does that leave the players? Well, Micron would be, I guess, the fruit that China just went after in banning certain chips. So they got hit dramatically. NVIDIA's CFO just last week in a webinar with Piper Sandler said that roughly 20 to 25 percent

of their data center revenue comes from China, but she claims that there wouldn't be an immediate impact. However, 20 to 25 percent, that's substantial. And so should the United States go ahead, which it seems like it likely will, perhaps this summer, perhaps in October, with putting further restrictions. That is going to have an effect given China contributes roughly, what, 20, 25 percent of global chip demand. So if you're cutting out that country, that's going to have a substantial impact. Right now, though, it seems like the argument is that AI revenue is enough to offset any type of weakness that may come from the loss of China. Yeah. And of course, as we're showing, the sector is up more than 40 percent year to date, even with this little pullback here, Christina. Thanks so much.

Thank you. Scott Cronin, what's your current snapshot on how investors are sort of positioned and what sentiment might mean for the next, let's say, few months in this market? Well, we think the surge of this mega cap growth cohort year to date has caught many types of investors off sides. And we think part of the move has probably been a catch up in various ways, shapes and form. Even on the ETF side, you know, flows were meaning very, very subdued from last November through May. We began to see a pickup in June. So our sense is here is that there's still an element of, OK, how do I position around this market?

AI is sort of the elephant in the room. And here, we're trying to keep an exposure to those areas where there's a more direct revenue and then earnings component. So we tend to prefer the communication services slash Internet names. We prefer the software names within that cohort. We're less constructive on tech hardware at this point. We're neutral on on semis, as just discussed. But I just I think the issue here is, OK, great. How long can this mega cap growth rally extend?

And coming back to your survey a while ago, I do think that Q2 earnings are going to be really critical here. Essentially, the higher you run the stocks, the more implicit the expectations are that should be come out with the quarterly earnings reports. And we think that that's going to be the next significant hurdle for these names. Scott Cronin, appreciate the time today. Thanks so much. All right, coming into the close, we've got about 40 seconds left. The S&P 500 still sitting on modest losses, just about 17 one-hundredths of a percent. The Russell 2000, though, has been weak all day, down 1.2 percent. Also, the equal-weighted S&P is off about four-tenths of one percent as well. The big downside leaders in the S&P, Apple, it is off about six-tenths of one percent, coming off of that $3 trillion market cap.

But Meta, upside leader, up almost 3% today and really mitigating the losses across the entire S&P 500. That about does it with the Dow down 130.