Power Lunch - Big Tech on Deck, halting buybacks and a power player 10/25/22

Episode Date: October 25, 2022

Big tech earnings are on deck as they face their biggest challenge yet: an economic slowdown. Plus, why one analyst says Allstate should halt their buybacks. And the Goldman Sachs President & COO on recession risk, dealmaking and the firm’s big reorganization. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

And on that auspicious note, welcome to Power Lunch. I'm Contester Brewer. Here's what's ahead. A financial power player Goldman Sachs president and CEO John Waldron joins us. We'll discuss the unprecedented shocks facing the economy, dealmaking, and the bank's massive reorganization. Plus, here they come.

Big Tech earnings on deck, Microsoft and Apple today, meta Apple, Amazon to follow margin contraction in focus. That is not stopping a fund manager from going all in ahead of their results. Talk to him in just a minute. Brian? Contessa, thank you very much. All right, so those are individual names. Let's talk about the macro markets and they're looking pretty good. Stocks overall rising for a third day. The Dow, the S&P and the NASDAQ, they're all higher. In fact, gaining a little bit of steam. The NASDAQ now up 1.7%. The Dow, the laggard. By the way, the Dow is on pace. I know a lot of people don't watch the Dow professionally, but still gets the headlines. The Dow is on pace for its best month since November of 2020. So basically two years. All right. Here's what else is moving this afternoon. Xerox shares falling after the company cut its full year revenue guidance. They blamed inflation. They blamed supply chain constraints.

By the way, Weber is up 30% after its biggest shareholder offered to buy all the outstanding shares. And yes, this is Weber, the grill maker. So what do we say? Weber's on fire? I don't know. And Twitter, sorry, Contessa. And Twitter shares moving higher in the past 30 minutes or so, David Faber, reporting that equity investors in Musk's deal for Twitter.

Twitter have actually gotten the paperwork. They're going to sign the deal will close on Friday. Twitter stock up again today. Contessa. All right, Brian, we're about two hours away from the biggest earnings reports of the biggest week of earnings season. Microsoft and Alphabet are out after the bell, followed by Meta Tomorrow, Apple and Amazon Thursday.

These companies facing some of their biggest challenges yet, a slowing economy, punctuated by reports of job cuts here and slowdowns and do. digital ad demand. According to refinative, earnings growth estimates for the just-completed quarter have come down substantially for Meta, Alphabet, and Amazon. All of these stocks have been under heavy pressure, ranging from meta down 60% this year, Apple down 15%. Denny Fish is a portfolio manager of the Global Tech Fund at Janice Henderson. His top 10 holdings include all of these tech giants. So, Denny, good to see you today. First, let's start with Microsoft and Alphabet reporting after the bell, what do you expect to hear?

Yeah, well, thanks for having me. Really appreciate it. You know, as we think about Microsoft, you know, one of the reasons that we've owned the stock for several years is the resiliency of the business model. And I think what you had just mentioned, you know, some of the reasons that you've seen Alphabet, Meta, and Amazon come under pressure is both the demand environment for digital ads as well as the general backdrop for consumer spending. And Microsoft, while it has consumer exposure and PCs, and that's clearly really soft and gaming, the predominant area of profit growth for the company has been from Azure, its cloud platform, as well as its business and productivity apps with Office and everything

that layers around that. So the resilience of the earnings model is probably strongest and the range of outcomes around what that earnings growth rate looks like at Microsoft narrower than the other big tech platforms that are facing more acute headwinds, both because of potential macro softening and a software ad backdrop, as well as, let's not forget, you know, many of these companies are still feeling the effects of privacy headwinds, particularly meta, and then to a lesser extent alphabet with its YouTube platform. search has been a little bit more immune. And then, you know, Amazon has held up a little bit better because of first-party ads. So they're not as affected by privacy changes. But they're still digesting all of the investments that they made in the latter part of last year as they try to scale profitability in the retail business through their logistics and fulfillment investments. Okay, so let me just ask, Denny, your global tech fund is off 39% this year. So why are you so optimistic that tech is going to see a turnaround?

Yeah, it's actually, I think the way to answer that question is I'm very bullish on tech over the multi-year. And yes, this year has been a tough year because we've had two particularly pronounced issues that have hit the tech sector. One is rising rates hit growth stocks. And so if you look through what would have been some of the best growth names across technology over the last decade, those have come under pressure because their multiples tend to be higher. And when interest rates go up, multiples come in. Nonetheless, those secular growth prospects across software and cloud and, you know, parts of semis are still quite strong and are going to grow multiples of GDP over the next decade and continue to take. share of not only revenue per GDP, but then also profits. And then secondarily, we've had the

cyclical concerns. And so you've seen the majority of the cyclical growth assets like semiconductor, semiconductor capital equipment have come in under pressure because of the prospects for slower economic growth over the next year. But the reality is we're now trading at multiples. We haven't seen in quite some time. And the Sox is trading at a discount to the S&P. And anytime you have leaned into the socks, you know, over, you know, many, many years, that's generally been, you know, a fairly attractive opportunity with a multi-year bias in place. So we just, it's been the perfect storm for tech. But I still, you know, highlight that if we go back through the last 10 years and look at the percentage of GDP that, you know, has shifted towards

technology and technology like companies, that, you know, should continue. kind of unabated over the next decade, and that's why we continue to be bullish. If you see this big headwind coming from the ways that the digital ad ecosystem has changed, is that something that these tech companies just adapt to, Denny? Or is it something that continues to present challenges if and until they do? Yeah, absolutely. It presents challenges. And I know you mentioned something earlier that we own all these.

We actually don't own meta, just to be clear. And I think that's, you know, they've been the most impacted. And so you've seen a compression in return on investment spend for ads, clearly, as you have more limited targeting. And then the other impact to these companies is they just have to spend a lot more in CAPX to try to drive ad ROI over time. So that's the difference. And it's why we tend to be a little less optimistic about the digital ad ecosystem. at the moment because there have been structural changes, you know, in the industry relative to areas like growth software, cloud computing, semis, semi-cap equipment that, you know, have, you know,

really nice cyclical and structural growth tailwinds over the multi-year, you know, notwithstanding some of the, you know, issues that we've seen with, you know, the U.S. government getting more aggressive on our semiconductor stance with China. Denny, thank you so much for joining us. We appreciate it. Denny Fish. Appreciate that. Great. All right. The major index is all up more than 3% over the past week. But amid the recent run-up, there is still value to be found. Or so says your next guest. And he says, if you want it, you got to look for the financials.

Let's go value hunting. The Sarat Setti managing partner and portfolio manager at DCLA. Obviously, also not only a C&BC contributor, but arguably the best one. Sirot, welcome back to the program. We treat you well here on Power Lunch. There's no lunch involved, however. You are, and you're very kind, so thank you. I know. It's a mutual admiration society.

Surat, value the financials. We're in a rising rate environment. We know that. We've got a lot of global conflicts. We've got a lot of global confusion. Lack of clarity about what's going to happen in Europe and parts of Asia, including China. Why are you finding value in some of these financials? So if you look at it, Brian, I mean, I've broken out two different companies here.

Morgan Stanley, for example, I mean, 60% of its business is wealth management. That's growing high single digits. The rest of the business is capital markets, M&A, that we know is a trough business right now. Stock selling it less than 11 times earning, solid balance sheet, almost a 4% dividend yield, a big buyback in place. And if you look at kind of their acquisitions such as, you know, Eaton Vance that they've done in e-trade, these are all accretive. And I think the stock has just kind of been sold off. They have very little credit exposure. They really have almost none. So if you think about a company that you want to own that has recurring revenue, has a great business management team, you know, it's a stock that's trading it at a discount of the

S&P that's growing at a much larger rate at the S&P. The second one is American Express. Now here's another great well-run company. The brand is incredible. You've seen a huge amount of travel, entertainment. And the thing that people don't understand about Amex is the growth is really coming from the younger customers. Gen Y and Z. They are all. almost 75% of the growth with credit cards in the platinum area, in the higher level, and the recurring revenue there, it's a 90% rate of people keeping their cards. So we see that also as a great inflation play, because credit cards on Amex, again, as people spend more money, they make more money, and they're global in nature.

So they're actually going to do really well kind of as people are now, as you've seen it. Look at the travel and entertainment business. It's really, really growing. Yeah, but we're talking about a consumer-led slowdown. We just don't have much visibility on the consumer longer-term, Sarat. We're seeing probably default rates. They're inching up, but you wonder how once people, they wake up and realize they're paying, you know, 22%, not 7% on their credit card. Sounds like you're fairly confident in a consumer.

So remember, Amex is much more of a charge card than a credit card. So if you look at it that way and you look at small businesses, also spending money, all of this coming out, and all the data. I mean, look at the airlines right now. You can't get a seat on there. Look at the hotels. And what Amex does is it makes it so much easier for people who have that card. Again, I'm not saying you're buying a company that's selling it, you know, 20, 25 times earnings. This is 13 times earnings. It's got a very strong balance sheet. They reinvested a lot into their brand. So this is something you want to own. You know, it's already discounting a trough. I mean, to your point, it's already discounting at its valuation, which hasn't been this low in a long time.

So high-quality companies, those are the ones you want to buy when you see the slowdown, because when we come out of it, and nobody knows when the bell is going to ring, but when it does, these are the companies that lead you out of the downturn, as opposed to kind of ones that you want to still be defensive. Do you think, Surat, that the market should be discounting a slowdown as much as it is? I think at this point the market is so confused as to what the Fed is going to do and what's going to go happen geopolitically, that it's should. shooting first and asking questions later. So high quality companies are trading at, you know,

high single digits, low, you know, 12 to 13 times earnings. They've already been discounted. So I think it's more of a fear factor. You kind of had this when we had the COVID factor too. I think the proof's going to be, hey, can you execute? I mean, Amex is going to grow their earnings 20% next year, but the market doesn't believe that. So it's really a show me story. And when you have high quality management teams and high quality products and brands like the Morgan Stanley's and Amics of the world, those are the ones you really want to own. especially when they're on the discount rack. Surat, nice to see you.

Thank you. Thank you. Coming up, Allstate should stop all buybacks. That's the call from a Wall Street strategist who says there will be consequences if Allstate doesn't shift gears. Plus, the COO of Goldman Sachs, John Waldron, calls the current economic turmoil one of the most challenging he's ever faced. We'll talk to him about the key to investing in this market.

And as we had to break, Meme trade is back moving higher in afternoon trading, bed, bath, and beyond, a small cap stock up 19%. Welcome back to Power Lunch. American companies are on pace for a record $1.25 trillion in buybacks this year, according to Barney Associates. Some companies, though, may be better off halting their stock repurchases. In fact, our next guest calls on Allstate to do just that, or risk a potential change

to its credit rating. Joining us as Elise Greenspan, senior research analyst at Wells Fargo. Elise, you wrote a note this morning that said, you are refactoring in the forecast for all state saying it shouldn't continue with its buybacks. Why not? Yeah, so it has not been a great year for auto insurers, including all state. And because of that, they've just seen a large amount of losses, both impacting their current year results. They've have to take charges. for prior year results just because there's been a high level of inflation, right? So we've seen high medical costs, high bodily injury costs. It's been very expensive to repair cars.

And so because they've seen a lot of losses, so that's impacting the capital that they hold and their surplus that they hold within their subsidiary. And so we think given that drain on their capital, that all state would be wise, you know, to look to preserve their capital and return less to shareholders. I mean, a lot of times buybacks are seen as a company's vote of confidence in its future, no matter what's happening with the markets. But you're saying right now the pressure on Allstate to pay out claims is so great that they should maybe hold back some money here. Let me, guys, can you give me the chart for just the last week? What we saw last Wednesday when Allstate pre-announced earnings sort of dropped this as a surprise was an $875 million chart.

to boost its reserves to pay out claims. It had last quarter a $400 million charge, and this quarter it announced losses of as much as $725 million. What's really the challenge for Allstate? Well, the challenge is, you know, losses are, you know, high because of, you know, we've been dealing with record levels of inflation, right?

Record medical cost, record auto body repair costs. And just, you know, there's also, we've also had, you know, higher attorney representation, labor costs are going off. And so, you know, it's kind of been, you know, all sides of cost are increasing, you know, for all state. And so they've had to deal with, you know, claims, you know, for the current year as well as for prior years. Elise, is it just all state or is it hitting, for instance, progressive, too? We've seen it, you know, with progressive and other auto insurers as well. you know, the difference is, you know, there's a different capital return strategy between the two.

You know, all state has typically returned capital via sharing purchases and dividends. Progressive has historically used, you know, a small quarterly dividend as well as a large special dividend towards the end of the year. So there's been different, you know, difference in capital return between the two. And, you know, look, progressive has also had not seen the level of adverse development and the level of losses that we've seen at all state. but their results have not been great either. You know, at least it's Brian Selwyn. Listen, I don't know anything about the insurance business other than I drive a lot.

And I know by eyeballing it on the New Jersey Turnpike every day, I see literally 10 to 20 wrecks a day. Most of them, thankfully, are just little fender benders. But it's, I don't know if it's people forgotten how to drive or if everybody's back on the roads. Nobody's on mass transit. What kind of trends are we seeing in claims and what's going to happen to our premiums? Well, yeah, so a good part of what we've seen so far has been severity, right? Just the amount per loss has gone up affecting all these inflationary factors, but you bring up a good point. Frequency is also coming up, right? Individuals are driving back to work, driving on vacations. And so frequency is going to have an impact as well. And in terms of premiums, right, losses is what brings about prices in the property casualty industry. However, you know, with the auto insurance industry, you know, we went into this elevated loss. loss period following a really strong year for the industry. 2020 was the best year ever for the auto insurance industry because no one was driving.

So, you know, personal auto is, you know, very heavily regulated. And so, you know, the rate increases are coming. You know, but they're not, they're not coming as fast and to the same degree as the level that losses are rising. And that's really what, you know, pressuring profitability, you know, for all state as well as progressive and all auto insurers. It just seems like the, the volume. of incidents is just unbelievable.

Plus, the cars have gotten more expensive as well. Elise Greenspan, thank you very much. By the way, Contessa, just so you know, Chub. Chubb earnings are out, apparently this afternoon. Will you be covering said earnings? Yes, I will be covering said earnings and the conference call tomorrow. You can get the latest headlines on that, you know,

after I listen to the call. After you listen to it? Because before the call, and if you did the headlines, it'd be weird. Like, indicating some psychic ability. Or that, too. All right on deck. Why some am I? Amazon news is popping PayPal plus this fortune favor the bowl. We're going to talk Chipotle coming up.

We have a news alert out of Washington. Elon, Mui has those details for us. Elon, what do you have? Contessa Fed Chair, Jay Powell, is facing some new political pressure. The chairman of the Senate Banking Committee, Democrat Sherrod Brown, has issued an open letter to him warning of the risk of higher rates on the employment market. He said, I ask that the Fed not forget their responsibility to promote maximum employment and that the decisions you make at the next FOMC meeting reflect your commitment to the dual

mandate. Sheriff Brown says that they must avoid having short-term advances in the economy and strong labor markets get overwhelmed by the consequences of aggressive monetary actions. He also said that higher interest rates have not prompted companies to bring down prices. Of course, it's important to remember. We are two weeks out from the midterm elections. Democrats have been trying to sharpen their message on inflation. And now we have the chairman of the Senate Banking Committee asking Jay Powell to not forget the impact that rate hikes could have on the job market.

Contessa. Okay, Elon. Thank you. Well, hey, Alon, can I jump in here for one second? Because we were just talking on the exchange in the past hour about Jay Powell. And I sort of made an offhand comment about Lael Brainerd. and Powell, Powell has a contract, right? But let's be clear.

People say, well, they can't force him out. You can't force him out. He's got a deal. However, as we have seen in the past in 1970s, Powell is not immune to political or human pressure. Is he? I mean, you can make life uncomfortable enough for him that he may choose to move on on his own.

It's not impossible he would leave early, is it? Sure. It's certainly not impossible, but I would not want to imply that that is the environment that Democrats are trying to create at this point. I think that they are trying to highlight that there are two sides of the dual mandate and that the cooling of the job market

comes with pain. And that Powell has been very clear that the economy will have to take some harsh medicine in order to bring inflation down. And right now we're in a very sensitive political moment. Of course, the Fed meeting next week, deciding on interest rates just before the election. That is what is top of mind for Washington right now.

we'll see how this all shakes out and whether, you know, Powell will continue through his term, but certainly not say that this is what they're trying to do. No, but we, no, I know you're, well, you don't have to say it along. We've seen other high-ranking members of Congress tweet about it themselves. It's out there. It's public. There are Democrats who certainly have not been, who have not been Powell fans over the years, but it's important to remember, too, that Sherry Brown did vote for Powell and did confirm him. Yeah, and I think also, as you pointed out yesterday, Elon,

that right now with pocketbook issues being top of mind that you're seeing Democratic leaders, including Nancy Pelosi, trying to shift the focus a bit away from any perceived failures to what they have been able to accomplish and where they think that there could be more scrutiny on the part of voters. So thank you for bringing us that information. We appreciate that. Politicians aren't going to say we caused inflation. They're going to say you caused, not you, the Federal Reserve. It's your fault. elected official, you did it, not us. Well, and if you're trying to convince voters that whatever pain they're feeling in their pocketbook

belongs, that the responsibility belongs elsewhere, you can see why that would be important to them two weeks before the election. What? Politicians blame others at times of elections? Breaking news. Shares of PayPal jumping today as it makes a deal with Amazon to start allowing Amazon customers to check out with Venmo. Kate Rooney joining us now with more. Kate. Hey, Brian, that's right. This Amazon partnership is all about boosting Venmo's appeal beyond just sending money to friends

and family, the dog walker, babysitter, whoever used Venmo for. And the scale of Amazon's checkout platform makes this significant. It's a way to encourage people to go and spend directly from their Venmo accounts instead of just cashing that money out to a bank account. PayPal has now owned the app for almost a decade. It has about 90 million users and has been seen as what some call the crown jewel for this payments company, but Wall Street has been frustrated at the app's inability to break even or contribute to the bottom line for PayPal. Executives have stopped promising any sort of Venmo profitability on the earnings calls lately.

It's so far been a free offering. Checkout, though, tends to be much more lucrative for Venmo. They get a slice of each transaction and getting people to use Venmo for checkout, similar to how a lot of people now use PayPal, is a key tent pole in PayPal's turn. turnaround strategy driven by Elliott Management. The activist investor took a $2 billion stake in PayPal earlier this year. It's really been helping the stock outperform its fintech peers, at least, and PayPal's also getting a boost from that Amazon News today. The CEO, Dan Shulman, outlined some of his priorities on the last earnings call. He said they're now doubling down

on checkout, PayPal and Venmo digital wallets and then Braintree, but there is, of course, growing competition out there for those digital wallets from Square, Apple, plenty of others. Back to you guys. All right, Kate, thanks for bringing us that. Let's get over to Bertha Coombs now for the CNBC News Update. Hi, Bertha. Hey, Contessa. Here's what's happening at this hour.

House progressives have taken the unusual step of retracting a letter to President Biden, calling for accelerated diplomatic efforts to end the war in Ukraine. The letter was criticized by many fellow Democrats who also object to Republican calls to cut aid to Ukraine. Representative Jayapal took responsibility for the letter, but blamed its release on staffers. In the meantime, police have identified the suspected shooter who killed a teacher and a 15-year-old girl at a St. Louis High School yesterday.

Authorities say 19-year-old Orlando Harris was armed with an AR-15-style rifle and more than 600 rounds of ammunition. Police say Harris also left a note in which he claimed to have no friends or family and that he lived a life of isolation. And across much of Asia, Africa, and Europe, a partial eclipse of the sun was visible earlier today. People looking skyward with proper protection saw the moon taking a crescent-shaped bite out of the sun.

Always amazing to see that, Brian. Just don't stare directly at it. No. Not directly at it. All right. A head on power lunch. A poker or power player. I got gaming on the head, Contessa.

Yeah. We're going to speak with Goldman Sachs' president and COO about the markets to fed the economy and more. And we're there going to make a bet. How about that? And more. Things keep getting worse here for home builders. Pulte is seeing increased cancellations as mortgage rates climb. But the stock is seeing a nice jump.

Why? We're going to trade that name in three-stock lunch. All right, we call it the power rundown. It's not just snazzy animation. We've got a lot to get through here and get you caught up on the markets. All right. Let's go ahead and blast through this if we can. Stock spawns commodities in the state of banking with the president.

CEO of Goldman Sachs. Let us begin, though, with Christina Parsonableness at the NASDAQ on what is another good day for technology in October. Christina. Yeah, another day for all three major indices right now. The Dow on pace for its largest monthly gain since November 2020 and the S&P and NASDAQ on track for their first monthly positive since July. Stocks essentially are just getting a boost from another round of pretty decent earnings, plus softening economic data, which has people thinking the Fed might downshift its tightening pace. next week. Plus, the 10-year-sought quick drop and yield, thanks to a push into global government bonds after weaker European economic data. And you got the U.S. dollar that's a little weaker.

And so that's helping a lot of names on the board. We're seeing SAP trending to 6% higher to Coca-Cola. And this is because of some kind of beat on earnings or revenue. Pricing power, though, a major factor for a lot of companies right now. UPS averting the FedEx disaster, higher shipping prices, helped offset lower volume. You can see shares are up a quarter of Kimberly Clark and Sherwin Williams. Other examples for today, the firm's hike prices to offset currency headwinds and weaker bombs, both trending higher at the latest earnings report. And then, of course, we await meta, Amazon, Apple earnings,

which are likely to drive markets given their sheer size and market cap. But I'd like to end with this. It's a crucial earnings season that I'll either expose negative underlying fundamentals, especially within technology and cause massive earning cuts in 2023, or instead prove that the bearishness tone was maybe overblower. or premature, whichever one you want to say. Brian? We're going to find out. It's all happening in the next couple of days. Christina, thank you very much. All right, now to the bond market, where it was another volatile session, yields. They're moving a little bit lower. Rick Santelli telling us what's

going on at the CME and in the bond market. Rick. Yes, and yields are moving dramatically lower the further down the curve you go, but let's hold off on that for one second because I'll tell you what, my sources and my phone are going wild on the Sherrod Brown story. Now, Now remember, he's chairman of the Senate Banking Committee, and he's not too pleased that the Federal Reserve is going to keep on hiking rates pointing to the dual mandate. I'm going to cut through all the clutter. Let's get to the meat here, right? The meat is that in one week and one day, most likely the Fed's going to raise rates three quarters of a point. And in two weeks from today, we have midterm elections.

Enough said. Now, let's look at the two-year. This is a two-year going back to when it made its intraday highs because it has come down. down a bit. And today's auction didn't really help because today's auction, of course, pushed yields back up a little bit because it wasn't very good. But have yields really come down all that much? Here's a year-to-date of twos. They closed at the end of last year at 73 basis points. They're up about 372 basis points. That doesn't look like it's rolling over. Here today, the 30-year bonds. It's up 235 basis points on the air close at 190. That doesn't look like it's rolling over.

everybody's looking at stocks, saying rates are rolling over. Now, look at Boons. And Boons, by the way, are up exactly the same amount as 30-year bonds, up 235 base points. But they do look a little more like they're rolling over. But the chart that truly looks like it's rolling over is the dollar index. Look at the year today to the dollar index. It closed under 111. What was?

It closed at 9567. Right now it's under 111. It's closer to 1.10 and a half. The point is, when the dollar index goes down, start. stocks go up and that is not lost on investors. Brian, back to you. I think the Senate Banking Committee head is coming after the Federal Reserve Chair, not a small story, Rick, at all. All right, now to oil, which is closing slightly higher for the day around $85 a barrel, rebounding for some earlier losses. The head of the IEA said tight supply is putting the world in the middle of the first

truly global energy crisis. So with high commodity prices, high rates, high inflation, and high and certainty where exactly is the American and global economy headed. Your next guest says the current economic turmoil is one of the most challenging he has ever faced at his career. Goldman Sachs president and C.O. John Waldron, joining us now with our own Leslie Picker at the New York Stock Exchange. Leslie, take it away. Thank you so much, Brian, and thank you, John, for joining us. Really, really great to hear your perspective on the plight of the economy. Obviously, CEO David Solomon, said last week that there is a good chance that we could see a recession. Your economists have said that's

closer to about a third of a chance that we'll see a recession. And in your role as president, you're talking with clients all the time, you're talking with the C-suite. What are they telling you about the state of their business? And how does that all kind of come together for your predictions about the potential for a recession? It's great to be here, Leslie. I appreciate the time. It's good to see you again. I would say most CEOs right now are still of the belief that the U.S. economy is pretty resilient. And while there is some early sign of weakness and elements of the economy, broadly speaking, it's hanging in there pretty well in the U.S. for sure, less so, obviously, overseas. The things that we're watching are really the forward indicators. You know,

you want to watch advertising spend. You want to watch kind of demand rebuild in terms of supply chains are working their way through. We've gotten through a lot of the disruption. Does the, does the supply get reset, you know, back into those chains at the same level as it was working through or are they working off of kind of, you know, last six-month demand orders and the new demand will come in softer? And so I think there are some signs, certainly anecdotally, and some of the clients we talk to, that there's some weakness coming, you know, on the forward. But I think by all accounts, you have to say the U.S. economy is still hanging in there pretty well. Weakness on the forward. As you look ahead, I mean, I think some CEOs have given it about six to nine

months before we could see a real downturn. And a lot of that, they lay at the feet of inflation. and that ultimately eating into the pocketbooks of the average consumer. Is that something that you see as well? For sure. I think inflation is the single biggest issue that we all have to tackle right now, which is why you see the central banks, the Fed in particular, being so aggressive in its posture to try to tackle the inflationary impulse. Definitely companies that we talk to are wrestling with inflation.

They're obviously wrestling with commodity, input price inflation, but also I'd say more significantly wage price pressure. Which is stickier. The challenge right now is we have 3.5% unemployment. So you have actually a pretty tight labor market with everybody predicting a recession and demand destruction coming. And so it's very complicated for companies right now to plan for 2023 because they still have a very tight employment picture while they know their demand. They're forecasting their demand will get weaker. So I think you could you could preview that there probably be some wage some wage pressure and some margin pressure in corporate America,

which should have some negative implication for earnings. And I think a lot of investors today are trying to figure out where do I price earnings in 2020? How much of a decline do I want to buy into and what's the right multiple for that, you know, for that earning stream as it comes down? But as we saw banks report last week, the consumer remains very strong, very resilient. You agree that ultimately inflation will have an impact here if it's sticky enough. And you think that will ultimately be the culprit for the recession? Or will it be just the rising interest rate to the acceleration?

I think inflation is already having an impact. I think consumers, if they're not spending less, they're substituting. So you're starting to see some change in behavior. we're not yet seeing a real rollover of consumer spend, which I think is what everybody's worried about. My contention would be that one of the issues is there was so much stimulus put in the system that the lag effect of a monetary policy might be a little longer than normal. I'm certainly not an economist, and we talk to our economists all the time about how do you think about that lag effect. But my suspicion would be that we might have a longer lag in the impulse of the policy actually running to the real economy

based on how much stimulus was already put in. And so balance sheets are stronger. Personal balance sheets are stronger. Corporate balance sheets are stronger coming into this, you know, down draft, if you will. And so I think that may have an impact on how the policy actually gets transmitted into the economy. Yeah, the lag effect aspect of this is really interesting. I think historians will be studying it for years to come.

You may not be an economist, but you are a banker, at least a former banker in your former role before getting promoted to CEO and president. Do you think we need to see the other side of a potential recession or get some they're in before we get a resumption in the M&A and IPO market. I mean, there's just been a huge slump in activity. And I'm just curious what you're hearing from clients with regard to when they're actually ready to do deals and transact in a way that we've seen in a healthy market. So you reference MNA and IPOs.

I would say that those are two pretty different markets right now. The M&A market actually has been pretty resilient, surprisingly resilient in my mind, in terms of how much activity we've seen, despite, you know, all the volatility in the marketplace. it's certainly getting harder to price deals. With the volatility and divergent perspectives on where the economy may be going, it's harder to price deals and make those deals work. The IPO market has been all but dead for many months now in the context of this valuation reset.

And we are going to price an IPO today for Mobile Eye, which is terrific. We priced the Porsche IPO some weeks ago, which went very well. So it's not as if you can't get a transaction done. and certainly these more name brand companies that are well known to the marketplace can get done, I think it's going to be tougher for the sort of regular way flow to come back into the marketplace until we get a little bit more of a sense on rate policy and where the Fed is going to try to land in their perspective on rate policy. I think that's the most important indicator to watch. And a lot of this kind of uncertainty and questioning here has translated into Goldman's stock price,

which is stubbornly below book value, a discount to your peers, particularly. early JPMorgan and Morgan Stanley, do you think that's purely reflective of market conditions, just the fact that there's the cyclical nature of deals and ultimately that will rebound? Do you think that there's more of a systemic concern surrounding, you know, the business, and is that something that the recent reorg that you announced is looking to address? Well, we're highly focused on our business plan and executing on our business plan. We laid out a strategy four years ago, which we called one goal. Goldman Sachs is the architecture of this strategy, basically focused on client service and putting

clients at the center of everything we do, and then working hard inside our firm to break down whatever barriers that exist in the service of those clients. And we're now four years into that strategy, and it's gone quite well. Our wallet shares are up significantly, and we're much more important to our clients than we would have been four years ago, certainly in our view. And I think our clients would largely echo that sentiment. The reorganization that we announced is really the next evolution of that one Goldman Sachs strategy. all driven through the client lens, all focused on how do we organize ourselves internally to

continue breaking down those barriers so we can serve our clients most holistically with the breadth of capabilities that live inside of Goldman Sachs. So we put our asset and wealth management businesses together. We put our global banking and markets businesses together. And both of those moves are really the second stage development of what was an original strategy to try to be less siloed, more in the service of clients in a more holistic fashion. And so on both sides, of both of those business moves, we're going to be much better to serve our clients. On the asset and wealth management side, we'll have an integrated platform, one operating model that underlies from a middle and back office standpoint, all of the work we do with

our asset and wealth management clients. And we'll continue to drive our management fees forward as we raise more capital and become a better steward of the capital for our clients, whether they're wealth management clients or asset management clients. And on the banking and market side, we see increasing client demand to access both capabilities. So investment banking, wanting more market expertise and market capability, and market clients wanting more investment banking capability and more ability to get deals done. And so we're seeing that from both sides of the ledger,

and we think we can better serve those clients, particularly in the financing arena, which is a significant focus for us, is to drive more financing activity and more financing revenues for the firm. That's mostly going to come in that global banking and markets integrated model, where we are much better equipped to finance our clients

and to risk manage in a more joined-up effort. And of course, DCM is an area you're credited, you're credited specifically with turning around and having a particular expertise. So we will keep monitoring it. John Waldron, president and COO of Goldman Sachs, thank you so much for being here. We really appreciate it. Appreciate the time. Thank you. I'll sit it back over to Contessa. All right, Leslie, thank you so much for bringing us, Mr. Waldron. We appreciate that. After the break, Chipotle earnings on deck to stock climbing since the last quarter's results, customers' loyalty seems to remain strong, even as prices for those, oh, delicious burritos.

climb. We'll break down what to expect next. Chipotle shares higher today ahead of earnings due out after the bell, rising food costs, front and center. Pippa Stevens joins us with more. Hi, Pippa. Hey, Contessa. Well, the key thing to watch is whether consumers are pushing back against Chipotle's price hikes. The company raised prices by 4% in August to help offset higher costs from dairy, tortillas, packaging, and wage pressures. And that's just the latest increase. According to data from BTIG, menu prices are now up 23% over the last two years. So traffic during the third quarter will be important, as will commentary around how October sales are looking so far. Now, Wall Street is forecasting 7.3% same store sales growth

during the third quarter. Management previously indicated the number would be in the mid to high single digits. In terms of revenue analysts are looking for $2.23 billion, with EPS at 921 per share, according to estimates from refinitive. One other thing to watch is restaurant level operating margin. If margins are improving and traffic is holding up, it means Chipotle is able to pass those higher prices to their customers. Brian? All right, Pippa Stevens, Pippa, thank you very much.

All right, still to come. We're going to trade some key earnings movers in today's three-stock lunch. Powerlough. We'll be right back. It is time for today's three-stock. lunch. And we are looking at some earnings movers. You got GE down after earnings fell short and the company

cut its full year outlook. You got Halliburton also down, despite some doubling profits in the third quarter. It sounds like good news. And HomeBuilder Pulte Group hired despite weak earnings. That stock helped by lower yields, but better than expected margins. Let's talk

about it. Trade all three with Victoria Green. She is G-squared private wealth founding partner in CIO. Victoria, great to chat with you again in the daylight time. Let's talk about GE first of all. I mean, GE, I guess, a health care and wind turbine and energy company. How do you view the number and how do you view the name? Yeah. I look at it as a buy. It was all about renewables. That's really what dragged down earnings. Aviation was great. Power was pretty good. Health was good. They're also looking

at kind of streamlining their company. They're spinning on health. And so I look at this as a company in transformation. They rubbed down a lot in the renewable sector right now. So I think they ripped the band-aid off on that. Supply chain issues as well as renewables. It's been a really, really tough with wind turbines this year. So I think it's kind of got all the bad news out of the way. We're a buy-on-ge. All right. Next up, Halliburton, what did you get from their earnings call about future demand? Drill, baby drill. I mean, their numbers with the Stumburgie or SLB or whatever they're calling themselves. We're fantastic. They still grew internationally at 21%. Even with the right down in Russia, they got all the Russia, you know, off the books. And that's

great. So they're looking at increased demand. They're going to see it in Saudi Arabia, the Middle East, United States, great North American drilling. They're passing on these increased supply cost, increased labor costs to the EMP companies that are expecting a 16% increase. So I think their margins are pretty safe. And I think you've got a really good outlook for oil and gas. Their CEO's excited. They see a really good tailwind coming. So I'm a buy on Halliburton. And apparently not a lover of Schlumberjay's new name, which is just SLB. I'm not sure what that means, but that is the new name for Sumberz. Let's talk about Pulte. This one is so interesting, okay, a home builder, one of the biggest of the United States. You got rates, mortgage rates that have doubled or tripled

in some cases in a year, but the stock is up because margins did well. I got to imagine if you're a new home builder, you can do things to reduce your own cost to maybe make things more affordable. Just cut, you know, make the house a little bit smaller, right? Put it, build it out of sticks, not bricks. hope for no rules. Yeah, except their margins are probably going to go down, right? They're at peak. I think this is almost peak margin for them. They're going to have increased selling costs.

They may have to do some discounting or some deals. I mean, their cancellations were up 24%. They're, you know, they had a 28% increase in writeoffs and, sorry, 28% decrease in new business and new orders. I don't want to own a home buyer when it costs you $750 more a month because of the 7% mortgage rates, you know, a $400,000 house. I think people are staying cut. I think I'm not going to buy a home builder right now when the homesy market is slowing.

Look at Kay Schiller numbers today. It's not a place I want to be. We're short four million homes across the nation. So you'd think that there would be a market there no matter what the price is. Victoria Green, thank you very much for joining us today. We appreciate that. And thank you so much for watching Power Lunch. We'll see tomorrow.

Both of us. Closing bell starts down.