The Great Rate Shock 1/8/25

Summary

Halftime Report: The Great Rate Shock (January 8, 2025)
Hosted by CNBC's Scott Wapner

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Introduction

In this episode of CNBC's Halftime Report, host Scott Wapner delves into the pressing issue dubbed "The Great Rate Shock," exploring its potential ramifications on the stock market and broader economic landscape. Joined by financial experts Joe Cher, Nova, Shannon Sikosh, Stephen Weiss, and Jason Snipe, the discussion centers around rising Treasury yields, the influence of the Trump administration's policies, sector-specific impacts, and strategic stock recommendations.

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1. The Great Rate Shock

Scott Wapner opens the discussion by highlighting the significant rise in Treasury yields, marking the 30-year yield at its highest since 2023 and the 10-year yield the highest since April. He emphasizes not just the level but the rapid increase over a short period:

"It's not so much just the level, it's the distance that we've traveled in such a period of time." [00:41]

Frank Holland elaborates on the negative correlation between equities and bonds, noting that higher Treasury yields are increasingly holding equities hostage:

"We're getting a little bit of a lift right now for the S and P and the Nasdaq. Well, if I look and see where treasury yields are doing, treasury yields are coming off modestly." [01:55]

2. Impact of Rising Yields

The panel discusses how rising yields are creating a challenging environment for both bonds and equities. Shannon Sikosh points out the uncertainty surrounding policy changes under the Trump administration and their potential impact on growth and inflation:

"There's, there's uncertainty in terms of policy... But deregulation... is really supporting at least our view from a broadening out perspective for the equity market that has some legs to it later in the year." [03:18]

Stephen Weiss adds that rising yields could make bonds a more attractive alternative to equities, potentially leading to market instability:

"It is a real problem... it becomes a very real alternative to the equity markets when you want to sit out the chaos." [04:38]

3. Trump Administration's Policies and Market Uncertainty

The conversation shifts to the potential effects of the incoming Trump administration's policies. Shannon Sikosh discusses the administration's ability to enact changes quickly, such as tariffs and immigration reforms, and how these could influence market sentiments:

"The important things, he can actually execute those changes fairly quickly after inauguration day." [03:18]

Stephen Weiss expresses concern over the long-term implications of these policies on market stability and valuations:

"At some point you've got to ask yourself, when am I going to take what he says as a real look into the future and when am I going to disassociate it with reality?" [04:39]

4. Sector-Specific Impacts

Tech Sector:
The tech sector is under scrutiny due to its high valuations and sensitivity to yield changes. Discussions around major players like Nvidia and AMD reveal mixed sentiments. Frank Holland notes the volatility in Nvidia's stock despite strong fundamentals:

"You can't ignore that, that has significance." [16:45]

Jason Snipe comments on AMD's recent downgrade, highlighting concerns over its competitive roadmap:

"How about AMD today got double downgraded to sell from buy... it's unlikely any of that happens." [18:44]

Software Valuations:
The panel critiques the lofty valuations of software companies, arguing that high Price-to-Earnings (P/E) ratios are unsustainable in a rising yield environment. Frank Holland points out the disconnect between AI-driven growth narratives and actual earnings potential:

"We're categorizing all these software names as long duration assets and we saw the playbook in 2022. That's a difficult environment for them." [39:30]

Insurance Sector:
Travelers and Allstate receive upgrades due to strong margins offsetting catastrophic losses. Frank Holland emphasizes the resilience driven by margin improvements:

"It's being offset by strong margins and that's what's identified here in Goldman Sachs's report." [32:23]

Healthcare Sector:
Trian Partners' open letter to Solventum shareholders sparks a discussion on the performance and valuation of healthcare spinoffs from major corporations like 3M. Stephen Weiss remains skeptical about administrative interventions:

"If you're truly being constructive, you do it behind closed doors. Unless the company has rebuffed you and doesn't want to listen." [25:43]

5. Stock Recommendations and Analysis

The experts provide targeted stock recommendations amidst the volatile market conditions:

• Leidos: Stephen Weiss advises holding Leidos despite market overhangs related to Department of Defense contracts, setting an upside target of $165 from $200.

"165 is still, to me, a reasonable upside target for the stock." [29:25]

• Accenture: Upgraded to outperform, Accenture is highlighted for its strong earnings and strategic positioning in data work.

"They're continuing to monetize their new AI tools, so they're really making businesses more efficient." [31:09]

• Travelers and Allstate: Both companies receive upgrades due to their strong margin performance in the insurance sector.

"They report earnings on February 6th and I expect to hear something positive at that point." [32:35]

• Palantir: Facing significant stock sell-off, Palantir remains a hold with cautious optimism based on insider selling and high valuation ratios.

"sit back, wait, do not reach for the stock here, upper 50s to low 60." [35:08]

• Constellation Energy: Despite a 10% drop on potential acquisition news, Frank Holland sees long-term growth potential driven by surging electricity demand.

"If you believe that yields are going to push lower, the utility sector and owning it is a derivative way to play it." [43:37]

6. Market Outlook and Valuation Concerns

The panel expresses skepticism about the sustainability of high valuations in the current economic climate. Stephen Weiss underscores the necessity of a valuation reset for overvalued sectors:

"I'm not saying they're not [valuable]. I'm just saying there's a price to pay for them and this price is too high is my point." [40:27]

Frank Holland concurs, linking the pullback in software stocks to rising yields and the need for earnings growth to justify high valuations:

"The current price is a reflection and the pullback in these stocks is a reflection in the rise in yields." [40:21]

7. Conclusion

As the episode wraps up, Scott Wapner reiterates the challenges posed by rising rates and high valuations, emphasizing the need for investors to navigate a potentially choppy market environment. The experts advocate for cautious investing, highlighting sectors and stocks that may offer resilience amidst economic uncertainties.

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Notable Quotes

• "Is it a real problem?... As you get to 5%, it becomes a very real alternative to the equity markets when you want to sit out the chaos." — Stephen Weiss [04:38-05:00]

• "We're categorizing all these software names as long duration assets and we saw the playbook in 2022. That's a difficult environment for them." — Frank Holland [39:30-40:21]

• "I think there's going to be choppy... and I also think the president elect cares what happens in the stock market." — Frank Holland [13:26-14:23]

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Final Thoughts

Halftime Report provides a comprehensive analysis of the current financial landscape, emphasizing the interplay between rising Treasury yields and stock market valuations. The expert panel offers nuanced perspectives on sector-specific challenges and opportunities, guiding investors through a complex economic terrain marked by policy shifts and market volatility.

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This summary was crafted based on the January 8, 2025 episode of CNBC's Halftime Report. For more detailed discussions and live insights, tune into the podcast airing weekdays from 12-1 PM ET on CNBC TV.

Transcript

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[Frank Holland]

Eduardo Global Markets up to the minute, Front page news. Wake up to Frank Holland at Worldwide exchange, weekdays 5am Eastern. CNBC live. Ambitiously.

[Scott Wapner]

I'm Scott Wapner and you're listening to CNBC's Halftime Report, the podcast the most profitable hour of the trading day. We record this live weekdays at 12 Eastern. Listen in. Carl, thanks very much. Welcome to the Halftime Report. I'm Scott Wapner. Front and center this hour, the great rate Shock, whether it might ruin this bull run for stocks. We will discuss with the investment committee and tell you about some new moves our traders are making as well. Joining me for the hour today, Joe Cher, Nova, Shannon Sikosh, Stephen Weiss, Jason Snipe, we're all here at post 9. We do check the markets here. So we've come green a little bit, as Carl was just saying across the board here, the big winner right now, S and P. But as you can see, not much on either side of this today. Joe, I'm calling it the great rate shock of 25 because that's what it feels like here. The 30 year, the highest since 2023, the 10 year, the highest since April. It's not so much just the level, it's the distance that we've traveled in such a period of time. From that first cut In September we were 371. Okay. The 10 year note yield was 371 when the Fed cut rates in September. Now it's as I just showed you, 468. How much of a problem is this?

[Frank Holland]

It's a problem because what has happened now is the equity to bond correlation has turned negative and you really in terms of looking at the pricing of equities on an intraday basis, you're being held hostage by what happens with treasury yields itself. We're getting a little bit of a lift right now for the S and P and the nasdaq. Well, if I look and see where treasury yields are doing, treasury yields are coming off modestly. So we're we have a 30 year auction today at 1pm yesterday, the 10 year auction, the highest yield since 2007, I don't think we're going to see any change on that today for a 30 year. And in terms of momentum, because we always like to talk about momentum in commodities, in equities. Well, there's momentum as it relates to the treasury market, and momentum is clearly pointing towards higher yields. It's reflected in the open interest for the treasury future market that continues to grow on a daily basis here in the month of January. Clearly speculated speculators are adding to their short positioning, expecting that yields are going to continue to move higher.

[Scott Wapner]

Shan, how much of an issue is this for the market as it tries to work through all of this? It's trying to figure out what the Trump administration is going to mean. Higher growth, perhaps stickier inflation, universal tariffs, maybe a new trade war. How should we think about all this? Because the market seems unsure of what all is going to happen.

[Shannon Sikosh]

And I think it's, there's, there's uncertainty in terms of policy, Scott, But I think more importantly, there's a bit of, there's a bit of certainty about the timing of all of this. Animal spirits take some time to manifest. And so if you think about what the Trump administration could do in the near term, first of all, it's digesting a lot of the rhetoric. We have to get back into this news flow of hearing something every day, taking it apart, digesting it and seeing it incorporated into market views. But the second thing is, is that you talk about tariffs, you talk about immigration, and Ian Bremmer just said this on the program before us, the important things, he can actually execute those changes fairly quickly after inauguration day. Whereas deregulation, the potential for lower policy rates, this, this pro growth, continued economic growth scenario, that's really supporting at least our view from a broadening out perspective for the equity market that has some legs to it later in the year. But this immediate kind of coming off of last year, Scott, we know we have large embedded gains in some of these S&P 500 stocks, paring down some of those positions. Looking at immig immigration, looking at tariffs, looking at this uncertainty in the short term, I think that's why you're seeing the downward pressure. And I also think from a fiscal sustainability perspective, it's why you're seeing pressure on yields as well, twice.

[Stephen Weiss]

Look, it's real, the horizon yields.

[Scott Wapner]

Is it a real problem?

[Stephen Weiss]

It is a real problem. It definitely is a real problem because as you get to 5%, it becomes a very real alternative to the equity markets when you want to sit out the chaos so if you take some of the comments about maybe we should own Greenland, maybe we should own the Panama Canal, hey, maybe we should even own Canada, now, it's unlikely any of that happens, but if you're sitting as one of our allies and you're sitting in the US You've got to be concerned and you want to go to a safety train and wait out that insanity, basically. And if you're allies, you're thinking of how do we protect ourselves against America going down this path? If you remember how we have, we disenfranchised our allies during the first term administration, first Trump administration that's coming again. So I'm not talking about political beliefs here, I'm just talking about what he said. And then he hasn't backtracked from tariffs, as you pointed out. And that's a major issue, which is also. So at some point you've got to ask yourself, when am I going to take what he says as a real look into the future and when am I going to disassociate it with reality? What can happen? So that creates nervousness, instability in a market where we've seen valuations, critical components, stay at ridiculously high level.

[Scott Wapner]

I mean, is it enough to offset that, the optimism that has existed since election night? I mean, because the idea.

[Stephen Weiss]

It absolutely is.

[Scott Wapner]

And I don't know it is enough.

[Stephen Weiss]

And I said that then, that we pulled forward a lot of the positives that can come from a change in the business outlook from the administration into before the election and post the election. And now we're going to, I think it's going to be a very challenging market going forward because no matter what he does on the business side, no matter what he does, it can be offset by inflation. So the only thing, and I keep harping on this every time I'm on the show, inflation, inflation, inflation, jobs don't mean anything. Wage growth means something, right? Jolt doesn't mean anything. Wage growth.

[Scott Wapner]

Jason Snipe B of A says the path is now open to 5%, maybe even above that 5.3 on the 10 year. That feels like a game changing conversation to me that, you know, when I sat with Gundlock, I remember obviously sitting there in, in LA at the double line office, Fed cuts rates. Gundlock comes on and we're both looking at the bond market and watching yields go up. Like that's interesting. And I just told you what they've done since that day. I don't know if most people had in their playbook that back in September that in January, we'd be talking about 5% potentially on the 10 year.

[Jason Snipe]

I couldn't agree with you more, Scott. I mean, I think that, you know, I'm looking at 3, 3 cuts in the fourth quarter. Right. 100 basis points. And you're talking about the tenure at 3.7 in September and now well over 4, 7. Clearly, this is definitely a concern. And I think it's not about having a decision on whether it's US Exceptionalism or it's inflationary concerns. The reality is the pace, the pace of rates, 100 basis points in little under four months is significant. And I think that, you know, as we, as we turn the calendar, as of course we have, and thinking about the Trump agenda, pro business deregulation, all these different things that I think had been pulled forward since the election, and now we're kind of going through. What does real policy mean? You know, I'm turning to earnings starting next Wednesday in earnest with financials, and I think that will be positive. And I think that would be the callus for us to move forward.

[Scott Wapner]

I mean, Weiss, you're looking at moves, you know, to make as a result of what you think could be a game changer for the rally. Most of what you're doing today, it appears to me, it relates to outside the sort of derivative play, if you will, of what higher rates are going to mean. You've loved the India trade for a while. Now you're bailing on it. It looks to me in numerous ways, right through the inda and the SMIN. Both are ETFs, one related to small caps and the other may be larger cap stocks.

[Stephen Weiss]

Yeah. And look, I made money in the trade, but I didn't make as much money as I thought with the supply chain moving from China to India, which I still think will occur. But the element you've introduced also is that there'll be more on shoring, which was a theme already and has been theme for a number of years. I think that accelerates because again, you know, that's, you know, we talk about Trump being pro business, but let me deal with that a little bit, right? Is it really pro business if you get a cowardly move by Mark Zuckerberg on Metta to say, okay, anything goes now. And then, what do you, what are the advertisers going to think now? They're not going to come out like Disney and say, hey, we're not going to be a Twitter anymore because of this. Okay? Because you can't do that. That's not politically correct in a different way now, but it is influencing how businesses work. That's not pro business. That's going along to a certain narrative that the administration wants. So as part of that, I worry about tariffs coming from India. I don't worry about tariffs making good business sense. Right. Because you do need some external manufacturing capabilities, some external supply chains. We're basically saying, no, we don't want anything coming from any other country into our country. So there's no balance right now.

[Frank Holland]

Look, it's, it's difficult to invest outside the US Right now with rates. Right.

[Scott Wapner]

With yields.

[Stephen Weiss]

Right.

[Frank Holland]

Because we're not just talking to your point, Scott. It's a problem not just here, it's a problem in the rest of the world. UK yields, I think, are at this highest level since 2008. Emerging market yields are all rising. So that environment is very difficult to find opportunities outside the U.S. but I think back to the U.S. i just think all of us, what is consensus day on 2025? Choppy first half, better second half. I'm not saying that's right or wrong, but if we have a continued negative equity to bond correlation, you're going to have choppy.

[Stephen Weiss]

That's always the consensus in the US because you've got strategists, no offense, that work for equity houses, that work for investment banks. They can't say it's going to be a bad 25, it's going to be a worse 26.

[Scott Wapner]

You don't think you're going too far in suggesting like this has the potential to really like, offset, set all the positives that people think are, are coming? Well, what are the positives?

[Stephen Weiss]

We're going to extend the tax.

[Scott Wapner]

What do you mean, what are the positives?

[Stephen Weiss]

I mean. Yeah, let's go through what are the positives?

[Scott Wapner]

Okay, they're going to extend the tax cuts.

[Stephen Weiss]

Right. That's not new.

[Scott Wapner]

Well, that's not necessarily in the market now.

[Stephen Weiss]

Deregulation is in the market.

[Scott Wapner]

Deregulation is in the market.

[Stephen Weiss]

No, I think part of it is.

[Scott Wapner]

Absolutely, wow, there hasn't been any deals yet.

[Stephen Weiss]

Scott. People, good investors, go where the puck's going to be.

[Scott Wapner]

They don't know when deals are going to happen yet.

[Stephen Weiss]

No, they don't know, but they know it's going to be a much more accommodative deal regulation environment with Lina Khan out. Everybody knows that. You don't know that.

[Scott Wapner]

Of course.

[Stephen Weiss]

Of course.

[Scott Wapner]

But that doesn't enable you to invest in the companies you think are going to have some sort of event.

[Stephen Weiss]

I would say that interest rates were a much bigger governor on deal activity than Lina Khan was.

[Shannon Sikosh]

I just, I disagree with that.

[Stephen Weiss]

How do you disagree? The FTC lost about everything they did.

[Shannon Sikosh]

No, I think it's. I think. I think the impact of deregulation is being underappreciated and I think that this near term bump in yields and I think the concerns about fiscal sustainability. Yes. Will they create a negative impact on the potential M and A activity in the second half of the year? Perhaps, but not for quality.

[Stephen Weiss]

The same level.

[Shannon Sikosh]

We have to monetize private portfolio companies. That has to happen because these fund companies, the big asset managers, they cannot raise another fund until they do. So I think there's going to be a realization, a come to Jesus moment, if you will, on the fact of where rates are going to be. And I think that this deregulatory impulse combined with the fact that there is a very salient capitalistic drive to monetize these.

[Stephen Weiss]

I'll give you the other side and just one more.

[Shannon Sikosh]

Two strong years of public equity returns that have made valuations easier to determine. I think that all of those things are going to play into this M and A drive.

[Stephen Weiss]

Let me give you the other side of that. Of course they want to monetize and they'll monetize. The only rush to monetize is when they're trying to raise a new fund.

[Shannon Sikosh]

Which they all are.

[Stephen Weiss]

Right. Which they all are. Have not been able to do. But they need to get good money Marks funding away from. We hear about anthropic and open air funding in the private markets is still ridiculously tough. Ridiculously tough. I'm in the private markets, half my time's there. Ridiculous.

[Scott Wapner]

You run it for the hills. I mean, what are you doing with your sound so negative.

[Stephen Weiss]

I have, I have raised a lot of.

[Scott Wapner]

Seriously though, I mean you sound so negative now.

[Stephen Weiss]

I am biased towards negative. Absolutely. Okay. But I still think there are enough people that think what these people think around the table.

[Frank Holland]

I think that's going to take, I think choppy. And I also think. I also think the president elect cares what happens in the stock market. We might talk about universal tariffs, but the minute the stock market declines, he's going to go, whoa. He's going to call his economic team and say, hey, put something out there to comfort the market. Look, here's the thing.

[Scott Wapner]

I don't know. You know what? I would only say that the difference this time is he's not running for reelection. I think he can cares more about what he cares about getting done than necessarily how the stock market, tick by tick, reacts to what he does. I think there may be a little bit more nuance this time that, you know what, I'm not running for reelection. Here's what I think I can get done. I got the Congress, you know, the courts are in my favor and I'm going to do what I want to do. And if the stock market gets upset for a minute or two or ten, then so be it.

[Shannon Sikosh]

He's also questions about legacy building for him. I agree with you, Scott. I'm, you know, he hasn't really come out and said this is the legacy I want to have. But I tend to agree with Joe that part of that is going to be delivering a strong stock market.

[Stephen Weiss]

Yeah, look, I think choppy best case. And people said to me in response conversations, well, we were at these rates a year ago and as you pointed out, you know, back in 2 8, 2008, we were here at one level. But the point is, at that point, we, we knew the market had 100% consensus that the next move was a cut. That consensus is no longer there.

[Scott Wapner]

So we've seen certain trades obviously have some bit of issue. Yesterday was a rollover in tech, which we hadn't seen in a while to the magnitude, Jason, that we did. It was the worst day for the NAS, the NAS 100 in the tech sector at large since December 18th. Right. There was positive economic data stronger than some people, I guess, expected. Yields go up, tech goes down. Nvidia is trying to get a bounce back after the rout that it had yesterday. That was the worst day in months for the stocks in September, ces. Now in the rear view, how am I thinking about trades like that today?

[Jason Snipe]

Yeah. No, so, I mean, obviously for Nvidia, I think the big thing for me as. Forget about C for a second. The last six months has been relatively flat for Nvidia. Right. There hasn't really been a seismic move there. You know, there was a lack of, not necessarily innovation talk, but what is the here and now, you know, what is. What's going to happen in the near term? And I think that was, you know, somewhat of a letdown, you know, and that's why the stock kind of traded lower, you know. But when I think about semis broadly, I start to think about, and I continue to love the Nvidia story, but we're hearing from the hyperscalers, we're here hearing more about them developing their own chips or proprietary chips. So I start to broaden out my scope in the, in the semi space. And start to think about some of the, you know, companies like Broadcom, companies like Marvell that are doing custom made chips that I think that those names could kind of get, get a nice run here coming in the, you know, over the next couple quarter. So for me, I don't think, I don't think that the tech trade is disrupted terribly. I just think that, you know, CES was a little bit of a downer.

[Frank Holland]

If I could on Nvidia, I said the other day that I believe that the keynote address would lead to a new all time high. Check the box. Got the new all time high. That's not me patting myself on the.

[Scott Wapner]

Back because guess what? No follow through history. Well, see that's, you're right.

[Shannon Sikosh]

I was.

[Scott Wapner]

So last year goes to ces, he, you know, gives his keynote and the stock goes up and in the subsequent two days it goes up more and it stays up. So you, you know, it was sort of telegraphed that the stock was going to go up. It did into the event, but it didn't stay there.

[Frank Holland]

Didn't stay there. You didn't get the follow through. And let's kind of walk through that and explain how I think the viewers need to manage or shape the risk surrounding yesterday's move. It's very rare to see a stock trade to an all time intraday high and then close challenging the 50 day moving average. You can't ignore that, that that has significance. I think that there also is an element that you have to acknowledge that in video, despite all its strong fundamentals, the stock has been gamified. When you have all these ETFs that are double levered and you have exposure of algorithms participating, I think a lot of that contributed to what you saw yesterday. So if you're a buyer up at 150 or if you're a buyer up near those intraday highs, you have to take a look at where price is today and understand the momentum in the near term is down. And I know that's, that's not something that is normally said because most people say, okay, and Jim Crame is right. Own Nvidia as a core holding, don't trade around it. But there are a lot of people that own are trading around Nvidia. There's a lot of tactical elements surrounding Nvidia. And let's just acknowledge that what I expected to happen did not happen. And now the momentum is rolled over. You've got negative momentum in the near term. It doesn't wash away the long term strong fundamentals. This company and the belief that you want to own it for the long term and it will make a new all time high at some point in the future.

[Scott Wapner]

How about AMD today got double downgraded to sell from buy. We had some calls of late that you just don't see all that often. This is a big one because it's a two step move. Okay? The target to 110 from 200 bucks. This firm says they see additional downside as they now believe its AIGPU roadmap is less competitive than we previously thought. Weiss, you've talked about, I know you don't own amd, but you have talked about one of the threats to Nvidia being. Well, it's only a matter of time before competition comes online to take this company on. Now you have this call on AMD today by HSBC which says not so fast, not so fast.

[Stephen Weiss]

Well, I never thought AMD would be.

[Scott Wapner]

Competitive, whomever we're talking about.

[Stephen Weiss]

Well, no, it's an important.

[Scott Wapner]

There are only a few companies that are even in the queue to be competitive.

[Stephen Weiss]

And those few companies that are in the queue are the biggest customers of Nvidia, which you referenced, the hyperscalers. They have R and D budgets that far exceed what the R and D budget is for amd. So that's where the weaponry comes from to compete with Nvidia, not to be held hostage by them. And the reason why the stock sold off is that what he talked about was not the, you know, the euphoria around data centers anymore, of course that was mentioned, but into the other areas like robotics. Look, Nvidia has been writing $50 million checks to $100 million checks out of their venture fund. Like they're going out of style, like you guys will tip on a weekend meal at a coffee shop. That's how many checks they've been written. So they are searching for the next avenue of growth for themselves because they know, as they should know, as every company does, the great times don't last forever in a product because water finds its equal level. So look, so I debate in video all the time. Is, is everybody too, you know, much in this state of denial that it can be competition? And it's never been a core position for me, unfortunately, because it's done so well. But it is a position. So it's what I look at and say, where can, where could I go where everybody's not so bulled up on it? But as yet I haven't pulled.

[Frank Holland]

Does anyone own AMD on the desk? It's in the etf you do have it, we have it. And I'll tell you right overvalued, I'll tell you relative to Broadcom and Nvidia. Absolutely correct. I think right now current P E103 on AMD momentum clearly read for this stock rebalance. January 31st gets dealt with accordingly. But it certainly doesn't look good and that's an environment where you had a really strong end to 2024 for a lot of technology names.

[Stephen Weiss]

It was so asinine to have Nvidia, I mean to have AMD for the entire year trade at a higher valuation than video. It made no sense. What were people thinking that all of a sudden can be this great technology leader. It never has been. It's been an alternative to intel its entire career to Lisa Su took over and she made it a little better but not great. And Broadcom, I think the bull case there is also overstated because it's not as pure play in data centers. They've got a lot of cyclical companies, cyclical products in there as well. So I'm not, I'm not a Broadcom owner.

[Scott Wapner]

All right, so there's another name I want to get to because it's a new stock that Joe Terranova has added. It's Teradyne. Right?

[Stephen Weiss]

Yeah.

[Frank Holland]

The other day I mentioned the look risk to reward is important in the stock and I said we're using 125 as the stop out level. It appears as though this semi equipment name is finally gaining traction in terms of AI facing exposure. It's also breaking out technically. So you take a look at the chart, you see it here in the mid-130s. I said on Monday I would buy it. I did that on the close. You have to manage a type stop on this one. And if in fact we have moving forward a choppy equity environment because of this negative equity to bond correlation it's. It's going to fall victim to the overall market itself and I think a lot of individual stocks are going to do that as well. So I'll keep a tight stock.

[Scott Wapner]

I want to do some news what we're calling new at noon today. It's an exclusive that we've just got our hands on. It's Nelson Peltz's Tri N Partners sending an open letter now to Solventum shareholders today. That's the health care spin off from 3M. 3M doing that earlier in 2024. Try on holding what I understand to be a near 5% stake in that company first took its position last year has, has Added to it a bit in terms of what the letter says. Now try and wants the company to release a plan to quote, restore performance back to the levels that it delivered inside of 3M and says that if it does that that shares can reach $140 by the end of 2027. That's far higher than the 60 that you're watching it trade right now. Trian also making it clear in the letter that it was in favor of that spin, that it set Solventum up for better long term performance, but now says that quote, performance has taken a major step back. It says the company trades at a discount to its peers and even 3M itself, quote, in a short period of time. Trian says this company went from being 3M's best performing division. Consistent consistently growing revenue organically at a low to mid single digit rate to high to and mid to high 20% profit margin under 3m to 1 that is barely growing at a low 20% margin standalone. The company is expected now to release its long term plan in February. You can see the stock is getting a bump off this letter that is going to be made public at some point today again by trading Trian to Solventum shareholders. Weiss, you want to comment on this? I mean Trian has participated and been involved in other healthcare spins, right? GE Vernova and GE Healthcare. It understands not only a spin well, but certainly one within the healthcare orbit. And here they go sort of up in the ante and the pressure. This company, which they like and they like the spin, but they think it can do a lot better than 70 bucks.

[Stephen Weiss]

Yeah, and look, Pelt's a smart guy. He does put together obviously very thoughtful analysis of companies and how they can grow. And this company will need to grow because right now as I'm looking at forecasts, you've got basically flat earnings, a flat revenue revenue, flat EBITDA, flat earnings going forward. So on that basis in this sector it should sell at a low double digit multiple. Now what I'd also say though is that companies have become much more emboldened in telling, you know, activists that hey, thanks but no thanks. What are you going to do about it? You don't enough to influence the board, you know, and we're set and this is a new board relative to the spin out. I don't expect much to happen there.

[Scott Wapner]

Well, I mean this would, this would I guess fall in the line of what, what, you know, Mr. Peltz tries to suggest. He is anyway more than an activist but a constructivist now and that's B.S. okay, but let me finish what I'm saying. Let me finish what, Let me finish what I'm saying. There's nothing in here that says well we want you to, you know, do this buyback or this or that or really push for financial engineering if you will. This somebody who likes the company a lot, who agrees that the spin was a good idea. So he's not coming it from a highly adversarial point of view. It's like look, you're coming with your own long term plan. We have some ideas of our own. Let's try and work together to get the stock to 140, not 70.

[Stephen Weiss]

If you're truly being constructive, you do it behind closed doors. You don't do it publicly. Unless Scott, that's how it works. And unless the company has rebuffed you and doesn't want to listen. And if that's the statement he's making, then it's antagonistic. But when I, when you say his constructive look at what Disney right. I think this stock could double.

[Scott Wapner]

I'm saying that's what he consistently says he is and tries to be.

[Stephen Weiss]

And I consistently say I'm 6 foot 5 and complain the.

[Scott Wapner]

Well, we know that's not true when.

[Stephen Weiss]

It comes to you.

[Scott Wapner]

And I know not only have I seen your real height, but I don't even need to see your basketball skills are good.

[Stephen Weiss]

My day baby.

[Scott Wapner]

Notice that's B.S.

[Stephen Weiss]

But, but no, look, it's a cheap stock. It deserves to be cheap. If he can get the company to adopt some of his suggestions, then fine, it's going higher. But I guarantee you, and I'll bet you right now that he's not staying there for 140, he's getting out and there's nothing wrong with that. He's there to make money for his investors. So overall, yeah, it's a good target because it's got a very strong pretty.

[Scott Wapner]

Long term holder of the of stocks that he's gotten involved in. Particularly ones where he's taken enough of an interest to release like a letter to shareholders. So like I'd be shocked if he, I mean what are you suggesting?

[Stephen Weiss]

Most recent, recent Disney. Was he a real long term shareholder there?

[Scott Wapner]

I mean he was in there for a while.

[Stephen Weiss]

Yeah. But as soon as, because he got stuck because it was underperforming. As soon as he got some relief and moved up, he got out. Right.

[Scott Wapner]

Well, he's been in a lot of names for a while anyway. We'll follow the story but said about.

[Stephen Weiss]

Him it's a decent name to Target.

[Scott Wapner]

Obviously, the stock is getting a bump off of our reporting here and we'll follow that for the remainder of the session. We'll do calls of the day next, including a big downgrade for one of Steve Weiss's favorite stocks, plus a double upgrade from one of Joe's names are back into.

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[Frank Holland]

Global markets up to the minute. Front page news. Wake up to Frank Holland at Worldwide exchange, weekdays, 5am Eastern. CNBC Live ambitiously.

[Scott Wapner]

All right, welcome back. Time for calls of the day. We start with Leidos. Cut to hold from buy. Target goes to 165 from 200. That's at TD Cowan. You own this, Weiss?

[Stephen Weiss]

I do. And if you look at this whole complex of stocks, you look at Booz Allen Bah, look at Khaki, look at saic. The perception is they're all, all in the crosshairs of Doge. Right. 30% of Leidos employees are embedded in the DOD. Now, if you talk to the company, it only relates to tens of millions of contracts that can go away. But that is the issue that you see the overhang of what the rationalization of the cost savings will be in the Department of Defense. So that's why you sort of got to sit in these things and hold back. I don't think it's as bad in Leidos as, as the market has said it is. And 165 is still, to me, a reasonable upside target for the stock, you know, Baker used. I keep looking at it and I keep wanting to buy it. Quality name, but they have even more exposure to the government. But it's not just there. It's IBM also. So basically, you just got to wait, see what happens. That could be a year from now before there's some clarity on those names.

[Scott Wapner]

Weiss, I mean, Joe, Sorry, Accenture. I just can't get Weiss. Same thing, please.

[Frank Holland]

It's a struggle.

[Scott Wapner]

Accenture upgraded to outperform from peer perform at Wolf Target. $425.

[Frank Holland]

You know, part of being a good investor is the ability to change your mind. You have to recognize that you have to Call balls and strikes. That's basically what it is. And when I look at this company earlier in the year I was frustrated. I was skeptical about their ability to deliver earnings. They've steadied themselves in that regard. And now just the other day at Jensen Huang's keynote address address they got to mention a strong shout out surrounding robotics. Obviously they're involved in industrial automation and their software will contribute to that evolution.

[Scott Wapner]

You want to Shan, you want to comment on Accenture?

[Shannon Sikosh]

Yeah, I mean I think that they had pretty strong earnings in the fourth quarter but I also think more importantly they're guiding to this increase in data work that they're doing. And really they're likely to be one of the better positioned companies on the IT consulting and we think that that's not quite going to necessarily be appreciated until 2nd 3rd quarter of this year.

[Stephen Weiss]

It's another one that's on my buy list but it's got to be Accenture is yeah much lower from here.

[Scott Wapner]

Travelers today got double upgraded. That's the one we were teasing Joe to buy from. Sell at was it sell at Goldman. The target 278 bucks. You own this stock in the T.

[Frank Holland]

It's very difficult to think about owning insurance companies given the horrific scenes right now out in California. And catastrophic losses have been significant the past several quarters for each of these insurance companies. However, it's being offset by strong margins and that's what's identified here in Goldman Sachs's report. Personal lines, commercial insurance been very strong. It's going to remain strong in a high yield environment. And that's, that's where the resiliency is coming. It's coming from the margin side.

[Scott Wapner]

Allstate upgraded to outperform Evercore. ISI does that. They had it in line. They had the target at 209 and they bumped that up to 226. They say there's a disconnect in the valuation.

[Frank Holland]

Very similar story to Travelers pulled back recently. That pullback is going into the supportive moving averages. They report earnings on February 6th and I expect to hear something positive at that point.

[Stephen Weiss]

You know this is the playbook in PC. You know property casually forever catastrophes are good because, because it allows them to raise rates significantly and they, they've laid out, laid off a lot of the liability that they have. So that's what we're seeing playing. At some point though you have too many catastrophe losses. They're not covered by your reinsurance partners be an issue apparently that's not what.

[Frank Holland]

There'S no stronger there's no stronger element of inflation than insurance premiums, that's for sure.

[Stephen Weiss]

Auto insurance has been through the roof every year.

[Scott Wapner]

Let's get the headlines now with Contessa Brewer. Hi, Contessa.

[G]

Hi there, Scott. We just got an update here from fire officials about that wildfires raging out of control across the Los Angeles area. Two major fires burning at this point. Tens of thousands of people have been ordered to flee. The Palisades fire on the west side of LA in the Pacific Palisades and the Malibu area already has destroyed an estimated thousand structures. I mean, a lot of these will be homes. It's a dense urban area and it's not contained at all. Authorities report a number of significant injuries to civilians and firefighters. And then the Eaton fire on the other side of LA county in the Pasadena area has claimed two lives so far and destroyed more than 100 buildings. Meanwhile, the Los Angeles County Fire Department says it's been stretched thin battling these flames raging across the city. It's requested aid from four nearby counties for help. The department says responders from Nevada, Oregon and Washington are also on their way. That's badly needed relief. Here's an early morning video from NBC News correspondent Liz Kreutz showing the destruction in the wake of the Palisades fire. A row of beachfront homes in Malibu just leveled by the flames as it jumped the Pacific Coast Highway. We're keeping our eye on all of these fast moving developments.

[Scott Wapner]

Scott contest appreciate that. Thank you. That's Contessa Brewer. Coming up next, Palantir pain the stock selling off big time this week. Joe owns it. We have a report on it coming up. Shares down another 4% today. We're back right after this.

[Capella University Representative]

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[Frank Holland]

Edu weekdays at 5am Be first on world markets, first to the global business conversation. Get a jump on the investing day every day with Frank Holland. Success starts early. Worldwide exchange, 5am Eastern. CNBC.

[Scott Wapner]

Want to focus on Palantir shares now under pressure yet again today, down near 15% this week alone. Seema Modi has a look behind that big drop for one of the biggest winners of last year.

[H]

And Scott, even when you look at a longer term chart, shares of palantir down about 16% from the record high it hit on December, December 24. The move has coincided with about $45 million in insider selling this year, all pre planned. Most of that aggregate total was sold by Ryan Taylor, the company's chief revenue officer, according to Verity data and a view of SEC's filings. Meantime, Cathie Woods Ark Fund sold about $15 million of stock stretched valuations that continues to be a key focal point for Wall Street. Even with the drop in Palantir shares, it's still trading at a premium at 146 times forward earnings, making it the seventh most expensive stock in the IGB Software ETF. And if you look at ratings across the street for Palantir, there are 3 Buys, 12 Holds and 8 Sell ratings on Palantir. Other software names worth noting trading at a higher multiple than the software sector include SentinelOne, Confluent and CrowdStrike, which is at about 92 times for forward earnings right now. And Scott, it does seem like the street is getting more selective with Deutsche bank today. Bullish on the sector, yes, but they suggest that a slower than expected ramp when it comes to Jenny adoption and elevated capex could pressure margins. Analysts there are downgrading Adobe and Palo Alto network to hold from buy and they're upgrading work day to buy. Scott.

[Scott Wapner]

All right, Sima, thank you Sima Modi. So Joe, let's start with Palantir because you own that. But I want to branch this conversation out to some of the other software names that have ownership up here with their PEs, which are rather lofty. But Palantir, what do you tell our viewers?

[Frank Holland]

I continue to say to viewers in Palantir, sit back, wait, do not reach for the stock here, upper 50s to low 60. If you don't own it, that's where from a risk to reward standpoint, I take the initial shot.

[Scott Wapner]

Okay, CrowdStrike 91 times. It's forward PE, give or take. Mean these numbers are the numbers that we did prior to noon. So give, give or take 91 times. For, for CrowdStrike you have Datadog 74 times, you have AppLovin 61 times. About that.

[Frank Holland]

A lot of software too rich. A lot of software names high value. So valuations. Valuations are rich. Valuations are rich if you continue to see yields move higher. Why? Because you're categorizing all these software names as long duration assets and we saw the playbook in 2022. That's a difficult environment for them. So let's take cyber. Right now Fortinet is the one cyber name that is outperforming the others. CrowdStrike I still think is still in an okay place. Palo Alto as we speak, breaking down below the 200 day moving average. Some other, other software names. Twilio looks great. Of all the software names I've purchased recently, that one appears to look best. Datadog, DocuSign. That's kind of in yellow territory, so to speak. And then another name, Zoom, that I added recently. I think Zoom is in a good position and on a valuation basis, it's cheap.

[Scott Wapner]

Jason, you have ServiceNow. It trades at 67 times. It's forward PE. It was up 51% percent over the last year.

[Jason Snipe]

Yeah, so, I mean, obviously had a tremendous year last year and we just trimmed it. Actually, you know, I, I look at, I look at a name like ServiceNow, the IGV was up 23%. ServiceNow was obviously double on that. So I continue to like Bill McDermott. I, I like the story. Automated workflows, you know, they're continuing to monetize their new AI tools, so they're really making businesses more efficient. But a Forward multiple of 67, you know, thinking about sales going forward and capex in the software space, that was the concern going into this year. I think it might slow a little bit this year. So we decided to come back to market weight.

[Scott Wapner]

Weiss, what about these valuations?

[Stephen Weiss]

Yeah, they're ridiculous. And if Joe thinks these are reasonable valuations, his wife must have a closet full of Birkin bags.

[Frank Holland]

I didn't say because did I say I think they're a reasonable valuation?

[Stephen Weiss]

Well, you said, what you said was. I'm paraphrasing. Grant, you said five, reasonable at 5%, then I'd start to worry. Meaning that you're okay now.

[Frank Holland]

You said as yields move towards 5%.

[Stephen Weiss]

Judge, these are going to make a ruling.

[Scott Wapner]

You, you said that these valuations were high because of where, you know, yields at this level.

[Frank Holland]

Okay.

[Scott Wapner]

Essentially saying whether yields are at this level or not, the valuations are ridiculous. Did I, did I paraphrase you correct?

[Stephen Weiss]

Perfectly. Thank you. That's why we get along.

[Scott Wapner]

That's why I'm here.

[Frank Holland]

That's why you're the judge.

[Scott Wapner]

So respond to that.

[Frank Holland]

So these companies, in an environment where yields stay relatively anchored, began to see that the artificial intelligence halo was affecting their ability to grow earnings. And you saw a lot of software companies, a lot of the conversation about AI and the thematic of AI expanding beyond semiconductors, datadog critical in terms of security for artificial intelligence.

[Stephen Weiss]

I'm not saying they're not. I'm just saying there's a price to pay for them and this price is too high is my point.

[Frank Holland]

Okay.

[Stephen Weiss]

And the Trump administration is going to be much more proactive on cyber and spend a lot more money. Whereas the Biden administration held back spending even for defensive spike spending on with the dod. But so that's a positive.

[Frank Holland]

The current price is a reflection and the pullback in these stocks is a reflection in the rise in yields. Go back three months. These companies had very strong momentum because yields were anchored. They weren't.

[Stephen Weiss]

The challenge should be the year of valuation reset in these names.

[Scott Wapner]

Okay.

[Stephen Weiss]

All right.

[Frank Holland]

That's so doesn't it doesn't matter where yields go.

[Scott Wapner]

We got to go.

[Stephen Weiss]

I got to be quicker if yields go higher. But still going to happen.

[Scott Wapner]

The valuation reset would be even quicker. He's saying if deals would be higher. Do I need to translate? This is happening.

[Frank Holland]

It's a vague conversation. If yields go, if the 10 year goes to 4%, are they still overvalued?

[Stephen Weiss]

Yes. Okay.

[Frank Holland]

That's all I want to know.

[Scott Wapner]

Okay. Santoli's next with his midday Word. Senior markets commentator Mike Santoli joins us now with his midday word. And we're still obsessed over rates.

[I]

Yeah, I mean the sensitivity to where yields are every tick is pretty extreme to the point almost of absurdity at this point. I mean, I still think we're pretty well set up for a bid to find its way into bonds. Got the weird kind of half day bond tomorrow, equity market closure tomorrow. It feels like building up toward jobs on Friday. Maybe that's going to be the excuse. But breath is horrid. It's really bad. The tape is very slippery and unstable. The one good thing today is some of the real low quality speculative stuff is finally getting purged. So maybe that, that's part of the process here of, you know, wringing some hope out and maybe setting the stage for a bit of a rebound.

[Scott Wapner]

I mean, we, you know, we're not trading tomorrow, obviously for the national day of mourning, but that ups the ante to some degree for the jobs report report on Friday given where yields have moved to.

[I]

Yeah, got some help from Waller today. But then I think, you know, this Bloomberg story about Trump administration advisers plans for the Fed maybe kind of unsettled things again at like 11:40am so, you know, it's a little bit touch and go.

[Scott Wapner]

All right, I'll see you in the afternoon, Mike. Thanks. That's Mike Sentoli. We're back after this.

[J]

Welcome back to the Halftime Report. I'm Dominic Chu. We want to call your attention to what's happening now with shares of Constellation Energy which are down roughly 10% right now near session lows. This is all on the heels of a Bloomberg report saying that Constellation Energy is nearing a deal for roughly $30 billion to take over privately held utility and power provider Calpine Energy, which is private equity owned. We've reached out to both Constellation and Calpine for comment, but you may recall Constellation Energy, Scott, guys on the desk, one of the biggest gainers in the S&P 500 last year. All on this optimism around nuclear power alternative alternative energy powering data centers. We'll keep you posted on any news that comes out of this, Scott. But that's the big deal. Why Constellation energy is down 10%. I'll send things back over to you.

[Scott Wapner]

Okay, thank you, Dom. Dom Chu with our reporting. We're fortunate to have Joe Terranova who owns that stock, Constellation Energy. What do you think about this Reporting?

[Frank Holland]

Early October, Constellation 288, 200 day, moving average to 17 to 2950 as we speak right now. Why is this deal happening? Because electricity demand in this country is absolutely surging. This will be one of the biggest if it happens, power generation deals. I like where Constellation is.

[Scott Wapner]

You want this deal to happen?

[Frank Holland]

Donut?

[Scott Wapner]

You want, you want the deal to.

[Frank Holland]

Happen For Constellation, this would be a good deal. And I think right where this stock is right now, you could buy it.

[Scott Wapner]

Why do you think the stock's down 10%?

[Frank Holland]

Stock's down 10%. Because they're spending capital, number one. Secondarily, the utility sector sector is challenged by yields continuing to rise. In fact, if you believe that yields are going to push lower, the utility sector and owning it is a derivative way to play it.

[Scott Wapner]

All right, we'll do finals next.

[Frank Holland]

Couple.

[Scott Wapner]

Hours from now closing bell. We'll take you through the final stretch. Kevin Gordon, Doug Clinton, Bryn Talkington, Kevin Simpson will join us. Jason Snipe. We begin with you though, for our finals.

[Jason Snipe]

I like Apollo here. I think private equity exits should double this year. So I like this one here.

[Stephen Weiss]

All right, Steve Weiss, I mentioned that started last Show a position UnitedHealthcare. I think that's a, that's a safe holding for this kind of market share.

[Shannon Sikosh]

Financials. We just talked about private equity. You've got money center banks, you've got insurers we talked about earlier. We've got exchanges. There's a lot of ways to play financials this year.

[Frank Holland]

Joe T. From the Adam Parker playbook. Health care, Boston Scientific.

[Scott Wapner]

All right, so we're negative across the board. We obviously will watch interest rates, rates for the remainder of this day. And I'll see you on closing bell, 3:00 Eastern the exchanges now you've been listening to CNBC's halftime report, the podcast you can always catch us live weekdays at 12 Eastern only on CNBC.

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