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

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.

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.

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]

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.

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.