The High-Multiple Stocks Take the Biggest Hit, Post-Downgrade, and a Lookahead to Apple & Amazon Earnings 8/2/23

0:02Right now in fast, Fitch downgrades the U.S, but many investors, including America's most influential CEO Jamie Dimon called the move ridiculous. Still, we saw the markets react. Rates spiked. A big part of tech got hit hard today. We'll go inside the slide straight ahead. Plus, Apple and Amazon on the clock. The two tech titans reporting tomorrow. Both stocks tumbling today. Not exactly sizzling this summer. So where do we go from here? We'll debate that. And later, we'll have the after hours action. A host of earnings movers from Qualcomm to Robin Hood to Zillow and much more. I'm Melissa Lee.

0:32This is Fast Money. We're live at the Nasdaq MarketSight on the desk tonight. Karen Feynman, Steve Grasso, Tim Seymour and Julie Beal. We start off with a straw that might have finally broken the rally's back. Fitch's downgrade of the United States long-term credit rating sent the yield on the 10-year Treasury to its highest level since last November. And that took the wind out of the sails of the equity rally in a big way. The Dow dropping nearly 350 points, going negative for the week. The S &P down 1.4 percent for its lowest close in more than two weeks. The Nasdaq shedding more than 2 percent, its biggest loss since February.

1:03But take a look at the stocks that were particularly hard hit. High multiple names like Zscaler, Datadog, CrowdStrike all dropping more than 6 percent. Semiconductors also taking a leg lower. AMD, which was up about 6 percent after its earnings report last night and the day down more than 7 percent. Investors turning instead to the safety of more defensive sectors, consumer staples, health care, the only groups in the green today. So did Fitch effectively show how tenuous this rally has been. And we've seen this before, Karen. Four percent seems like the magic number. Whatever the reason for the getting above four percent is, this time it's Fitch.

1:38Stocks sell off. Right. Well, there's sort of a confluence of things. I think, you know, this run in the equity markets has been huge. And so maybe that was just out of gas. And so the Fitch thing certainly just throwing some gasoline on it. And then I think some of this Treasury issuance, particularly longer dated, that's going to be a lot of supply, a lot more than was expected. And so that was sort of just another thing to throw in the fire. And I don't think this is a one day fire, actually. I think I think it's going to take a while. Yeah, I do. I do. I mean, if we step back, it hasn't moved that much.

2:11The market hasn't moved that much. Bonds are starting to really begin to have a big move. Yeah. 408 right now. Grasso. Yeah. I mean, I think Karen hit it. The market's been looking for a reason to sell off. This was as good as any other reason. But if I asked you, does Powell hike further? What's your answer? It should be no. You would think it's no. I don't think anyone can say that and be serious about it. But can you be certain? I don't think you can be certain. But does it matter? Let's say he hikes 25. Yeah, I think it does, because if everything is rising around him and he does it again, those long and variable lags become even more important.

2:52They become even more detrimental. They said they would do something until something broke. The regionals broke. They said they would stop when we see something in the unemployment market. We haven't seen that yet. That's the last shoe to drop. Julie, what's your take? Yeah, I mean, I think I appreciate everyone's commentary that, you know, this is ridiculous and this is just like 2011. And, you know, We all agree that the U.S. economy is, bar none, one of the most strong and stable. But look, you can be the hottest girl at the party and still make very bad decisions. And I think we know that that's true of our government, right?

3:27So when I look at what's happening with Secretary Yellen coming and saying this is an arbitrary decision, but she also has testimony saying that if we get to 3 % interest costs versus GDP, that that's a dangerous level. And we're getting there. We're getting really close to that. But it's sort of like, you know, I do think there are some concerns and I think they're valid. And I think we should take them seriously. Tim, do you think this is a one day reaction or do you think, like Karen, that this might take a little bit longer to figure out? Well, 2011, I don't think anyone's implying this either.

4:01But 2011 was one of the worst times to be trading through markets in my career. And it was the volatility there was something we had not seen. And it was combined with ECB dynamics. And I think we're in a different place here. I think the reality is that, yeah, the equities, everyone said the equity markets needed an excuse. I'll buy that. You know, 35 percent in the Nasdaq off of that SVB low, 38 percent in semis, 20 plus percent in the S &P. And yet it seemed like all the bears capitulated last week. So this all kind of makes sense. We're up 80 bips on the 10 year before the switch announcement from early May and 120 on the two year.

4:39So yields are moving higher. I'd make an argument yields have been moving higher on the two year. if you take out COVID from since 2011, since actually when we were downgraded. But pointing out some of the technical elements of issuance, technical elements of Bank of Japan, maybe no longer yield curve targeting and BOJ also in terms of central banks globally buying less in the way of treasuries. Higher yields here are something that I think equity markets have not contended with. So I think we're all have been scratching our heads over the last couple of weeks for sure as they have been crescendoing.

5:12the Fitch announcement. We're going to talk more about this. I think there's there's kind of comedy on both sides. I mean, the fact that we're referencing January 6th as a U.S. citizen, I didn't like January 6th. I'm not poo pooing that. But that was January 6th. You know, that was 2020. The fact that this is coming up now, the governance dynamics, the qualitative elements of this relative to at least other other central banks or treasuries in the world, I think is is not even close. The White House's response is also kind of laughable. So it does put a bright light on the political folly here.

5:46Equities were overbought and yields are going higher and it's not good for equities. Yeah. You know, to Tim's point, this timing could have been any other time before this. The timing is suspect. But fast forward. Suspect like they did it on purpose. They waited for the Treasury to announce what their issuance would be. They waited. All the reasons that they stacked up, to Tim's point, you're stacking up January 6th, that you had a long time to think about this, right? So I think they just had a bolster there, maybe their case, so to speak. But if you look at it this way, if Amazon and Apple report better, the market rallies, this could be where we started the show when you said it to Karen, is it a one-day event?

6:29If Apple and Amazon are greeted favorably within the market, it's going to be a one-day event. Well, I mean, I think the question too is like, does this change the thinking of all those people who finally came onto the other side of the boat, who finally now say that there is no recession, that there is a soft landing or no landing at this point, that investors in large part were under-invested in the stock market. And there's some aspect of catch-up because of positioning going into this rally because people hated the rally going up and resisted and finally are jumping on board. All that still exists.

6:59That doesn't change with Fitch. And we knew that it is going to be higher for longer. Right. So does 4.08 % in a Fitch downgrade change this overarching thesis? I don't, I'm not sure that it does, but I think to your point, sort of the market just looks for something. What's the excuse that we're going to have that, oh my God, this rally has been too far, you know, too much, too fast, all of that. And I'm just, it does sort of feel like it needs to cool off a little bit. Now I'm long, I'm not, you know, a day like today, I'm just for sure going to lose money. but I added to what hedges that I have, I'm still very, I'm always long.

7:35I'm always long. But I just feel like the Qs, really expensive. The IGV, really expensive. And shorts and bonds. So I think I'm in for more pain. I'm going to stay long, though. Tim, is this a pullback that is temporary within a longer, a bigger uptrend that is still intact, in your view? Or is this the reason this rally cracks? I don't like equity valuations here. I don't love positioning. I'll reference a JP Morgan survey I read today. And a lot of these surveys can be noisy, but 43 % of their institutional investors think equities are going to make new highs this year, get to 5 ,000, etc. And while at the same time, 76 % say that the markets have priced in too much credit complacency.

8:25So these types of divergences are what we have. I agree with that. And I think equities can go higher, as I often give kind of roadmaps and my dashboard continues to be things like, look, semiconductors failed to make new highs. 160 on the SMH, relative new highs to the S &P. And that's something that we need to watch. The reversals in AMD you cited at the top of the show, valuations are really tough here. What we've seen out of this earnings season, though, is that margins have been very resilient. And that's something that I think for the most part is part of why equities, we are actually seeing multiple re-rating.

9:01I believe equity markets have to be challenged after the kind of move. We've had one of the greatest equity rallies in market history. And while I think there are credit dynamics out there, that's not what I'm worried about in the short run. I'm worried about a lot of pulled forward and a lot of multiples that are going to be tough to live up to. So is today the crowning moment of the last 30 percent on the S &P? No, but I don't like equities today as much as I did yesterday. All right. One of the analysts behind Fitch's downgrade joined Squawk on the street this morning to explain what it would take for the U.S.

9:33to regain its AAA rating. I think there's a couple of things that we'd probably want to see. One would be some kind of solution, long-term fiscal solution, tackling the entitlement programs, for example, willingness to somehow look at the revenue side of the picture and or the spending side of the picture and actually bring down the deficits enough to at least stabilize the debt to GDP, which I mentioned is already like three times the level of the AAA medium. For more on what the downgrade could mean for the markets, let's bring in Ben Emmons, He's a senior portfolio manager, head of fixed income at New Edge Wealth.

10:11Ben, welcome back to the show. As we had been sort of pointing out during our discussion, there are a lot of factors here surrounding this one Fitch downgrade, whether it be what the Bank of Japan is doing, what the Treasury is doing with its issuance. But what's the bottom line impact, do you think? Yeah, it is on the one hand the Treasury issuance that really played up the Treasury market because that was not priced in. I think when the Treasury made the statement on Monday, traders started to really guess. This is not just issuing T-bills just to get that account of the Fed filled up. This is about we're borrowing a lot of money because we have fiscal spending that's expansionary.

10:46And we didn't really change it through the debt ceiling. So, you know, you got to borrow to fund it. And that means longer maturity bonds have to be borrowed. And I think that's what got priced in today. On the other hand, the downgrade itself, awkward timing, as I heard the discussion, It's interesting that reference to January 6th. I think it's really a statement to about this is brinkmanship that's going to last. And, you know, that's going to become an issue in the future. I think part of the reaction of the stock market is about someone who comes in the White House in the future. And the future administration is going to have to deal with this deficit and rein in spending and maybe go towards austerity at some point, like we experienced in 2011.

11:23That's a negative scenario. So that may be somewhat of a reaction in the stock market today. that. You know, whether or not you agree with the downgrade or what, I mean, the fact of the matter is, is that, you know, higher yields are really challenging this market, whatever the cause is of the higher 10-year yield. Where do you see yields ultimately going here, at least in the next six months or so? Yeah, you know, you can look at it tactically, strategically. You think tactically, you know, maybe to Karen Short, you're going to go towards the upper end of this range, which is around four and a quarter, 4.3, because we've got a lot of like data come out that's going to likely show surprise strength.

11:57And we got a 10-year auction next week that's going to test the market on this supply. But then, you know, if you think longer term, if this is an economy that's really growing, but with inflation starting to continue to moderate, then I think you don't really get as high with yields. You know, the deficits are not playing a role. That's the inflation story. So, Ben, when we saw today's action, when we saw the large cap tech stocks sell off, in my mind, it would make them more attractive, at least their debt on that side of the equation. So was this a head fake? Where do you think people would rather be, Apple or the U.S.

12:31government? Well, those are focused on ratings, Steve, that you would start to look at Apple, right? That's the AAA-rated debt as well as Amazon and others. Obviously, that's not as large of a deep of a market as the Treasury market is. But I think life insurers, pension funds, mutual funds, if they're driven by ratings, they're going to look at that corporate debt that is that high rated. You know, because the choice for AAA is really small now. I mean, you have to look at Sweden or Switzerland or, you know, other kind of like tiny sovereign markets that, you know, that's not as attractive to invest in and not as deep as Treasury.

13:07So, yeah, Apple debt could be interesting. Hey, Ben, how about, though, the dynamic with where the Fed is? And the presumption is that the Fed could push things too far or break something. We've used that terminology tonight. And so a Fed hike seemingly should be something that pushes rates lower if the assumption is that the Fed is actually pushing too hard. Can you speak to that? Because that seems to be weighing on the complete other side of this dynamic. And meanwhile, we're in a world where people are now discussing. I've read three reports in the last week about how China may be going through decades of a Japanization and the dynamics that we've seen of deflation in these places that had credit bubbles.

13:49Yeah, sure, Tim, because, you know, that is a good point. Like the Fed hiking further from here would mean that they are winning more and more the credibility of the bond market to bring inflation down. And that should cap yields over time. And that's been the story in the Treasury market over the last sort of six months or so. But I think the latest move in Treasury yields is not just hikes, really. I mean, today, if you look at the probabilities for September and October, they really change, even though yields went up. And I think it's more a story about the strength of the economy that came together with this surprise story.

14:23But, you know, if the Fed starts to push further from here, you know, I think the break evens in the tips market are telling you this. Like, you know, OK, Fed, you will get this inflation under control if you bring this rate higher. That's a bond positive story. Do you think that that auction will be a really important one, that 10 year one or not so much? Well, I think of the timing, Karen. Like, so next week, it's the day before the CPI report, that auction. It's a larger size auction now. I believe it's 5 billion more than what it was the last time. We've seen the foreign investors start to move away from treasuries.

14:56That's a trend that's developing. So I think that's an interesting moment. Then you get CPI. So we're expecting a bit softer number again. And then on that day, we have the 30-year auction too, which is going to be larger. So this is a bit of the test case of what we experienced today. if the market sold off too much because discounted the supply and it gets actually taken down well in that auction. We'll see. But, you know, there's this, I think, a good good segue for a good moment to get into that market, perhaps. You know, good time. Ben, thank you. Thank you. Ben Emmons. Julie Beal, if we go to four and a quarter, 4.3 percent on the 10 year yield, what happens?

15:34You know, I mean, I think some of that is actually starting to get priced in. And I think that's, you know, a pretty positive thing. there's no reason why we can't get to those levels. You know, I think there are so many factors that are driving it right now. But what's critical, I think more important than even, you know, whether we go to 4-3-4 and a quarter is what is happening in the U.S. economy and how much benefit have we had over the last, you know, six months, let's say, from exogenous factors that aren't going to be recurring like lower oil prices. And I think that's actually going to be the much bigger determinant, not so much rates, but more so what's happening in the economy.

16:11You're already short TLT, Karen. That was your final trade yesterday. Yeah. More committed about the trade. Yeah. I mean, it wasn't a one day. I'm not really a one day trader. I do think that that auction will be important. And I think that, I mean, we think of this as such a crazy, wow, it's 4, you know, 4.08. Oh, my God. Well, it's been 4.08. A lot of, we always go back to, you know, what did our parents pay for their mortgages? Right. 12 percent, whatever it was. Right. So I feel like, you know, we just got to get it. I'm not as alarmed by it. That's why I think it could go higher. Coming up, we'll find out what America's banker, Jamie Dimon, had to say about the Fitch downgrade.

16:51All the headlines from Leslie Pickers' exclusive interview with the J.P. Morgan CEO and later, a big tech look ahead. Apple and Amazon report after the bell tomorrow. So how do options traders see the tale of two tech titans play out? We are breaking down the action. We'll be right back.

17:14Welcome back to Fast Money. We've got an earnings alert on Qualcomm. Shares are dropping after the chipmaker reported a revenue miss cited continued macro headwinds. CNBC's Christina Parts and Eblis got the details here on set. Christina. Well, the PC market may have hit a trough, but it appears the smartphone market is still looking for a bottom. Qualcomm blaming the 25 % year-over-year drop in smartphone revenue because of smartphone weaker industry revenue and slower-than-expected recovery in China, and that had to do with part of the reason. Keep in mind, it makes processors in most of these high-end Android phones.

17:43But those factors, so the weaker environment as well as weaker China, leading to elevated customer inventories and why management says drawdowns will, quote, be a factor through the end of the calendar year. On the call that's going on right now, CEO Kristiano Amman, warning of, quote, additional cost actions to deliver maximum value in an uncertain environment. The CFO adding the cuts would come in the first half of fiscal 2024. So we don't know if that necessarily means job cuts. But to your pitch to me or your toss to me, you're talking about the guide. The midpoint of their guide was$8.5 billion, lower than what the street was anticipating.

18:18Some of that actually has to do with the U.S. export ban. Management just said on the call right now that the September and December quarters wouldn't have revenues from Huawei since they can't get a license to ship 5G chips. The company also guiding for flat margins in September. And lastly, since it's so important, we got to bring up AI. It was just asking them a phone. How is AI? How is your model going to change with AI? It was from Stacey Rasgon who asked that question. They said it'll be an inflection point because they're working with Meta, right, to provide Llama 2, which is a large language model on smartphones, on their chips by 2024.

18:50So this is something that they can capitalize. They believe they'll capitalize in the future, but again, you can't monetize it just yet. They will provide the chip in 2024? Yeah, the chip will be available in 2024 for phones. So who knows how long we would get it on our actual phone, but it would be pretty incredible that you would have a large language model capabilities on your phone for all of the app uses. I would think that that would already be, though, practically not in the guidance, but I mean, something tangible that they could actually model. He responded, and it's in the press release to use the word inflection point.

19:21It reminds me of yesterday with AMD and the number of engagements, right? Yeah. Well, Christina, thank you. Christina parts and up list. Tim Seymour, what do you think of the quarter? Well, the quarter was not as good as people wanted. And after a 30 percent move in the stock, despite trading 14 times, so not expensive and I think relatively interesting. That's what you get. We haven't had this smartphone recovery. That was the whisper coming into these numbers, are we going to start to see it when they've reaffirmed at least a high single digit drawdown in handsets? You add that to still an inventory clear, which has been a headwind to margins.

19:58So the numbers aren't terrible. The move of the stock going into this was 30 % off the recent run, tops out at 135 twice now. That's major resistance. Yeah. Grasso? Yeah. And I believe the 200-day moving average is right around 120 or between 119 and a quarter or somewhere around there. When you look at Qualcomm, if phones are weak, the stock's going to be weak. There's very few names in this industry that you have this equals that. Qualcomm, phone's weak, this is weak. Okay. So the question there for Apple is what? Is everybody else losing, but Apple is okay? Or is Apple not okay? Right. Or is Apple not okay?

20:40Well, it trades like it's A-OK. It trades like it's A-OK. But, I mean, maybe we're in an environment now where good isn't good enough. Where really good isn't good enough. Well, you could make the case that overall smartphones are decreasing, but Apple's selling more of a share. But I think everyone's going into this Apple print knowing that smartphones have been on the decline. And then we have the upgrade cycle in September. So there's a lot of things that could make this number a little vague with Apple. but I think there's room for Apple still to thread the needle, even with smartphone sales coming down.

21:13And we were practically at record high. We've been setting record high after record high after record high, Julie. And so, you know, the super cycle or upgrade cycle, whatever you want to call it, the services revenue, it's the same bull case every single time, no matter what the environment is, to why Apple should trade at this premium, why Apple should trade at these prices. Do you buy into that this time around? I think it's hard, right? If you think going into this quarter, I agree it's going to be pretty squishy in terms of figuring out what the upgrade cycle for the 15 is going to look like, if it's actually going to be worth it.

21:46And part of it is understanding also how the mix is starting to evolve over time. Can we get more involved with services? What are the opportunities for them there? Because we know that the headset is it's not it, right? It's not going to be it for this business in the very near term. So if phones are going to be soft, which they probably are, where else can we see as any kind of inflection in terms of revenue? And I think what it really comes down to is what can you sell that's as profitable as the iPhone? And there's just not that many things that are like that. So I think it could be a challenging quarter, particularly when you see how much the multiple has expanded for this name.

22:22But again, because people have been so reticent into this rally, I do feel like they cling to certain elements of quality. And Apple certainly has that too. All right. Coming up, Wall Street's biggest banker went on the record with her own Leslie Picker. We'll dive into why he is so bullish on America ahead on Fast. But first, the after-hours action continues from fintech to real estate to cleaning supplies. We've got a slew of results to get you. We'll bring you the numbers and the trades next. There's a lot more Fast money to come.

23:01Welcome back to Fast Money. We've got more earnings for you. Robinhood and PayPal both tumbling in the after hours. CNBC's Kate Rooney's got the numbers. Kate. Hey there, Melissa. So PayPal eked out a revenue beat. Well, let's start with PayPal, by the way. We've got two here. But eked out a revenue beat in the second quarter. Earnings were pretty much in line with expectations. But pressure on operating margins is really overshadowing some of the strong consumer spending PayPal saw. It's hitting the stock after hours. Margins were below what PayPal had guided to. This was from the credit portfolio and the small business lending side for PayPal.