Ready to go. The Halftime Report starts right now. Welcome, good to have you with us this committee joe terranova, stephanie link, jim lebenthal, jon najarian, also on set mike wellson, Morgan Stanleys chief u. S. Equity strategist stocks are getting a lift with some big dow beats today, makes for an interesting setup with the fed just a week away steph, ill give you the first crack today. I was going to come in and say earnings have been kind of lumpy, and then you get guidance raises today, whirlpool, coke, lockheed, pretty good. I dont think lumpy, i think really good. Choppy . I think pretty good, especially if you go underneath the surface, especially today, to your point, not only is it better organic growth out of kimberlyclark, out of coke, organic. These are great, top line numbers. But also what ive been impressed with, margins. Margins are expanding. Take a look at Stanley Black decker today they have some challenges for sure, but they beat margins in every single segment you know my thought process is, earnings are going to be profitable troughish here in the second quarter, because we had a slow patch in the economy. Second half of the year, stimulus will kick in and i think youll see better earnings ahead. Mr. Wilson, you heard it from the guy at the top what earnings recession . That was directed squarely at you, did you feel it i felt it, im ready for it all right im not in the camp that earnings are going to drop this quarter. The call was a lot of people thought the First Quarter was going to be a drop now its the second quarter. Our guess is the third or farthFourth Quarter. We think it will go negative in the next two quarters. It will probably about 5 negative, not a disaster but that is an earnings recession. Its pretty clear whats going on this Year Economic growth has disappointed for the most part, not just globally but in the u. S. , leading indicators are softer. Some companies margins are bottoming. I dont think thats true across the board. Thats been our main call for the last year. We think theres margin pressure in the system. The fed is on the ball we dont think we need to have what we had in december. 10 correction is likely in the next two to three months thats when the market will care if youre right if im right. And theres no reason to think thats not the case. Because that trajectory has played out, scott. If you go back a year ago, our call was wildly out of consensus. In the First Quarter people acknowledged it and got off the train. Were not getting off the train. We think the earnings risk is still significant, probably 5 to 10 downside in terms of the earnings thats the story and then we can look forward its a 18month kind of rolling bear market, cyclical top at 3,000. This will be the understood attempt, okay . If im wrong, well break through 3,000 cleanly in the next few weeks if im not, its a pretty good sign im right about the earnings cocacolas ceo on cnbc earlier today, quote, there were some dark clouds but the storm never came why cant you take off the raincoat look, thats a consumer staple were overweight consumer staples. Theyre a global company. Lets talk about aero electronics, they have recession here, they are the leading, bleeding edge for semiconductor consumption. I would believe them more than tsmc who doesnt have end customer visibility the way aero does i could name a host of companies that are saying the sanch. So same thing our call continues to be that all the risk is in two areas in the market now its in defensive areas, bond proxies, and its in high quality. That includes growth its really high quality we have a lot of names in there. Our fresh money buy list, our focus list has outperformed dramatically over the last 12 to 18 months by 12 basis points because weve been overfocusing in those areas im nervous because those are the risks that are the greatest. We have to go through the course of that. People are overpaying for that defensiveness. I think thats where the risk is in the markets mike, aero has been getting a lot of play this week. People have been talking about it a lot how much of that is the inventory carryforward or the demand carryforward in advance of tariffs, things happening at the end of the Fourth Quarter into the First Quarter because of china couldnt that easily reverse inventories, which are projected to be a drag Going Forward in the second half, if we continue these trade tensions, maybe they need to stay high as supply chains rework. I think thats right. Theres a misunderstanding about how much of it was because the economy was overheating last year in the semiconductor supply chain, a lot of people built inventory because of the apple product cycle and they built too much then of course theres data center, they built a lot of supply in the supply chain for those two product cycles in retail, the same thing, retailers thought what happened last year because of tax cuts was going to continue. In industrial, were probably the furthest along with respect to the irrelevant getting senvet bun last comment on that, the amazon prime day went extremely well but remember, they just increased that by 12 hours on june 25th, they increased it another 12 hours i have a view they did that because they were trying to burn through a lot of inventory they pulled forward a lot of demand by heavy discounting. People bought a lot of stuff i think well have a bit of an air pocket on demand because of some of the pullforward let me ask you this you said earlier if the market doesnt rally on the fed, takes sort of going to be your tell, that weve got a problem what if it does rally . Lets define the problem. The problem is at the s p level stocks are 20 above where they should be. Theres two things im looking for next week to tell me im right or wrong number one, can the market rally through 3,000 and accelerate and look forward the other one is the yield curve, scott if the yield curve doesnt start to bear steepen soon, that means the bond market isnt ahead of this and more importantly, they dont believe this is an insurance cut as people are portraying it. I do not believe this is an insurance cut. Thats right. You make the point theyre not cutting to preemptively prevent against a problem you. Say t you say the problem is already here the fed can cushion it but they cant reverse the trajectory i believe theyre cutting rates because theyre looking at the same thing im looking at, theyre nervous that corporate earnings are weaker. Theyre nervous about the pmis and corporate surveys and theyre nervous companies are going to start laying people off. Thats okay theyre nervous. Thats right. But the data is very clear that things are slower. And theres elevated risk, not a guarantee. Theres elevated risk of an Economic Contraction youve taken, though, slower to earnings recession. They may be worried a little bit about earnings and corporate performance but youve taken it to a further place that says earnings recession thats right. And the economy is weaker than many people think, theyre not paying attention to the rights parts of the data yes i think the market is paying attention. This is why we have an inverted curve. This is why we have defensive and quality stocks leading dramatically thats why the overall market isnt as at risk as it was last year when people were ignoring those risks. Mike, quick question about two companies, big spend Consumer Companies auto nation, new car sales were down they werent actually that was in line, they werent actually great but used car sales were up 7. 4 . Second, polaris. Polaris blew out and both these stocks are up nearly double digits today. Auto nation is up double digits. Polaris is just behind them. Polaris makes obviously some pretty expensive i guess you could call it farm equipment, hunting stuff, just, you know, snowmobiles and the rest, water sleds, whatever we would call them, pretty bigticket items, anywhere from 3,500 on up to 14, 15,000. Numbers have been going up, up, up, despite tariffs, despite anything else. Why wouldnt you look at those and say the consumer is looking pretty good . Auto has been in a recession over a year, sales have been terrible housing remains fairly week, i would argue numbers this morning were pretty disappointing. Once again, were not calling for an outright recession. Were calling for economic slowdown that maybe feels like a recession and the market may start to price it. Thats why the high quality stocks and defensive stocks will come under pressure if the market starts to believe that its getting worse remember december of 15 and january of 16 no recession, okay do you remember what those types of stocks did in december of 15 and january of 16 they got hammered at the end because people started to feel like there was a recession coming it wont be as dramatic as the Fourth Quarter of last year. And it doesnt mean that you things you just said about high spending ticket items wont persist. Its a mixed economy were not going over a waterfall. But expectations about the sustainability of growth are a little optimistic. Thats why were looking to the fed in the manner in which we are one week from today, the fed kicking off its meeting on Interest Rates joining us now, steve liesman, senior economics reporter. I love the way the guys on squawk in the street were talking earlier today, make sure jay powell doesnt see the earnings today, put on ear muffs, because if he looks at what the Companies Said today, why would he cut rates earnings play a part. Its not maybe the most important part, but its a factor when they look at how the health of companies are, and right now, in this particular decisionmaking process for the Federal Reserve, Companies Spending and cap x is a big part of what theyre worried about. I think theres a legitimate question as to what a quarter point rate cut would do to help Capital Spending given that youve just come off an historic Corporate Tax cut and you have decent growth. Im not sure how that would help, but be that as it may, its something theyre going to watch and its another notch that along with the imf upgrading the u. S. , you have the earnings seem to be doing better, the job market was doing pretty good, the retail spending was pretty strong. The entire case for the rate cut is if you play craps, what we would call you would not be on the line bet. On the come is betting on the next thing to come inflation, theres no inflation anywhere that to me is what the between light is for the fed its a green light. Inflation is running about 0. 4 below their 2 target. How precise you think you could be on the prices in a 22 trillion economy its not three. Its not 3 . No, its not 3 its well below 2 . Its below 2 mike wilson is making the argument its not an insurance cut thats coming. Mike, i didnt hear your gdp number what happens to growth in the near term it doesnt do anything. The fed cuts dont affect the economy you talked about disappointing. Where are you at now 1. 6 for the back half. So just a little bit below potential. Correct all of this gets better, i know this is sounding fantastical, but if you get a meaningful china trade deal, i think your pessimism eases a lot. I think your comments about capital expenditure, you feel a lot better when people know the rules of the road and start spending on supply chains where they know that we are not going to be upended in six months. Play that through for second. If im a ceo, which god forbid i should run a company, we wouldnt want that to happen, and im sitting there holding on to my cap x because of the china trade war, and the fed cuts a quarter point, am i all of a sudden spending Capital Spending because of that . I dont think so your point is made. And i wasnt saying that im just pointing that out, its an important consideration. Your point is made. Ill say it for what it is the fed cut is all about sentiment. Do we need it . Absolutely not steph, your comment about inflation is well made but we dont need it its all about sentiment if we dont get it, the market will have a hissy fit. Why dont you think we need it the economy is doing well enough unemployment at 3. 7 . I forget the number, its below 4 its well below what the data is all ugly. The data says you have a worsening economy. Here is what i see. You can play back on me on this. You got 3 wage growth and its trending higher. You dont have inflation that is goldilocks, okay it wont continue, steve, to your point, unless you get productivity picking up. Eventually the wages come through. You need unit labor costs to come down. Productivity comes from capex. I think companies on the margin are more liable to expand their operations that was a call we made back in december, i remember you guys snickering about that a little bit. No. Heres what happened, heres the truth. Capex has disappointed not because of trade but because they overspent last year its that simple and they overbuilt inventory last year. They did that in advance of because of the tariffs and trade issues, no most of it was because they were double ordering because they thought demand was going to be sustainable, okay it was twofold tariffs plus double ordering demand was not sustainably that high now were getting a payback. Those two items alone add about 4 to 5 to gdp over the last three to four quarters lets take those out thats your drag on the economy. Theyre not going to reverse that companies arent going to stop tried to reduce inventory or reducing capex because they overspent, because theres a basis point cut. Once we get through that and you get trend capex back to where it should be and you get inventories normalized, well move forward there are two different outcomes from a rate cut one is the stock market. And the other is the economy stock market could go up on a rate cut or a rate cut cycle the outcome for the economy is, who knows . Richard fisher and others made the point that, what are you, going to lower the cost of capital . Its already low the fed can answer conditions immediately with job inowning, very powerful tool, and pivoting financial conditions came in, multiples are way up ive got a question i have to ask real quick an inventory adjustment cycle is something i can buy into sure. Usually takes two or threequarters what is your estimate for how long it takes the companies to right size their inventories right now, this quarter, we think it will be a 1 drag three in a row, it will be over in threequarters. If you have inventories turn around, and one more quarter of this thats right. Believe me, were going getting more constructive as that plays out. You would be getting more constructive in the next quarter . Yeah, particularly if prices come in. I can buy into that right now prices basically, theyve listened to the fed, the fed wants the market to go up, it wants to stimulate the economy. Not all sectors are expensive, to your point i agree why cant the laggards actually start to lead and do this rolling bear market of yours and we actually just stay where we are and we dont have a 10 correction its very possible. My guess is we go down and the laggards go down last. If you were to ask me thats whats been happening in the last week exactly weve seen that, this rotation in the market i think thats right, stephanie. And weve talked about this before, i think that rotation is overdue. It started in december, played into january people thought we were going to extend the cycle for another two years when the reality is its probably closer to the end of the cycle which isnt the end of the world. The fed can actually have a cycle, we can have capex pick up again, we can have people operate hand to mouth and not have excessive inventory tech is rolling again, talking about sectors that are going to work. S p tech sector hits a new record yesterday now youve got all these big earnings coming down the pike. This week, facebook, amazon, alphabet, intel, a jimmy stock so lets come back to earnings, because here we are on the best day of the earnings season by far. Today is the day that gives you encouragement. If were going to focus on the Federal Reserve, listen, the Federal Reserve will cut 25 basis points the price of the u. S. Dollar, given the period we know theyre about to cut, is higher by 1. 25 for the month. Thats telling you theres weakness in the rest of the world thats being exported here, and the Federal Reserve is going to fight that. Thats a known known go back to earnings. Go back to understanding that today you had fantastic reporting. You want to focus on industrials with a little bit of a u. S. Specific focus. Look at the earnings from sintos, its the second leading industrial in the s p. 85 u. S. Revenue exposure. Bought it today. 190,000 Companies Use them. Correct mike brought up margin before. I agree, mike. Its all about margins for these companies. But were going to learn about margin and margin compression to scotts point in the next week or so. And if there is not the margin compression that the street is expecting, then the market is going to continue with the current trend which is higher. We did not see market compression at all today nothing not today, absolutely not as i said, i was going to come back from vacation and say, okay, earnings seem to have been choppy then you get today and im like, okay, this is pretty good, rattled off a number of companies that raised that are guidance is tech going to keep it going or bring me back to choppy i think youre going to find potholes in all sectors, okay . So i mean i dont know if potholes are good enough to keep me driving down the runway. You dont have to get a flat tire and pull over with a pothole. Unless youre driving a jeep. Theyve been doing great, but united rentals, that was a pothole, unfortunately you can find them out there. But they dont have to upset the apple cart thats across all sectors. Were braced for good tech reports. Obviously netflix is not one of those. Its uncomfortable but you can drive past it. Google you could say laid an egg last time. What gives you great comfort that theyre going to deliver now . Facebook may be the one to hang your hat on. I think facebook. And google, expectations have come down so low that doesnt mean if they get over a hurdle im sorry, but that is very much the theme of this Earnings Report the bar has been lowered enough that you can clear it by just walking over it. Are the faangs