Closing Bell 10/28/26

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1:02Nick Tamarosa, The Wall Street Journal. Chairman Warsh, I want to follow up on your answer to Claire's question. As the AI investment boom becomes more dependent on external financing, does that make aggregate demand more sensitive to interest rates than it was before? And related to that, when you removed a dose of accommodation last month, did you see about what you bargained for? So you gave me two questions, and neither of them had any sort of parliamentary out. So you're giving me the opportunity to choose which of those.

1:40So I'll answer your second question. When we removed a dose of accommodation, I don't know, six weeks ago, we don't have perfect foresight on what financial markets are going to do with it. But broadly, I would say the effects on financial markets, on financial market conditions, broadly were consistent with my expectations. Howard Schneider. Howard Schneider with Reuters. Thank you, Chairman Worsh. I'm going to take Nick's first question then. Okay. Give it to me again. I don't remember. No. It's about aggregate demand and the components of inflation. A lot of your colleagues have said they felt the investment boom in AI was now adding a strong demand component to inflation.

2:26And this was a handoff from the supply side concerns that might be expected to fade over time. How much do you think demand is adding to inflation right now? And how sensitive will that be to Fed control? Good, good, good, good, good pickup of that. Good team effort. So I'd say this. The only things we really know in economics and supply and demand cross. Our measures of the size and the shape of the aggregate demand curve is imperfect. Broadly, what I heard in the room the last couple of days is consistent with my own views, which is the economy is strong. I didn't try to sugarcoat that in the first part of my statement.

3:10The economy has been marked up for the first three quarters. The economy is pointing in the right direction. Is the economy running too hot? Is the economy running too strong? That isn't the judgment of most of my colleagues. Part of it is we never know what potential growth really is, Howard. My judgment is we have seen an improvement in productivity. We can't measure it precisely. I think most of that change in productivity precedes everything we're talking about, super intelligence. but productivity has been moving higher in the economy, however imperfectly measured, I think for a couple of years.

3:51And so economic growth is higher, but that doesn't tell me that economic growth is somehow causing inflation and making our job harder, but we'll be continuing to look at those issues. The goal in my view, and you've heard me say this before, isn't to throw sand in the gears of the economy and throw people out of work. I don't think we have to do that. The dominant means in which this policy is going to be put into practice is we are tightening financial conditions. They've tightened a bit since we met last time. That isn't something that we're uncomfortable with. That tells me that policy is working.

4:28And I think we can do that and make the economy more durable, have it last longer, and still achieve stable prices. Okay, we'll go to Victoria for the last question. Hi, Chair Warsh. Victoria Guido with Politico. I wanted to ask, next week is a hearing at the White House on Lisa Cook's future and allegations that have been made against her. Are you personally or the Fed as an institution going to be involved at all in those proceedings? Not to my knowledge. Thank you. Thank you, guys.

5:09Scott Wapner: All right, we begin with breaking news. That was Fair Chair Worsh following a meeting in which the Fed kept rates unchanged. Far from an uneventful meeting, however, a couple of dissents. They upgraded the economy a bit, said inflation remains too high, also made some changes to the meeting schedule itself in the years ahead. We'll get to all of that coming up. Welcome to Closing Bell. I'm Scott Wapner, live from Post 9, right here at the New York Stock Exchange, as always. And this make or break hour begins with that Fed decision, the impact on the markets. We will check those markets. We were green coming in.

5:40Scott Wapner: We're still green coming out, though. The Russell has dipped a bit negative. Let's check rates, too, because they were a bit higher. The 10-year was at 501 coming in. And take a look, 504. So we're a few basis points higher than that. The two-year, though, given the no move and maybe some uncertainty about what lies ahead, is in the red. And on that note, let's bring in Jeffrey Gundlach. He is the CEO, CIO, and founder of DoubleLine. He joins us now. Welcome back. It's good to have you back. All right. Good to be back with you, Judge. Here we are in another kind of ambiguous press conference, I think.

6:16I heard a lot about looking out the window and a lot about interrogating reality. But really, what I think my major takeaway is this accumulation of more information concept, which reminds me of almost 20 years ago when I was criticizing the Fed for being kind of ready, aim, aim, aim, aim, and the trigger doesn't get pulled. So we're just going to have to wait and see. But meanwhile, while, you know, there is a problem with inflation. He pointed out that he doesn't have a soft inflation target, but he did late in his statement say something about looking to the left of the decimal point again, which I can only assume means talking about the inflation rate.

7:05The bad news is that based upon our inflation model, which has been very accurate over time and and it leans a lot on energy prices, which, of course, are up dramatically this year, we're going to start seeing the headline CPI left of the decimal point start with a four. And it's going to be like that as long as energy prices stay reasonably where they are. It's going to stay that way for a few months, maybe even five months, until we get to the print, perhaps, where you finally get some base rates rolling off for the April report that might be printed in May. So commodity prices are well above, the Bloomer Commodity Index is well above its 200-day moving average and in a rising trend.

7:48Nominal GDP, which is traditionally a good way to think about where the 10-year Treasury yield maybe should be. Well, I think the GDP now for the third quarter is at 3.4 on a real basis. You throw on 3 % inflation, which is probably being generous, on the downside, we've got a 6 % nominal GDP. That doesn't mean it's going to sustain necessarily, but that's where it is right now. And I noticed that the yield curve has steepened over the course of the press conference, not mightily. But the long bond, I think, doesn't like this ready, aim, aim, aim stuff. And so I don't know. I feel there was a little bit of flowery rhetoric, like I said, looking out the window, interrogating reality.

8:34But I think the Fed should be raising interest rates based upon the two year treasury being at four and three quarters percent. And now the yield curve in the wake of this news conference actually steepening again. So let me interrupt you just for a moment, if I could.

8:51Scott Wapner: I mean, I wonder if part of that is because of the upgrade, even albeit slight, that they did on the economy, called it strong where it was called solid. So and he even said that did the chair that the economy is strong and performing really, really well. Yeah, I mean, it's it's some sort of upgrade of the economy in line with the GDP now. And, you know, he did mention that financial conditions are tighter since the hike last meeting, but they're not tight. And they're tighter not because of really what he's talking about. They're tighter because spreads are widening on lower quality credit. The BBB bank loan index, if you just look at the index level, is at a price of 65, which is down pretty mightily, like 18 percent on a year to date basis on just a price basis.

9:44And what we've seen in recent several weeks or a couple of months is that the huge issuance by AI and AI adjacent types of businesses have not been really well received by the bond market. And what I mean by that is they come out at a certain rating, which immediately gets questioned by the market. SpaceX came out as triple B and immediately widened down to a jump on type of spread in the market. Then Oracle came out at a triple B minus, which is clearly not being embraced by the market as the correct weighting because it's trading like a single B minus company based upon the spread that it's at.

10:26So we're running into a problem that the market isn't accepting the ratings that are being put on some of these AI and AI adjacent businesses. And this reminds me a little bit of how the market started to behave regarding, say, triple B subprime, the ABX index back in 2006 into 2007, that we don't have, we're starting to get a little bit of a crisis of confidence on how rating agencies in the private credit, particularly related areas, where insurance companies owned by private credit, owned by private equity firms are leaning on these investment grade ratings that the market doesn't think are real.

11:07And I think this is a trend that is worth following because it has started to pick up steam. So all spreads are widening. Emerging markets have started to widen, even asset-backed securities, commercial mortgage-backed securities, particularly in certain pockets, are widening. Investment grade spreads are widening. And it's just a little bit. I think that's what Chair Warsh was talking about, that financial conditions are tightening. But I believe that is the beginning of a trend, not just a bump in the curve.

11:38Scott Wapner: Well, I have to say, I mean, I thought that his commentary around the market was the most interesting and if not profound part of this entire exercise that we just had and what we listened to, where he says, quote, interest rates have had an effect. Credit spreads have widened out. This isn't something we're uncomfortable with. Clearly suggesting that he thinks that the market has rightly so done at least part of the Fed's job for it. And he's darn happy about that because then he feels like he can temper some of the enthusiasm through the market doing that for him rather than the Fed having to make a move on its own right.

12:27Well, I think there's merit to that. I think he is happy about that. The market has certainly tightened more than the Fed has. The two-year Treasury is up to four and three quarters. Fed funds rate is down at 4%. And the long end is over 5%. It should probably be a little bit higher given where nominal GDP is. One thing that is obviously also affecting interest rates is the deficit. We went over$40 trillion on the national debt in September, about or rather in August, about two months ago. And I was shocked yesterday when I looked at the debt clock website, and it shows that the national debt is now over$40.5 trillion, which means it's up by half a trillion dollars in two months, which means we're running at a$3 trillion deficit rate for the last two months.

13:16Now, maybe there's something idiosyncratic about those two months, and it's not right to assume that that's the new trajectory that we're at. But if it is the new trajectory we're at, we're running a deficit right now for the last two months of 9 percent of GDP. You know, Scott, that in the United States, 6 percent of GDP deficit has only happened five times. Civil War, World War I, World War II, global financial crisis and COVID. And we're already in fiscal 2026 ran a 6 percent deficit of GDP. And in two months and on the last two months of that period, of the most recent two months, running at nine percent of GDP.

13:57And that together with this insatiable demand for AI and adjacent borrowing, there's a real pressure on interest rates that I think got relieved here in the month of October because we had rebalancing. Rebalancing at the end of the third quarter, stocks were up and bonds were down year to date. So rebalancing means that institutions that do that systematically quarter end, we would sell stocks and buy bonds. And also the problems in France and Europe with their spreads blowing out as well. France has all kinds of problems with their debt to GDP, with 57 percent of their budget spending on social programs apparently isn't enough for the population there.

14:40They want it to be higher. And Le Pen, who's leading in the polls in France, amazingly wants to lower the retirement age, which is kind of mind blowing given the financial condition there. So interest rates are really starting to suffer from excessive borrowing by governments and excessive and huge demand from AI. And so, yes, the market has tightened more than the Fed. And that's another reason why I say it's I almost harken back to two meetings ago with that fantastic question changed the energy in the room. What are you waiting for? You just upgraded the economy right here. We're headed to four percent handle headline CPI.

15:20The commodity index is rising in a bull market. And I don't understand why the Fed is so reluctant to move. So I feel like rates should be rising in the meetings ahead.

15:33Scott Wapner: I mean, the chair said that the midterms had no impact whatsoever. Politics played no role, he said. Do you buy that? Yeah, I'll take him as word for that. I just really don't think that the midterms really have an effect on interest rates. I've said this before, Judge, when we've talked. I don't think the average person in the public knows anything about where the Fed funds rate or even what the Fed funds rate is, let alone to know what the level is. So I really I dismiss this idea that the Fed is is changing their their trajectory based upon politics. What about the the idea of the dissents?

16:14Scott Wapner: Right. You did have two dissents. I also thought it was interesting, frankly, when the chair towards the end of the news conference said, quote, we just came out of a heck of a family fight, leading us to believe that there is a real vigorous debate in the room, which then sets the tone for December when let's just say, OK, the clearing event of the midterms is out of the way. Do you think they'll hike in December? Base case is probably a hike in December. Yeah. I mean, the friendly fight thing is interesting, again, because the number of dissents is actually lower than it was at the last meeting.

16:51So it's actually headed more towards a consensus and more of a robust family fight. But I do believe that the market thinks they're going to hike in December. And absent a crack in the oil price, I think they have to hike in December. The oil price is just too high. I mean, WTI is over 100. And, of course, people are now talking about the fact that there's a lot more costs in shipping this oil. So today's$100 oil really is equivalent to like$135 commodity spot price for oil because of all the surcharges that are coming in. So we're already at a very elevated oil price. In reality, it's even higher what it looks like just at the Commodity Board of Exchange.

17:36Scott Wapner: He noticed he noted that, too, obviously, looking at oil futures. He specifically mentioned that. Jeffrey, let me get to Steve Leisman, who's come out of the room. I'll come back to you in just a minute, as we always do. What, Steve, stood out to you the most, I'm not sure if you heard any of my exchange with Jeffrey to this point, but I really was taken by how the chair spoke about the market essentially doing its job for it when he noticed, he noted, quote, interest rates have had an effect, credit spreads have widened out. He specifically mentioned what's been taking place within the tech and the AI trade and then just underscored it, exclamation point.

18:15Scott Wapner: This isn't something we're uncomfortable with. React to that and then tell me what stood out beyond that to you. Yeah, I agree, Scott. Those were interesting comments from the Fed chairman. He also said that after the meeting, the effect of the mark after the rate hike at the last meeting, the market effect was about as he had expected, which was pretty interesting. I did look that up earlier today because it was one of the things I was thinking about asking him. He does not think that the market can do the Fed's work for it entirely. The Fed does have to follow here. So it's not enough, Scott, at least according to what Kevin Warsh has told us.

18:57And most people who think about monetary policy have the same idea. It's OK for the market to lead the Fed, but eventually the Fed has to get there. It's a credibility thing, but it's also an actual and it's a real thing. The only thing I could think of, Scott, was I'm not sure where we're going next here. But here's what the Fed chair said about the continued focus of the committee on price stability. On the employment side of the Fed's dual mandate, conditions are quite positive. And yet Americans, of course, are still dealing with inflation that has been running above the committee's objective for close to six years.

19:39It's our responsibility to get inflation down. That's the reason the FOMC's discussion over the last couple of days focused mainly on the price stability side of our remit. So, Scott, I just it's pretty easy to do the math. Tomorrow we get the PCE. If it comes in at expectations, you're going to be up at 3.1 core PCE. If the Cleveland Fed now casting inflation number is right for October, that's another tick higher in inflation. So I think it was Jeff who said we're headed to 4 percent inflation. I'm looking at the core still going in the same direction. So I think that the Fed is going to have to address this through rates.

20:22Scott Wapner: But that's not what the chairman said today. I can't I can't help but think either if he hears any part of this conversation where he may hear you say, I don't know where we're going from here. He's like, yes, it's working. I don't want them to know where we're going from here. I would push back, Scott. What is working? Why is it better to go into a meeting with a higher probability of the opposite happening? Who benefits from that? What is the benefit? Maybe Jeff has an idea. I'll leave it to him on that one. But I don't know that anybody is better off, that the markets are better off, the economy is better off with that kind of uncertainty.

21:03Now, you know, it was like a 10 percent uncertainty going into this one. I look back at many of the meetings of Powell in the last several years. It was like 1.2 percent.

21:14Scott Wapner: Steve, I appreciate it, as always. That's Steve Leisman just coming out of the room, our senior economics correspondent. Jeffrey, I'll come back to you. I mean, how about that? He's not given guidance, forward guidance. He said he's just not going to do it. So we know that is the case. But what do you make of what Steve has said? Well, yeah, I think that Kevin Warsh was a little bit testy today. You know, I think he reprimanded Steve for saying, you know, you ask two questions and somebody else asked two questions and he wouldn't answer one of the questions. But basically, I just feel like the Fed is a little bit behind the curve right now.

21:58And I think they need to hike interest rates at the next meeting. I think they're going to, given if you look at the probabilities in the market. But basically, I'm in the same mindset investment wise that I've been in our last visit at the last meeting. I'm really looking at about a 30 percent allocation to equities. And in my current state of mind, I only want the equities to be in equal weighted S &P. I don't like the cap weighted S &P. I don't want all this exposure to the epicenter of the blast radius of the AI problems or developing problems. So I like equal weighted S &P. And interestingly, it's outperformed or slightly outperformed the market cap weighted S &P recently and also year to date.

22:44So that's a relatively low equity weighting that I'm recommending simply because the valuations are very high and the spreads are starting to wind out on the bonds. I also continue to recommend 30 percent in bonds with a barbell approach, half in a very safe portfolio, one that has virtually no corporate credit exposure. whatsoever that's completely domestic and in highly investment grade, largely non-corporate bonds, which happens to be exactly what my, how not surprisingly, my flagship bond fund is positioned. And I also still like half of the 30 percent bond allocation in local currency emerging market debt, where we continue to have the strongest performance, although it's been a little bit rockier at points during the year.

23:31But I think the dollar still goes lower. And because of that, I think you're going to continue to make money on the currency translation. You're getting a decent yield out of those emerging market bonds. So that's something I've been in increasingly since a year ago, June. I still like 20 percent in commodities. Right now, I would have 15 percent in simply the Bloomberg Commodity Index and 5 percent in gold. But at this point, what I would do is every time gold drops$100, I would switch 1 % from the broad commodity index into gold. So ultimately, if the spot price of gold gets to$3 ,500, you would be 10 % commodities broadly at 10 % gold.

24:12And that leaves 20 % for dry powder, which I've been recommending for a while now, which also doesn't mean T-bills or cash. It means like a two-year duration, well-managed, low-risk bond portfolio where you can get yields of about 6.5 % with a duration of two, which means that you have what we call the Sherman ratio, the yield divided by the duration of over three, which means you're not going to lose money on a total return basis in that type of strategy. Even if interest rates rise by over 200 basis points, you're still going to be positive and you're getting a real rate of return above the inflation rate.

24:49So it's a conservative... Go ahead.

24:51Scott Wapner: I want to make sure I saw this correctly, too, when I was doing some research ahead of this. The Double Line Commodity Strategy ETF, the DCMT, has a year-to-date return of 44 % to 50 %? Yeah. The last time I looked at it earlier this week, it was up 48%. So that's better than the commodity index, But it's a rules-based strategy that has been good. We've had energy. And obviously, that's what's driven the commodity complex. And yeah, it's up a lot. It's been kind of sideways for the past couple of months. But certainly, it's been a phenomenal return here today. Yeah, I mean, it underscores, obviously, just the overall commodity view that you've had.

25:35Scott Wapner: So, I mean, let me ask you this. What did you make of that day, 10 days ago or whatever it was, in and around that ballpark, when you had that massive drop in the 10-year yield? It was like 20-plus basis points, something we hadn't seen in such a long period of time. Certainly, the one idea was that yields just got so attractive that people just couldn't ignore them anymore. And there was a lot of buying at that part of the curve. I don't think you were a buyer, right? But what did you make of that? Well, I think it was two things that were underneath that. It started at the beginning of October, I think, by institutional rebalancing.

26:19Bonds were down as the yields had risen, as you said, quite rapidly, actually, but a few months into the end of September. And stocks were up and continue to be up, which means if institutions rebalance, they want to buy bonds. There was a buying of bonds. Also, the problem, I think foreign money started to come in, out of Europe in particular, because the situation in France does not look very good. And French yields were skyrocketing, and people were worried about those riots they were seeing on the weekend 10 days ago. And so I think money was really looking for a safer place to be. And the U.S.

26:59yields over 5 percent, you know, those those are attractive enough to bring in some buyers on a value basis. I know some people who were bearish earlier this year on the Treasury bond market, like my friend Jim Bianco. Once we got over 5 percent, he felt like there was actually a justification for owning some long term Treasuries. I agreed with him. I actually did a meeting in Toronto with Dave Rosenberg, and he's been bullish on bonds for a long time. And I actually agreed with him that in the high fives or higher fives with third year was that it's worth a shot on a counter trend rally in bonds.

27:37I told Rosie, though, I said, but once they get down towards five, I'm not going to be I'm not going to be holding anymore. I'm going to be moving back out. That's how I feel right now. I think the 10 year got below five below five. I'm not really interested in the 10 year and below 540. I'm not really interested in the third year freshman up.

27:57Scott Wapner: Interesting. Let me finish by asking you about this change in the schedule, at least somewhat. They're not moving off the eight meetings, but they are making a change starting next year. One is going to be focused on strategy alone. Then they'll do six normal and then two on strategy in 28. I mean, some thought that maybe they would eliminate a meeting altogether and maybe in some respects they have because they're not going to give you any kind of statement on that. But what's your reaction to that? Well, it doesn't come as any surprise. He's teased this sort of an idea from the very beginning.

28:32And I don't really criticize it at all. I don't think eight meetings is really necessary. It seems like they come up really quickly. You don't get that much data. I would actually be very much in favor of six meetings starting immediately that you actually change policy at. So at least you have a couple months worth of data to filter in. I mean, he did say that, you know, we're going to be bringing in, what was the phrase, accumulation of more information and information-rich periods and all this sort of stuff. I sort of, broadly speaking, I don't know if I like the characterization exactly, but I like the idea of six meetings.

29:12I've sort of been in favor of that for a long time. You know, when I started in this business, they used to change interest rates just out of the blue. I mean, we used to have a machine. It was a ticker tape, a teletape thing. And if there was important news that came out, there was a bell on the machine and it would ring a bell. And every now and then you just hear the bell ring on some random afternoon. And it would say the Fed just changed rates by 50 basis points. So we've had all kinds of different methodologies being used. I really I wouldn't mind if they changed interest rates without having to have a meeting about it.

29:49meetings. And maybe if conditions change on an intermediating basis, maybe they can have an interim interest rate move. I wouldn't be opposed to that whatsoever.

29:58Scott Wapner: Interesting. Well, we shall see. And I will see you again in December, where I have a feeling we may have a little more action to discuss, along with everything else, as we always do. Jeffrey, be well, and we'll see you in December. Very good, Scott. Nice to be with you again. 47th time. Yeah. I'm glad you're counting. That's Jeffrey Gunlock. Coming up next, we're counting down to those big tech earnings in overtime. Alphabet, Microsoft are on deck. And not to mention this move in Oracle, the neoclouds. We've got all of that covered coming up.

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31:57Rule number five, more style means more celebration. Number four, buy gifts, but remember to treat yourself too. Number three, there is no dress code, but always leave them talking. Number two, show off different outfits. No party remains unattended. And rule number one, have it all without spending it all. Happy holidays from House of Burl, Burlington.

32:23Scott Wapner: All right, welcome back. We do have that market alert on Oracle, which is moving quite substantially. What stands out to you here the most of what they've updated from their Oracle world, where you had just come from? Right. And Scott, today is the investor day. Oracle stock shot up the moment. It's CFO Hillary Maxson said Oracle would only need to raise about$20 billion through fiscal year 2030, currently expected to be about$10 billion in equity,$10 billion in gross debt, suggesting that a lot of the AI build out thereafter can be self-funded. It also reaffirmed that the revenue in cloud infrastructure is accelerating for fiscal year 2030.

32:59Its outlook, It sees revenue coming in at about$225 billion. That's up 35 % from 2026. Oracle also saying that it will return to positive free cash flow by the second half of 2028. So what this tells us, Scott, is that Oracle is responding to these market concerns about capital raises by showing that it is committed to limiting external financing. The street likes what it sees. Shares up over 11%.

33:23Scott Wapner: I think what it also may suggest is that the rise in interest rates, which has really put more focus on all of the borrowing, whether it's by Oracle or the neoclouds themselves, has clearly had an impact where it might not be as cost effective now to continue to raise the debt that they've raised because interest rates are obviously much higher now versus then. So they're speaking to that, too, perhaps. Oh, absolutely. They also have been using these other creative options like vendor financing, asking tenants like OpenAI to bring their chips to the data centers that they're leasing. That just brings down costs.

34:02But to your point, Oracle, in a way, is responding to not just the higher cost of capital, but this idea that they become much more sensitive to AI financing.

34:11Scott Wapner: Yeah, all the names in that sort of the conversation are up sharply. Seema, thanks so much for that update. That's Seema Modi. Up next, Trivariates' Adam Parker, Fundstrat's Tom Lee, the dynamic duo standing by as we ramp into those critical earnings from Microsoft and Alphabet in overtime. We are back.

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35:51Rule number five, more style means more celebration. Number four, buy gifts, but remember to treat yourself too. Number three, there is no dress code, but always leave them talking. Number two, Show off different outfits. No party remains unattended. And rule number one, have it all without spending it all. Happy holidays from House of Burl, Burlington.

36:16Scott Wapner: All right, welcome back. We bring in CNBC contributors Trivariates' Adam Parker and Fundstrat's Tom Lee. All right, let's react to what we got. I mean, we didn't get anything that we really didn't expect. But let's look ahead, though. Because, I mean, I don't think we really need to dissect everything that the Fed said. Economy's good. Inflation is too high. December's on the table. Big earnings are on the table tonight. What are you thinking about? I think the Fed kind of rattled markets in September. Now we have a Fed that's sort of saying they're committing to the same targets. But I was happy to hear him say that he didn't think AI growth is necessarily inflationary.

36:56And so I think now we can look at good earnings, which we're going to get this week, a lot of tech earnings. And I think now we can say good news is good news. I think you're going to be in a position to say big beats are great because the Fed's not going to try to slow AI growth.

37:08Scott Wapner: Did we already have the pullback in the markets that you had said for many months we were going to have? Because it wasn't that substantial while it got a little volatile, obviously. And under the surface, a lot of stocks look horrible. Where are we in that whole timeline of how you thought this year was going to happen? going to play out. Yeah, and I know we talked about an expiration date. I think we already had the massacre because, you know, we know that the AI trade, a lot of these names are down 20%. The equal weight fell almost 9 % from its highs. And I'd say that two cohorts, active retail investors and a lot of hedge funds have actually lost their years.

37:44So I think we've already seen the sort of big give back and correction. So I'm... No, go ahead. So you're what? Yeah, so I'm kind of inclined to think the window for the bottom is now to midterms and then that's the low. What do you think? Yeah, I think we end up materially higher in six months. I wouldn't be surprised if we have a huge rally after the midterm, although maybe that's even the consensus. But, you know, you listen to Goodlock before, and I Googled while we were waiting, when's the last time he was bullish? The Googler says 2016, right? I think if you're a smart fixed income guy and you have a lot of experience, your bias is to be negative on the AI spend and build out.

38:20But if you take a step back and you're an equity guy, you say, wait a minute, you know, it's three and a half years into a 10-year investment cycle. And the earnings power and cash flows of these businesses are going to be pretty good. I don't agree with the equal weight conclusion. I want to be overweight the good stuff, a lot of which is hyperscalers. We'll see on the prints tonight, but over the next few quarters, semiconductors. I liked how the memory complex reacted to the Korean news overnight. You're getting, I think, as Tom said, a good point, like beating is getting rewarded a little bit.

38:48Maybe that's a new trend because we haven't seen so much of that since the last micron print.

38:53Scott Wapner: Why wouldn't you be more positive across the board? I mean, if the chair worse, well, not enough to get you into the equal weight. I mean, there are a lot of other sectors and stocks that go into the equal weight that play more heavily on a broader cyclical advancement in the economy, no? Yeah, but I think most institutional investors are underweight the grade 8, and the grade 8 are probably going to grow their gross profit dollars faster. So I tend to try to advise people to not be underweight that group. I mean, everyone I know when I analyze their portfolios, they're underweight NVIDIA, they're underweight Memory, they're underweight Broadcom.

39:33And I just think those things are going to grow much faster than the market for the next 2, 3, 4, 5 years. So there's too much bearishness on AI in terms of what it's going to do for growth and earnings. If the earnings are, let's say, above 20 % next year and they grow again in 2028, the market's not going to be commensurally cheaper. So I think I phrase differently, I have the same answer on my test as Tom, which is the price of earnings is going to stop contracting at the rate it did since July. And you'll start seeing the earnings growth matter more going forward. It might be starting tonight, but I think it'll be certainly the case over three, six months.

40:07Scott Wapner: It's almost been a tale of two markets that you have to judge commentary on. You could say, well, I've enjoyed the gains in the highest cap parts of this market, but I've been negative on other parts of it. Below the surface, the market has looked, as I said, like garbage. A lot of stocks, don't you think? I mean, a lot of stocks have traded horrifically. Yeah, and quickly. So maybe you have some catch up there, but if you've got the big names up, like Apple's a good one. So many institutional investors are underweight Apple. I was in a meeting a couple of days ago and somebody was sort of saying, wow, it hasn't been a very good stock.

40:50And I was like, you know, you don't get to be five trillion market cap while you're a bad stock the whole time. These stocks are too big for investors to be underweight. So I like stocks. I like U.S. equities. I think the markets can end up higher. and I think the stuff in the AI trade that's been the worst performing since July 1 is going to catch up the most. They're the highest baited AI and they're going to go up. So yeah, I think Micron's$1 ,500,$1 ,600,$1 ,600 by the time this thing is six months from now.

41:14Scott Wapner: And by the way, Apple's only 2 % off of its all-time high. Yeah, it's up a lot. Tonight, Microsoft, Google, what do you think? You know, I think that these stocks, kind of as Adam said, the expectations have been taken down and I think spending numbers aren't going to scare people. Part of it is that we're finding there's money available, like Meta was able to raise the money that they've targeted. So I think on margin, I think the stock's going to react positively no matter what they say. And, of course, Microsoft had that big layoff announcement as well. So we've changed in the price action dynamic because maybe you thought that after Micron reported and after Lamb reported and after Western Dig reported and after Meta reported and the price action was not good.

41:55That's right. And part of it, I think, was the October FOMC. You know, was Kevin going to come out swinging again, kind of unrattle? You know, the bond market basically ground to a halt after the September FOMC meeting. I think the reaction in markets and the reaction in spreads is showing that the markets are functioning.

42:11Scott Wapner: The Fed doesn't want to create financial instability. What do you make of the Oracle move, guys, and what they're saying? So much focus on the amount of debt that these companies are taking on for the buildout. So, you know, higher interest rates have obviously had a toll on this company and all of the neoclouds, the CDS. I would venture to guess look opposite today of what the stock prices do, take a little bit of the edge off, maybe get people back to a more reality type of place. What do you think? I mean, each one of them is different, but this one has a lot more debt. and the cloud business, I think, is not, it's going to be much more competitive.

42:53So it makes sense it was a big relative underperformer, and they get some positive news that goes up. A little bit like Microsoft in this summer print. Remember, it was a really bad stack the first half of the year. They printed stock up 20 on the print. So some of it was just kind of, you know, a lot of negativity, and I would say it's a lot of people's favorite cloud-based short ideas. So I think you get some good news. It squeezes people out.

43:13Scott Wapner: I'm not shocked. Well, I mean, you get some good commentary from, you know, CFO Amy Hood comes out in the summer, the last earnings report, and says we're going to stay free cash flow positive. Everybody else is like, how do they do that? We're negative, we're negative, we're negative. And then the stock has made a run since then. I think people got too negative, though, on ability to access capital ending the cycle. You and I had a meeting over the summer, a really smart friend of all of ours, Keith Meister, said, guys like Musk have unlimited access to low-cost capital. I've thought about that several times.

43:41I think there's a lot more runway, as Tom said, with Meta. You know, Google peeled off ADB at six and a quarter, three years like, I just think there's a lot more left on top of the free cash flow. Yes, depending on who you are.

43:53Scott Wapner: Yeah. The brilliance of the stock market and the markets in general, not just the stock market, is it rendered its verdict, so to speak, on who has bigger and longer runways than others. The market was clearly saying stocks like the one we just saw, some of the other neoclouds, maybe the runway needs to stop. Yeah, their business models are more tenuous, higher-baited AI. But, like, Micron is one that I like. People were nervous when they printed in what stock went, what, 500 to 350 in the spring, and then it sprinted to 1 ,300. So, yeah, it disappointed, but after it four-repped. Now we've kind of had the same issue.

44:29I think we're headed for another major-leg hire because they're just going to make so much money here. The spending's not going to slow from the hyperscalers. I don't think you're going to hear that from the big ones tonight. And I think you're going to look out and say, wow, these companies generate a lot of free cash. So I like the semis in particular here. I think they're going to trade well between now and your end.

44:46Scott Wapner: By the way, just if Gunlock Googles you and he's like, when was the last time Parker was bullish on bonds? What is he saying? Never. And now let's compare returns over the last 10 years for the Aztec classes, the defense rests. All right. I'm just throwing that out there. I won't make Tom agree with you, but I appreciate it. I didn't say he wasn't smarter and richer than me. I didn't say either of those two things. I just said when you're always bearish on equities and they triple or quadruple, you have to question the source. If you're a bond guy, you get more flows when you're bearish on equities.

45:17Scott Wapner: I'm just saying to Mike, don't lie. You say what you say and then you live with the consequences of it. And I back it up and repeat it. All right. All right. We've got to go. We'll see you guys. See you later. Thank you, guys. All right. Big Tech on deck. You know that. Full coverage. Alphabet and Microsoft ticking down to the prince. We have more next.

45:40Scott Wapner: All right, we're now in the market zone. Just moments away now from Alphabet and Microsoft. Those earnings hitting the tape. We do have full team coverage standing by. Kenzie Sigalis is all over Alphabet. Kate Rooney on Microsoft. Oliver Rennick at the Civo Global Markets with the options action on both of those names. And Dan Ives and CNBC contributor requisite Bryn Talkington here as well. Mac, we begin with you, our last look. So Scott, really what's at stake here is whether Alphabet can prove that its massive AI spending is actually paying off, and Google Cloud is the clearest proof point so far.

46:16The street expects cloud revenue to double year over year, even as growth in its core search business slows down. But keeping up that momentum is expensive, especially as rivals like SpaceX now compete for the same AI workloads. Alphabet's spending up to $205 billion on CapEx this year. It's already raised$150 billion in debt and equity, and free cash flow still turned negative for the first time last quarter. Google's now turning to its custom TPU chip sales into a standalone business, selling them outside its own cloud for the first time, including through Oracle. That gives Google another way to monetize its infrastructure spending and compete more directly with NVIDIA as it lands deals with Anthropik and OpenAI.

46:56So what investors need is blockbuster cloud growth after the bell and evidence that another leg higher in CapEx can still generate enough return to justify it. Scott?

47:06Scott Wapner: Okay, back. Appreciate that very much. Kate, tell us more on Microsoft. In some ways, it is actually similar to Alphabet. So for Microsoft, investors want to see real tangible payback from AI spending and then some discipline around its balance sheet. The big stat to pay attention to, it's going to be cloud growth. Street looking for about 45 % Azure growth. That's from a year ago. Microsoft is also changing how they report cloud numbers. So we'll get the raw revenue numbers alongside that all-important growth rate. You've got co-pilot adoption as well, which is key for the entire AI story. And then CapEx Street expecting roughly$50 billion for the quarter.

47:43They last forecasted$175 billion for the first year, which ends in, or full year, I should say, which ends in June for Microsoft. Free cash flow is another key topic here. And one aspect of that spending picture, as D.A. Davidson put it this morning, Microsoft can, quote, differentiate from Google and Amazon if it puts less strain on its balance sheet. Shares of Microsoft are up about 12 percent for the year. They have been slightly underperforming the broader Nasdaq.

48:10Scott Wapner: I can't appreciate that. Thank you, Kate Rooney. To Chicago we go. Oliver, let's play Options Action. it's google options that stand out today scott which may be tied to that big rally in oracle which could be renewing hope for a rally in alphabet which is on the border of a bear market going into this report the implied move for google is now six percent that compares to the two-year average earnings reaction a little bit more 2.7 so we are really way ahead of that right now stakes are very high last quarter was a sell-off but there was a big rally in april the biggest dollar amount trades today included one big sale of at-the-money calls and puts, which was a way it looked like basically to just bet against volatility.

48:53But there was also one standout bull who spent a million dollars on a 350-365 strike call spread expiring mid-February, which needs a 10 % rally to pay off. By the way, it's not that Microsoft options look bearish, Scott. It's just that they've been generally leaning bullish and they still are ahead of this report. But without as much volume today, whereas the volume jumped in Google.

49:18Scott Wapner: Okay, good stuff. Oliver, thank you very much. We've got Dan Ives here and I said we have Bryn as well. Let's talk first, Dan, Microsoft. The way that I've heard it characterized in terms of CapEx, just enough, but not too much. Is that fair? Yeah, I think it strikes the balance, right? Because investors don't want to see them tip the scales from a CapEx perspective. But I think on the Azure numbers, you're going to continue to see that acceleration, not just this quarter, but into next quarter. I think no one has a better perspective in terms on the enterprise to what's happening than the Dell and Redmond.

49:53Scott Wapner: I think that along with Alphabet, it's the validation moment that we're going to see from the hyperscale are starting today. So revenue growth for Azure, there needs to be enough to justify the spending, obviously. We're looking at 44%, which would be a slight tick up from the prior quarter. Is a slight tick up good enough? Probably not. I think it probably needs to be about a 1 to 150-bit type of beat. And going into next quarter, sort of whisper numbers, probably about another 100, 150 above where critical consensus is. The important thing is, can this be a growth acceleration story on Azure that goes toward with a 5 in front of it in terms of 50 %?

50:32Scott Wapner: I think that's the focus here, and it shows. That's going to calm the fears of this tech trade, Microsoft, Alphabet, and then ultimately Amazon. What do you think, Brent? I think that Microsoft is in pole position. First of all, Microsoft is way above the 200-day moving average. The inflection point was last quarter, and you just hit on it earlier, when Amy Hood said they were going to stay free cash flow positive. And so it's above its 200-day, but it's only up 10 % for the year. So the equal weight S &P is up 13.5. So Microsoft has a lot of room to run. Meanwhile, Google is way below, like$20 below the 200-day.

51:11And to me, that's the big divergence there is the market is saying we don't necessarily like your$80 billion convert that you did, etc. And so I just think Microsoft is in a better position from a company as well as a stock price chart looking anyway.

51:26Scott Wapner: Amazing what Google Cloud has been able to do. You're sort of, you know, you're picking up the rear in the race and you're wondering if you're going to catch up. Investors are wondering what's going to happen. It's the fastest growing of all of the major players. CloudRev expected up 90%. It's been stunning. I mean, what we've seen at Alphabet, I think it actually just speaks to more like they were viewed. They were playing from behind. You go back to the last year and a half, two years. What they've done, it's a stunner. But Microsoft, as Bryn talks about it, they continue to be clearly in the lead.

52:00Scott Wapner: Amazon and JASC are saying, don't forget about us. Because when you combine it all, you're going to be talking almost a trillion dollars of CapEx into next year. but you still have only less than 5 % of customers that have gone down the AI path. Overall revenue growth, 25%, good enough? Probably not. I think we're going to have to see sort of definitely upside there. And also on the search, given some of the concerns about what we're seeing in AI, they need to show uptick there. We think we will from an advertising perspective. Search advertising is on pace for its best year since 21. And it goes back to like death greatly exaggerated, go back to the last year.

52:34I mean, this has been a renaissance of growth that we're seeing for Alphabet.

52:37Scott Wapner: And just like Bryn was talking about, I believe this is one that has significant upside as we go into the next six, 12 months. No buybacks for the prior two quarters. CapEx just too big. First time since 17. When do we come back to buyback stock? I don't think we're there yet. Because I think ultimately investors want to see on the CapEx side. They don't want to see the accelerated buyback like we've seen with Apple and others. All right. So we're green across the board. Bell is going to ring. And it really does. set the stage for two mega, mega caps. Alphabet and Microsoft moments away. Into overtime with no mic.

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