Closing Bell Overtime: AI’s Next Phase Comes Into Focus 9/22/26

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0:48Gareth McCartney: The bells bring an end to the trading day at the NYSE. The Prime Minister of Portugal ringing the closing bell and at the Nasdaq, Sigma Lithium doing the honors. Welcome to Closing Bell Overtime. You're live from studio B at the Nasdaq Market Site. I'm Melissa Lee, along with Mike Santoli. Stocks mostly higher. Building on yesterday's rally, the Dow falling nearly 200 points. S &P 500 almost unchanged. And the Nasdaq Composite closing out at a record and hitting an intraday high as well. More in the market straight ahead.

1:12Alan Ratner: Meta basically flat after its huge day yesterday. The stock becoming emblematic on a couple of fronts as an example of the market getting top-heavy again, but also as its agents potentially are a threat to other companies. We'll dig into that as well.

1:27Gareth McCartney: We're also watching the homebuilders getting nicely today. Lenar popping as Berkshire buys more. And we are waiting for results from KB Home. We start off with the first word on today's close. And maybe what's impressive, Mike, is that we held on. We had just enough news, the three-hour meeting with Iran that is perceived as constructive. We had backing off on oil prices, backing off on yields. Just enough for us to hold on to some of those gains.

1:48Alan Ratner: It's true. Plus, there's definitely this heavy flow back into tech. And so it was a little bit of a tech versus the rest type of a day. I think a breather makes sense here. Yesterday, you really did start to see the spark of FOMO was lit and people were maybe worried they were sort of underpositioned if we're going to go into this A.I. momentum game again. It didn't quite develop that way. I think you could still say, you know, people have sort of reset positioning to be more cautious. It is true that oil gave us a little bit of a break, some breathing room, as did yields, but not big moves there.

2:19Alan Ratner: And you didn't really see any kind of resurgence in, let's say, the cyclical parts of the market that you might expect there. So it still is, you know, everybody fixated on whatever wrinkle of the A.I. trade is going to work today. And then things like banks under a lot of pressure. So you're still seeing, you know, the after effects of, you know, at least the debate over what the Fed means for the market.

2:39Gareth McCartney: Yeah. And as for banks, we'll get into much more in terms of some of the cross currents facing that sector there. But sort of this notion that all in on A.I. means disruption to other sectors still, even though we've traded on that premise time and time again. Here we are yet again seeing that weakness in financials driven by that.

2:56Alan Ratner: It's true, and I think it really comes out of a market environment that is always trading one thing against another. You know, we talked yesterday about how many new lows there were, even though we were almost at new highs in the indexes. And it feels like this rotational action is now just the mechanism of this market. And I think it's the sort of price you pay for not having an across-the-board correction over the summer. You've got isolated pockets of weakness, but the overall index managed to hang in there. Well, guess what that means? You don't get the full market washed out. You don't get that big cathartic comeback.

3:26Alan Ratner: And so it's a lot of, you know, moving it from one pocket to the other.

3:30Gareth McCartney: Well, as Mike had mentioned, tech once again taking the lead with an important milestone for one mega cap. Seema Modi has that in all of today's action for us. Seema. Hey, Melissa, the sector is certainly coming back today with Apple getting close to surpassing the five trillion dollar milestone just a few days after CEO John Ternus took over the stock. also in record high territory. It follows AMD topping$1 trillion yesterday. As UBS points out, AI leadership is starting to broaden beyond the semis, which did have another strong day. NVIDIA in the green. Intel up today and now higher by 26 percent in the last five sessions.

4:06Gareth McCartney: Speaking of standouts, SanDisk's price target at Rosenblatt initiated at$2 ,400. That's a 27 7 % upside from current levels flip side software was weak into it adobe workday No real catalyst sort of characterized to us as a breather following last week's rally Financials as you mentioned did underperform fears of softening profits the impact of AI Despite some interesting comments from JP Morgan CEO Jamie Dimon about capex tied to the AI build-out Hitting a trillion dollars next year Finally talk about oil dipping to 95 bucks and change following President Trump's meeting with the Iranians lifting some hopes of a deal coming together.

4:45Gareth McCartney: Guys, I'll send it back to you.

4:47Alan Ratner: All right, Seema, thank you. Well, speaking of oil, crude prices going down did not really exert much of a gravitational pull on longer-term treasury yields. Rick Santelli in Chicago with more on the bond action. Rick. Yeah, as a matter of fact, we see yields now hovering very close to unchanged, all except for that two-year. Well, it's near unchanged now as well. Remember, the two-year note yield has really been a booster on the yield curve, flattening the curve. But let's start at the beginning. If we look at a two-day chart of tens in oil, we can clearly see there's a lot of distance between the blue and orange lines there.

5:23Alan Ratner: And if you open it up to Fed Day, you can really see the percentage changes for virtually a sideways yield in tens. And we continue to see prices dropping crude oil. Why is there a divergent? Well, for a variety of reasons, not the least of which is the Fed hiked rates and there's much more attention being paid to things like debt and deficits. However, should we see a real positive ending to what's going on in Mideast? I'm pretty sure that the market would pay a whole lot more attention, but kind of been there, done that. Now, if we look at what's going on with that two year I mentioned earlier yesterday, four point seven, five percent high yield close going back to July of 24.

6:03Alan Ratner: The 10s, of course, had their day in the sun last week when they had their 19-year high close at 502. But since then, mostly sideways activity. And we want to continue to monitor the fact that all things being equal, the markets are awfully calm post that first rate hike. Melissa, back to you.

6:24Gareth McCartney: Rick Santelli, thank you. Major averages closing flat today, but the Nasdaq did hit an all-time high as AI names continue to dominate the market. if tech once again becomes the underpinning of this rally. Where does that leave the rest of the market? Joining us now, Alalu Agonga. She is CitiWealth's head of portfolio construction and analytics. Alalu, welcome. Good to see you. Thank you for having me. Mike was saying earlier, you know, in his take on the market, that basically what we're seeing is sort of one sector goes higher at the expense of another, and it's, you know, this rotational pull here.

6:55Gareth McCartney: So is that kind of market vulnerable in your view, or is it fine?

6:59Kate Rooney: I mean, we think it's fine. We actually like equity markets here. For us, post the Fed hike last week, we've been focused on three main things. So obviously, rates, yields, what does that mean for duration positioning? We lean shorter. We like equities over fixed income. There's just more upside there. AI and the potential regulation around AI could, and that for us is the risk that we're watching, it could impact markets. But hyperscalers and some of the larger players have the capital to be able to, you know, withstand that and withstand some of the costs. If you look beneath that, cybersecurity and some of those names, we've been focused on that.

7:40Kate Rooney: So there's a lot to like. And even if you were to look at earnings, the breadth has been wide.

7:44Alan Ratner: Yeah, earnings breadth definitely in terms of, you know, most companies growing pretty well faster than the economy on a year-over-year basis, although the absolute dollar amount of earnings growth has clearly been dominated by the AI trade. So are you looking for ways to rebalance out of tech exposure or essentially ride it until it stops working?

8:04Kate Rooney: For us, we're looking to the second derivative and the third derivative from there. I mean, we haven't seen the productivity gains just yet from AI. There's been a lot of capital spending. But I think once that starts to happen, then, of course, it's going to be more expensive. But, again, there's the second derivative. There is cybersecurity. There are all names that are associated with the AI infrastructure build-out, energy. So then it even actually expands beyond stocks. It goes into metals and things like that. So we think this can sustain more than just technology. We're not looking to rotate out.

8:38Kate Rooney: We're actually looking to expand and add more on the periphery.

8:41Gareth McCartney: So if you're thinking about productivity gainers, what sectors are they? Because it seems like right now there are sectors that are being punished because you can make the case that they will be gainers. We can also make the case that they will be losers out of this whole thing.

8:54Kate Rooney: We could, but it's almost like the Internet, like net net. Everybody benefited from that. So with regards to AI and productivity gains, you'll see that in a number of different sectors, call it financials, call it tech and health care. There are many avenues where you can see those types of productivity gains. And frankly, even if you were to listen to all the earnings reports, everyone was talking about AI. Every sector, every CEO, for the most part, had some kind of AI strategy. So that was part of what we were listening for. We even saw that in some of the smaller cap companies. So AI is an area that every company is really focused on to see how they can use it to increase their own productivity.

9:32Alan Ratner: As somebody who used to work for a newspaper company, I'll say maybe not everybody benefited entirely from the Internet. But I do know, of course, the economy-wide net beneficiary. When it comes to the Fed, you mentioned you think equity markets can kind of stomach whatever is likely to come down the path for them. What is the premise? Is it just kind of a couple of more adjustment hikes? Are they not really trying to restrain demand or tighten financial conditions in a way that would pinch markets?

9:58Kate Rooney: So we've talked about this at City Within Our Investment Committee meetings. There are a lot of people that are talking, is it one hike? Is it two hikes? Is it whatever? We know the Fed's not giving guidance, but they've been incredibly clear about their direction. And the direction is to be able to focus on 2 % from a PCE standpoint. And it's also not one data point. So we've seen one 25 basis point rate hike. The market has stomached it very well because the economy is pretty strong and can withstand it. For us, it's the focus on the speed and the magnitude. So with one, if it's a wait and see, and then the next comes in, you know, maybe a couple of months or what have you, we think the market can absorb a more gradual hiking type of cycle.

10:42Kate Rooney: But is it one and done? No, because obviously we haven't hit the inflation target just yet. So we're focused on what they're saying, what they're doing. And we know that it's going to be more probably in a hiking cycle until we reach that, because in their dual mandate, employment's fine.

10:57Gareth McCartney: When you think about a hiking cycle and you think about the possibility of, let's say, three hikes or so, I mean, do you think about in terms of what can stop or constrain the AI trade? Since the AI trade is such a driver of the markets, it doesn't really matter in a way how many times the Fed hikes rates as long as the AI trade can still expand.

11:13Kate Rooney: From an earnings standpoint, for sure, and that's what's been driving the equity markets higher. Yes, there has been some debt issuance with regards to AI in some of those companies, but it really hasn't been at a meaningful magnitude that we could be concerned about. So the rate hikes, maybe some rate-sensitive companies, ultimately, at the end of the day, but if you own floating rate debt, that's good. We've looked, going back to 1990, we just did an analysis of this, and even when rates were above 5%, since 1990, S &P average return was about 11%. So psychologically, that's a number. rate hikes could be concerning and challenging if you have debt refinancing and so on and so forth.

11:53Kate Rooney: But thus far, we think the AI trade and the expansion of it has really been supportive and driving equities.

11:59Gareth McCartney: Awalu, good to see you. Thank you. Well, Anthropics CEO Dario Amadei kicking off the latest wave of concern over AI safety, and today his company releasing a new safer AI model. Kate Bruni's got that story. Kate. Hey, Melissa. Well, both Anthropics and OpenAI launched some new AI models today. It does come, as you mentioned, about a week after Anthropic CEO and some other leaders in the space called for, quote, pacing the frontier of AI. So pacing here clearly doesn't mean pausing. Both companies highlighted safety and testing in their announcements. And the other big headline, guys, was price.

12:33Gareth McCartney: It has become one of the biggest battlegrounds in AI. We saw even more evidence of that today with new and better, but also much cheaper models from both of these companies. OpenAI's new version adding to an existing suite, so it's called Sol and Luna 6 in this version. They say compared to prior generations, they're about 50 % cheaper. Described it as a step up across some of these model families on cost efficiency. It is priced as well below Anthropics models. Not even two hours before that news, Anthropics unveiled its own new model, Opus 5.5. The same headline here, efficiency and cost. They say it performs at the level of its best model, which is fable on most work, but it does cost about 40 percent less to run than some of the older generations.

13:17Gareth McCartney: The backdrop on cost here is corporate budgets. We've talked a lot about CFOs, CEOs reining in their own AI spending. Plus, there are now these open source models out there. They're a lot cheaper, and that's adding to some pressure here. Both these companies, worth noting, have also filed confidentially to go public.

13:32Alan Ratner: Yeah, as a matter of fact, Kate, as we hear the companies roll out these announcements, even the kind of pacing the frontier stuff, the being somewhat concerned about not being liable for defects in the product, it feels as if they're trying to anticipate some of the pushback an investor might have about the business model. And I guess this also goes right there. Lower cost, trying to broaden out adoption. And who knows, maybe down the road, it will ease up the capital intensity of this business model in the out years.

14:03Gareth McCartney: You know, it's a great point, Mike. And a lot of the investors and bankers I talked to after the Saturday Dario Amadei post had said initially, this is a strategically good move for Anthropic, meaning that them coming out, talking about safety, wanting to lead with the safest AI models in the wake of what has been criticism about the risk of extinction level events here. A lot of folks have viewed this as they had to come out and say something because, again, they are going public. We do expect this to show up in some capacity in the S1 and the risk sections here. And they are going to have to answer that question.

14:36Gareth McCartney: We've also heard that they are fielding some of these questions with those sort of preliminary tests of water meetings with bankers right now. It is a huge topic, especially when people inside of these companies are raising these alarm bells. But the tightrope here that they're walking is growth, you know, launching these new models like we got today, with also talking about safety. You should also mention Dario Amadei and Sam Altman are going to be at the UN this week trying to really talk about this on a global stage with a global audience.

15:02Alan Ratner: Kate, thank you. Well, as Kate was just saying, AI also a hot topic at the UN General Assembly meeting this week. The CEOs of OpenAI Anthropic, as well as Hugging Face, all expected to meet with the UN Security Council to discuss the future of AI globally. Meanwhile, President Trump says the US rejects any attempt to, quote, construct a globalist scheme, globalist scheme to control for the artificial intelligence. But amid fears the U.S. could fall behind China if it slows down development, there are signs that it perhaps is already happening. Data from AlphaWise and Morgan Stanley show that only about half of Americans use AI at least once a week for personal and professional purposes.

15:42Alan Ratner: All those numbers are closer to 80 percent in China. And more American companies are using Chinese AI models. Add that to the latest news from Alibaba. The company today unveiling new AI chips and updating its models and agent platforms, calling the new chip the most powerful one in China today. The stock ending the day higher, off its best levels of the day, up actually just half a percent there.

16:04Gareth McCartney: I mean, that Baba chip triples the performance of the predecessor chip. So it just shows you sort of it really underscores this notion of competition between the U.S. and China and where we stand as we are trying to sort of throttle back how quickly we develop.

16:18Alan Ratner: It compromises the view of some that would say that if the U.S. were to slow down, it would, by definition, also kind of slow China down. I've heard the analogy of, you know, they're kind of being towed by by by the boat that is the U.S. Because of distillation, it doesn't really seem like that's a one for one at this point, because they're making do with a whole lot less hardware.

16:39Gareth McCartney: But keeping pace. And it does seem like they are quite really making the rounds. I mean, Dario and Sam at the U.N., then at the at the Xi Trump state dinner. So there's a lot of sort of performance aspect here, I think. Yeah, it would seem that that's absolutely true, yes. Meantime, Meta's Muse AI agent has been downloaded nearly three million times since being released two weeks ago, surpassing downloads from some of its biggest rivals over that time. And today, Wall Street analysts are weighing in. Jeffries raising its price target on the stock to$8.75 from$7.10, reiterating its buy rating. Analyst Brent Thill writing, Muse is a killer product and an inflection point for consumer agents.

17:16Gareth McCartney: J.P. Morgan saying, we believe that Muse has the potential to become the most widely used consumer AI app since ChatGPT. Meanwhile, Bank of America maintaining its buy rating, but cautioning that the monetization path for Muse, including ads, subscriptions and commissions, seems unlikely to be material before 2028. All this enthusiasm for Muse sparking new AI disruption fears on Wall Street and putting pressure on everything from travel stocks to financial and insurance stocks. So take a look at those declines. And that's sort of what we were alluding to at the top of the show when we were talking about the weakness in financials.

17:50Gareth McCartney: You see there the notion that Muse could replace maybe financial advisors, advice. You still need, though, a platform to execute a trade, though. For sure. That that's safe for now.

18:02Alan Ratner: Yeah, I think the idea, and if there is an idea, it could just be this kind of reflex, it's muscle memory from the February software sell-off, is that it just maybe reduces the profitability and the moat of some businesses. If they have a hold on the customer, if there are anything that has high customer switching costs or it's just a hassle to switch or search for a better deal, the argument is these agents are going to just do it for you. You know, Citrini Research, which sparked some of that sell-off in software in February, just has a new report today. I didn't delve into all the details, but they're basically saying, you know, they can wait on the phone for five hours, this agent, and get coverage from the health insurer, right?

18:38Alan Ratner: So there's little bits of profit that these companies might have that will get attacked by the efficiency created by Muse. Obviously, that's an idealized situation.

18:47Gareth McCartney: Yeah, so think of anything that churn. You're talking about telecommunications. Imagine if you can just find the cheapest wireless plan out there and switch me and somebody can do it or something can do it for you.

18:57Alan Ratner: And in fact, the other example is if you have membership rewards points anywhere, it will find a way to spell or spend them. Right. So in other words, somebody's on the hook for the other side of that. Right. They're not going to expire worthless. We have a news alert on Qualcomm. Now, Mackenzie Cigalos has the details.

19:12Gareth McCartney: So, Mike, Qualcomm just announced its newest high-end smartphone chip, which will go into premium Android phones from companies including Motorola, Xiaomi, and ZTE with a focus on running more AI directly on the device. Now, the new chip is aimed squarely at Apple's A20 Pro, which powers the new iPhone 18 Pro lineup, as smartphone makers really try to bring things like transcription and image generation onto the device instead of relying on the cloud. It's also being built using TSMC's most advanced manufacturing technology, putting Qualcomm and Apple on increasingly similar footing when it comes to the underlying chip manufacturing process.

19:50Gareth McCartney: But the larger challenge for both companies is what's happening to the smartphone market itself. Memory prices have surged, pushing phone prices higher, and that's already weighing on demand. And you've got CounterPoint expecting global smartphone shipments to fall 14 percent this year, putting even more pressure on phone makers to focus on these pricier premium devices. So both Apple and the major Android players are leaning harder into the high end of the market. And then for Qualcomm in particular, the strategy is increasingly about making sure that its chips are powering the most expensive AI heavy Android devices.

20:24Gareth McCartney: We're going to hear from Qualcomm CEO Cristiano Aman on the company's chip strategy tomorrow at 2 p.m. when he joins Power Lunch for a first on interview here on CNBC. Guys. All right, Mac, thanks. Mackenzie Sigalos. We're seeing a pop in shares of KB Home. The earnings are out. Diana Olick's got the numbers. Diana. And, Melissa, that's because it was a solid beat on the top and bottom line. EPS came in at$1.05 a share versus estimates of$0.89. Revenue of$1.3 billion versus estimates of$1.29. Gross margins 16.8 % versus 16.2 % estimates and deliveries at 2 ,732. That is four more than were expected.

21:02Gareth McCartney: Now, the chairman, Jeff Metzger, said in the release, we're operating in a housing market that continues to be challenging with conditions weakening since our June earnings report. Higher mortgage rates have further pressured affordability and together with geopolitical uncertainty and broader economic headwinds have caused many prospective buyers to be more cautious on purchasing a home. Now, gross margins for guidance were actually right a little bit below expectations, actually above expectations, 17.2 percent versus estimates of between 16 and 16.5. But deliveries actually beat on Q4 guidance.

21:36Gareth McCartney: So, again, remember, KB Home is on the lower side of the market. That is cheaper homes, so they might have a little bit more of advantage here, although their buyers tend to be mortgage dependent. You are seeing their price is off about$700 from expectations at$473 ,000. So they're lowering prices and most likely buying down those mortgage rates. But again, nice speed. Back to you guys.

21:56Alan Ratner: Yeah. Stock gaining a couple percent on top of a percent and a half rise during the regular session. Diana, thank you. Coming up much more on Meta's impact on the market and what a mega cap of shooting up 10 percent in one day can tell us about where the markets might be heading. Over time. Be right back.

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24:07Alan Ratner: Welcome back. We keep talking about the seesaw market where one thing is up, the other is down. Here's the NASDAQ 100 relative to the bank's index, a two-year chart. It shows you how the banks have been able to build up these temporary leads over the mega cap tech related NASDAQ 100 when tech needs to kind of go sideways and rest for a little while. And then they reverse. This has happened in a pretty dramatic way here, actually in different directions. Banks were really the leadership going up into this latest phase when MAG7 was sort of broken and semis were selling off. And now you see it this way.

24:37Alan Ratner: Are there macro implications? As the market's saying, you have to hide in tech because, you know, Fed raising rates and maybe some of the cyclicals got a little bit overextended. That is a question I think you have to, you know, start to ask here a little bit. Now, within tech, it's also interesting. I've seen this surge. We keep talking about the AI agents, Meta, all the rest of it. So Evercore ISI has this AI agent basket. It's a handful of stocks, includes Meta. It includes a few CPO-related semis as well as some other software names. Almost caught up to semis here on a one-year basis. Now, that's not the same as NASDAQ 100 or software.

25:11Alan Ratner: So clearly the market is trying to isolate that one theme inside of tech.

25:15Gareth McCartney: And I would think within semis, there's been some of a rotation as AI agents have taken off. You've seen that move towards CPUs.

25:22Alan Ratner: That's right. And NVIDIA has been kind of the laggard in that context for sure.

25:27Gareth McCartney: Coming up, could AI slowdown fears be hitting the IPO market? We'll dive into that ahead. But first, the obesity drug competition is no longer a two-horse race between Lilly and Nova. but we'll tell you about the potential new entrants into the field.

25:40Alan Ratner: Want more commentary from the best strategists, commentators, and traders on the street? Check out Mike Santoli's weekly Market Memo newsletter, featuring exclusive analysis and breakdown of the biggest market themes, including his personal take on the markets and more. Subscribe at CNBC.com slash Market Memo.

26:24Kate Rooney: We'll be right back.

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27:32Gareth McCartney: It was a big day for the obesity drug market as Roach and Viking Therapeutics both announcing progress on their experimental drugs. Annika Kim-Constantino joins us now with the details. Annika. Hey, Melissa. Let's start out with Viking Therapeutics. We saw Sarah surging on new early data on a weekly obesity injection that works similar to Lily's ZepBound. The biggest takeaway here is less about the level of initial weight loss itself, which was around 16 percent to 19 percent across doses after 21 weeks. What's really new is data showing that patients were able to maintain most of that weight loss after switching to less frequent dosing for 12 weeks.

28:09Gareth McCartney: Patients who switched to taking it every other week maintained up to 97 percent of their weight loss and people who switched to monthly kept off 90 percent of their weight loss. This drug hasn't entered the market, but this is a positive sign that Viking can bring something new to the table here. Meanwhile, it's been a rough start of the week for Novo after it unveiled a long-term growth strategy that underwhelmed investors. And part of that strategy actually involves diversifying its pipeline from obesity rather than only doubling down on it. Here's what the CEO Mike Deustar told CNBC Europe this morning.

28:42Gareth McCartney: It is the right time now that I feel comfortable about the core to speak about the diversification of the company in adjacent areas that are not new to us either. So it would be more obvious for me to imagine that we will be making more deals on areas outside of the core than in the core. But overall, Novo faces an uphill battle to win back investors. Melissa. I want to ask you about the Viking therapeutics because it's a dual agonist and one of the agonists is a GLP-1 that is similar to terzepatide. Does that show us that Lily can come up with something, I don't want to say similar, but along the same lines where you can reduce the frequency and maintain the weight loss?

29:25Gareth McCartney: There's definitely a possibility here. It's unclear at this point if Lily's going to pursue that. We've seen it pursue a maintenance dosing schedule with its obesity pill, but that's something that we're going to have to wait for.

29:34Alan Ratner: And in terms of Novo looking elsewhere to diversify, is there one single market that there's consensus around in terms of product category where everyone sees it as a new opportunity? Or are they just going to have to pick and choose and experiment?

29:50Gareth McCartney: That's a great question, Mike. So actually today, Novo had a media call and they talked about pain being one area that they're interested in. And obviously that's been a category that is dominated by opioids. But, you know, we've seen a lot of, you know, different companies trying to pursue different ways to use non-opioid sort of approaches here. And that's something Novo actually expressed interest in here. Annika, thanks. Annika Kim-Constantino. Time now for CNBC News Update with Julia Borson. Julia. Melissa, Florida's passenger railroad, Brightline, is reportedly preparing to file for bankruptcy.

30:20Gareth McCartney: According to Bloomberg, it could come as early as this week as Brightline works to restructure about$1.1 billion in debt. The potential bankruptcy would reportedly exclude the railroad's operating unit, which would allow trains to continue running and avoid the appointment of a federal trustee to run the private railroad. The National Hurricane Center says the Category 5 Hurricane Polo is now packing 180 mph winds. Meteorologists say the storm is unlikely to make direct landfall, but is expected to bring heavy rain to the western Mexican coast starting Wednesday. And a new study finds the number of people taking GLP-1 drugs with no FDA-approved medical indication is climbing.

31:02Gareth McCartney: According to an analysis, the medical records of more than 92 million people, more than 1 million were taking the medications without a documented condition that would qualify them for treatment, such as diabetes or obesity. The researchers say prescriptions increased 15-fold between 2021 and 2025. Back over to you.

31:22Alan Ratner: All right, Julia, thank you. Coming up, shares of KB Homes, they are rising after reporting earnings. The sector has been under pressure as mortgage rates continue to rise and inventory remains low. We'll dive into the housing trade next.

31:41Gareth McCartney: Welcome back to Closing Bell Overtime, live from the Nasdaq market site. Broader averages flat to down today. The Dow losing 185 points. S &P 500 closing down less than a tenth of a percent. The tech-heavy Nasdaq closing with gains. That's intraday and closing highs for both. Apple with a small gain today, but continuing a strong recent run since the new CEO and product launch closing just below the$5 trillion market cap level. It also is the best stock in the Mag 7 this year, up 25 percent. And Royal Caribbean moving lower today. A source telling CNBC that the company is nearing a deal for sandals that would value the resort company and more than six billion dollars.

32:17Alan Ratner: Let's get another check on KB Home. The stock is up one and three quarters percent after reporting earnings just moments ago. The company executive chairman saying in the release we are operating in a housing market that continues to be challenging. Higher mortgage interest rates have further pressured affordability and together with geopolitical uncertainty and broader economic headwinds have caused many prospective buyers to be more cautious on purchasing a home. KB Home has been under pressure this year, down 13 percent, underperforming the home construction ETF, the ITB, which is down by just 5 percent.

32:50Alan Ratner: Joining us now is Zellman Managing Director Alan Ratner. Alan, it's great to have you here. I mean, maybe some stabilization in the in the as reported numbers from KB Home, albeit on diminished expectations. I know over the last few months estimates have come down, But their guidance says maybe they can maintain expected gross margin levels. What's your takeaway?

33:12Olaolu Aganga: Yeah. Hey, Mike, thanks for having me. You know, I think the backward looking numbers were actually a bit better than expected. And to your point, I think the estimates have kind of come in quite a bit over the last couple of months as we've seen rates go up. And overall, market conditions remain pretty choppy. The more forward looking numbers are a little bit lighter, in my opinion. If you go back three months ago, the company had previously expected their fourth quarter margins to be the high watermark of the year and improve sequentially. And now the updated guidance in this release suggests a little bit of pressure next quarter.

33:46Olaolu Aganga: So, you know, the forward looking numbers, along with orders this quarter, were also a little bit lighter than expected.

33:52Gareth McCartney: Alan, you know, conventional wisdom would be that you want to be in the home builders with the higher income demographic, the more expensive homes, homes that don't need a mortgage in order to close that deal. But you do like home builders that have diversified price points. Why?

34:10Olaolu Aganga: Yeah, I think when you say diversification, what we're really getting at is what you mentioned, that the move up, the active adult segments, basically buyers that are less susceptible to affordability challenges and less impacted by higher rates. That is where we are seeing relative strength in the market today. Those buyers are benefiting from having a lot of equity in their existing house that they're selling. They're benefiting from the strong stock market gains. So they're a little bit more insulated from the more challenging conditions we're seeing at entry level. It's not to say that there's no demand at entry level.

34:44Olaolu Aganga: And I think some of the larger companies like D.R. Horton, for example, are doing very well navigating that tough market. But we do prefer the builders that have more exposure to the move up and the active adult.

34:56Alan Ratner: You know, if I just look at the at the valuations, KB Home has been trading around 80 percent of book value. You say that's not really a compelling enough discount at this point?

35:06Olaolu Aganga: Well, I think that when we think about home builder stock valuations, it's not unusual to see stocks trading below book value for extended periods of time, especially at periods where return on equity is depressed. So right now, a lot of these companies like KB that are trading below book value, their return on equity is in the mid single digit range. That's below their cost of capital. It's below their cost of equity. So, you know, in our opinion, that current valuation, while it seems depressed, it is justified based on the earnings of these companies.

35:37Gareth McCartney: We heard about Berkshire Hathaway increasing its stake in Lunar Allen. I'm wondering if I mean, you have it rated as a neutral, not a buy rating. And so I wonder what you think of that buy and what that says about the housing sector.

35:50Olaolu Aganga: Well, Berkshire Hathaway obviously is taking a long-term view on housing. They recently acquired Taylor Morrison for about 1.3 times book value, and they've been long-term believers in the housing shortage thesis. So I think right now they're in a position where they're able to look past some of the near-term volatility and take a chance on what we think is still a great company. It's the second largest home builder in the country. Right now there's a lot of negativity associated with their gross margin pressure and their exposure to entry level. But I think if you have a multi-year view, and in Berkshire Hathaway's case, a multi-decade view, this probably will prove to be an attractive entry point.

36:28Olaolu Aganga: But I don't see a near-term catalyst necessarily to see the stock moving higher outside of maybe people trading on the back of Berkshire. All right.

36:37Gareth McCartney: Alan, great to speak with you. Thanks. Thanks, Melissa. Thank you. And Mike, I'm just curious, because you follow Berkshire so closely, if that was a surprise to you at all.

36:46Alan Ratner: I would say not too much of a surprise, given they already have this pretty sizable position. So if you already own 20-something million shares, you're averaging down, and you are kind of lowering your kind of blended cost in terms of valuation. And I do think it's worth remembering, and Alan's right, it's going to be a longer-term view. I think back to 2003, Berkshire Hathaway acquired Clayton Homes, manufactured home company, which at the time was, I mean, it was really on the skeds. It was a real down moment for that cycle. And arguably, they underpaid for it, even though at the time nobody was looking for it.

37:18Alan Ratner: So it does seem as if it's a small enough incremental bet by Berkshire that it's not as if they need it to work very soon. All right.

37:27Gareth McCartney: Another AI-related company is pulling plans to go public up next. UBS's global head of capital markets weighs in on what that means for the IPO market. And here's a check on some notable stocks hitting 52-week highs, AMD, F5, Okta, Cloudflare, and Twilio. Closing Bell Overtime, be right back.

37:48Alan Ratner: The data center backlash is making its way into the capital markets as one AI-related company announces it's delaying its IPO. Leslie Picker has the details. Leslie.

37:58Gareth McCartney: Hey, Mike, yeah, SoftBank-backed SB Energy is reportedly delaying its IPO. That's according to the New York Times' reporting, citing four sources familiar with the matter. Now, the data center company has been reportedly seeking a$50 billion valuation, and investors weren't willing to pay up amid a slew of risks. SB Energy summing those up, saying, quote, we have limited operating history in data centers with none currently operational, are substantially dependent on open AI, and face challenges in personnel, labor, and business management. That's according to its S-1. Now, taken together, it's not too surprising that investors would take a pause here.

38:37Gareth McCartney: However, the delay of SB comes on the heels of Whole Tech Nuclear, which is also seen as an AI infrastructure play, which blamed data center backlash on its IPO postponement. But on the flip side is its peer, Westinghouse, which is on file confidentially. We were able to confirm via a source last week that it plans to seek around a$50 billion valuation in an IPO. And the last thing I'd mention is that data center company Nscale actually disclosed its S1 on Friday. So it seems undeterred by some of the slowdowns we've seen in the IPO processes elsewhere. Mike. All right. I'll take it, Leslie. Thanks, Leslie Picker.

39:15Gareth McCartney: Even as some high-profile AI companies delay their initial offerings, other areas like biotech remain hot. We got smart ring maker Aura's S1 just this week as well. So what's the true state of the IPO market? Joining us now is Gareth McCartney. He is a UBS Global Head of Capital Markets Origination. Gareth, great to have you with us.

39:32Olaolu Aganga: Thank you.

39:33Gareth McCartney: So we hear about some high profile. What are you seeing? Is there any sort of slowdown in this quarter, in this month?

39:38Olaolu Aganga: Look, I think the real story of this year has been IPA market volume significantly up, but the number of deals getting done slightly down. So what that tells you is you have a market that's open, but an investor base that remains highly selective in what they're looking for. But actually, we are seeing high quality, large scale companies getting to market. And I think that will be the continuation of that theme to year end.

40:01Alan Ratner: For the most part, are companies and investors waiting until the huge deals that everybody's expecting to clear or trying to get out in front of it? Is it putting any kind of a of a chilling effect on activity or not?

40:15Olaolu Aganga: I think you look at the market big picture. You've got market pretty much at all time highs. You've got the VIX index volatility pretty much at lows. that's usually preconditions for a very functioning and healthy equity market. So your natural instincts, the capital markets banker, is that the message is go. Strategically, at the company level, it will remain idiosyncratic. And so we want to be prepared and ready to take this window, particularly with the midterms coming up as the next big catalyst as we get to November. But it will be stock-specific.

40:43Gareth McCartney: There's a perception, though, that there's only so much the market can handle in terms of issuance. And when you have open AI and Anthropik coming down the pike, that you might hold back on some others if you're an investor and wait for those. Is that notion correct? I mean, is that what you see play out? Or has SpaceX sort of dispelled that whole thing?

40:59Olaolu Aganga: I would challenge that. I mean, normally the IPO market is a very small capital call on the broader equity market. You're really looking at checks of up to a billion, billion and a half. Clearly, this year has been characterized by these mega deals. But I would say we haven't got a liquidity problem on the investor side. It very much comes down to what exposure are they getting? is that differentiated what they get in the current secondary market? And also, does it fit the narrative that they're looking to expand their equity exposure into what has been a very strong secondary market?

41:29Alan Ratner: Talk a little bit about, from the issuer perspective, the debt versus equity equation. Obviously, there's been a lot of attention on some companies that never had any leverage, and they're obviously borrowing a lot to build out AI. Some of them have also done equity deals. So is there anything changing around that mix?

41:45Olaolu Aganga: I think less that the mix is changing, it's more just the scale of capital that we're looking for in and around this AI infrastructure story is much greater than we've seen before. Today, however, we have seen both equity and debt investors willing to provide that liquidity. And again, I think it comes back to that company mix where you are with your equity story, what the growth projections look like as to what the right balance is between equity and debt.

42:09Gareth McCartney: You have the global view. So where else are you seeing strength in terms of issuance?

42:12Olaolu Aganga: I think Asia. Asia has been a great story again this year, building on the strength of last year. Again, I think they're benefiting from the AI story. Other trends like EV has also been very strong in that region. And I think regionally, I think the onshore domestic China Hong Kong market has very much been to the forefront of that. Europe has been a little slower. Europe has been less an IPO story and more driven really by secondary market blocks and also companies using the equity market to raise more primary.

42:40Alan Ratner: I was wondering about the this idea that private equity might be able to have more exits. That was one of the things we talked about. People talked about coming into the cycle that there's been this pent up supply of those deals. Is it happening in a big way or is it still clogged?

42:58Olaolu Aganga: It's definitely happening, but there's clearly more to come. And I think you're right to mention it because the last two or three years, we've been very much looking from an exit perspective where private equity have got assets which are significantly bigger than they've perhaps had in the past. Just given the size of funds they now manage, they would be excellent candidates for public markets. And I think we're very much at the beginning of this private equity IPO cycle.

43:20Gareth McCartney: At the same time, I mean, I'm wondering, are there certain kinds of deals that are getting clogged or held back? I mean, is it software? I mean, what are we seeing in terms of the hesitation?

43:30Olaolu Aganga: Yeah, look, I think over the course of this year, thematically software, we were expecting to be a huge part of the pipeline. I think some of the challenges around the AI threat to the SaaS market particularly caused some pushback of that instance earlier in this year. I think we'll see that naturally work its way through over the next 18 months. And more broadly, I think you mentioned earlier, I think industrials is another sector where, again, with larger deals, with liquidity, with good growth projections, we are seeing very strong investor interest.

43:59Alan Ratner: A hypothetical company that just has no sort of valid AI story to tell. Are they orphaned?

44:06Olaolu Aganga: Not not orphaned. I think, again, it depends on the underlying characteristics, particularly. Look, there is a demand if it's got a strong dividend yield, if it's got a good earnings growth trajectory and it has liquidity. I think you will have an investor base that's engaged and interested. I think what you've seen this year, clearly all the headlines are going to some of these mega deals, both in scale and within a concentrated sector. One thing I would like to see with this IPO market as we go into the more mature phase is that we see a broadening out to more mid cap traditional stocks, which I think you're alluding to.

44:39Olaolu Aganga: There's definitely interest there. It's just a question of a catalyst, really, to get people excited about that.

44:45Alan Ratner: Gareth, thanks so much. Thank you, Cass McCartney. Well, Calci is seeking approval to begin margin trading. What it could mean for investors in the competition between prediction markets and Wall Street when closing the Lovatime returns.

45:06Gareth McCartney: Welcome back to Overtime Prediction Market platform. CalShe is looking to bring leverage to part of its business, asking federal regulators to approve certain traders using margin on some event contracts. That would allow eligible traders to make larger, to take larger positions without putting up the full value up front. Similar to margin trading in stock markets, Calci tells CNBC the proposal would only apply to certain traders and certain contracts with sports, culture and mentioned markets excluded. We should note that CNBC and Calci have a commercial relationship that includes customer acquisition and a minority investment.

45:39Gareth McCartney: and presumably allowing larger trades to be made will really attract institutional traders in addition to big retail traders.

45:47Alan Ratner: Sure. So you can enlarge the trading, but also you can just get more juice in those trades. And I think that's an issue with prediction markets if you are looking to make it much more of a kind of fast trading product because it's kind of like zero sum, right? It's 80-20 percentages, and you just don't have that much inherent upside unless you bet something that's just not going to happen. So if you look at the growth in financial transactions, it's all in options, perpetual futures and stuff that just have built in leverage. So we'll see. I mean, if it doesn't include those things like sports and event markets or mention markets, we're talking about elections and weather and other event type things.

46:26Alan Ratner: Yeah, exactly. All right.

46:27Gareth McCartney: Let's get you set up with tomorrow. on trade today. General Mills, Sintas, Paychex, and Manchester United are all set to report earnings ahead of the bell. And on the economic front, we'll get the S &P Global Flash manufacturing and Services Purchasing Managers' Indices. Also on tap, the MetaConnect Conference and McDonald's is hosting its Investor Day. So those will be interesting. Meta in particular, given the gains that it's made this week, will they release some more refined Muse data? Will there be any more products to be unveiled. We'll see.

46:57Alan Ratner: Yeah. I mean, it's you've obviously front loaded a lot of the excitement about what's going to happen here. And as a matter of fact, the valuation also has gone right back up to like its five year average. It just made up that that the laggard bit of its history in a pretty big bite in the last several days. That does it for overtime.

47:14Gareth McCartney: That's when you start right after this quick break.

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