Closing Bell Overtime: Four-Year Anniversary of the Bull 10/12/26

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1:09Stocks mostly lower to start the week. The Dow of 200 points. The S &P 500 right near the flat line here. NASDAQ Composite losing about a half a percent. Tech taking the worst of it as the high beta AI names got hit. Sandisk, for one, down 6%. But among big tech, Meadow, with a nice gain on optimism about its AI agents. We're going to have more on that coming up. And it is the tale of two software companies. Salesforce getting a double upgrade from Bank of America. Adobe, meantime, a double downgrade at Wells Fargo. More on those moves as well. But we start off with the first take on the close.

1:37And it really does feel like we are just waiting for earnings season to start here. Just pins and needles. I mean, the market worked hard to do as little as possible today is the way I would think about it. It was almost 50-50 up and down in terms of the New York Stock Exchange. In fact, NVIDIA and Micron down penny for penny as much as Apple and Meta were up. In other words, contribution to the S &P 500. So that explains part of it. Bond market close. If you looked at the bond ETFs, they were up just fractionally, implying that yields would have remained suppressed if bonds were trading today.

2:08So kind of we live to fight another day. I still do think when you see going into earnings season, banks and semis are both double digit percentages off their highs. Right. You know, there was a time when you'd say, hey, that's not what you want to see as a leadership profile. So there's a burden of proof on those groups to reassert themselves in earnings season. Yeah, and I think that notion was sort of underscored by this note from Binky Chata over at Deutsche Bank and his team, basically saying, you know, the bar is very high for tech. Even if they surpass earnings expectations, the bar is high for them to actually move higher.

2:41And the bar is much lower for sectors such as banks, for instance. You mentioned double-digit, basically correction territory. The bar is low there. So at least tactically to earnings season, the question is, do you go into those sort of low bar stocks that can outperform? And are you going to just make a big bet on another phase of mean reversion going into this? And to me, the bond market has to allow for that. And right now it seems to be doing so. Yep. Let's get more on stocks making big moves today. Seema Modi is here at the Nasdaq with more. Seema. Well, hey, Melissa, Microsoft making news, revealing a new AI chip as it looks to reduce its reliance on NVIDIA and AMD, a sign of how more hyperscalers are coming out with their chip alternatives, yet demand for NVIDIA GPUs remains red hot.

3:23That's from the latest channel checks from Bernstein. NVIDIA did end last week down about a half a percent and closed lower by around 1.3 percent on the day. Negative price action across the memory universe after a Chinese competitor announced a new design that claims to be powerful with inference set to be released before the end of the year. You saw Micron, SK Hynix, SanDisk all down between 3 % to 6%. Shangshin is the company looking to rival its U.S. counterparts. It's not a small company. It's based in Shanghai. And the market cap at around$500 billion. It went public earlier this year. The fallout really extended beyond memory to optical technology with names like Coherent, Sienna down significantly on the day.

4:04In fact, the worst performing stocks in the S &P. Cyber stocks underperformed as well. We saw Wells Fargo cut its price target on Palo Alto Networks from$525 to$475 a share. Finally, the XLE, the energy sector, hitting an all-time intraday high today as Brent crude tops$106 per barrel, its ETF's first record since September 10th. Mike? Seema, thank you. Well, it is the four-year anniversary of the current bull market, the S &P 500, climbing nearly 120 percent since the closing lows on October 12, 2022. The Nasdaq is up more than 160 percent. For this year, the S &P 500 is up nearly 14 percent, but more than four in 10 stocks in the index are lower for the year.

4:47So are index gains masking serious problems under the surface, or is this the normal ebb and flow of a maturing uptrend? Joining us now is Max Kettner. He's chief multi-asset strategist at HSBC. Max, it's good to see you. So how are you reading some of these mixed signals from here as we head into earnings season, head into a fifth year of a bull market? Yeah, good afternoon, Mike. Thanks for having me. I think the mixed signals are indeed actually quite clear when we look at what's been hit. When you look at PEs, you look at multiples within the Nasdaq, within the S &P 500. You are seeing quite clear destruction and quite clear multiple compression and a hit from higher yields.

5:30And that, indeed, actually, in our reading, is really supportive. Because what that means is that sort of often asked question from clients that we get is around, so what kind of magical level do we need to see in the 10-year and the 30-year Treasury yields until risk finally gets hit? And we would say, look, you look at PEs, they've compressed in so many parts. You look at credit, you look at CCCs, they're already trading above 1 ,000 basis points. They're already trading well in distressed territory. You look at some of the popular EM credit names. They've sold off 10 to 14 points. So we have seen quite a bit of destruction already in terms of not only multiples, but really in terms of risk premium across the board.

6:08And that actually does set us up for pretty bad sentiment, I would say. And for an earnings season where I think, once again, people are a little offside, people are a little too skeptical in light of a record high number of S &P 500 companies guiding us actually higher just ahead of Q3 earnings season. Does that bad sentiment, though, Max, set us up for positive stock reaction on the back of earnings? Yeah, I think so. Particularly in terms of broadening, I think, yes, Mike, I think is totally right. We do need the bond yields to allow us for that. But if bond yields do calm down a bit, if we don't see further spikes in interest rate while going forward, I think actually when you look at the S &P, we've got six, seven sectors expected to be down sequentially in a quarter where many are sort of touting 7 % to 8 % nominal GDP growth, that to me doesn't make sense.

6:59So, of course, we're not going to have the same sort of markups from the Entropic, the OpenIR holdings like we've had in Q2. But in terms of the earnings beat rate, I'd be very, very surprised if Q3 was materially weaker than Q2. We might even match Q2. And that, of course, would then say, actually, it's not just about tech. It's not just about the semiconductors like we've had in performance in the last month and a half, last two months. It's actually also the other sectors that perhaps have suffered a little bit too much in the last two months. So to me, it's a bit leaning into the equal way to S &P again and playing tactically a little bit that broadening theme again.

7:38Looking at things like widening credit spreads, as you mentioned, and the underperformance of a lot of the cyclical parts of this market, That only, I guess, represents an opportunity or an unwarranted valuation compression if you don't think it's sending some kind of a worrisome macro signal, right, that there's either going to be a growth stumble or financial conditions are going to tighten beyond what's warranted and maybe the Fed's going to make a mistake or whatever it might be. Yeah, I think this is where also the contradiction right now lies that I hear so many times. So I see rates guys saying, well, you know what, the 10-year is probably going to have to go to 6 % because the new floor for nominal GDP growth is probably around about 6%.

8:18You know, we're tracking even higher now in Q3. And a lot of that is because of AI investment. And that just lifts us to a new floor in terms of nominal GDP growth, not in Q3, but more on a structural basis. But then at the same time, I'm hearing, well, actually, stocks, they can't really push much higher because look at all these AI stocks. Look about the sort of ambiguous news we had last week about open AI and the reaction to that. That tells you that people on the one hand are pretty skeptical about AI from a bottom up, from an earnings perspective, whilst at the same time, touting higher nominal yields, higher R star because of AI investments.

8:54Now, that doesn't make sense. You can't have both at the same time. You can't tell me that AI is so great and AI capex are so great, it lifts our star. And at some point, that's going to be a problem for equities. And at the same time, you tell me, but I'm really skeptical on stocks because AI is actually nowhere near as good as we thought. That is inherently contradicting each other. I actually do think that people really, really do underestimate how much cyclical fiscal support we've thrown up on the economy this year in terms of tax refunds, tariff refunds. When you look at things like the CapEx incentives through the One Big Beautiful Bill, a lot of that fiscal support will not repeat in 2027.

9:34So that, to me, means with a little bit of a negative fiscal impulse, that actually might mean some first negative economic surprises coming. And that, of course, would be welcoming relief for yields and therefore also really for risk premium everywhere, whether it's credit, whether it's equities, whether it's EM, really across all the asset classes. Max, great to speak with you. Thank you. Max Kettner, HSBC. Well, Salesforce was among the winners in the Dow today thanks to a double upgrade from Bank of America going from underperformed to buy, hiking the price target to$285 from$160. The firm saying a strong enterprise AI strategy supports their upgrade along with encouraging signs of improving momentum.

10:16The stock is still down 12 percent this year, but the stock has risen 40 percent in the past three months. So what will drive the stock even higher? Joining us now is Bank of America Securities senior software analyst Tal Liani. Tal, great to have you with us. Thank you. It sounds like you were one of the biggest, or I shouldn't say biggest, but you were a true skeptic in terms of the impact AI could have disrupting CRM's business. But now you've come around to the idea that it's actually valuable at every layer of the stack. What did you find that changed your mind so dramatically?

10:53Larger enterprises, small companies are looking for alternatives, cheaper alternatives. And there are many CRN companies out there that offer different solutions. If you talk to distributors or resellers that only service small companies, you'll see that the market is changing. But when you discuss the same thing with large enterprises, they have no desire to change the workflow, the governance, the system of record, the data that they have, and what they need. Forget Salesforce. What they need in general in order to deploy AI, they need some kind of an orchestration layer that enables AI for the existing data, existing applications, new agents, and then the interface.

11:36It's the value of the interface, the new interface that is going to be simple language interface. So the reason why we went for a double upgrade is because when we consider the offering, AI offering of Salesforce, we are saying it is one of the best in the market because it's comprehensive. It offers a solution for all four layers. There is a risk with it and the risk that the growth is not coming at the expected time. But when it comes to the offering, the offering is well-rounded. Tal, there was a line of reasoning that said it's not so much that large companies will immediately run to rip out their CRM systems and fire Salesforce, but that it would give them leverage and the incentive to look for savings, either pay for fewer receipts or change how they pay or essentially try to drive a better bargain.

12:26Is that something that is a risk that's in the stock? How do you think about that? So everything that has to do with AI is expensive. I cover networking, I cover cybersecurity, and I cover software. Everything that has to do with AI is expensive. Actually, enterprise software is not expensive. Let's start with that, that if these stocks, whether it's Salesforce or ServiceNow or Workday or any other stock in this space, if they prove that they can have a valid and profitable AI strategy, these stocks can go up. That's kind of as a base for the discussion. Number two, when I look at the market, the deployment right now is zero, basically.

13:03Enterprise deployment of AI is really, really small. It's confined to a few things because there are many issues, cybersecurity included. That's going back to your previous discussion. There are many issues that prevent or kind of create concerns over the deployment of AI. The way I look at it today, there are companies that are well in the bucket of AI tailwind versus companies that are in the bucket of AI headwind. And in my view, companies like Adobe is seeing AI as a major headwind, while companies like Salesforce and ServiceNow are using, could be using AI as a tailwind for growth. And that's the main point.

13:43Now, it is true that it's going to take time to deploy. That's why I'm going back to the issue of timing. I'm not expecting I'm expecting growth to accelerate for the next few quarters for Salesforce. But on the other hand, I don't expect growth to kind of go double digit crazy numbers next year. If it does happen, if you do see evidence that AI is contributing to growth, there is tremendous upside potential for these enterprise software companies. That's the main point. Well taken. Tal, thanks very much. Your price target of$285 does not get it back to the former highs, so maybe somewhat not so aggressive on that basis, Taliani of B of A Securities.

14:24Well, as Tal was mentioning on the other side of this software trade, Wells Fargo doubled downgrading Adobe to underweight from overweight. The brokerage firm said cracks started to show in its third quarter results last month, and it's worried about fourth quarter numbers and 2027 guidance. Also saying the results of its survey of CIOs shows Adobe could be a clear budget share loser. while it's cutting its price target to$225 a share. That's below where the stock closed today, around$238. I think this is now maybe the way the consensus is building around Adobe. It's applications. You can disaggregate the stuff that Adobe offers in terms of tools and maybe do it cheaply outside the ecosystem.

15:02Even outside of the AI factor, there's also a new CEO. That's right. So there's an execution risk. And then there's also a model change. They moved to freemium, so they're giving away certain functions with the hope that people come back paying customers. So there's uncertainty around that. So it's sort of like a double whammy of negative factors hitting Adobe, which has now, as you said, become the poster child of AI disruption in the software space. Yeah, no doubt about it. And that CEO succession was given kind of a thumbs down in terms of how it went by the street. Yeah, exactly. Interesting, though, to see CRM here.

15:33If you take a look at the, you know, year-to-date charts and see it against other software players, It's really sort of recovered since that initial disruption scare. Take a look there. Live look at Chicago. That's a SIBO. They're ringing the bell there, ending the regular trading day for options. While sticking with the tech and AI trade, shares of Meta up 3 % on continued optimism about Muse as it debuts a new Muse Wonder model. Julia Borson joins us now with all the details. Hi, Julia. Yeah, that's right, Melissa. shares of Meta are moving higher on Meta's new Frontier model series called Muse Wonder.

16:09There's also a higher end model called Muse Wonderful. Muse Wonder will start rolling out that Muse will, Meta will start rolling out this new model to Muse and Muse Code subscribers who are paying$20 a month or more. Now, Muse Wonder has specific domain expertise in law, finance and health, which Meta says are especially valuable categories for both personal and professional agents. I spoke to Meta's AI chief Alex Wang, who told me that users will, quote, sort of feel it as a natural step up on just overall intelligence, saying the progress will be quite noticeable, similar to when other frontier labs have sort of had these big jumps in sort of generations.

16:48Now, as for concerns about users' data privacy and safety, Meta says this is the most aligned and most safe model yet with significant investment on their part in how the models handle adversarial instructions as well as private information. Now, this comes as Meta's Muse AI agent tool sees ongoing growth. Sensor Tower tells us the app has now been downloaded 8.8 million times since launching in early September, up from 5 million downloads at the end of September. Melissa? Julia, this is all still for free. No, so these new frontier level tools will just be for subscribers who are paying$20 a month or more.

17:27They have different tiered levels. You could be paying$20 a month or$100 a month for compute. So if you want to have this most cutting edge frontier model for now, it's only if you are subscribing. Down the line, they did say they will be customizing some of these tools for free users. But I do think this is part of the overall play for Meta to really target the small business consumers, the prosumers, people who are willing to pay for that AI compute. Yeah, and I noticed Mark Zuckerberg posted earlier that Muse had ordered him a watermelon from Safeway, and he was very pleased about that. So a photo of his kitchen as well.

18:04Yeah, so watermelon was the code name for this new frontier model. Now that they've launched it, it's called Muse Wonder. The higher end is wonderful. two words, but it was originally codenamed watermelon. So that must have been the little play on words that his AI agent did there. I hope the agent told him that watermelon's not in season and he shot for another fruit like an apple. California. It's almost always in season. You get everything all the time, I guess. Julia, thank you. Julia Porston. Microsoft closing today within a couple bucks from its all-time high back in October and in October, I should say, in regaining the$4 trillion market cap level.

18:41Could its gain be Nvidia's paying and eBay rising today, as one brokerage calls it, the NYSE of used items. We'll explain that coming up on Closing Bell Over Time. Legacy credit scores only look at a brief snapshot in time, and that limited view often leaves millions of qualified credit seekers out of the picture. Vantage Score is changing that by modernizing credit scoring. Vantage Score uses 400 % more credit and alternative data to create a fuller picture of financial behavior, including trended credit data, rental payments, and timely utility payments. VantageScore safely broadens access to the credit economy and brings 5 million mortgage-ready borrowers into the market.

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19:56That's precision-crafted performance. That's Acura. Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi because we all know airplane Wi-Fi is the worst. I get ad free, I get backroom play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. Try it now for two months free at youtube.com slash premium. Trial eligibility varies. Terms apply.

20:27Cancel anytime. That's a mouthful. We talked earlier about this being the fourth anniversary of the AI rally, and NVIDIA has been the poster child for that rally, up 1 ,800 percent as everyone needed their chips during the AI boom. But now Microsoft, the latest to cast out on that thesis. Kate Rooney's got that story for us. Kate. Hey, Melissa. So Microsoft is making a bigger push into its own AI chips in a move that could reduce its reliance on NVIDIA. The tech giant unveiling its third-generation Maya chips today It says it increasingly plans to use its own silicon to handle AI requests. For some internal things like Microsoft products, think of Copilot, for example.

21:07The company says these Maya 300 chips can process up to seven times more AI tokens per data center rack versus its predecessor. So really leaning on costs. They're also delivering greater power efficiency compared with other GPUs. This is important for tech companies. They're already spending hundreds of billions of dollars building out the entire AI data infrastructure. They're trying to keep costs down for themselves, at least. This is a larger play in the tech industry. They've been pushing to build alternatives to NVIDIA's very dominant chips. You have Amazon, you have Google doing the same thing.

21:40OpenAI and Anthropic are also getting into custom semiconductor design. Microsoft says it is going to begin producing these Maya chips in 2027. Analysts over at Evercore, at least, are estimating these homegrown chips could account for about 10 percent of Microsoft's AI chip spending by early next year, at least. NVIDIA, though, is not necessarily going away. Microsoft says it's going to continue using NVIDIA and AMD chips in particular for things like training AI models. So it's sort of this frenemy relationship, guys, where they still rely on NVIDIA, but they're trying to diversify a bit here.

22:14Yeah, the whole industry seems to be doing that, Kate, and yet I don't see the sales projections or earnings forecasts for NVIDIA do anything but keep going up. So everyone seems to be operating in this idea of and not or on some level. Yeah. No, I think you're right, Mike. It has not dented into NVIDIA's market share at all, really. And the pie seems to be growing. You look at Amazon as one example of this. You know, Microsoft is doing something similar here. But Andy Jassy has talked about this really being a potential anchor for the business and sort of new business for them. So diversifying their own business, selling these chips externally.

22:50Microsoft has talked a little bit less about that and has talked more about keeping their own costs down. But you could see a world where a lot of these cloud providers want to own the entire stack is sort of the jargon, but own every piece of AI, whether it's semiconductors, cloud, some of these applications. If they can do that, it not only keeps costs out of their own business, but there's a world in which if these are successful, they could go out, sell them to customers. That's sort of a way to grow their own pie, to use that analogy again. Would there still be, though, a bottleneck, Kate, in some way?

23:19Because, I mean, Microsoft doesn't have a fab. It doesn't have a clean room. It's got to manufacture it someplace. And I'm guessing it's manufacturing in the same place where NVIDIA manufactures its own chips or where Broadcom is manufacturing their chips at a TSMC or something like that. It's a really good point, Mel. I mean, even if they saw this market and wanted to go out and build this custom semiconductor business, it's not clear that all of the raw materials are available, that they could compete and that, right, the materials are available to go and do that. So that's been one bottleneck and hold back.

23:50I mean, they now have a lot more competition, not only for actual materials, but for talent. You need the best people, maybe former NVIDIA people, former AMD executives that are also being lured into places like OpenAI. They've got their jalapeno chip and have kind of gone after this same strategy and same with Anthropik. So you have a talent issue, too, where there's only really a handful of people that know how to do this well. And they are getting offers from all over the place. Oh, for sure. Kate, interesting stuff. Thank you, Kate Rooney. eBay, one of the big winners in the S &P 500 today.

24:24Morgan Stanley naming the company a top pick and increasing its price target to$132 per share from 127, implying upside of roughly 18 percent. The analyst there says eBay's gross merchandise volume growth has surprised even the most bullish investors, and he believes the reason for that is live commerce. In his note, he writes, think of eBay like the NYSE for used items. Historically, the market was dominated by long-only users, individuals who wanted to buy and hold items. Live commerce effectively adds hedge fund-like users, short-duration resellers who try to identify underpriced items and fast-paced auctions to relist them on eBay for a profit.

25:01The analysts estimating that live commerce is now driving roughly 40 % of eBay's growth from here. So it's kind of like a high-frequency trading market maker function. I mean, you need some pretty serious efficiency in the platform to do that. And if the NYSE is an example, I mean, fees and spreads have compressed a lot over the years. So I'm not sure exactly if eBay can maintain the pricing on the trades. I think also the other key difference here between trading a stock, obviously, and trading like a handbag is that handbag has to be shipped to the person. Like you have to take delivery of this handbag and taking delivery takes time and then to also turn it around and deliver to the next person.

25:42So there's also that automatic friction. There's only so fast the commerce can get. And I guess it would mostly apply to standardized items, right? Things that you could easily kind of are interchangeable with others or you have an easy kind of objective price or value for as opposed to just, you know, whatever came out of somebody's garage or whatever. All right. Well, if you park your money in an S &P 500 index fund, you've more than doubled it in just the past four years. Those are pretty hard gains to beat. Up next, we'll explain why this has not been a stock picker's market. Stay with us.

26:14Some of the most important design choices are the ones that go unnoticed. The details that together make an experience feel intuitive, comfortable and above all, exhilarating. At Acura, that means looking closely at how every detail could make your experience behind the wheel more rewarding. Every lesson learned and every idea refined becomes part of what comes next, and it lives inside every MDX, ADX, and Integra. That's precision-crafted performance. That's Acura. Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi.

26:50Because we all know airplane Wi-Fi is the worst. I get ad-free, I get backroom play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. Try it now for two months free at youtube.com slash premium. Trial eligibility varies. Terms apply. Cancel any time. That's a mouthful. This holiday, all plans, even unlimited, are just$15 a month. A holiday deal this good obviously deserves an enormously expensive holiday song. Like, all I want. Right. Okay, we can't afford that. You know what? Forget the music budget. We're going to stick with whatever's in the public domain.

27:23Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three months,$90 for six months, or$180 for a 12-month plan required. $15 per month equivalent. Taxes and fees extra. New customer offer for initial plan term only. Greater than 50 gigabytes may slow when network is busy. See terms. Well, a lot of investors claim to want a stock picker's market, one where you could sort winners and losers, where most stocks are not moving in line with the S &P 500. Well, we've had one, but it's been really easy to actually not pick the winners. This is the percentage of large stocks that have outperformed the S &P 500 over the prior 12-month period.

27:59It's pretty much near a historic low here, around 34 percent. This is according to Adam Parker over at Trivariate Research. Clearly, two-thirds of all stocks lagging over the prior year means it's been really tough to be an active manager. And I'll point out the periods when it seems like a lot of stocks are outperforming typically are times of weakness for the S &P 500 in general. So you have kind of a downturn where you have some defensive stocks do better, some growthier stocks maybe do better. So I do think there's an issue here for what people think they want and maybe what the market is willing to deliver on that basis.

28:33Take a look at the XMAG. This is that ETF of all stocks in the S &P besides the MAG-7. And it's at an interesting spot here. It's actually held up OK, but it really can't buckle too much below here because you're going to have people say that that's an ominous signal. So I do think there are many things that are saying, look, this mega cap dominant period for the market has kind of run its course unless we're going to have some broader weakness. I'm sure there are a lot of portfolio managers who will breathe a sigh of relief thinking that that period is going to be over and they can actually pick stocks and try for sure.

29:05Exactly. And then everybody else who owns index funds probably has to brace for it being dead money for a while. Exactly. Time now for a CNBC News update with Mackenzie Cigalos. smack. Mel, the Archbishop of the U.S. military said today that no Catholic soldiers should participate in the death by firing squad of the former army psychiatrist who killed 13 people in a shooting at Fort Hood in 2009. The Catholic Church condemns the death penalty. The Archbishop also criticized Defense Secretary Pete Hegseth's suggestion for the December execution to be made public. FIFA President Gianni Infantino is facing a new scandal.

29:38The U.K. paper The Times alleged today. He's been receiving two separate salaries, one from FIFA in Switzerland, which is declared in its annual report, and a second paid by a World Cup organizing company in the USA, which has not been declared. And a federal judge tore into the Trump administration today after it cut down more than 400 trees at the historic East Potomac Gulf course in D.C. over the weekend. The president's plans to renovate and make it a champion level course have been challenged by the D.C. Preservation leak. The judge said administration lawyers failed to honor an agreement to give ample notice before taking irreversible action at the course.

30:15Guys, back to you. Mack, thanks. Mackenzie Sigalos. We are just three weeks away from the midterm elections, and it could result in divided government. Up next, we'll discuss whether gridlock in Washington is actually good for Wall Street. Welcome back to Closing Bell Overtime, live from the Nasdaq market site. Stocks closing mostly lower today. The Dow did gain nearly 200 points. S &P 500 with a very small lost, still above 7 ,800. Nasdaq 100 losing three quarters of a percent. No impact from the bond market today as it was closed for the holiday. Chip stocks leading tech lower. The stocks losing more than two and a half percent.

30:46Nearly every component was lower, but rising oil prices helping energy stocks, the XLE rising to an all time closing high. Crude oil ending the day higher with Brent topping$106 a barrel after new attacks in the Middle East over the weekend and an energy ceasefire declared by the president between Russia and Ukraine that didn't hold. Eamon Javers has the latest details on all of it. Eamon. Yeah, Mike, that's right. President Trump took to social media earlier today to defend his decision to allow Russia to sell diesel fuel to the U.S. and global markets after he came under some bipartisan criticism from some Republicans and Democrats for the move.

31:22He wrote, the European Union paid Russia$250 billion for energy, and the fake news media doesn't want to get near that story. I made the right choice for the American people. Now, that coming after the president said, as you point out over the weekend, that Russia and Ukraine had reached an energy ceasefire, but neither side agreed that a deal had been made and strikes continued in the hours after the president's announcement. President Vladimir Zelensky of Ukraine said the deal was news to him, but he said he'd support such a truce if the Russians stopped attacking Ukrainian targets. And he said the Russian strikes, though, continued through the weekend.

32:01Now, the president spent most of the day today at his golf course in Virginia. We haven't heard from him publicly on camera, but he is heading to a rally tonight in Ohio. So we may get a better sense of his thinking if he talks to reporters on his way there. Guys, back over to you. All right, Eamon, thank you. Eamon Javers. So how will the recent geopolitical developments play into the midterms with just three weeks to go? Joining us now is Monica Guerra, Morgan Stanley, Wealth Management Head of U.S. Policy. Monica, great to have you with us. You're not going to make a call in the election, but you are preparing for a gridlock scenario.

32:33How big of a factor is the war and, by extension, what's going on with energy prices and affordability? Well, affordability is, you know, the top issue. I've been traveling all around the country the last two months, meeting with clients. It doesn't matter where you are in that wealth chain, you know, alternate where it's mass affluent. It's the top issue. One of the things that's important that we're watching is really gas prices, because in years in which you get a sustained increase, it could be 10 cents. It could be a dollar or more. And the sitting president's party on average loses 32 seats in the House of Representatives.

33:07So it's quite an impact. So what are the stakes, I guess, under each scenario in terms of policy, but then also from an investor perspective? I just wonder what's sort of priced in in terms of the policy mix for 2027 and beyond and where you might see a surprise. Yeah. So when we're thinking about the potential for a gridlock government, which is where we're headed. So a blue House, potentially a blue Senate with that red president. You're looking at typically outperformance versus other congressional presidential scenarios, about 18 percent. So when you have a blue Congress versus a GOP president.

33:43Now, since what time? Because I've seen other stuff since 1945 that says that's not the best configuration. I mean, it's since I think 1945 is when we've done it. Yes. And so when you're thinking about that dynamic versus the other scenario of gridlock, of red versus blue, regardless of what side of the chamber it is, it does underperform. So when you have that red versus blue in Congress, you outperform it's about 23 percent because the news cycle is essentially truncated. You get a surprise in one chamber, the other chamber shuts it down, nothing's going to happen. The opposite happens, right, when you're in the blue scenario, because you get a longer runway for more policy to essentially be developed, more fear factor, more money sitting on the sideline, waiting to see where it's going to go until the president can come in and veto.

34:34I'm just curious, and I know this is not a scenario that most people are working under in terms of assumptions, but if it were all, if it was a red sweep, Is that the ultimate, like, the best scenario, conventionally speaking? No, not if you're looking at historical performance. It's actually lower. But you have to account, if you're going to go into the history of it, you have to account for Nixon era. And that's a big drag on that red scenario. So it's not a one-for-one. You have to think about the macro environment. It's not apples to apples. And so the macro is what's really driving the market right now.

35:04And when we think about policy, what's important for us is to lean into the fact that it can either present risk on the margin or opportunity on the margin. One area could be in AI data centers. So while we've had this huge run up in markets in the last year on that AI trade, any sort of headline related risk. So if Congress has a hearing or there's negative pressure on that, there could be some volatility or weakness in the market. We would say, you know, that is potentially a really attractive entry point because it doesn't necessarily derail the broader economic cycle, because, again, nothing is unlikely to make sorry, nothing is likely to make its way out of Congress.

35:46I've seen some folks flag the possibility that the election itself might actually give way to a period when the president tries to, you know, potentially enact some policies he wouldn't want to do before the election. In other words, it could be some disruptive things, whether it's with Iran or whatever other levers can be pulled, that maybe would be something the market would have to contend with. Does that make sense to think about? Well, I think it's important to remember that the use of executive orders does change the relationship between markets and politics. So the use of executive orders means the president can wake up.

36:22He can tweet something. He can, you know, put out a new a new order and tariffs, for example, and cause a significant sell off. Whereas in prior iterations, when you had less power in the executive branch, you had this prolonged legislative process where essentially all that risk gets priced in right away as you go along. Are there any sort of, you know, black swan sort of events that you're looking for? I mean, in terms of, you know, after the election, the days after election distrust, you know, people questioning that we saw seeds of that in the prior presidential election, questioning the results of the election.

36:58And we're talking about midterms that could happen in races across the country. So for us, we're really leaning into what the Supreme Court has recently done as far as essentially a stabilizing factor. So, for example, there was an executive order from the president encouraging states to scrub the roles of different potential electorate. And what the Supreme Court essentially decided was if you're already doing this, great, fine. It's your call. Right. This is the state's rights issue. they manage each election and they manage their state's results. And so from that perspective, we view that any pushback is going to continue to be handled on that state by state basis.

37:37You may have some states that all of our eyes are locked into in the Senate. But on the House side, we think it's going to be more marginal as far as impact. Monica, great to talk to you. Thank you. Appreciate it. Earnings season kicks off with a bang tomorrow when the big banks start reporting. Up next, we'll discuss how you should be trading those names and what the results could mean for the health of this rally. Let's get you set up with tomorrow's trade today. Existing home sales, the only economic data on the calendar, but the real focus will be on earnings. We'll hear from Johnson & Johnson, UnitedHealth, Albertsons and Domino's.

38:10Plus, a big week of bank earnings kicks off with results from J.P. Morgan, Citigroup, Wells Fargo, Goldman Sachs. Well, let's stay with the financials. That sector has underperformed the S &P 500 over the past month as rising yields and concerns around inflation put pressure on the sector. So could results from this quarter turn the story around or are more headwinds ahead? Joining us now is Barclays large cap banks analyst Jason Goldberg. Good to see you, Jason. Thank you. You have a we have to go all through all of them, but you have like a list of 10 reasons banks have struggled. And not really among those reasons is anything going on in the business of the banks very much.

38:46No, the fundamentals are solid, right? Loans and deposits are going to be at record levels this quarter. Nantishness margins holding in. You know, fee income higher year over year. Expenses controlled. Credit quality very benign. And the companies continue to buy back stock. So the fundamental story is solid. You know, there are concerns about the economy. You mentioned the backup in interest rates, persistent inflation, elevated oil prices, upcoming midterm elections kind of casting some doubt. And then, you know, the concerns around the backup and interest rates, you know, increasing unrealized losses that banks have in their bond portfolios, how that plays through the quarter as well.

39:22So a little bit of uncertainty. Hopefully the banks quell that concerns in the coming days. Do you have any concerns about an AI, about the AI scare that has sort of unfolded with banks in terms of the fear that AI agents will be able to, you know, independently move money from one bank to another higher yielding savings account or product at another bank? Certainly not in the near term. I think, you know, you've seen a lot of changes throughout the banking industry over the last, say, 50 years in terms of, you know, new products, new services, you know, the introduction of money market funds, cap accounts and the like.

39:55And banks will have to adapt. And, you know, this time will be, you know, no different. So certainly there is kind of always competitive balance for both banks and non-banks. And, you know, this doesn't certainly change that. But no, we think they'll adapt to whatever gets thrown at them. You mentioned, you know, fee income year over year will be better, maybe down from the second quarter, I guess, in terms of investment banking fees, I guess, capital markets revenue. To what degree do you think that's now, you know, sort of in the stocks of the big institutional firm? Yeah, you know, certainly that was, you know, a concern that came out of our conference, you know, last month that, you know, trading revenues, while good this quarter, they'll be the best third quarter ever for trading revenues, but maybe not as strong as people thought three months ago.

40:37So investment banking fee is also a little bit soft versus what people thought. But pipelines there are really good. And if you believe this whole AI build-out story, banks are going to have to play a role in financing that. So we think when the numbers come out tomorrow, our guess is it will actually probably be a little bit better than feared and maybe another factor that helps alleviate some of these recent investor concerns. When we were looking ahead to the last quarter and beyond in terms of the factors that are a little squishy or uncertain, uncertain, which banks do you want to tilt towards in terms of them not having as much exposure to those areas at risk?

41:07Yeah, listen, generally, you know, we're constructive overall, maybe a little bit biased towards the bigger banks. You know, we talked about, you know, some of those capital markets concerns may be priced in. So, you know, tomorrow you'll have, you know, Citigroup, J.P. Morgan, you know, Wells Fargo, Goldman Sachs. They actually think they all could have pretty good, pretty good results. And in terms of leverage to what you expect the rest of the year, I mean, it's sort of another version of the same question. There was a story out there that, look, in an active capital markets scenario, maybe Citi has the most upside because less is expected of them.

41:41Maybe it's a cheaper stock. Yeah, certainly with Citi, right, if you look at the top 10 banks, they would trade at the lowest valuation. So, you know, more room to improve. And they've done a good job in terms of driving their returns higher. and we expect them, you know, they came out with a 10 to 11 percent ROTC target for the year. We expect them to be above that, you know, despite maybe capital market revenues being a bit more sluggish in the third quarter. So that would certainly be behind our list. How should we think about banks' exposure to the AI trade in terms of either within the capital markets?

42:10I was just thinking about some of the comments from Hawk Tan in Singapore and the CEO of Broadcom, and he was saying the next constraint could be capital. And so if we are to think that there's some sort of a pullback in capital raise amongst the AI firms. Are we going to see that impact in banks, bottom lines? Yeah, no, certainly, right. There's a lot of capital needed to finance this AI infrastructure build out. Banks will play a part of that, certainly on their own balance sheet and then raising money in both the debt and equity markets. Private credit has played a role as well. And I think if you kind of look back at the internet build out, the railroad impact and some of the other kind of industrial stuff we've seen, you know, it tends to get done if it's going to be profitable.

42:52And, you know, over time, we think this will happen as well. I think we're seeing, you know, the early advantages of it through everything we've done and even the banks themselves benefiting from it. So we think it's, you know, it's certainly going to have fits and starts and it's never a straight line. But it feels like there's another, you know, 18 to 24 months of, you know, pretty good healthy activity coming, you know, even if, you know, one month may not be as strong as you'd like. You mentioned the, you know, mark to market losses potentially in bond portfolios. What is the tangible impact of that?

43:22I mean, is it essentially just restrain book value growth or is it something you have to worry about another shoe drop? Yeah, you certainly, you know, keep an eye on it. Yeah, it's it's, you know, book value will be tougher to grow this quarter. You'll see some pressure on capital ratios. You know, maybe companies pull back on share repurchase, you know, for a little bit and rather use capital to focus more on loan growth. But, you know, we've seen kind of jumps in interest rates, you know, multiple times over the last few years. And, you know, the group kind of manages through it. I think some people have, you know, some nightmares of what happened with Silicon Valley back in March of 2023.

43:56And, you know, the banks that are here today are much different situations. That bank had, you know, 90 percent of its deposits uninsured. It didn't have contingent liquidity set up. You know, the banks that are left standing are much healthier. And you really don't have that kind of idiosyncratic issues we had back then. Jason, great to see you. Thank you. Good seeing you. Investors fear AI agents like Meta's Muse could disrupt the travel industry. Up next, we'll discuss why not all travel companies could be at risk. Closing Bell Overtime live from the Nasdaq market site. Be right back. Shares of Airbnb are up 20 percent this year, but the stock continues to be a battleground over whether it will be disrupted by AI or not.

44:34The share sold off in late September when Meta's Muse reignited those fears. Here's the bear case, is that if agents are doing the shopping that takes Airbnb away from the end user, limiting cross-sell revenue, and if the agents just shop by price, that makes it easier for competitors. Here's the argument, though, for Airbnb. Unlike shopping for products that are all the same everywhere, Airbnb listings are all different. They've got different locations, different amenities, and maybe most importantly, vacation shopping is something a lot of people actually like to do. They like looking at the pictures, seeing the homes themselves.

45:04They're not just buying, as one sub-sec put it, a pair of tube socks. So they're basically the same anywhere you get them. There are actually a lot of nuances and differences in the listings that you want to see yourself. Or even a generic hotel room, right? So I think that's the other distinction between other types of travel booking that might be vulnerable. On the other hand, I think there is a sense out there of AI will hunt for companies that are big toll takers and where their customers sort of resent them a little bit for how much they take in fees and how much friction there is. in some of the transactions.

45:36So I do think there's a risk out there. Maybe it can enhance competition and maybe there's more margin and things like that. But yeah, if you're a host, I'm not sure how many other places there are to go unless you want to just let AI do it all. By the way, that's the same sort of thinking for every service that is a big toll taker, right? No, exactly. That AI will be there to disrupt and to, you know, completely cut that toll. For sure. And we were talking about Salesforce earlier, B of A upgrading it. And I think there was a sense out there of like, do your customers actually like you? Or do they feel as if to?

46:06Yeah, that's right. They feel obligated. They feel like you have too much pricing power and they don't have as much agency in there. So we'll see how that goes. So tomorrow, bond market will reopen. We will see. And what was interesting today's session, the dollar index hit a new high today at the bond market. So we'll see if that sort of lift exists. Exactly. And I guess we were always watching South Korea market overnight as well, which was interesting last night. All right, that does it for overtime. Some of the most important design choices are the ones that go unnoticed. The details that together make an experience feel intuitive, comfortable, and above all, exhilarating.

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