Closing Bell Overtime: Markets Push Through the Anxiety 9/18/26

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0:55New customer offer for initial plan term only. Greater than 50 gigabytes may slow when network is busy. See terms. The Bell's bringing an end to the trading day at the NYSE. Citigroup bringing the closing bell in Electrotherapeutics. Closing up the trading week here at the NASDAQ. Welcome to Closing Bell Overtime. We are live from Studio B at the NASDAQ Market Site. I'm Melissa Lee along with Mike Santoli. Stocks mostly flat today. The Dow losing about 100 points. S &P 500 with a small gain. About half a percent gains for the NASDAQ indices. And on the week, a similar story. The Dow with a decline of about one and three quarters percent.

1:27You can blame Goldman Sachs for a lot of that. The S &P, a small loss, barely for the week. And the Nasdaq composite, Nasdaq 100, both were higher over the five days. Bond yields, a huge focus for the market this week. Volatile following the Fed decision on Wednesday. Yields did ease back yesterday, but have been rising again today. The 10-year, right at 5%. Oil meantime moving in the opposite direction, falling for the third straight day, ending the week around$99 a barrel. Let's get the first word on the close here. Eventful week. It seems like the markets escaped any real damage here, but is it too early to proclaim that?

2:03Probably so. It keeps kind of slipping the punches to some degree, but it's feeling it where it matters, where rates matter, where bond yields matter, where oil matters. So you just look at the consumer cycles. Banks had a very rough week, down 5 percent, the BKX index. And I think the continued question is, is this the market's way of digesting some of these challenges and sort of pricing in what the Fed is likely to do? And maybe we have a little bit of a stutter step in the AI growth story. Or, you know, is it kind of losing altitude here in this sideways fashion that we've been in for a while?

2:40I would note the, you know, all of August, we wanted to make sure we stayed above about 7620. And we're kind of right there, right at the lower edge of that range. Yeah, but to your point on consumer cyclicals, I mean, if you want to look at this market and say the Fed proclaimed this economy very strong, things are great. The underlying of the markets don't necessarily portray that when it comes to, you mentioned financials, but also industrials, consumer discretionary, materials, energy. A lot of these sort of cyclical sectors did not do well for the week. Right. The Main Street economy is not necessarily kind of showing a lot of momentum based on what the market is saying.

3:13It remains the AI CapEx story kind of driving things, and it does seem to be kind of setting the cost of capital as well. I think that's been the setup for a little while now. As we mentioned, a flat day for the broader markets, but a familiar theme reemerging as big tech and chip stocks hold up better. Seema Modi joins us here at the Nasdaq with more. Seema. Melissa and Mike, tech started strong with MAG7 ETF hitting a new all-time high. Hyperscalers rebounding, the triple Qs back above the 50-day moving average. A little bit of fading towards the close for some of the names, but the rebound in hyperscalers, we zoom back, has been notable.

3:45The standout meta up about 16 percent this month as excitement grows around its new agent, Metamuse, which is currently ranked number one in the app store. Also feeling gains. The expectation that if the Frontier Labs slow down, meta and other hyperscalers that have their own native AI offering could catch up. You talked about semis, Melissa, rebounding today after a bruising start to the week. Memory stocks, Micron, SanDisk, up as well as investors now count down to that U.S.-China summit next Thursday. That could have implications for this sector. Speaking of that meeting, Nucor and Steel Dynamics among the worst performers on the S &P 500.

4:20Both steelmakers issuing a conservative guide for their respective third quarter due in part to tariff uncertainty. Lennar, too, underperformed, results amplifying fresh concerns around rising mortgage rates, the impact on home building. RBC lowering its price target on this stock to 69 from 85. And guys, there are now nine sell ratings on this stock. Yeah, that's an unusual skew there of sell side sentiment. Thank you very much. The Fed's return to tightening is another test for equities, especially with yields still elevated and investors wrestling with the AI build out and inflation outlooks.

4:53Even with those concerns, money has been moving back into the trillion-dollar tech leaders, where investors may be seeing more durable earnings growth, stronger balance sheets, and AI tailwinds. So where does this leave the market set up in a sometimes turbulent time of the year? Joining us now is John Flood. He is Goldman Sachs head of America's Equities Execution Services. John, it's good to see you. Thank you so much for having me. So as we keep discussing, I mean, this market has had plenty of excuses maybe to sell off harder at the index level over the past few months. Another Fed rate hike this week.

5:24We get through that. You look at flows and sentiment and positioning and all these factors. Where does that lead you to believe the risk reward is from here? I believe that there is significant risk to the upside between now and year end. It's going to be volatile, but I think the trend of up and to the right is still intact. I think that the S &P 500 should pierce through 8000 before year end because there is a whole lot of negative sentiment out there and positioning is very light. Just build that up a little bit in terms of how positioning has has shifted, let's say, over the last couple of months.

5:58You see a lot of short exposure rising in futures products, in macro products. So hedge fund net exposure is very low right now. It's light as hedge funds, as institutional investors get worried about all that we have to grapple with in the market. Sorry, John, we got it here. President Trump is speaking. Because they're fake news. You get so tired of reading and seeing fake news. When you look at CNN, it's just fake. That's why their ratings are no good. When you look at MSNOW, which used to be MSNBC, which some people call MSDNC, Democratic National Committee, it's fake news. It's fake news.

6:44And excuse me, excuse me. And when you look at P.S. Politico, I mean, they got a government. The government under Biden gave him like eight million dollars to keep him afloat. And the stories they wrote are fake. So there's a lot of news. and there may be others to join them and maybe they can get better and would like to have men. But our country has to have honest news. You know, you don't have a country unless you have, as I say, borders, good voting. We're straightening them out. The borders are unbelievable. Nobody's come into our country in the last 17 months illegally. But you need borders and you need fair and free voting.

7:21And you know what you need? You need a free press. You need a fair press and CNN, and you know it, and everybody knows it. You're intelligent. I've known you a long time. You know how fake their reporting is. It's one-sided. It's never good. I've done many, many... Look at the story today about favored nations on drugs. We lowered the drug causes by 50%, 60%, 70%. They won't even put it... If they put it on, it'll be a negative. They will find a reason why that's a negative, okay? Why are you doing this ban now? Is there a particular reason? No, no reason. No, just because... No, it's really just cumulative stories over the last two years.

8:05You get sick of it. And you call them and you tell them, I have very good experts, like people behind me. Bobby Oz, they call and they try and explain things to... They know that they know it. They know it as well. They're smart people. But they purposely write negative news. And they do that because they want to try and diminish the Republicans and a Republican administration. And honestly, we've done a fantastic job. Look at the numbers. Look at the economic numbers. We have more money coming into our country today than ever before. We have the highest employment that we've ever had in history.

8:41All of these things are the lowest. We have the best poverty rate, the lowest poverty rate in the history of our country. And people are making more money today than they ever had. And we do have something that I'm very proud of. Iran will not have a nuclear weapon. Now, for that, people are going to have to pay some extra gas. I think most people, if they had a vote on lower gas prices or letting Iran have a nuclear weapon, I'd be willing to vote that it would be a massive landslide. People don't want to have Iran have a nuclear weapon. And you know what? They won't. And the war is going to end soon.

9:16And when it ends, your gas prices are going to drop to a level that they were before, maybe even lower. When I left Iowa, just before I started this, I had no choice. I said to my people, I'm going to have to do an excursion down to Iran, the Islamic Republic of Iran, because they're going to have a nuclear. If we don't hit them with the B-2 bombers, they right now would have a nuclear weapon. And if they had it, it would be a matter of days. I equate it somewhat to the Democrats. If they ever got into power, they will terminate the filibuster and they will immediately have D.C. as a state. They will immediately have many other things take place.

9:59But D.C. and Puerto Rico will become immediately. That gives them four more senators. That gives them lots of other things like 12 congressmen. They want to have ideally 21 Supreme Court justices. They will have everything they ever dreamed of. And frankly, Republicans should terminate the filibuster, because if you don't do it, they're going to do it. And you can't let that happen.

10:28Mr. President, Willie Nelson with Salem Media. Mr. President, reports say the holdout juror in the Lindsey Clancy case— Excuse me. Reports say the holdout juror in the Lindsey Clancy case— We've been listening to President Trump from the White House speaking after. He said that he would ban media outlets from the White House, including our sister network, MSNOW, CNN, Politico, among others. Obviously, this has had major impact on how outlets cover the news. It is unclear at this point whether these outlets will challenge the decision. We presume so. But, of course, we'll keep you posted on this all as it develops.

11:03Mike, very interesting. Yeah, no doubt about it. Not expected. He said there was no reason for it happening right now. Cumulative stories, he mentioned. Yep. Do want to get back to discussions of markets, John. I know you were talking about how you felt as if positioning had become much more defensive among institutions. And I assume that means you think that that is not reflective of fundamentals eroding. It's something that doesn't match up with how the underlying fundamentals are. Correct. Just extreme hedging happening in the market to combat all of the various macro headlines that we have to deal with.

11:36In our client conversations, oil rates, geopolitics come up constantly. But when we look at earnings, they've been stellar. Q2 earnings season was one of the best we've seen. And investors like was wasn't it all A.I.? No. If you look at S &P 500, Q2 earnings, X. AI, X energy, you know, with crude spiking, they still grew out 14 percent year over year. We think this trend is intact and we're bullish because earnings are very, very solid. At the same time, you're very bullish on one particular pocket exposed to AI or related to AI, and that would be software. So what do you see here? Because you're saying that this is what semis were 18 months ago.

12:15Correct. And the positioning there is very light. Hedge funds have started to cover shorts. There is no length in the sleeve of the market. And specifically within software, we like cybersecurity and data infrastructure. Protect the home front. Organized data are two themes that our institutional investors are going to start leaning into. You mentioned that it's where semis were a while ago and hedge funds are not really there in software. But it kind of reminds us that it's been such an either or market, right? You have all of these kind of paired up trades, these relationships that seem to dictate exactly what works on a given day.

12:50Is that just with us for now? And obviously, it's been helping to keep the index level volatility down. But is that just the market we have for a while? It is. As the multi-strap community continues to dominate a lot of the trading activity in the market and factors become more and more important, I think that the pair trades factor movements underneath the surface are here to stay. What kind of asterisk do you have on this bullishness if yields go considerably higher from here, 5.2 percent, let's say? So the market right now is pricing in three more hikes before year end of next year. Our economists are really good.

13:25We think we get one more 25 basis point hike this year and then two cuts next year. So it would take a lot for the market to have a hawkish surprise. That being said, when institutional investors rotate out of equities into bonds, it's all about the speed of move in rates. So if we see the 10-year yield hit 5.5 % before Halloween, it's essentially a two-standard deviation move over a one-month period. That is when you start to see assets move away from equities into bonds. That would be concerning to me. Is there anything to be aware of? I mean, we can recite the historical patterns of September-October weakness or there's some, you know, today we have this big options expiration.

14:04Things roll off. I don't know if that matters or not. or we just kind of, you know, don't worry about it because everybody knows already about seasonality. Seasonality for me, where we see it the most is because September is the number one fiscal year end month for the mutual fund communities in terms of, you know, year end. So you see a lot of tax loss selling. So I would not be surprised to see continued chop through September because of these large tax loss sales. But like we said, expect the volatility to continue. But when you have positive GDP growth, positive earnings growth, light positioning, negative sentiment, that's usually a solid brew to buy stocks.

14:42And if the ceiling is five and a half percent by Halloween, I mean, that that doesn't seem like it's within reach. I mean, that seems unlikely at this point. Highly unlikely. OK, John, great to see you. Thank you. Thanks so much for having me. Goldman Sachs. Warren Buffett stepping down as chairman of Berkshire Hathaway. In a note to shareholders, Buffett assured them Berkshire is in good hands with CEO of Greg Abel. And with Buffett's son Howard stepping in as chairman, he says Abel will run.

15:16Buffett is 96 years old, so this move was not unexpected. But for people who have watched and covered him for a long time, like Mike, it is an important milestone here. Yeah, I would say not unexpected just because of the realities of his age. But I don't think anybody necessarily would have said for sure that he would surrender the chairman's role before he passed away. So I do think that it represents an effort to keep this a methodical succession in every respect. He made the call on being transparent about when he was going to step down as CEO and also now as chair. And I think that if you're a shareholder, you want to say it's great that you have cultural continuity, but also fresh eyes and fresh energy in the CEO role.

15:59We'll see if that means a lot for capital allocation. And the ability to do things without the old guy sticking around. Now, he still owns a lot of the stock. You have to hope he's OK with it. But yes. There you have the close in Chicago at the SIBO. That bell marking the end of regular trading for options. Coming up, a firm launching a new AI model. It says underwrites loans better and faster. We'll talk to the company's CEO, Max Levchin, about his company's use of AI and the fears surrounding it. Over time, be right back.

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18:19Terms at VectorVest.com. A lot of focus this week has been on the dangers and threats from AI, but proponents talk about the tremendous good it can do for productivity. A firm touting a new AI underwriting model, which can analyze customer credit history and make a decision on what each borrower can responsibly pay and do it better than current systems. Which, again, brings up the question about whether AI will put human underwriters out of business. Joining us exclusively is Affirm founder and CEO, Max Levchin. Max, great to have you with us. Thank you for having me. So using this new AI tool, you're making more loans.

18:51You're making better loans. So how do you think about the impact on your business? I mean, obviously, more loans and ones that perform are good, but in other ways in terms of headcount or productivity. Well, certainly this model launch and the reason we're so excited about it, it's fundamentally about saying yes to more people, giving more folks access to credit while maintaining the same or better levels of loss. So we are finding efficient ways of lending money to people where we otherwise might have said no. So it's an unequivocally good thing. It is a product of 15 years of doing research and building AI and machine learning models.

19:31And so this is just a particularly exciting one, which is why we announced it. In terms of AI, at large, I'm a huge techno-optimist. I think we are living in the absolutely magical time. We're curing diseases. We're solving unsolvable math problems. So all things kept equal. We should be so lucky to be alive today. There's absolutely no question that safety and monitoring and evaluators, et cetera, it's all very, very important. But by and large, we are probably quarters away from foundational breakthroughs in all kinds of sciences, my own underwriting included. So it's just exciting. A firm, our stance from the very beginning, as this journey began with the attention paper a bunch of years ago was we want all the people we can have just to become more and more and more productive with these models and these tools.

20:24And that's what we've been doing. We've never had to let go of a person to buy more tokens. We've been able to quite economically put a lot of tokens to work to build some amazing things. Max, you mentioned that, you know, for 15 years, you've kind of developed these models and this machine learning kind of mechanism, these platforms. I know this is going to supplice the question, but what makes it AI? I mean, if we've been doing versions of this, we have a decision-making algorithm trying to knit together all of the different inputs that might determine somebody's creditworthiness. What has been the leap, if there has been one, through the kind of AI tools in particular?

21:03So at the risk of jumping into my computer science degree and giving to lengthy of a lecture, here's kind of the most simplistic way of thinking about it. The machine learning that now goes under the classical machine learning is pretty simple. You take a bunch of buckets of information. They have some number of dimensions, not that many. And a human decides what's worth looking at, what's not worth looking at. And then you build essentially a decision tree saying, oh, if this thing is here and we kind of know how to look at it, let's automate that. And to the left, good risks. To the right, the ones we're not so sure about.

21:38You do it again and again and again. You have this big decision tree at the end. The answer is either yes or no. And that's how machine learning, much more sophisticated, but foundationally kind of that way has been functioning for a very long time. Generative AI, transformers, all the things that are powered by, this is actually not new technologies that have been around since the 70s, but the current rebirth of that technology has fundamentally allowed us to broaden our ability to look at data far, far, far beyond what a human can look at. And so we represent information in these enormous multidimensional embeddings, as they call them, which allows us to understand things that a human may not be able to actually comprehend, even by looking very, very deeply.

22:20This question that you asked before, will human underwriters be out of business? Not really, but human underwriters could never do what we're doing with Transformers. And those of us who build these models marvel at the depth and complexity that we can extract just by building these things. And combining the two, the sort of a simpler decision tree like models with these extremely multidimensional models that allow us to dig deep into things like footnotes on your credit report, where you wrote in a letter saying, hey, the reason I was late is because I changed my address and the build didn't reach me in time.

22:53Traditional underwriting model would never look at it, but just discard it. How do you read these kind of nodes? And transformer-based one will absolutely take that in, make full use of it and say, hey, does this change the situation? And it does, so long as you generally believe people, which you should. This is a mitigating circumstance. And so the ability to take in all kinds of data that was never looked at before because we just had no machine or human, really, ways of doing it is now upon us. That's where all this new alpha comes from. So, Max, right now this new model is giving you an edge.

23:23But at some point, I mean, I would imagine every financial services firm that extends loans to anybody will use AI in some way to make loans better, to improve their ability to loan, etc. So isn't this sort of just keeping up with the competition in a way? Well, it's always good to be first. And we've been first for 15 years. If you look at our scale in the U.S., it's pretty clear that we've been first and successfully so and pulled away from the competition. So not to do my own work too much, but we've been able to come up with new ideas and move forward away from the rest, not the other way.

23:58But the other thing that makes it very, very defensible is just the data. So we don't just train these architectures in a vacuum. We have literally petabytes of data. And the whole idea behind Affirm was if we could capture more diverse data, these handwritten notes, the alternative data sources, information about things that aren't actually kept in credit reports, we can take all that and turn it into decision-based information and approve more people without having to charge them fees or compounding interest. And so we have an enormous advantage in a form of just approved loans and many, many years of looking at their performance.

24:37That's why we're able to do this model relatively quickly and test it and measure its exact impact. So so long as everybody's moving scientifically, progress wise, at roughly the same speed, we're gathering data faster than anyone else. Our next model will outperform this one. I can guarantee that and so on and so on. And so I suspect we are in probably better shape than we've ever been and will be in better shape this time next year. All right. It'll be a challenge for those people who say, here's how to improve your credit score, because those were pretty simplistic means. But you have an obviously more comprehensive view.

25:11The best way to improve any credit score is to pay your bills on time. That's all it takes. Got it. Max, great to talk to you. Thank you so much. from Affirm. 2026 was supposed to be the year of the IPO with SpaceX to be followed by OpenAI and Anthropics. Still could be. Well, that led to a lot of fears of money chasing a few offerings. But with those AI issues potentially on pause, how has the money been moving? We'll discuss that next on a live.

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27:29Welcome back. You know, in the first part of this year, one of the big concerns that was out large in the market was that there was going to be so much new equity supply from big IPOs that it might kind of swamp the demand for stocks. That hasn't really happened that way. Here is net equity supply and demand. This is IPO proceeds year to date, essentially. It's kind of a quarterly number. But it's actually exceeded by the amount of stock being taken out of the market by take privates or buyouts, essentially leverage buyouts. So, so far, anyway, we're running ahead. Of course, there's still also corporate buybacks happening.

28:02Might be one explanation for why the big cap indexes have managed to hang in there. Obviously, we have more to come in terms of big offerings. But so far, it has not been too much of an imbalance at this point. Now, take a look at how IPO, recent IPO stocks have performed basically since the SpaceX IPO. This is quarter to date, so since June 30th. These are two ETFs that basically hold new stocks down 12 percent. So there was a big stampede of optimism in IPO type stocks. They've obviously gone away. The other chart, does it take into consideration lockup expirations? No, it's actually just proceeds.

28:35So it's initial IPO proceeds. And so you'd have to layer on lockups, secondary sales, all that stuff. So it's not necessarily a one for one, but it definitely shows that it isn't all kind of one way. A lot of stock being dumped at once. Time now for CNBC News Update with Julia Worcester. Julia. Melissa, more U.S. troops have reportedly died in Iran. The Iran war than has previously been disclosed. The Washington Post reporting today there have been at least 22 military fatalities, four more than what is reported in the Pentagon's defense casualty analysis system. The Washington Post says the Pentagon did not address questions about the discrepancy.

29:13A federal judge ruled today the Trump administration illegally canceled $7 billion intended to expand solar energy in low-income communities. The program lost its funding as a result of the One Big Beautiful Bill Act, but the judge says the EPA exceeded its authority when it rescinded the previously awarded grants. And in another court loss for the Trump administration, a federal appeals court ruled today a policy allowing for the rapid deportation of migrants to countries other than their own is illegal. A panel of judges upheld a lower court ruling that migrants must have a chance to raise safety concerns before they are sent to a so-called third country.

29:53Back over to you. Julia, thank you, Julie Borsten. Emerging markets have been significantly beating the S &P 500 this year. Up next, we'll discuss the bond side of that equation. And shares of Accenture jumping after hours. It is partnering with Anthropic to evaluate its frontier AI models, saying both companies plan to invest at least a billion dollars in AI safety over the next five years.

30:22Let's get back to the White House before President Trump's ban of some media networks. Eamon Javers got the latest. Eamon. Yeah, Melissa, I wanted to give you an unusual shot that we're not used to seeing here from the White House, because despite the really dramatic and unprecedented nature of the president's social media post about an hour and a half ago that he's banning certain media outlets from the White House, including MSNOW, CNN, and Politico. There's really no unusual activity here at the White House on the North Lawn at all. No unusual press office activity, no unusual Secret Service activity.

30:53The outlets continue to be here and broadcast from the White House. I want to give you just a sense of how the sort of physical location works. These are the White House broadcast tents. So all of the TV networks have tents here, including us. The MSNOW tent is right here in the green, and you can see that just behind me. That's a tent that, in full disclosure, we share with MSNOW through our joint ownership by Versant. CNN is just down the line. No unusual activity there. Both outlets continue to broadcast. And I'll show you over here. This is where you see the White House press briefing room, this sort of low-slung white area over there.

31:29No unusual activity at the White House press briefing room either. The president was just asked about this a short time ago. And what he said was he's banning these outlets because he feels they're fake news. He feels that no court in the land would support media organizations continuing to post what he calls false information. But to be clear, the president has faced legal challenges in the past trying to ban specific reporters, taking their credentials, banning entire media outlets from entering the Oval Office, that sort of thing. He has tried that in the past. It hasn't always stood up in court.

32:02He's been overturned several times. The president said whether or not this one is overturned, you know, that will probably go through the courts. And we do have a statement now, I believe, from CNN. They just posted a statement reacting to this. They say CNN stands fully behind our White House team and their fair and accurate reporting. We have a right under the U.S. Constitution to do that reporting without hindrance or interference from the government. should the ban which President Trump threatened go ahead, it would be an illegal assault on that fundamental and constitutionally protected right.

32:36So, Melissa, a showdown here over press access, freedom of speech, and the First Amendment. But as you can see behind me here, really no unusual activity. We don't see any sign that the staff here at the White House is trying to eject any reporters or anything like that to follow up on the president's social media message. So as of now, it's just social media noise. We'll see if the White House tries to take some steps to put it into action. Back over to you. I would imagine, Eamon, that there is a case being made that he's not preventing any outlet from actually reporting on the White House or its affairs.

33:07He's just preventing them from being at, physically, the White House. Right. The president was asked about that just a short time ago. And he said, look, I feel I have the right to ban them from my, and then he said, from the people's house. And that's the ultimate debate here is, does the president have the right to exclude media organizations who are protected under the First Amendment from this physical space where I'm standing right now. This is the White House North Lawn, obviously the West Wing, the press office behind me, and the main White House residents. There are varying levels of access, and over the years that has been eroded.

33:42But the White House Press Corps has always maintained the ability to report from these grounds. And to be here in person really matters for your White House reporting. You do have the opportunity, as restricted as it is, to see some White House officials in person to ask them questions, to talk to the press staff, to get a feel of it, to go into events with the president. So what they're talking about here is potentially ejecting those outlets from the White House grounds altogether. That's never been done before, and we'll see if it holds up in court. Eamon, thank you. Eamon Javers from the White House.

34:12A new report is blaming staff at the Federal Reserve for the collapse of Silicon Valley Bank three years ago. Senior economics writer Matt Peterson joins us now. Matt, great to have you with us. What did the report find? It found that the Fed knew or should have known that Silicon Valley Bank was vulnerable, and it should have known this as much as a year in advance of the actual collapse of the bank, which, you know, that happened very dramatically in March 2023, and then the Fed and the FDIC had to step in and rescue the bank. And so in the wake of this, there's been a lot of kind of, you know, soul searching at the Fed, and this is the latest round of it.

34:48It's actually the third such report that we've gotten out of the Fed. And what are the implications of what might happen as a result of this, if anything? Well, some of it's already happening. And this is what we heard from Michelle Bowman, who's the Fed's top regulator. She said, I'm already starting to change how we regulate. I mean, she said that this report found that the Fed was overcautious. And she says, you know, her new regulators are not going to be like that. She's also thinned the regulatory staff quite a bit. She's said that they will cut that staff by as much as 30 percent. That's already underway.

35:21You can see the staff changes on the Fed's website. They've dropped a bunch of big names from their regulatory division. They're already gone. So in some sense, this is just a ratification of the path that the Fed is already on under Michelle Bowman. I thought what was interesting also was the finding that that would happen at Silicon Valley Bank is not because of the regulatory framework, which basically gives a green light to what the Fed is doing now. And so So can it be viewed in any way as political because there had been some dispute over how the contract was awarded to this outside group and who is actually connected to this outside group in terms of Republicans?

35:53Right. So that's very much how this is being read politically in some corners. I mean, the White House put out a statement immediately under the name of one of the White House spokespeople, which is somewhat unusual. They attacked this very directly and said, you know, we put this at the feet of Michael Barr. Michael Barr is a current Fed governor who used to be the Fed's top regulator. He was in charge of regulation at the Fed when Silicon Valley Bank blew up. And he issued a report back April 2023, so almost immediately afterwards, saying, you know, in fact, it was this lightning of regulation at the Fed that was in part responsible for this failure.

36:31Although he's also very critical of the Fed as an institution as well. But so now the new Fed top regulator is saying, well, it wasn't the changes in the way we think about regulation. It was just how we did our job. Right. And that sounds a lot like it was the fault of the guy whose job it was to do that. And so people are expecting that maybe there may be another shoe to drop in terms of trying to get Michael Barr off of the board of governors. Yeah. Interesting. Matt, thanks very much. All right. A lot of attention on bonds this week, of course, following the Fed decision. The 10-year yield right at 5 percent.

37:05A lot of bond and central bank activity around the world as well. We'll discuss it all.

37:14The Emerging Markets Index is closing lower this week after the Fed's rate hike. Despite the volatility they have faced from rates and rising energy prices, emerging markets are actually outperforming the S &P 500 this year. Joining us now to talk more about the emerging market landscape is Pramal Dhawan. He is PIMCO's head of emerging markets. Pramal, it's great to have you. Interested to see you say that the emerging markets are winning the policy credibility race relative to developed markets. Talk a bit about that. Well, Mike, thanks very much for having me back again. We're very excited about emerging market assets.

37:47We think the outperformance that you mentioned, that can continue into the rest of this year and into next year and beyond. And it's really underpinned by three key factors. Firstly, cheap valuations. When we look across equity or fixed income valuations, emerging markets have a significant discount to that of their developed market peers. Some great companies generating really good free cash flow, particularly out of South Korea and Taiwan as well. The second factor is credit impulse. We're at the highest level of credit impulse across emerging markets that we've seen since the global financial crisis.

38:19And that's helping to raise nominal growth. And finally, an ode to your comment, is just on the monetary policy side. We've seen quite front-footed emerging market policy reaction with regards to inflation and central banks raising rates very, very quickly and being very prudent around cutting rates. And that's really brought inflation back down in emerging markets, so much so that inflation in emerging markets, excluding China, is now lower than that in the United States. So high growth, cheap valuations and low inflation, I think that really underpins the emerging market asset story. Which emerging markets look the best to you, Pramil?

38:56And how do you think about, you know, high commodity prices, for instance, as you know, as you sort of think about which ones look attractive? Yeah, we really like Latin America. We think it sort of threads the needle well between the high commodity price story, U.S. policy support, and a pendulum that's sort of moving towards more market-friendly governance. And you sort of couple that with cheap valuations in Brazil, in Colombia. The rally's been very impressive across Argentina this year. I think Latin America is just a very durable story. And in many ways, sub-Saharan Africa has a similar sort of playbook than Latin America, albeit Latin America benefits from the U.S.

39:34policy put, Sub-Saharan Africa typically more from the Chinese policy put. But again, these are two stories that are very much tied to the commodity story. And we sort of think about the world across AI and commodity vectors. Really hard to build durable portfolios that can work in lots of states of the world without thinking about emerging markets. So we would be very much on the front foot across those two regions. I guess by implication, the ones that you prefer mean that you're not as interested in those couple of emerging markets you mentioned earlier, Taiwan and South Korea, which have basically been an AI trade.

40:09Well, look, they're going to continue to benefit from the widening AI Catholics. We're seeing AI data centers move beyond the U.S. borders because of the political issues that we have here. We're seeing data centers being built out across East Asia, across Latin America, in Kazakhstan as well. So I think the story is widening out and that will set to the rising tide will sort of lift all boats there. You know, when you look across the free cash flow generation in Taiwan and South Korea, they're still very, very strong. There's still two countries with great current account surpluses. But it is an AI story.

40:46It's hard to sort of get away from the fact that there's very little diversification across the equity markets. It's one trade expressed in lots of different countries and lots of different themes. We almost think to ourselves, if you want diversification, you need to do that in fixed income. And we need to have much more of a global thought process. How do you think about U.S. yields and, you know, by impact, the U.S. dollar in thinking about emerging market trades? Well, look, it's hard to say that the 5 % on 10-year treasuries is the right level. Could it go a little bit higher? Sure, it can.

41:20And I think that the more that we think about it, we think about states of the world where this particular yield offers a lot of cushion. If you sort of build a globally diversified portfolio with some sensible spread, you can sort of bump into that seven, seven and a half percent type type yield. And that is a really positive yield for us. A lot of things have to go wrong for you to sort of lose money in that state of the world. And of course, if you get an AI winter scenario, everyone's thinking about inflation right now. But there are lots of paths to deflation, lots of paths to an AI bubble popping.

41:53And in that case, the insurance that that high quality fixed income provides you is going to be needed. And we sort of think to ourselves right now, PIMCO, you can build those portfolios relatively robustly. You can get paid for that insurance and protect yourself against a scenario which is still a tail, but one in which is starting to rise in probability. Yeah. So the diversification value is still there, despite what some folks would say about global fixed income. Pramil, thanks so much. Good to talk to you. Thanks for having me, Mike. All right. Just a month after he downgraded stocks, Warren Pies is reversing course and says investors should be buying back into this market right now.

42:29He lays out his case straight ahead.

42:38AI leadership is back. Tech was the only S &P sector hired today. Semis rallying and the MAG-7 trade is pushing back toward record territory. Does that make this the moment to get more aggressive on equities? With us now is Warren Pies, 314 Research co-founder. Warren, you think so? You're reversing course here. Why? Yeah, thank you for having me. It was a little over a month ago, August 10th, where we downgraded equities from an overweight to benchmark weight. And our primary concern at that point in time was the market had underpriced the risk of a Fed rate hike. And so our view is that as those probabilities shifted and we approached this September meeting, you would see a repricing in the rates market.

43:17And that could cause problems for the equities for equities. And that's basically what we got. We had two-year yield rise, 40, 45 basis points, 10-year rise, 30, 35 basis points. And the Fed ultimately hiked. The S &P 500 really weathered that quite well. We were down a couple percent from our downgrade, some pockets of weakness with financials and industrials and things like that. But when I look out from here, I think that the Fed was pretty, I know there's many interpretations on what the Fed was signaling yesterday. I think it's one more hike with a pretty high bar to an additional hike. I think that translates in the market's mind.

43:56The market's going to see that closer to like a 1997 one hike and done type of cycle. And it honestly just clears the decks and allows everyone to focus back on the earnings story and the AI story. And so I think it's time to, I think the Fed cleared the decks. It was a clearing event. Yields have repriced. And it's time to push back into the equity trade. I guess, you know, we can guess on what the outlook is like in terms of Fed subsequent hikes and things like that. But to say that they think it's one more, I think maybe overstates how much they have decided. Right. I mean, in other words, it's going to be somewhat data dependent, I would assume.

44:38And the 97 example, it was one. But who knows if it was intended to be one at the start because you got the Asian financial crisis hitting not that long after that. Yeah, it's always the data can always change. So I like yesterday because for one moment in time, every the data is all frozen and we know what the Fed's reaction. We have an idea of what the Fed's reaction function is. And so from that point, I think you can read the tea leaves of the SEP and see two things that I think are really give us a high bar to that third hike. So we have one already. I think we get one more high bar to the next one.

45:12Two things I would look at. Core PCE projected out the 3.4 percent in the median SEP forecast. That doesn't account for the revisions we're about to get. I think that's a very high bar that's going to be easy for inflation data to come under and the Fed can declare a little victory there. And number two, 4.1 % unemployment rate in 27 and in 28 in the Fed's SEP. That shows to me, like, given their idea for higher for longer, it also assumes the labor market won't weaken even a little bit. So when I look at those things and weigh them all together, and of course, yeah, it's going to be data dependent.

45:48I think it's a two-hike little mini-cycle and then a pretty solid bar to get over for the next hike. So within this overweight, Warren, is it tech? That leads us higher. I mean, where in tech? Yeah, I think it's hyperscalers first, and then semis right after that. And it's got to be a tech. This is going to be a tech-led rally if it works out the way we envision it. I think we didn't upgrade bonds yet. We're still underweight bonds. I think the two-year is at fair value. The 10-year might have another 10 or 15 basis points to reprice. I think the curve's a little flat here. So to me, it says that narrow mega cap leadership is going to be the place to be while that process is ongoing.

46:31Once we get a little higher yields or we get all clear on the fixed income side, you might be able to broaden the rally out. But this is going to be tech. It's hyperscalers. The real news that was fundamental that I think went underappreciated by the market on the same day the Fed hiked was that Nebius, this neocloud, hiked their on-demand GPU rental rates. And so everything we see is pointing to this crazy demand for compute. So you want to be long compute. You want to be long the hyperscalers. And the semis, they have to get back into gear. So our line in the sand on this trade is if the semis break below that Leopold low, then we're probably wrong.

47:08But a day like today was very encouraging for the metrics we laid out. Warren, great to see you. Thanks. Have a good weekend. Thanks for having me. Let's get you set up with next week's trade. Earnings season grinding to a halt, but we do get results from AutoZone, KB Home on Tuesday, General Mills on Wednesday, Darden Restaurants and Costco on Thursday. And on the economic front, we will get the S &P Global Flash Manufacturing and Services Purchasing Managers Indices on Wednesday, weekly jobless claims and new home sales out on Thursday. And we will get durable goods orders and consumer sentiment on Friday.

47:41We also have a bunch of investor days next week like Movo, Nike, McDonald's. season and we will probably get a ton of fed speak because now they're free to get out on the road and we'll see how they characterize what they did and what they're likely to do next. All right, have a good weekend. It does for overtime. Fast Money starts right after this.

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