Will Markets Keep Ignoring Iran Tensions?... And The AI Race to Supremacy 7/20/26

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0:39Now you can easily make your voice heard. Vanguard Investor Choice gives you a say in the companies you invest in. With just a few taps, you can set your proxy voting preference for your index funds. Visit vanguard.com slash investorchoice to learn more. Vanguard Investors own shares of our index funds, which own shares of the companies they invest in. Available for Vanguard Index funds that participate in Investor Choice. Vanguard Marketing Corporation Distributor. Live from the Nasdaq market side in the heart of New York City's Times Square, this is Fast Money. Here's what's on tap tonight. Giving up gains, stocks steadily falling during the session, major indices all closing in the red as investors start to digest the impact of rising tensions in the Middle East.

1:14We've got the very latest developments and how they'll likely play out in the markets. And the race for AI supremacy, how the latest offerings from Alibaba and Moonshot stack up against homegrown models and how it'll impact the U.S. hyperscalers. Plus, Bitcoin gets a bounce. Oracle closes at a more than two-year low. And the latest stock's taking a hit from the cyclopsoriasis outbreak. You know, that parasitic outbreak. How long could the impact last? I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Steve Grasso, Karen Feinerman, Dan Nathan, and Guy Adami. We'll get to the latest out of Iran in just a moment.

1:49But we want to start with other breaking news out of Washington. The White House just announcing new tariffs on Canada. Let's get to Eamon Javers for those details. Melissa, that's right. President Trump is using an unusual tariff authority to impose significant new duties on Canadian imports. Senior administration officials said in a conference call this hour, the president has signed three proclamations pursuant to Section 338 of the Tariff Act of 1930 to impose additional 50 percent tariffs on certain goods coming from Canada, they said, ranging from wine to hockey sticks to cement. Now, these new tariffs will take effect 30 days after the signing.

2:27Section 338 has been on the books for years, but it hasn't been used to enact tariffs before. So we can expect that this will be challenged in court as a part of this ongoing debate about the scope of the president's tariff authority. And now, according to senior administration officials, the new Canadian tariffs apply to all designated goods, whether or not those goods are compliant with the existing trade framework known as USMCA. That's a signal that the administration is willing to further undermine the USMCA agreement with Canada. But at the same time, U.S. Trade Representative Jamison Greer is heading to Mexico this week to negotiate terms for that country's agreement under USMCA.

3:07So that suggests that Washington is far more eager for a trade deal with Mexico than with Canada upending the previous trilateral approach. And we'll wait for the reaction from the Canadian side once this news is public, guys. Is there a reason for these additional tariffs, Eamon, because the president had alluded to levying tariffs because of the wildfires and the cost of the United States? Yeah, officials on this conference call were asked that question and they said these are not wildfire tariffs. They said these are the result of an ongoing process that's been going on for months and just happens to coincide with the president's remark last week about imposing tariffs in response to the wildfires.

3:46All right, Eamon, thanks. We'll see you in just a minute. Eamon Javers in Washington. So our neighbor to the north no longer, I guess. So we're going to look at more tariffs potentially. You know when you're a pro is when you're able to say Canadian wine and hockey sticks without laughing. I mean, yeah, without laughing. Let's note you did laugh. Of course, because it's absurd. Anyway, I don't know if you can trade it. But what I'll say on the margins, it's one more reason, in my opinion, to be bearish of the bond market. I mean, these things continue to sort of line up and it continued to, in my opinion, put pressure on things in terms of the inflation problem.

4:21So I think if anything, it's bond negative. Just when we thought the impact on tariffs was waning. But it's not just that. I mean, our largest importer is oil from Canada, right? And if you think about lumber, you think about auto parts. I mean, who eats this, right? I think we're at a point where, given the inflationary situation we are right now, the dislocations that we have in supply chains because of this war, I mean, it kind of just speaks to the fact that inflation is likely to be sticky right here. And I think to Guy's point, that keeps yields where they are. It's kind of bid. So it's kind of surprising.

4:53I wasn't expecting any hockey stick news or anything like that today. But here we are. I don't know. I kind of I feel like it's a little bit of theater, which Trump loves to do. and that this may not really happen at all. And he was also in the private box with Prime Minister Carney and the president of Mexico yesterday at the FIFA finals. So I got to figure if something came up on this. I think the market's going to look directly through this. He's lost in the Supreme Court on a lot of these. I don't think the market's going to pay attention to this. All right. Let's turn now to Iran and the very latest developments there in the Middle East.

5:32CENTCOM announcing a new round of strikes in just the last hour. Let's get back to Eamon for the details. Eamon. Yeah, Melissa, that's right. CENTCOM said U.S. forces began that new round of strikes this afternoon against Iran beginning at 4 p.m. Eastern time. Now, that comes after the White House said President Trump will attend the dignified transfer of the remains of the American soldiers who were killed in Iranian airstrikes over the weekend. That transfer will be at Dover Air Force Base tomorrow. The Pentagon identified two of the American soldiers who were killed in Iranian strikes over the weekend.

6:05First Lieutenant Tyler James Feehan, 25, of Ava Beach, Hawaii, and Private Isabella Gonzalez, 19, of Carrollton, Texas, were killed in strikes on U.S. forces stationed in Jordan. According to new data from the Pentagon, as of today, a total of 427 Americans have been wounded so far in Operation Epic Fury. And on social media today, President Trump wrote, every time Iran kills an American soldier, they will pay for that killing many times over. Meanwhile, Houthi leaders in Yemen this morning declared a maritime embargo against Saudi Arabia, which they said will be effective immediately. That threatens one of the alternate routes for oil out of the Middle East.

6:49The Houthis, who are closely linked with Iran, have threatened to close the important Bab al-Mandeb Strait, which is a route that the Saudis have used to divert millions of barrels of oil each day through a pipeline to the Red Sea. You can see it there. And the British military also today said a second ship was attacked in the Strait of Hormuz today, this one off the coast of the United Arab Emirates. So the conflict is continuing. Melissa, back over to you. Yeah. Is there are there any responses or comments from other countries in the Middle East that are viewed as our allies there? Because they seem to be getting hit in a more fierce way than in the past.

7:29Kuwait last week suffered a lot of hits to their infrastructure. And then you have this potential blockage, which would impact Saudi. There are reports of several diplomatic initiatives, the idea being countries in the region want to deescalate tensions as quickly as they can and not let this outbreak of renewed warfare expand further into the region. It's just not clear how successful that diplomacy will be. It seems like both sides are really spoiling for a fight here. And the reaction in the U.S. side to these American casualties, now that additional American soldiers are dying in this battle, you see Pete Hegseth, for example, Secretary of Defense at the Pentagon, saying this only renews our commitment to this effort.

8:11So I think there's a sort of a doubling down effect that happens when you see American casualties like this. Yeah. Eamon, thank you. Eamon Jabbers in Washington for us. You heard Eamon's report and you said, guess how the markets did today. I don't know if you'd say flat. Yeah. It seems like things are worse here. No doubt. I think things are worse and I don't think things are going to get anywhere. I think markedly better anytime soon. And the things we've been talking about continue to work. and refiners, PSX, all-time high. Marathon Petroleum, Valero, all-time highs. OIH getting off the mat, although closed lower today.

8:47And even the big cap integrated names are starting to bounce. So regardless of what you think about the price of crude oil, which, by the way, I think will go higher, I think you've got to stay low on these energy stocks. Yeah, and when oil goes up, that's a sticky price. So the refiners spread, the crack spread, what they actually refine and what they sell it for, those prices stay static a lot longer than that input price can fluctuate dramatically, giving them a better margin on it. So if you're going to be in that space, sounds like there's going to be an underlying bid in the energy space.

9:15I would just continue to stay with the refiners. So I was surprised. I mean, coming in last night, coming into today was really not looking so good. I was surprised, happy to see the sort of tensions cooling a little bit in the morning. But I was surprised as the day went on that oil wasn't higher. Yeah, I would have thought that it would go higher. So, you know, I'm long energy, and every time energy comes in off of some good news, I look to add. But I think the market is just sort of waiting. AI trade has been everything, and all right, we've got to see what are they actually going to earn, what are they going to tell us.

9:49Yeah, semis and software were okay today. I mean, they were weak towards the end, but they were okay relative to the broader markets. Horrible price action, though. I mean, when you think about it, we've seen this back and forth with semis. I mean, Friday was a very bad day, and if you look at today, so it was a nice little bounce. I think Semi's memory, they were definitely oversold on a near-term basis. But the fact that they opened up and closed the way they do, I mean, the SMH almost closed down on the day, right? And you saw some huge reversals from stocks that were up 5%, 6%, 7%. So, you know, this is one where I think you're going to continue to sell rallies in this space.

10:20And, you know, just use Intel as an example. I mean, here's a stock that was an absolute darling. It was, you know, late to the party for a whole host of reasons. And then, you know, the thing's down 30 % right now. Now, there is a gap below here going back to their last quarterly report that it really feels like it has the potential to go and fill. That would be cutting the stock in half from those recent all-time highs. And when you get to some of these reports over the next couple of weeks, I'm just hard-pressed to think that the guidance that these companies are going to be able to give will not be discounted.

10:49Now, it depends how oversold that they are. The further oversold they get, the higher the potential they have to pop. But I'm just not sure they're sustainable at this stage of the game. Or they can give good reports and they can have good guidance and they can still have the reaction that would that's hostile, basically down. Which we've seen in the last couple of quarters. Yeah, with the memory stocks. I mean, if you go back two quarters ago, it happened in Micron. It happened again. I mean, Micron made an all time high at twelve hundred and change, traded down to the prior all time high in May of eight oh five, which we flagged should have been support.

11:20And it was. But it's like the bounce has been that resounding. So to your point, you could still have great quarters and bad price action. Should we rethink this AI trade at this point? I mean, given with moonshots, Kimmy K3 and Alibaba Quinn, I mean, and just the whole narrative prior to those releases of are we overspending is are we going to get the money back from our spend? I don't know is the short answer, but I do really want to hear from. I mean, that's why it's going to be so interesting. I do think that the demand side of the equation is so enormous and doesn't get as much focus as the supply side and the competition.

11:58And so I'm still at the moment going into earnings, staying long. It's about free cash flow. I've been saying this for weeks now. If you look at it, there's a correlation between the two. stock price once they're eliminating that free cash flow. Look at with an Oracle where they went cash flow negative. Look at where any of these companies that used to just be stockpiling money, free cash flow margins through the roof. Once those start to disintegrate, investors lose patience with that story. And I think that's the near term and to the entire AI story. All right. Another big catalyst for markets, of course, we've been talking about it, earnings.

12:31For more on how that could impact stocks, let's bring in Chris Harvey, head of Equity and Portfolio Strategy at CIBC Capital Markets. Chris, great to see you. Great to see you. Are there risks to the upside or to the downside out of earnings season right here with the markets at these levels? Okay. Trick question because... It is a trick question, but you know. On the fundamentals, the fundamentals are good to great, but the issue that's overhanging the market right now is rates and what was on before. Oil keeps creeping up, rates keep creeping up, And there's concern. And we still have to hear from large cap tech, such as Google on Wednesday.

13:09I think fundamentals will eventually power us forward. But rates are hard to keep down at this point in time. And that's causing equities to look, quote unquote, tired, if you will. Yeah, that's the story. Rates for 60 today is below 460. But when does the market really start to matter in a meaningful way? I think what you need to have, you need to have Kevin Warsh come out and say, we're not raising rates. Until you have that, the hawkishness is there. The concern is that they could raise rates. Oil going higher pushes it up as well. And so we need to have the Fed come out and say, we're good here.

13:45So Kevin Warsh, I don't think, will come out and say we will not raise rates, even if he wanted to say we will not raise rates. because that is, it seems, the new Kevin Warsh way to not tip their hand at all. Why should they? He'll say we have a task force for that, and he'll defer to him. Now, what he will say is we'll probably get enough. Hopefully we'll get nothing done. And for the summertime, we'll be OK. But I agree with you. He won't go out and give you forward guidance. He said he's not going to give you forward guidance, so you can't expect much. But once we get through that, you don't raise rates, then I think we can feel a little bit more comfortable because one of the things he did say is we're going to have a good family fight about raising rates.

14:25And if they come out and they say we're good here, I think the market can go higher. Chris, you spend a lot of time talking to institutional investors, right? And I think it is probably as tricky for them as it is for many of us right here. How do you think positioning is right now? Because, you know, despite the weakness that we're seeing in a lot of like large cap tech stocks of late, you know, the S &P really hangs in there. You know, it's acts on a relative basis much better than S &P 500. I'm just curious how you think funds are positioned right now. So if you look at hedge funds, hedge funds position a little bit different than long only's.

14:58Let's start with this. If you were related to gold, if you're a gold player, if you're a memory player, if you're a mode player, the conversation we're having is, Chris, when is it over? Make it stop. I'm in a lot of pain. If I'm talking to more diversified funds, they're saying, this is fine. This is good. But we can do, we're having very good stock picking across the board. And they're saying, yeah, we're concerned about the macro, but our stock selection is doing fantastic, whether it's in industrials, technology, utilities, or elsewhere. So it's a little bit different depending on who you're talking to.

15:31So, Chris, when you look at small caps, the outperformance is, we've been waiting for this forever to have some ongoing longevity to an outperformance of the small caps. When you see that, when you see people wanting to rotate at a large cap, where do you see them putting money? It's not. So we talk about small caps, but allocators are not putting money to small caps. What they're doing is they're looking for more diverse funds. They're they're looking over in Europe. They're looking for value, value funds. The hedge, as you know, is energy. So energy funds, they waxed and waned. But that at the margin is the place where people are putting money.

16:09Again, people talk about small caps, but I'm just not seeing that allocation. And lastly, what is quality, Mo? Good balance sheets with things that are working. And that's what you like. That's what we like. Can you give us just an example, just so we have an idea of what the hyperscalers should do? There's some hyperscalers. It's really across the board. So in utilities, it's some of your Genco integrated. In industrials, it's some of your AI beneficiaries. It's your cats of the world. In tech, it's a smattering. You have it in hardware, a couple software, but more so in hardware. Okay. Chris, thanks.

16:43Good to see you. Good to see you, too. CIBC. Why am I smiling? Yeah, why are you? I don't know. We're talking about very serious things here. We are extraordinarily. But Chris brought up Jenko. And, of course, you know the first thing I thought of, Mel, because we talked about it, is olive oil, as Steve just said. Oh, right. Not in Popeye's girlfriend you're talking about. No, no, no, no, no. Jenko, olive oil. You know this. Of course. Now, I don't know about the Mo thing you talked about, but I will tell you that the market's going to start to care about rates. And again, you know, the bond market can't get out of its own rate.

17:13What are you saying about Kevin Warsh? I'm with Karen. He's not going to backtrack on this. I don't even know if it matters, quite frankly. I think the market's doing it for him. A lot of people, though, will say it's the trajectory of the rate increase. And right now it's been kind of slow and steady. Not steady, but slow. It's stuck, though. I mean, like you might say that it's got an upward bias here. We were higher, you know, within the last year. And so we're stuck here around 455 or something like that. You know, going to the quality mode, though, you know, Google is going to be really interesting a week, week and a half before the rest of its competitors.

17:44And, you know, if you go back to Q1, GCP was the fastest growing cloud business, right? It was like 60 percent. You saw the headline today about a new chip that's going to be embedded with this model, you know, architecture, that sort of thing. But then you've got to go back to last week when the latest Gemini mile is being pushed out. I still think Google is probably the best position to get, you know, some investor backing here. And, you know, CapEx is the thing. Right. And I have no idea if any of these companies cut CapEx because for whatever reason, they've achieved certain goals about where they want to be or, you know what I mean, they continue to raise.

18:19And I just can't imagine that that's going to be beneficial. Or they can at least indicate maybe that they won't be raising any more capital or issuing any more debt, perhaps, to fund CapEx. So looking where Google was before the last quarter announcement, which was huge, right? With that, I think it was 68 % for Google Cloud. We are within 1 % of where that is. A lot's happened since then. And yet, so it was up huge on that. And then we had some of the stories you're talking about and, you know, people cutting back on token spend and all of that. And I think the story is just going to kind of continue.

18:54They are in the position to be able to spend the money. What I want to hear, though, we talk about it all the time, return on invested capital. I don't know if they'll tell us, but they should. I think it's going to be not a backseat conversation during this earnings run about CapEx, but I think you have to eventually start trimming those projections because it was OK when you were spending your own money. It's not OK when you're borrowing and raising debt to fund that CapEx story. Google is a different story. Dan talked about their chip. Their chip is pulling away from NVIDIA. Amazon's making their own chip.

19:26Google's making their own chip. So a lot of this stuff is coming out of the pocketbook of an NVIDIA. So what's good for the hyperscalers could be a negative for NVIDIA. NVIDIA has been the poster child for this whole AI story. Coming up cracks in Oracle's crystal ball, the company's AI buildout, reportedly facing major cost surprises. More on the true cost of scaling up next, plus a food safety overhang for restaurant stocks. How similar outbreaks have taken a bite out of this trade in the past and what it says about how long the current weakness could last. Don't go anywhere fast when he's back in two.

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20:58Shape your future with EY Parthenon. Learn more today. It's smart to always have a few financial goals and a really smart one you can set? Earning cash back on what you buy every day. And with Discover, you can. Get this. Discover automatically matches all the cash back you've earned at the end of your first year. Seriously, all of it. And we trust you to make smart decisions. After all, you listen to this show. See terms at discover.com slash credit card. Welcome back to Fast Money. Oracle down 4 % today and reports a company's data center buildout is costing billions of dollars more than anticipated.

21:36The information reporting that multiple projects are seeing additional charges as the company is forced to change its original power sourcing plans. The overruns come at a rough time for the tech giant Oracle's now more than 64 % off its September 10th all-time high. It closed today at more than two-year lows. Dan. Man, I mean, this is a company that, you know, did not have a whole heck of a lot of experience doing this, right? And if you think about AWS and GCP and Azure, I mean, these are companies that were building these clouds out for years, And they were well positioned, right, to put models on them, to do heavy duty training, right, to have access to chips from a company like NVIDIA and actually have the trust of the clients.

22:20Right. And so Oracle, you know, I understand why they wanted to enter this business. But like it seems like there's couldn't have been a worse company to actually take this on, at least given their execution and the continued confidence that they have fulfilling some of these obligations specifically to open AI. I think the market is calling BS on it. And that's pretty clear right now. And to Steve's point before, I mean, negative cash flow for this company. They continue to have to raise debt. They said they weren't going to do any more than that. Twenty five billion this year. I suspect they're going to have to for this very point because they're having cost overruns and they didn't foresee some of these problems.

22:55Well, you know, we talked about the CDS, the credit defaults, spreads, which are an indicator of how levered, I guess, really, and how much concern there is about the leverage. So it's big here and higher than where it's been. I think, you know, at some point they probably can't issue more debt. They could issue more equity always. Right. Not that they would want to, but that is a possibility. So that would weigh on the stock as well. but of all of the ones, this is the one that's least interesting to me by a lot. It all hinges on open AI and their ability to sort of fulfill that. I mean, some of the revenue forecasts for open AI are staggering, and if they don't get there, they'll lose, obviously, but Oracle loses in a major way because Larry Ellison basically pushed all the chips in the middle of the table, and right now it's not working out, and the credit default swaps, Dan and Karen just talked about, It's problematic.

23:51I mean, they're trading as if something's more wrong than even the stock price at this level suggests. You know, it's really interesting. As negative as we all are on Oracle, when I look at it on a technical basis, I go back a couple of years. And this is where the stock has bottomed out for the last maybe two or three years. This has been some support. Now, fundamentals and technicals always tell two different stories. And Carter will tell you that technicals tell everything that the fundamentals tell. Well, I'm not saying go in there and buy it. I'm just saying this is a place where it's had support in the last few years.