The Rally and Rising Rate Risk 10/8/26

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0:56Scott Wapner: I'm Scott Wapner and you're listening to CNBC's Halftime Report, the podcast, the most profitable hour of the trading day. We record this live weekdays at 12 Eastern. Listen in.

1:12Scott Wapner: All right, guys, thanks so much. Welcome to the Halftime Report. I'm Scott Wapner, front and center this hour. The rally in rate risk has some hawkish Fed speak today has yields on the move again. And we'll discuss and debate what it means for the markets. Joining me for the hour today, Josh Brown, Jenny Harrington, Malcolm Etheridge, and Shannon Sikosha take you to the markets. We are mostly lower. Yields again the story, especially at the short end. And that's after Governor Waller on the Fed said, quote, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal.

1:41Scott Wapner: Some flexibility when those hikes will occur. Don't need to come at consecutive meetings, but they should be in place in an acceptable period of time. Oil surging today, dollars at an 18-month high. That's a backdrop for you. You can see that right where we just showed you. Sort of the long end comes down a little bit, but the short end is rising. This is just going to remain the conversation for the foreseeable future. We're going to get earnings soon. So you're going to have, you know, if you put the rising rates on one side of the scale, you're going to tip the scales. But then when you get earnings to sort of get the equilibrium there at minimum, or perhaps sort of tilted in the earnings story favor?

2:21Yeah, so I think this is going to be an earnings season of haves and have-nots and not in terms of the results. I think the results are going to be pretty good across the board. I think in terms of the reactions, I do not think good, quote-unquote, good earnings reports are going to be enough to bail out the most interest rate-heavy sectors in the market. I think those stocks will remain on the mat. Doesn't mean we can't have a good finish to the year. It doesn't mean the S &P can't gallop higher into December. But this idea that we're going to get a resumption of the broadening trade, I think is just harder.

2:56And when you look at what's on the, not even the 52-week low list, but the worst performing sectors and industry groups, what they pretty much all have in common is that interest rate sensitivity. That might be because these are businesses that are very heavy in terms of a need to borrow, or it just might be they're historically competitive with high rates because a lot of the allure of their equities was the dividend. And so, sorry, Jen. So, like, we just have to get used to this reality. Not everything that happens, you know, not every time something goes down, it has to automatically bounce immediately.

3:33There are still opportunities for investors who could broaden their time horizon, but we're basically doing a show called Fast Money Halftime Report. And so the fast money is not going to be in those areas. The industrials fell yesterday. I think they had like a two standard deviation fall, one day fall. There's nothing wrong with the industrials in terms of their fundamentals. This is purely about people looking and saying, I don't want the rate risk right now.

3:58Scott Wapner: And I don't, Jenny, hear many thinking or saying or writing that what's happening with yields currently is enough by itself to derail this record-setting rally. Again, 7 ,800. We closed above it a couple days ago. We're hanging around the rim of that number right now. I mean, if you look at the notes today, UBS stay invested near record highs. Wells Fargo Investment Institute, while higher rates, energy prices and policy uncertainty may increase volatility in the near term. We believe economic growth and the AI investment cycle are supportive of large cap equities. And even Ray Dalio to this network today, who's been talking a lot about, you know, perspective bubbles within AI.

4:44Scott Wapner: Also, the impact of rising interest rates and the impact on the market says we're in the part of the cycle where interest rates can rise without sending the equity market down. because there's enough earnings growth and there's enough expected return. But when that cushion comes down, then you're coming later into that cycle. So that's where we are. Even he acknowledges that right now, as long as growth is good, as long as earnings are good, rising rates, not that big of a deal. Right. And the nuance on both of those, on all of those statements, is that they are referring to the S &P 500 collectively.

5:18So I heard a really interesting, I read a really interesting statistic this morning, And it was from a Morgan Stanley report that said since June 1st, so a little arbitrary, right? But since June 1st, 89 % of S &P 500 stocks have experienced a 10 % drawdown. And then there was a CNBC headline a week or so ago that said in the month of September alone, 75 % of stocks in the S &P 500 were down.

5:40Scott Wapner: Well, that's why we've said that more stocks have closed below their 250-day moving averages. Yeah, but when we're talking about this comment is to the S &P 500. And so you need to think about the intense concentration. And right now, there's five companies that are making up nearly 30%. I think it's about 28 % of the index. And that is the most five stocks I've ever made up in history that I've seen. So when we think about those statements to say, OK, equity markets should remain on track. Large cap stocks are fine. The reason is, is because of that concentration. So you have Apple, Amazon, NVIDIA, Microsoft, right?

6:16And their returns alone from like a market cap weighting, the returns alone and the points that they add to those markets are kind of insurmountable. So I agree with that. But I think, you know, even when you say large cap equities, even that is a very narrow and concentrated part that has total influence over the market. But when you step out of it and have any breadth or any like broader look, it is not that simple a story. UBS, I think, to expand further on what they were talking about today, I think underscores maybe the debate about sentiment and what you're supposed to do about it.

6:52Scott Wapner: Like when we ask people, well, what do you think about rising rates? You're like, well, if rates continue to back up, let's say the 10 year goes towards 6 percent. Well, that could be a problem. If interest rates continue to rise, if the 10 year goes to 575. five. I mean, wow, maybe is that is that when you get a problem? They point out that waiting for these concerns to fade could mean missing future and further gains. That sort of underscores the whole argument. Like if you're sitting here waiting for all of these alleged risks to actually come into clearer view, you risk missing out on what still is a pretty good story in the market because the economy and earnings are strong.

7:33I think I think it depends on who you're asking that question to. Because if you are a bond investor, you're paying attention to the fact that the 10-year shot up at the end of February when we all learned where the straighter formulas was at the same time. If you are a stock market investor, you're not so concerned about interest rates because the companies that you want to own at the moment are not super sensitive to interest rates because, to Josh's point, where people have skated back to is in tech. So just for sake of example, the VIX is down about 30 % since that start of this war at the end of February I'm talking about.

8:10The move index is up about 30 % at the same time. So it shows you very clearly where the trade actually is and where the sentiment actually is.

8:19Scott Wapner: Isn't that incredible? When you look at a VIX at 15 and a half and you've got interest rates at 24-year highs and oil up another Because everybody knows the smoothing effect of the MAG7 earnings will be more than enough to offset all the geopolitical stuff that's playing havoc. Malcolm mentioned the move index, bond market volatility. Currency volatility is actually pretty notable right now, too. The stock market is sleeping through it. Now, there's two interpretations. Good luck. Wait until stocks wake up. So, all this volatility in rates and in currencies. Or what if that portion of the market calms down, rate volatility fades, rates themselves fade, the stock market will go up even more.

9:09So, you could pick one side or the other based on what your bias is. What do you think, Shan? I think that there's two things that investors need to think about. One, actually, if you have enjoyed three straight years of very strong equity performance, bond yields at these levels are actually kind of attractive. And so there's really no reason, if you're actually feeling concerned about what's happening underneath the surface, that you can't potentially pick up some yields here and allocate a little bit more to bonds, which seems counterintuitive, Scott, since all we're talking about is the Fed raising rates and having, you know, the average rate hiking cycle, just so everybody knows, isn't 50 or 75 basis points.

9:48It's 300 basis points. And so if you really want to talk about a protracted rate hiking cycle, we have a much different dialogue. We don't think that's going to happen. And so if you don't think that's going to happen, yields are probably pretty attractive here.

9:59Scott Wapner: You can't ignore what's going on beneath the surface either. I mean, this is a market in which you need to be correctly positioned or you're going to experience a fair amount of pain relative to some of your friends who are also managing money and who are in the right place. Well, the selectivity of - I mean, you personally, but I'm talking the collective you. You've got to be rightly positioned in this kind of market. You have to be. And it's not about just being in the right sectors. It's actually about being in the sub industries of those sectors and choosing like in financials, like do you want to be an alternative asset managers?

10:30You want to be in an insurance like you have to be selective here. And so the challenge over the next several months is that we think that there is going to continue to be a rotation back to the names that have strong balance sheets, strong free cash flow. Doesn't matter if they take on a lot of debt. Those hyperscalers are still going to be able to drive earnings, to Josh's point. The second thing that you need to be looking for is, are there areas of the market that are perceived to be overly energy price or interest rate sensitive that actually aren't as sensitive and continue to drive margins?

10:58That's where that selection comes. Do you have one in mind? Like, I look at, if you look at, for instance, within the financial sector I just mentioned, there's this threat of disintermediation for insurance brokers. And actually, that there's a huge opportunity there in terms of bifurcating what's happening with PNC versus corporate insurance. That's an area where if you think about whether it's disintermediation, interest rate sensitivity, for instance, if you look at real estate right now, there's this perception that real estate's being traded off for interest rates. There's actually a significant amount of shift in terms of how real estate is being priced in the market.

11:34And a lot of it still looks pretty cheap, even in an interest rate environment that's 100 basis points higher than it is today.

11:40Scott Wapner: That's why there was a story, Maybe it was I can't remember where it was. Maybe it was the journal today, but wherever it was, how you would expect REITs to trade poorly in a rising interest rate environment like we have now. And they really haven't. Certainly, there may be some that have, but it's not a broad brush. It's too it's oversimplifying to say, well, rates are up. So avoid X. Well, I think the carnage is the carnage is away from. It's a great point. the carnage is away from real estate, at least at the moment. I'll show you where it is. Give me a one-year chart of BIZD. These are the BDCs.

12:19Well, now, when I show you this ETF, here it is. When I show you this ETF, which just printed, I think, a two or three-year low yesterday as rates spiked, this is like the kind of thing where people say, well, this is a really obscure corner of the market who cares about BDCs. This is private credit. This is what's underpinning a lot of the spending in the economy. And people would look at HYG or JNK and they would say, well, there are no defaults and things seem to be pretty quiet. Spreads aren't blowing out. What are you worried about? This is where I think people are now focused. But can I add to that?

13:01Floating rate, too.

13:02Scott Wapner: I'm waiting for an incoming from Diana Olek saying, you idiot. it. I'm the one who wrote that story on CNBC.com. I knew I was flipping around looking at, you know, reading as much as I could. Obviously, I saw that headline. I was like, oh, that's interesting. I want to talk about it on the show. Sorry. But everybody check the piece out because it's counterintuitive, I think. Right. Her title of this piece, why REITs aren't getting killed by rising interest rates this time. And REIT returns year to date are up six percent. I don't know if people would necessarily assume that that would be the case.

13:36Scott Wapner: Go read the story on our website. They are also down 8 % in a month. And this is what I've been struggling with, too, which is even if you look at the dividend ETFs, they're still up between 9 % and 19 % on the year, but they're crushed since the beginning, really since the end of August. But there's stratification within REITs. Do the healthcare REITs and the data center REITs look as bad as commercial properties in Manhattan? Like, I don't think they're all... No, they're not. What I think is the question, though, underlying what you guys are talking about, is are we in a position where we're looking at the market and we're saying it's time to continue doing what's been working because it's been working for the last four years now?

14:18Or are we saying it's time to start to reposition ourselves for what comes next? And you guys talk to clients as often as I do. It's tough to have a conversation with even a 75-year-old where you say, look, rates are attractive right now. Yields are attractive right now. It's time to take some of these profits and move into something that's a little bit more rational. So it's very hard to have a conversation with clients about what comes next. Well, there are tax, right, because number one, there are tax ramifications. People have to. You can't let the tax tail wag the entire dog. I agree, but that's part of that.

14:50When you're talking to an individual, you're not advising a pension fund. You're talking to a person and you're saying, look, it's October. Normally, I would say if we're going to trim, we're going to rebalance, let's roll it into January. You know, it gives you another 14, 15 months before you have to worry about it for taxes. But now it's a little bit of a different conversation. We talked about two-year yields at 5%. You have a stock market that's been doing double-digit returns for four straight years. Like, it's time. It's not the best conversation, but it's also not the worst. People are up so much money.

15:25But here's the problem. The question is, where do we go from here? And the moment you start talking to them about yield, H-Y-G, like you're talking about, nobody wants to hear that right now. Right, because they all suffer from the availability bias, right, the availability heuristic, where even my least sophisticated clients are like, oh, but bonds have been down. Like, even the least sophisticated know that the bonds are - So buy bills, shorten your duration. Something like, well, Malcolm says it's hard. It is hard. But it's also our job as investors to not only talk to the audience, but also talk to the clients and be like, hey, it's hard.

15:56But to Shannon's point, there's real return to be made. Like it's our job to have the hard conversation and push right now and say like, hey, you might have a moment in time where you can lock in five and change percent. Right.

16:07Scott Wapner: With no risk in terms of, you know, stock reaction. Obviously, there there's a fair amount, as we discussed under the under the hood. Yeah. Because of rising rates. Krinsky's out with a new note today talking about the relationship between the NASDAQ and the Russell 2000. So you can obviously see the divergence of the two and how they just have separated so much, he says, at historical extremes. So, you know, that's an obvious place to look is how small caps have gotten pretty much hammered. The market's not stupid. The market knows the companies that make up the Russell 2000 have a higher propensity for having to borrow at prevailing rates.

16:49That's number one. And number two, they might be more energy intensive. There's a ton of small industrials in there. And it's just these are the reality of what's in that index. Now, look across the street. Here's Alphabet. They care if WTI crude is 100 or 90 or 80 or 70. The earnings are going to come in regardless. Are you are you? Hold on.

17:10Scott Wapner: I'm going to just share real quick. Are you making you make the case here for small and mid cap? No, we actually reannounced this week that we actually have cut our long term overweight to small and mid cap to at Target. So we had been very overweight six months ago. We cut it last quarter. It's not it's, you know, Russell 2000 versus S &P 600. We can talk about the earnings quality of that underlying universe. The reality is that the sentiment is exactly what Josh just advised, is that there's a perception, whether true or not, that there's additional interest rate sensitivity and there's slimmer margins in that universe.

17:47The other thing is that we're at a crux of a period where the underlying companies that are likely to do well, that need to do well, are things like housing. The housing complex is going to continue to suffer as a result of this. And so we are actually pulling that back and saying that as of right now, we don't feel as compelled to be in that area despite strong economic growth and momentum, because we don't think that the earnings are going to be as as attractive in that space as they are in the large cap space, despite the fact that we see economic growth continuing and that we aren't concerned about rates becoming unanchored on the long end.

18:23Scott Wapner: Let's kick around the Starbucks-Chipotle story that is out there based on that FT report earlier today. Take a look at stocks are on the move, obviously. I don't believe it. Starbucks is kicking the tires on Chipotle, which at first you're like, well, I mean, is that a really big shock? Brian Nichol comes from Chipotle, goes to Starbucks. You know, notes have started as we came on the air today. The street is starting to publish on the concept, if you will. Well, they say Stevens does. They say, quote, while combining two massive restaurant systems would present considerable execution challenges, we believe the strategic possibilities are worth exploring given the similarities.

19:04I think both of these stocks will lose another 20 percent if they are seriously going to go. And they already look. Give me the Chipotle one year chart. This looks like this looks like a punch lasagna. Can you imagine trying to execute a turnaround of Starbucks now in year three of this alleged turnaround where the stock price hasn't done anything and saying, you know what the answer is? Let's get involved in somebody else's turnaround that's failing. I just I can't imagine that they would think that the shareholders are going to react positively. I'm sure they could save money on, I don't know.

19:40Accounting. Accounting. But what's even the commonality between these two? what are they both selling? That's the thing. You just talked about it. That's a great point. It's like Chipotle, you know, what Nickel did at Chipotle was turn around a brand that was beset by safety issues and concerns and got their growth trajectory back on pace. You did it. Starbucks is an aging global demographic challenge, right? This is an aging global brand that needs a refresh. They also have a, you know, they continue to have traffic that's down 15 % from 2019, and they have an afternoon day part that needs to be optimized.

20:13And so I don't think this is a similar challenge. And so to Josh's point, there probably needs to be a greater, a longer runway in the Starbucks story before there's a digestion of another firm that has hit some speed bumps. You're right. If you showed me, if you showed me Starbucks at 120, 125, and there was like this resolution in the equity market that, all right, the turnaround is working. We have concrete evidence that they have successfully fought off inflation. They have convinced the consumer to come back on a more regular basis. They fixed all their problems with this thing, that thing.

20:48I would be more inclined to say, yeah, maybe they're going to roll the dice and try to do something. Seems highly doubtful to me. It feels like it has potential to be like an AT &T Time Warner, where a few years later, it would just be like, oh, that was a bad idea. I forget whose analogy it was. One of the business This journalist said it's like two boxers in the 11th round holding each other up.

21:11Scott Wapner: I mean, we reached out to Stephanie Link, obviously, because she owns Starbucks. And we got just a quick response. She's on a plane. And she said she'd be shocked. I think a lot like you that I think her comment was more also on they haven't even fixed Starbucks yet. Right. So why would they do that? If she gets off the plane, by the way, in time, she's going to call in. If not, hopefully you'll hear from her at 3 o 'clock when she thinks about that. That's like a Martingale strategy. We're like you bet and every hand you double down until you finally hit or there's zero left. It feels like get one thing fixed.

21:53You'll have plenty of time to swoop in and fix the next thing. just be a floating, too, of an idea to see what there might be in terms of market appetite for something that nickel could do in this seat. I'm curious more to your point, the lack of an overlap between their core customers could actually lead to an opportunity here that maybe we just don't see. It probably will take a very long time for it to work out. But you talk about the afternoon rush and the lack thereof at a Starbucks store. I think that could be sort of the solution between them. But it's going to take some really tough work from some McKinsey consultants or whoever gets brought in to make this work to figure out how to match that together.

22:34Hear me out. Combination Starbucks-Cipotle. Refresher and Bowl together. Like a KFC Taco Bell? KFC Taco Bell, Baskin-Robbins-Duncan. Just spitballing here. But you get what I like. The overlap could actually be good for both brands if they can figure out a way to make more synergy than just saving some accounting headaches.

22:55Scott Wapner: Let's hit another name. Completely, you know, a hard turn away from that conversation. I was just looking at what's happening within some of the mega caps today. And I just keep noticing the fact that Microsoft has been on this pretty good move. You know, this week, it looks to me to be the best performing. Well, right there on the line of the best performing of the mega caps over the last month. It's had a nice move as well. It's been a bit of a different company since earnings. I bring it up, Malcolm, because there was a call on it today that I didn't want to miss. It's from Morgan Stanley. They're just incrementally more positive as a key AI winner.

23:36Scott Wapner: I think there was a moment in the market where, you know, if you look at the arc, at the beginning of the arc, it was like undisputed winner based on the open AI, you know, deal that they did a few years ago at this point. And then you sort of come in the arc and then it starts like, well, where do they really stand from a competitive standpoint relative to some of the others? But now I feel like the market and investors are giving them the benefit of the doubt again. You look at what the stock's done, that rebound since the last earnings report. We're not going to hear from them for a few weeks, obviously.

24:05Scott Wapner: But what's your take here? Yeah, I made the case a few months ago on the show that I thought investors were being a little bit short-sighted when it came to Microsoft, simply because them going back and renegotiating that deal with OpenAI that you mentioned, which basically said, OK, we agree now we're going to allow each other to see other people. That was the transformative moment for Microsoft in the sense that it allowed them to consolidate Copilot into one cohesive product that they could then go and sell to the enterprise customers. And it also allowed them to underpin it with Anthropic.

24:38So now you have your pick between Claude and Codex when you're using Copilot. And I think that was the game changer that unlocked a lot of value with regard to the how are you going to integrate AI question that Microsoft kept getting hit with. So there were a lot of folks that got a little bit antsy and said they don't have it figured out. Copilot sucks. I completely understand as an early user of it myself versus today what the product can do. I can see the difference. But I think that's where the short sightedness bit a lot of folks who dumped those shares.

25:07Scott Wapner: Some breaking news out of Washington, D.C. Megan Cassell is following that for us. We bring her in now. What do we know here, Megan? Got a big declaration from the president right now that he says the United States will not be bombing Iran at any point between now and the midterm elections on November 3rd. This comes after just last night the president was saying that he was no longer sure he wanted a deal with Iran. And it comes after there's been a number of reports in the last 24 hours or so that the U.S. was weighing its options for some sort of a strike in the coming days or weeks. Now the president saying quite clearly on True Social that we are having productive discussions with the Islamic Republic of Iran.

25:39And he says that while he believes Iran is in very bad condition and that while the U.S. blockade will remain in effect, he also says, quote, we will not be attacking Iran at any time prior to the midterm elections to be held in the United States on November 3rd. So quite clearly here, Scott, the White House wanting to tamp down all of this speculation and making clear both to the domestic audience and the Iranians that there's no strike coming up soon. Scott?

26:03Scott Wapner: Well, because because he obviously the president and and the administration are looking at the chart that we're showing on our screen, which I'm not sure you can see based on your vantage point of where you're sitting there is WTI crude and the fact that it's above 90 dollars. And that remains a central issue going into the midterms. They, I would assume, would like to try and do anything they can to get the price of oil to come down. Anything that they can. The two top issues in this election are absolutely the economy and oil being a big part of that. And then also this war, which is increasingly unpopular even among the president's party.

26:36So they're seeing this oil chart every day. And while you see there was a small dip just when this post came out, it's still up 3 percent for the day. And that's what they're seeing all the time. And everybody is seeing this at the gas pump. The White House is really, really wishing they could do anything to bring oil prices down and to make consumers feel better about inflation. Some of the thinking about why there might be a strike before the midterms would be to try to show people, yes, we are making progress. Yes, we're towards the end of this conflict. The thinking against it is that they don't want to remind people that this war is still ongoing.

27:07Scott Wapner: Yeah, well, they're reminded when they when they go to the pump, obviously. Brent 105, diesel, very much in the daily sentence. Megan, thank you very much. That's Megan Casella down in D.C. So I wanted to I wanted to get to this earlier in the show. I think it's really important. It's a non-AI related sector. where there are some really big winners. I know we've talked the refiners to death. Just the XLE in general, crude is up 60 % year-to-date, 50 % year-over-year. The XLE is having its third best year ever through the first 10 months. So 28 years of this ETF in existence, the third best of all time.

27:44And when you look at what happens when it's up double digits into October, eight out of 10 years, this thing finishes the year even higher. I don't think this rally's done. I understand it's day-to-day. It'll be about whatever's on Truth Social. But there are some huge winners in this sector. And then some stocks that could be even bigger winners that have yet to be discovered. But, Josh, the huge winners in that sector are directly because of AI. You know, like I was at the J.P. Morgan. Yeah, totally. Josh. Can we do facts? Yeah, facts. I was at the J.P. Morgan Energy Conference. The numbers one, two, and three stocks in the XLE, do you know what they are?

28:20No, you tell me. Okay, they're all refiners. Marathon? Yeah, because they all need oil. So those are the biggest winners. So I'm at the J.P. Morgan Energy Conference. The data centers are running on oil? Literally. Can we go to commercial? Listen, I'm at the J.P. Morgan Energy Conference in June, and the first speaker is Chevron, and they walk in and they say, hey, we want to announce that we just formed a partnership yesterday with Microsoft to supply their energy directly to their data centers. It's natural gas. It's an energy company. We don't get natural gas from the street of our moves. How much is Chevron up on the year?

28:49I'm just saying it's a huge part of the energy sector. Everything in the energy market is not everything. Almost everything is because there's so much demand for energy of every kind. Jenny, it's refiners. It's diesel. And so literally, those are the biggest winners in this. We're teaming up with with Cat. We're teaming up with GE Vinova to bring energy to Microsoft directly because they don't want to take it from the grid. I'm just saying, like, you can't say it's not AI related. A huge part of that move. AI is AI is powered by natural gas. Do you know that natural gas prices are lower today than they were 15 years ago?

29:22Do you know that Chevron's up in large part because of the demand for all sources of energy? Yes, but natural gas is not the thing moving the winners of the XLE this year. It's not. Is Chevron not one of the major winners in the XLE with a huge market cap? They sell oil. Oil is$100 a barrel. Natural gas is down. They sell gas, too. It's down. You can't disintegrate energy from AI right now. Yeah, I literally can. It's electricity. You shouldn't. It's electricity that's being driven by AI, and that's not oil. No. That's natural gas. Okay, all right. Say what you want to say. You guys should have bailed her out a while ago.

29:57Not at all. Just to be fair. I promise you the Twitterverse is going to have my back on this. No, they're not. The Twitterverse is not going to say WTIQ crude at 100. Did you go to the energy conference? Have you been to any energy conferences? Thank God, no. It's because the entire conversation at every major energy company is AI and how AI is benefiting their business. I'm sure it is, but that's electricity. The stock price goes up. Jenny, that's electricity. What do you think powers electricity? Not oil. Everything. No. You think the XLE is? Not everything. Hold on, hold on. Are you making the argument that the XLE is entirely because of oil prices?

30:29Yes. OK, you should not. Because then you should go and look at all of my midstream energy companies. Because most of my midstream energy companies used to be oily, and now they're gassy. And that's the midstream. That's not what's powering the XLE this year. If you look at Chevron, ConocoPhillips, they all sell huge amounts of gas also. The integrateds, the refiners, are the winners. What's the market cap of the refiners compared to Chevron and Exxon? It's massive now. Yeah. They're waiting in the index. It's now massive. They're up 150%. Wow. All right. Okay. Offline?

31:02Scott Wapner: 15 years in one day. No more line. No more line. The line has been crossed. No more line. I think you both like energy, though. We're going to go pay the bills now. Look at Shannon. We're back with Josh's best stocks in the market.

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32:42Bites me slow when network is busy. See terms. Halftime report on Pippa Stevens with the CNBC News update. A new Army report finds multiple systemic failures led to the deadly midair crash between an Army helicopter and passenger jet in Washington, D.C. in January 2025. The findings seen by The Washington Post largely follow the conclusions of an earlier NTSB report. The documents say the key factor was two broken radio transmissions that resulted in the helicopter crew not receiving critical air traffic control communications. Governor Gavin Newsom is reportedly considering sparing the lives of all 563 prisoners on death row in the state.

33:22It would be one of his final acts in office as he mulls a potential presidential run. According to the New York Times, Newsom has been deliberating the move for months, but ramped up conversations following the botched execution in Tennessee last week. And a crew of four astronauts from the International Space Station splashed down today off the coast of California. They were rushed to the ISS nearly eight months ago to replace the previous crew during the space station's first ever medical evacuation. Scott, back to you.

33:52Scott Wapner: All right, Pips, thank you. It's Pippa Stevens. You guys got anything left? I mean, it went the whole commercial break, too. Oh, we can go to the closing bell. Do you want me to, like, rattle off my Chevron statistics and the percent of the XLE that are Chevron and Exxon? No. No, because there's four people still watching and we want them to stay. Let's do best stocks in the market and hopefully they'll stick. Oh, my God. Well, get duct tape first. All right. For you? Wait, you're going to let me go through this? I can use my hand. This is not oil related. We'll be good. This is the weirdest thing.

34:25William Sonoma is having a good year. And you would think they're in the wrong industry group, specialty retail, in the wrong sector, which is consumer discretionary, and it's housing related. You would think, like, why are we going to... That's so funny. Just go ahead. You would think, why is Williams-Sonoma breaking out? And so we took a look, and we wanted to get behind the trends themselves and get into the fundamental story. It turns out there is some AI happening here, and the average shopping cart as a result of consumer use of AI on the Williams-Sonoma website is leading in some cases to orders that are on average nine times higher than before.

35:08It's really this incredible thing. People are using an AI assistant for Pottery Barn, which they own, called Otto. They're literally creating an entire room on the site and then ordering. Then they have Olive for the regular Williams-Sonoma brand, which is a similar situation. So they're putting AI to good use. It's a really interesting story of an AI winner in a sector that's been absolutely bombed out. I think the true test is going to be 248 to 252. Those were the old highs from a couple of months back. The stock got – give me a little bit further back on the chart. Stock got rejected there.

35:42It's going to make another run at those highs if and when it breaks out. That's probably where I'd be pulling the trigger from a trading perspective. If you're going to be long here as an investor, I would just tell you, you want to anchor to 215. That was the July low and the September low both held. You've got a rising 200-day just beneath, and that would be the way I would risk manage the position from here. If this thing can take out those old highs from earlier in the summer, get back above 250 on good volume, I think you want to stay long this trade. Williams-Sonoma may have figured something out well in advance of a lot of the other specialty retailers trying to use AI.

36:20Scott Wapner: I might regret this, but, Jenny, you own Best Buy. I do. Do you like it better than Williams-Sonoma? Oh, obviously. Say more. Okay, so you might remember that we bought Best Buy earlier this year. It's up about 31 % year-to-date. The thing that I like a little better, well, actually, thematically, they're not that different. I think it looks good, too. Right? Thematically, they're actually not that different. And so the thought on Best Buy was low leverage. When I bought it, it was trading at under 10 times earnings. It had over a 5 % dividend yield. So the money was there. And it's still only at 12 times.

36:52And that's the reason I like it a bit better than William Sonoma. But I like the AI thing. And that's been one of my arguments for the last couple of years is that so much money went into the obvious AI trades when it's really companies like what I am. Look how similar these two look. That is kind of amazing. Can I agree with you on something? I would love you to. You know what a lot of people get wrong when they look at housing related retail, for example? They make this assumption that you need a lot of new home sales. The reality is when you get trapped in your home because the market is terrible, the next conversation is, well, let's redo it.

37:25Right. Let's remodel it. And I think both of these stocks benefit. But I think there's something important to bring up here, too. If we look at other retailers like Lulu down 56 percent year to date, Nike down 46 percent, tractor supply down 35. This goes back to a comment Shannon made in the beginning, which is that you need to be selected by industry. You don't like we're in such a weird period right now and such an intense period where the winners really win. Right. And execution matters more than ever that you need to be selective within industry. You can't even just buy retailers right now.

37:55You need to really do your homework and choose the right ones.

37:57Scott Wapner: Right. Options action with Oliver at the SIBO in Chicago. Planning for the future? State Farm can help because they know life's biggest moments often come with big responsibilities. Whether you're starting a family or buying your first home, State Farm Life Insurance can help protect those you love. With flexible coverage options that fit your budget, plus the ability to update your life insurance policy as needs change, you can live more confidently as life changes. Get started with State Farm. Like a good neighbor, State Farm is there. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much.

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39:35Scott Wapner: All right, let's play some options action now. Oliver Rennick, he joins us live from the Seaboat Global Markets in Chicago. What are we looking at today? Airlines, Scott, ahead of Delta earnings tomorrow. Options trading is very active, two and a half times the 30-day average, with more puts trading than calls and more calls sold than bought. So no matter which way you slice it, the bias today is bearish. There was one big early put seller on the tape who bet$1.5 million the stock will hold$80. That was the one bullish bet. They think it'll hold$80 through January. But the put buying volume overall picked up as the day's gone on.

40:13And now the most popular contracts to buy are the 76, 77, and 78 strikes expiring tomorrow. What's interesting about the lower two there is they are below the implied earnings range for Delta, which is about 4 % right now, which is bigger than its typical swing. But for real drama, look at JetBlue. The stock is in free fall, put volume is surging, and generally it's never a good look when the$2 strikes on your stock are as popular as they are here, Scott.

40:44Scott Wapner: Oliver, thanks. We'll talk to you a little bit later this afternoon. That's Oliver Rennick in Chicago. You own Delta. By the way, Ed Bastian is going to be 7 a.m. exclusive interview tomorrow morning. CEO on Squawk Box. Obviously, Delta has been embroiled in this controversy with Elon Musk over Starlink. No, he's going to be asked about that. So don't miss that interview and exclusive 7 a.m. Squawk Box tomorrow. Stock. Yeah, I never know if it's a good sign or not so good sign when the CEO is like already pre-booked to talk about the earnings right after they come out. But he's always on. He's he's one of the ones that this is just part of the thing.

41:18So I'm not going to try to interpret that. I think this is the best airline. So, I know financially they are the best at managing their business. I also know from a consumer perspective they have the highest ratings, the best reviews, and they have a great on-time record. It seems to be everybody wants to fly Delta. I don't think that changed during the course of this quarter. I don't think it'll change next quarter. And they're very good at navigating these issues with the higher price of jet fuel because they've got the refinery component to the business. So, I'm staying long. wish me luck, I suppose.

41:53You sold JetBlue a while ago. Yeah. That's the worst airline. Yeah. I mean, I recently flew minted home from L.A. and it was awfully nice. But the problem with JetBlue is like following the pandemic, they kind of ended up in no man's land. They were no longer a discount airline and they were no longer a high end airline. And that really worked against them. You know, it's kind of painful for us because we suspect that they will still get back to a dollar of earnings. And they were like two dollars of earnings before the pandemic. So maybe we'll buy it back one day. Maybe it gets cheap enough. But they just kind of kept stepping on themselves.

42:24You're right about Delta being great. I think United is pretty nice to fly to.

42:27Scott Wapner: OK, we well, you're not buying stocks based on the experience, are you? No, but, you know, despite your great minted mint experience or whatever it is. All right. We're going to release CNBC as we are releasing. We good. We're good. All right. We're releasing the FA 100 list today. It's the nation's top ranked financial advisor list. We got number one. The firm that came out first is with us next.

42:56Scott Wapner: CNBC releasing its eighth annual financial advisor 100 list today, recognizing the best of the best in this country. Our Robert Frank joins us now with the details. Hey, Robert. Scott, good to see you. Well, they are the 100 firms that have proven to be the top providers of financial planning services to everyday investors. The CNBC Financial Advisor 100 out today. Now in its eighth year, firms are in 36 states. They have combined assets of over $300 billion, and they've been in business an average of 35 years. Topping the list this time around is Howland Capital in Boston. They're celebrating 59 years in business with$4 billion under management.

43:37Heritage Investment Group ranks second, followed by Beard Harris Wealth Management and ZWJ Investment Council. The firms were chosen from a pool of more than 40 ,000 registered investment advisors. Companies with regulatory disclosures or violations, they were removed. They were then screened through CNBC's methodology in partnership with Accupoint Solutions. The criteria includes years in business, number of investment advisors, ratio of advisors to employees, assets under management, and a lot of other measures. Now, firms do not apply or pay to be considered on this list. That's very important to mention.

44:15With investors increasingly turning to AI for investing advice, these top advisors are leaning into estate planning and tax, wealth transfers, and philanthropy advice. For the full list and the full methodology, you can go to cnbc.com slash FA100.

44:32Scott Wapner: Scott. All right, Robert, thank you. That's Robert Frank with our setup. Peter Dixon is the president and CIO of this year's top-rated firm, Howland Capital. He joins us now. It's good to have you on our program. Congratulations to you and all the good folks at your firm. Hi, Scott. Thanks for having me on the show today. I just have to say, on behalf of the entire Howland Capital team, we're just really excited and honored to receive this recognition from CNBC. How would you describe the ethos of your firm? The ethos, I'd describe it in really three key points. First and foremost is our people.

45:03We have a great team. It's easy to talk about, good teamwork and a strong culture, but they're really hard to accomplish. And we have just a fantastic team that puts our clients at the center of everything we do. The second thing I would highlight is our family office business model. Founded on family, built on trust is our mantra. As the intro mentioned, the firm was founded almost 60 years ago as a family office. And today we apply those same principles to our broad base of clients. And then the last thing I would just say is we're independently owned and we plan to remain that way. We think long term, we plan long term, and we encourage our clients to do the same.

45:38And the idea is for Howland Capital to be there with our clients over the long term and also with future generations of their families.

45:46Scott Wapner: Leaning pretty heavily into the AI trade, large caps, like we've been talking about on a daily basis. Top equity holdings are many of the mega caps. Obviously, Berkshire Hathaway is in that group. Robert, in the setup piece, was talking about how firms are leaning more and more into AI to help make better investing decisions for their clients. How are you guys doing that at Howland? We've been using AI for a long time now. We have one of our colleagues, Juliana Donovan, was on top of this trend really early, and she was just raising awareness, and we were asking a lot of questions. And so we started testing things out and trying different things, getting our compliance group involved with what we could and couldn't do because we safeguard our clients' data very carefully.

46:32But at this point, we're pretty excited about the opportunity to increase productivity and also to enhance and expand the services that we offer our clients. And three quick examples I'll give you about how we're using AI. Our investment committee uses it in preparation for our weekly meetings to make those really productive. Our research department uses AI at the top of the new idea funnel. And then we use AI to facilitate or to streamline a lot of administrative tasks. We don't let AI actually make decisions for us or do things, but we use AI to streamline things and make things easier. easier.

47:07And then human interaction and integration is a key part of Howland Capital. And so humans are always involved in the final say. But we're definitely using AI and we're pretty excited about opportunities to continue using it.

47:19Scott Wapner: Good to have you on. Congrats again. We'll talk to you soon. Thank you. That's Peter Dixon, Howland Capital, again, number one on our list. Mike Santoli is next.

47:31All right.

47:32Scott Wapner: Welcome back. Market pictures changed just slightly in the last few moments on a, there it is, the S &P 500 going down about a half percent. We'll show you what the Nasdaq's doing, and then we'll cycle through some stocks. There's the FT report. It's an exclusive that OpenAI annualized revenue is about$20 billion less than previously signaled. It's obviously a significant headline, and the companies that are most levered to OpenAI and all of that spending that's been done in the AI buildout. You can see Oracle is one of the hardest hit names, down about 5.5%. NVIDIA is down near 2%. But if you cycle through some of the other chip stocks, the AMDs, the Broadcoms, chip equipment names, there's a Marvell, which is down as well.

48:14Scott Wapner: Kind of anything that plays so acutely into that story is getting hit on this news. It's taken the NASDAQ down by about 1%. S &P 500 down about 42 points. That's one half of 1%. Let's bring Mike Santoli into our conversation. His market memo, obviously, in the overtime, I'm a co-anchor. What do you make of this report? Obviously, it definitely inflames a bit of a raw nerve on the market side, which is the durability and momentum behind the AI build-on. Even coming into this week for a while now, I was saying how people in AI keep saying it's early, it's early. There's so much more to come. From a market's perspective, how the capital markets have digested all this and financed it, it doesn't feel early.

48:56There's a lot of signs that, you know, they're kind of pushing the appetites of the public markets to back this and put a multiple on a lot of these expected revenue streams. So I do think that's a reason that you get this knee jerk reaction. Oracle obviously has already been hurt a lot. It's very tied to the open AI story. So I don't think it's a surprise that's the first place you go. And I think it creates a market wide question in terms of where leadership might come from. It's sort of, you know, the non-debt financed AI platforms are the ones that have been working pretty well recently. But, you know, even before this news, top stocks in the S &P in terms of upside contribution were Apple, Exxon and Philip Morris.

49:37OK, that's defense, defense and defense. And it sort of shows you the mode we're in right now. We're really close to highs. You've had a good rally the other day, but it doesn't feel as if we really have the broad momentum push behind it because of a lot of the questions. That said, 5.3 percent on tens has brought in buyers four times in the last week. So if you get relief on rates, the rest of the market could handle it.

49:59Scott Wapner: You know, this story and this metric is so important. This whole story has been built on demand. Yeah. And in part supply and the fact that in many areas of the build out, supply cannot keep up with demand. But you can't start having questions about demand because then you have to start questioning the story. Well, exactly. And it's in the context, too, of these companies, Anthropic and OpenAI, where they would they would extol, you know, their annualized revenue rate over the last week. Like literally they're multiplying the last week or month and saying that's our annual run rate. It was exponential.

50:36And if it stops to look exponential, then all the multiple years of orders from OpenAI and Anthropic that the rest of the food chain is calling their order book. You know, that's what you have to start to question, not to get catastrophic at all about it. But that's the relationship in the real moment of how the market is going to have to metabolize. I think the market is going to go through its its tantrum. But then the next phase of this is people are going to say, well, wait a minute. What if usage of news is starting to take away from chat GPT? And what if this instinct product that people are like begging their friends for invites to, that's using up some of these instances that people would have otherwise been on an open AI product?

51:20So that's probably where the conversation is going to go. And why that's good is that people are going to say, oh, it's not less AI demand. It's just more distributed than it was when it was just Claude versus Chad GPT.

51:32Scott Wapner: Mike, I'll see you later this afternoon. We'll obviously stay on this story. And I know you will, too. and we'll continue the conversation a little bit later this afternoon. But with 20 seconds left, let's just get some quick finals. What do you got for us? Industrials sector. Visa. Disney. Netflix. Maybe a double bottom. Maybe. So funny that you guys just do it. I have to do it. You guys talk. Me and Jenny love each other. For the viewers. I'll see you later. I'll send it into the next program. They'll be on this story, obviously. You've been listening to CNBC's Halftime Report, the podcast. You can always catch us live weekdays at 12 Eastern, only on CNBC.

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