Geopolitical risks, bank earnings and AI drive market outlook 10/12/26

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1:18Good Monday morning. Let's get a check on U.S. stock futures with the Nasdaq coming off of its fourth straight week of gains. And you can see it's a bit of a mixed picture here this Monday morning. The Dow was poised to open basically flat to higher, up 14 points. S &P, similar story, up five points. The Nasdaq down 83 points right now. That was after gains for all three of the major averages last week. The Dow and S &P notching their second positive weeks in the last three. And we'll get a check on treasuries, but keep in mind, it is Columbus Day here in the U.S. The bond market, U.S. bond market is closed today for that holiday.

1:50So this is where we ended the week last week, the U.S. 10-year Treasury yielding 5.24 percent. Might be a bit quieter here in terms of volume because of this holiday. Let's get a check on the dollar, too, coming off its fourth straight week of gains for the first time since mid-May. As you can see this morning, stronger against other major currencies. 102.32 is the level for the dollar index. Also, keep an eye on South Korea's yuan, touching a two-year high against the dollar in trading overnight. We're going to turn to the energy markets as well. It's been a flurry of big developments this weekend.

2:24This has really been the news coming out of the weekend after President Trump claimed that Ukraine and Russia have agreed to an energy ceasefire, quote unquote. This just days after the president revealed that Moscow had agreed to a deal to supply diesel to global energy markets. Meantime, President Trump says the U.S. is looking to potentially join Saudi Arabia in strikes on the Houthis after a deadly attack on Riyadh's international airports this weekend. We actually saw multiple attacks on that airport over the course of the weekend. An American was among those killed on Saturday. The Iranian-backed group has been ramping up its strikes on Saudi Arabia.

3:00So let's get the latest now with Dan Murphy in Abu Dhabi. Dan. Morgan, good morning. As you say, a deadly weekend at Riyadh's international airport with two strikes in two days that have raised the threat level in the region and put energy markets on edge this morning. Saudi authorities saying at least 12 people were killed, including a U.S. citizen, and hundreds more were injured when separate projectiles hit Riyadh airport on Saturday and then again on Sunday. Now, these attacks also raising some pretty serious questions about how the Houthis were able to target civilian infrastructure and why this attack couldn't be stopped or intercepted given the billions of dollars that the kingdom spends on U.S.

3:43weapons and technology. The Saudi-led coalition saying Saturday's strike on Riyadh airport constitutes a fully-fledged war crime and has also vowed to respond decisively. So now the focus, Morgan, is whether or not Washington will join that response. President Trump saying the U.S. may take part in Saudi strikes against the Houthis, saying we're going to take a look at it. Two Saudi officials also telling MS now the kingdom is seeking some urgent defense support from the U.S. But, of course, analysts also telling us today that the president really faces a difficult choice here ahead of the midterms.

4:19Morgan? I mean, two takeaways there for me on this. And that is the first. We've been talking so much about, you know, critical short supplies of missiles and munitions, including the PAC-3, the Patriot missiles that get used in some of these anti-missile defense systems. So this certainly raises some questions about supplies and inventories there, to your point. And the other perhaps bigger dynamic here, that commercial air travel is being dragged into the front lines of this conflict in a way we've never seen ever before in conflicts of the past. Exactly. And to your point, Morgan, just on what the U.S.

4:59could do next here. US strikes could, of course, draw Washington deeper into this near eight month conflict and risk further escalation. But at the same time as well, holding back could leave a key ally here in Saudi Arabia exposed. And on this issue of air travel as well, we're talking about civilian infrastructure here. This is an energy infrastructure. This is an ab cake like we saw back in 2019, that attack that hit Saudi energy infrastructure, all the attacks that we've seen through the course of this conflict. We're talking about a civilian airport here, one of the most critical pieces of infrastructure on the ground inside the largest economy in the Gulf region.

5:38So certainly a lot of questions coming forward about how this could have happened. But at the same time as well, what needs to happen now to ensure that the threat level in the region can be brought down? And also, what type of risk is now in the region when it comes to civilian energy infrastructure moving forward. If the Houthis can target Saudi Arabia's airport, then of course it means other airports, other pieces of critical infrastructure also in range now as well. Yeah, it opens up a new front line, if you will, in terms of economic warfare and just the knock on impacts of all this too, when you're talking about airports and planes and airspace.

6:16I do want to shift gears and just ask you one more question here, Dan, about what we're seeing with the Russia-Ukraine conflict and this so-called energy ceasefire and the latest there, because that really also drove headlines over the weekend, including comments from President Trump that he wouldn't be opposed to seeing another leader step in and Zelensky not be in place in Ukraine. Exactly. And this has been interesting to watch as well. I would contend that this is really what's driving the market right now as well, Morgan. Typically, an escalation like this in the Middle East would have caused oil prices to spike.

6:50That hasn't happened because it seems traders have been preoccupied with this diesel deal and also this so-called energy ceasefire between Russia and Ukraine. We have just heard from President Zelensky, and I wanted to bring you some of that as well. Of course, what we're looking out for here is any commentary or confirmation that this ceasefire is viable and material. But Zelensky has said Ukraine welcomes this deal, but hasn't necessarily received the terms. He also said Ukraine would stop striking Russian energy sites if Moscow does the same. Big question about whether or not President Putin is also going to follow through here.

7:27So markets attempting to price both of these stories at the moment. And it seems as if the trade is pretty neutral as we track into the U.S. Open. All right. Dan Murphy, thank you. Well, let's see how Europe and Asia are reacting to all of this. Karen Cho is in London with The Trade. Karen.

7:46Good morning, Morgan. While South Korean shares have led Asia lower to kick off the trading week, reopening from a long weekend, with shares in SK Hynix and Samsung Electronics hitting multi-week lows. This has concerns over AI valuations, have seen five straight months of outflows from the index. Japan, just a reminder, is closed today for a holiday. Meantime, it is a day in the green, though, for Europe. Lower oil prices are helping sentiment here on the continent, with banks leading the way. We're seeing a pickup, as you can see, in the major banks across the board. Meantime, autos, the sector, they're just motoring along.

8:21This after China and the EU agreed to cap the number of Chinese hybrid car exports to the bloc. Of course, we've got the Paris Motor Show, too. So a lot of news flow coming out from the sector. Morgan, back to you. Karen Cho, thank you. For more, let's bring in Seema Shah, chief global strategist at Principal Asset Management. It's great to have you back on the show. Yeah, I do have to start right here coming out of a weekend that was full of geopolitical headlines here with a push pull dynamic playing out in the crude markets with oil basically flat right now. What is an investor to do? How do you navigate all of this?

8:56Good morning, Morgan. Yeah, look, it's a really tough time for investors because I think, you know, what we continue to see is that this volatility of headlines means it's quite difficult to look beyond the Iran crisis and say that we think all prices are going to be meaningfully lower in a few months. That is a very challenging thing to say at this stage. For this week specifically, we're going to be looking towards, of course, earnings and see how that's playing out, as well as the inflation data in the US, because that at least will give us a path for thinking how the fundamentals of the economy are dealing with all the stresses that are putting on it, as well as what the central bank expectations are.

9:33And I think for investors, that has to be key as we look forward over the coming months and quarters. Yeah. I mean, if we just stick with the U.S. here this week, obviously, bank earnings unofficially kick off the season here. Ben Emmons over the weekend wrote a really interesting note where he basically said bank earnings move with CPI and PPI, these inflation reports, because inflation drives the rate path and the rate path drives bank profitability. What are you watching for in terms of that kickoff? And what does it mean when you do have U.S. equities sitting near record highs? Yeah, it's a really good point, because when we're thinking about banks, provided the economic backdrop is still constructive, the higher interest rate environment, particularly a steeper yield curve, is typically good news for banks.

10:15And it's one of the reasons why you have seen investor interest being sustained in that segment, despite all of the negative developments within the economic backdrop. And for us, of course, we're watching, that's going to be a good indication of how strong the US economy genuinely is if these bank earnings are still strong. But also trying to understand what are the pressures? Are we starting to hear about concerns around margins? How do they feel consumers, households are dealing with all of the increased price pressures? So that's going to be key. From our perspective, we do think Q3 is going to be another very strong earnings season.

10:50And that should at least give us some relief and another catalyst, at least, for equity markets to move forward. The real question mark, of course, really starts to be with 2027 and how earnings will deal with that then. Looking at your notes, when you talk about market leadership is broadening today, and that's with elevated yields, energy pressures and demanding valuations continuing to widen the gap between winners and losers. When you talk about market leadership broadening, are you thinking about that within a U.S. context, within a global one, across asset classes? Should we be looking at something more than just the S &P 500 when we have that conversation?

11:25then? Yeah, and I think that this is a key question. Investors should be thinking about the global opportunity set, whether that's across asset classes, but particularly across regions, this is key. Now, for the last couple of years, the focus has really been on the US tech trade on the hyperscale is the MAG7. But what we've been seeing as we go through the very structural trends that investors have been increasingly interested in, it's bigger than just the MAG7, whether it's the Asia tech trade with the semiconductor memory providers, or it's within, for example, European banks, European industrials, and of course, even Japanese banks.

11:58So you are starting to see that there is a divergence or at least an outperformance in another segment of the financial markets beyond just US tech trade. And then from a diversification story, given that we have yields so high, fixed income is a really interesting source of income again. So looking particularly at high quality fixed income will be important in this kind of environment where there continue to be some economic risks and investors really need to have some type of defense within the portfolio. OK, Seema Shah, great to have you on to start the hour. Appreciate it. We've got a lot more to come here on Morning Call, including a potential deal frenzy in the tech space with all the headlines to bring you this morning.

12:42Companies Amazon and Nvidia are reportedly setting their sights on now. Plus, President Trump heading back to the campaign trail with just three weeks to go until the midterm elections. Potential October surprises that could shake up the state of the race. What you as an investor need to be thinking about. And later, global automakers descending on Paris with their latest auto offerings. We just heard about that from Karen Cho. We're going to get a live report. What CEOs are telling CNBC about how elevated energy prices and a stretched consumer are impacting demand. We have a very busy hour still ahead when Morning Call returns.

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14:39Make work less work. Try Google Workspace with Gemini at go.gle slash workspace with Gemini. Welcome back. We've got a market flash for you now on Amazon. The Wall Street Journal reporting that it's in talks to buy AI startup Descartes for about$7 billion. Descartes' software makes it easier for developers to switch between different AI chips. It's raised more than $400 million in funding from investors, including Sequoia and Benchmark, according to PitchBook, and was valued at$4 billion back in May. Two shares of Amazon are fractionally higher this morning. We're also tracking NVIDIA because it's reportedly in talks to boost its investment in open source startup reflection AI.

15:18The Financial Times reporting NVIDIA could buy the company outright, adding it could also opt to hire staff from reflection and licensed technology versus pursuing a full acquisition to avoid any antitrust scrutiny. Call it an acquihire. You can see shares of NVIDIA are basically flat here pre-market, but certainly it seems that NVIDIA, based on this report, is going all in on open weight models and investing accordingly. Well, this week marks the four-year anniversary of the current bull market. That's after a nearly 25 % drawdown in the S &P 500 that bottomed on this day in 2022. Since then, the S &P has more than doubled, adding nearly$40 trillion in overall market value.

15:59That's been spurred on by AI, was four tech giants, NVIDIA, Microsoft, Apple, and Alphabet, each now worth more than$4 trillion. Now it speaks to how tech has become the economy, as David George, general partner and head of growth investing at A16Z, recently told me. For us, the big takeaway was tech is kind of the everything cycle. So historically, tech has not been a major contributor to CapEx. Now it is. Tech accounts for 55 % of capital spending in the U.S. Tech now, if you look at the stock market, contributes 76 percent of the earnings growth, incremental earnings growth that happens in the stock market is a result of tech.

16:42About 40 percent of the stock market composition itself is technology. And if you look at just the capital spending side of things, we just surpassed as a percentage of GDP the amount of CapEx spent on new AI build-out compared to railroads. So it's a percentage of its GDP at that time in the economy. We just surpassed railroads. So there's a massive amount of capital and spend that is impacting the economy. That's on the supply side. On the demand side, that's the piece that I think is even more exciting to see because the numbers are absolutely eye-popping that we're seeing right now. So the large language model companies themselves are contributing about$150 billion of revenue that did not exist at all a couple of years ago into the economy.

17:31They're adding more revenue now than each of the individual mega cap tech companies on its own. Same with the entire software industry. So the AI lab companies together are adding more revenue per month now than the entire software industry. This is on the back of just very, very, very early adoption of this technology. Well, A16Z, which is the world's largest VC firm, is also invested in SpaceX, which has reportedly in talks to raise$40 billion in debt to buy AI chips from NVIDIA. That's just part of the more than$650 billion that's already been or is being mobilized or negotiated to finance these advanced chip deals as a bankable asset class.

18:12George's report shows how GPUs have been retaining their value. Part of the report that we laid out, which you just referenced, is how much these older generations of GPUs have retained their value. That's because we're massively supply constrained in the market right now. I don't see that changing anytime in the near future. What we hear when we talk to companies in our world is pretty much everything in the data center supply chain world is constrained through 2028. So if you want to get capacity for anything, you know, get in line and that'll happen in 2028. Part of the reason that SpaceX is so aggressive in their build out is because they're seeing extremely high ROIs of the compute that they put into the ground.

18:59We certainly see that with OpenAI as well, which we're large investors in. And, you know, I don't see any reason why that will change in the next couple of years. The big story to me, which you touched on, is the fact that we're so early in the diffusion of this technology. So if you look at Google and Meta, the largest consumer Internet companies in the world, they each have about 3 billion users of their products. There are about 1.5 billion knowledge workers in the world, so white-collar workers in the world. Today, if I were to estimate, there's probably less than 100 million people, cumulatively, worldwide, who are paying anything for an AI tool.

19:37And I think that will massively expand in the years ahead. So that's the big opportunity to me. Well, George sees other investment opportunities as well. Autonomous driving, robotics, especially in industrial settings, at least to start. Defense tech. A16Z is invested in companies like Sironic, Andrel, Castellion, all names known to regular viewers of this program through its American Dynamism Initiative. But George is also focused on other uses for AI, for example, in health care. With the launch of the first personal AI agents and AI diffusion in corporate America, still in the early stages, token usage is going parabolic.

20:14And here's what's really interesting. It's not because of humans. I'd say the important point on this is these are bots acting at human direction, right? And so the bot use is expanding because the long-running capabilities of the models, the models being able to chain together tasks on your behalf, have grown rapidly. And so as we see further advances in the ability for things like completing long tasks on your behalf, using computers on your behalf, this will always continue to be human-directed. That's the nature of the technology. But I think the consumption of the tokens will be bot-driven at an increasing rate in the future.

20:54Chart. That chart sort of tells the story right there. In fact, all the charts in the State of the Markets report that George has released earlier this month are worth checking out, which is why we had this conversation. You can check out more of my discussion with A16Z's David George right now on CNBC.com. Well, straight ahead, another tech CEO speaking out on the need to contain AI. We've got those new comments ahead. But first, let's get a check on shares of Sony. It was a disappointing weekend at the box office for Aaron Sorkin and his second Facebook film, The Social Reckoning, which was distributed by Sony Pictures.

21:29The movie taking in just five and a half million dollars in its debut. Sorkin wrote and directed the film a companion piece to 2010's The Social Network, which made$225 million worldwide and won three Oscars. You can see shares of Sony down for actually morning call. We'll be right back. This message comes from Wise Business, the only account your business needs to scale globally. You're building a business with global ambitions, but hidden fees are eating into your margins. With Wise Business, you can pay overseas suppliers without exchange rate markups. Have customers worldwide get payment details in 22 currencies so you get more of each hard-earned payment without hidden conversion fees.

22:11Be smart. Get Wise Business. Download the app. T's and C's apply. Ever notice how every new AI tool asks you to explain your business to it all over again? Google Workspace with Gemini skips that. You get Google's AI built right into the premium versions of Gmail, Docs, Sheets, and more. No new tools. No extra logins. Just one subscription that gives you personalized AI right inside your actual workflow. Make work less work. Try Google Workspace with Gemini at goo.gle slash workspace with Gemini. Your sausage McMuffin with egg didn't change. Your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just$5.

22:55Only at McDonald's for a limited time. Price and participation may vary. Promotion pricing may be lower than meal pricing. We are checking some of the morning's latest headlines. Recovery efforts are underway in the southeastern U.S. as the remnants of Isaiah's move through the northeast. At least four people were killed in Florida and Alabama after the storm made landfall on Friday. Roughly 400 ,000 people in those states are still without power. President Trump has approved emergency declarations for Florida, Alabama, as well as Georgia in the wake of that hurricane. And Microsoft CEO calling for a, quote, emergency break for AI in a post on X this weekend.

23:31Satya Nadella calling for advanced systems to be built with containment and independent controls that lets authorized people pause or shut a model down mid-task. Nadella's comments, the latest by a tech leader, about insufficient AI safety protocols and moving to change that. You can see shares of Microsoft up three tenths of one percent right now. Foxconn, she said, speaking out on a probe into it and more than a dozen other companies by the U.S. International Trade Commission. That probe looking at the power delivery systems used in high performance computing and allegations of U.S. patent infringement.

24:07Foxconn says that its products are currently undergoing internal verification and evaluation over those accusations. You can see shares of Foxconn closed up 2 percent. And the Justice Department has launched an investigation into whether the White House television press poll's decision to suspend coverage of President Trump violated antitrust laws. The department says it is looking at whether the group of networks, including CNN, Fox News, ABC, CBS and NBC, violated the Sherman Act. Members of the press pool did not immediately respond to CNBC's requests for comment. Well, still on deck, we are breaking down the potential surprises that could shake up the midterms, from energy prices to the Fed, tech earnings.

24:47Our experts are going to lay out what may shift the state of that race as we are three weeks out. And as we go to break, a check on T-Mobile and SpaceX shares. T-Mobile's CTO discounting SpaceX's push into mobile, arguing that SpaceX will need to put in real work and invest a fortune if it truly wants to build a competitive network to the big three wireless carriers. Now, writing in part on LinkedIn, quote, great wireless networks aren't built with headlines or spectrum licenses alone. You can see shares of T-Mobile up one percent. Pre-market SpaceX is up about seven-tenths of one percent. But the debate continues here around what is coming in the communications sector.

25:29Morning Call continues next. I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures. The Nasdaq coming off of its fourth straight week of gains. The Dow and S &P notching their second positive weeks in the last three. And as you can see right there, this Monday morning pre-market, we are mixed. The S &P is poised to open higher by eight points. The Dow, 40 points. The Nasdaq down by 52 points. We're going to get a check on Treasuries, too. Keep in mind, bond market is actually closed today for the Columbus Day holiday. But this is where we left things off coming into the weekend.

26:00U.S. 10-year Treasury yielding 5.24 percent. Let's get a check on global markets as well, a mixed session in Asia. And if we check early trade in Europe, you can see some green on the screen. The DAX is up about half a percent. The French CAC is up fractionally as well. Let's also turn to the energy space because it's been a big weekend of headlines that have impacted that sector. And President Trump claiming Ukraine and Russia have agreed to a, quote, energy ceasefire just days after the president revealed that Moscow had agreed to a deal to supply diesel to global markets. In the last hour, Ukraine's president saying that Ukraine is ready to respect an energy ceasefire if Russia does the same.

26:38Amid all of it, though, Trump also saying that Ukraine needs to replace President Zelensky. That's already eliciting some responses from European allies as well. Meantime, President Trump also saying this weekend that the U.S. is looking at potentially joining Saudi Arabia in strikes on the Houthis after a deadly attack on Riyadh's international airport on Saturday. And we've seen more since then. Also, executives from Exxon Mobil, Total Energies, Shell, Chevron, BP have all dropped out of their appearances at a key energy conference that is taking place in real time right now in Riyadh this week, the WPC conference.

27:14And you can see oil prices right now are actually higher. WTI is up about seven tenths of one percent, trading around ninety two dollars, 50 cents a barrel. Brent is also up about seven tenths of one percent, trading around one hundred five dollars, 50 cents a barrel here. Keep an eye on Riyadh and Saudi Arabia overall, because this month in general had a lot on the calendar in terms of big financial investing business conferences, including what's called the so-called Davos in the desert one later this month. situation obviously seems to be escalating in real time here. Turning to the midterms with just three weeks to go, though, until voters cast their ballots, President Trump is set to continue hitting the campaign trail this week with rallies in Montana and Arizona after appearing in Tennessee this weekend.

27:59Using the event to reiterate his promise to give Americans$5 ,000 if the Republicans win the House and the Senate. But that outcome is looking unlikely, according to users on CalShe, with 61 percent on Calci expecting Democrats to sweep the House and the Senate. With three weeks to go, though, could a potential October surprise shake up those expectations or add others into the mix? What do investors need to know and understand? Well, for more, let's bring in Henrietta Trace, co-founder and director of economic policy at Beta Partners, and Jimmy Pethikoukas, economic policy analyst at the American Enterprise Institute, also a CNBC contributor.

28:34I've been finding myself, guys, having these conversations off camera about the possibility of an October surprise. I realize that tends to be a dynamic that happens more in presidential election years. But given how uncertain and geopolitically fraught the world is right now, I do think it's worth asking a question about what should be on investors' so-called bingo cards with us three weeks out. So, Henrietta, I'm going to kick this conversation off with you. What is your October surprise? What are you watching for that maybe others have not been tracking closely enough? I've been kicking this idea around all week since we last spoke, Morgan.

29:06And obviously we have the existential risk of maybe an AI event that could happen really at any time. A Federal Reserve interest rate hike just a couple of days before the midterms. Those are all anticipated October surprises. But I think what we really got from the president was a very real contender for a shock to the election, if not necessarily the markets directly. And that is with the decision that is, of course, illegal to suspend sanctions on Russian imports of diesel. This is causing a fracture within the Republican conference in a couple of really important states. The entire delegation of Alaska, John Curtis in Utah, who's been an interesting figure to watch since his election just a couple of years ago.

29:51And then also Mike Rogers in Michigan. Those are critical, specifically Michigan and Alaska, critical races to the decision about who wins the United States Senate. So purely from a political bent, I think this tension between Trump supporting Russia and the Republican conference strongly supporting Ukraine, rejecting Putin's incursion into the EU territories, NATO threatened. Those are all pieces that I think could upend this election going into the final stretch. Just to follow up on that quickly here, Henrietta, is this really a scenario where you could see diesel or other types of energies imported from Russia, or is this really just jawboning to bring prices down ahead of elections?

30:32It's an attempt to jawbone. As you walk through, it hasn't had an impact on WTI yet. I don't expect that it will. I think the decision to try to get the EU to release some of its SPR was much more impactful to prices. I mean, we all know that Russia has put an export ban on its own diesel because they don't have enough. And the question really remains, even if they were trying to get something over the United States, could Customs and Border Patrol even offload that product into the United States? Because, again, it is illegal to accept Russian diesel by our own laws. So I think there's a lot of problems with actually getting prices down here.

31:06OK, Jimmy, what's your October surprise? Yeah, well, clearly the president is trying to create an October surprise, which is a little unusual. We have the diesel fuel. We have the five thousand dollar checks. But, you know, something Henry said about AI. Listen, there are at least a couple of Senate races, particularly Ohio, where data centers is a big issue. And I don't think we need some sort of like major existential problem. But I think if we get another high-profile hacking incident, which is entirely possible, and the media loves to talk about it, people seem particularly susceptible to worrying about this issue, especially on social media.

31:48Now, if we get another, I think, big headline grabbing sort of A.I. hack, I think that could have an impact on some individual sub races where data centers are a big issue. And this could be a very close election in the Senate. So that matters. And we do, Jimmy, like to talk about this. Yes. You've seen a rebranding. I mean, you've seen a rebranding. I mean, A.I. is now super intelligence. Right. I mean, so there does seem to be a shift in terms of that's, you know, according to the administration and this executive order. I mean, it does seem to be a shift in terms of that narrative. And what's emerging now is the safety and innovation can track together.

32:27Do you think do you think there's there's dollars and there's meaningful investment and meaningful policy that's actually going towards that? Or no, not yet. Listen, I've generally, even though I'm super enthusiastic about artificial intelligence, super intelligence, sort of my baseline has been that in this election and in 2028, that still affordability issues would be the key issue. But clearly there are particular places in this election of the Senate race where it's going to be about AI and data centers. And to me, it's also not just an existential issue or a hacking issue. But if we should get some bad tech earnings reports, and all of a sudden these stocks aren't doing well, then I think more people will say, well, okay, there seems to be a lot of downside risk to AI.

33:17But on the upside, we haven't seen the big cures yet or the big scientific breakthroughs, maybe a few math problems. But at least the market's going up because of this. And there's a lot of great stocks. But like if that's not happening either, then not only does I think that hurt some Republicans individual races, but of course, the administration, which has been very pro AI, very skeptical of regulation. I think that's another sort of headwind against Trump administration going in both into this election and for Republicans two years from now. If we just stick with affordability, because it is driving so much of the action here.

33:52Henrietta, what can be done? What else can be done near term versus long term to actually, you know, help consumers pocketbooks? Nothing is the honest answer. We have a situation where Congress is not in D.C. So any kind of comprehensive legislation or real solution is not forthcoming. When you get stuck with executive orders, you by definition get more extreme events, such as the president siding with Vladimir Putin in Russia, such as trying to outright rebrand AI as SI. I think James brings up a really interesting point. The American public doesn't much care about AI as a top tier issue. It's the number one concern of just 1 % of the population in the latest Gallup polling.

34:35So they're really more concerned with everyday prices at the grocery store, every time they go to the gas station, if you're a farmer and you're dealing with diesel. 47 % of Americans say that the economy and inflation are their number one issues. So the president and the Republican conference would love to keep attention on that. But like I said, when you're splitting the conference on the very thing that's trying to bring gas prices down, you've got yourself a sort of negative narrative arc. And that's what the president is working with right now. and costs are not coming down, they continue to rise.

35:07Okay. Quickly, Jimmy, just on affordability here, how much onus is now on these inflation reports this week?

35:17Listen, generally, at least with elections, economists and political scientists will say it's all baked in in the summer. But listen, people are focused on inflation. Another worrisome inflation report. interest rates are always going up. I think it just further cement in that narrative in people's minds. But if you're looking for an October surprise about affordability, the president could do one and the tariff war. OK, Jimmy, we'll see you again in just a little while for the call crew. And Henrietta, our thanks to you for joining us to break this down today. All right. Just a reminder, there's still time to sign up for CNBC's Trading the Midterms Forum in Washington, D.C.

36:01this Wednesday. That's bringing leading macro minds together to examine why political risk remains one of the market's biggest blind spots. Just scan the QR code on your screen right there. Go to cnbcevents.com slash trading midterms. Well, we got a lot more to come here on Morning Call, including the next steps for software, where that trade may be heading in what's been, to say the least, a rollercoaster ride for the space. Morning Call is back after this. Welcome back. Let's take a look at software stocks. The IGV iShares software ETF gaining nearly 3 % last week, adding to what's already been a big rebound in recent weeks and months.

36:39As Jonathan Krinsky at BTIG highlighted in a new note over the weekend, software is the best performing industry group in the S &P 500 over the last three months, even over the last six months, surpassing energy and semiconductors. It's up over 50 % in six months. Now, as Krinsky noted, the IGV hit an all-time high last October before plunging to multi-year lows this past April in what's been dubbed the death of software or SaaSpocalypse. There's a couple of nicknames here. But it's now nearing an all-time high after two years of consolidation, also nearing a relative breakout versus the S &P 500, making it perhaps a compelling setup for the software space.

37:19As Krinsky puts it, software has quietly become the new Mo. And of course, they have these big install bases. There's M &A. They've also been investing in AI. Investors seem to be catching on here. Straight ahead. The Morning Call crew teeing up the trading day ahead as markets prepare for the one-two punch of earnings and inflation. We're back in a moment. It's time for your call sheet where we look at the topics driving the trading day ahead. Crew members today, Stephen Whiting of the CIO Group, Sylvia Jablonski of Defiance ETFs, and Jimmy Patakoukos of the American Enterprise Institute. He's also a CNBC contributor and still with us.

37:52Great to have all of you here. Stephen, I'm going to kick this conversation off with you. There's a lot to get to. But first, the weekend that was. We had a lot of geopolitical headlines, whether it was Russia, Ukraine latest, whether it's what we're seeing in the Middle East, you know, these attacks on an airport in Saudi Arabia, perhaps opening up a new front line in terms of attacks on civilian infrastructure and airspace and air travel overall. Your thoughts? Possibility of a wider war, push and pull, the announcement with Russia, whatever the politics or geopolitics are, whether or not it gets there, it's probably bigger.

38:24than the release of strategic reserves that we've seen recently. Yet the risks around the Red Sea are so dramatic if you think about the compilation of different bottlenecks. So we are in an environment where it's a big transportation problem for energy around the world. It's not running out of oil. It's getting it to the right place. The other side of this, energy companies, when we see them, it's going to be a much stronger quarter than estimates. And that's true generally of cyclicals like financials that we'll see this week, which should be, I think, stabilizing for markets right now. OK, I want to get into more of that just a moment here.

38:58But Sylvia, do you want to get your thoughts on this as we do see crude climb higher, fractionally higher this morning? Yeah, I think you about covered it there. The risk to the markets is really the uncertainty around the geopolitics. And if what we see here is that there's a sentiment that the war will continue and will perhaps even heighten in its nature because of the Houthi attack on the Saudis, then, you know, locally what you see is further increased oil prices, you know, further strain on the consumer, further strain on the economy, further worries about inflation. And so that uncertainty is something that the market will be trying to temper.

39:34Jimmy, we talked about quite a few things a few moments ago on the show. What we didn't talk about was the possibility of escalation on the U.S. side, given these attacks we did see in Saudi Arabia and President Trump's comments over the weekend. And how real is that possibility now three weeks out from a midterm election? Boy, you know, the war the war has not been good for markets. The war has not been good for the president's political standing. It is real. It is really, you know, split the party. People want to support the president no matter what. And the president and people thought they were voting for less war, not more war.

40:11You know, the markets have done better when there's been rumors of peace. to have an escalation. I can see why the president maybe would not want an escalation before the election. But to have another escalation, to me that's bad for markets. It's bad for the president's approval ratings. Maybe bad long-term for Republicans. Again, my baseline has been the president would love to get out of this war as soon as possible. And for him to suddenly find himself escalating a war in the Middle East when he promised not to. It's certainly not where he wants to go, and I think he's going to be reluctant, but events may force his hand.

40:49Yeah, we're going to have to see what happens here over the coming days and coming weeks. In the meantime, obviously we know this is funneling through, as war always does. War is inflationary, and it funnels through to economic data and higher prices for businesses and consumers. Ben Emmons put an interesting note out last night, and he said bank earnings move with CPI and PPI because inflation drives the rate path, and the rate path drives bank profitability. So how are we watching these two this week? Well, you are seeing now, and this is more than in the past, because we've decided that things like this are a decision, a monetary decision.

41:22It's what we hear from Chair Warsh. We are seeing a really strong correlation between the oil price and bond yields in a way that we were able to look through. But now, even now, to 30 years out in the future, we're seeing yields move up. The front end of the curve is backing off a little bit, but this tightening expectation with as many as five quarter point moves in total, including the one that we've already had priced in, is not the best thing for what you want to see in financials. If it was just a steeper curve with the Fed being easy on us, it would be better. I do think even with that, though, financials earnings, bank earnings are going to be stronger than expected.

41:58We're not overweight given some of these cyclical issues and the performance that we had last year. But it's still going to be a very strong delivery on the part of big financials. Sylvia, how does it set us up for the rest of earnings season, especially when we start to hear from some of the tech and AI players and hyperscalers, which we know continue to spend lots of money here? Yeah, so I think that the big banks will be a clearing event, right? The expectations there are a little bit less. So you're looking for high single digits, low double digits on interest income, on trading revenue and things like this.

42:30And that'll kind of set the tone going into it. But we really need another, for lack of a better word, just killer quarter here from big tech and AI. We're expecting really that 30 % year over year growth. And it's going to come from the AI hyperscalers. And it's essentially what could propel the market forward. So the expectations are incredibly high. And the setup is pretty good here, too, because right now investors are paying, you know, less per dollar profit just because, you know, for P multiples have fallen from 22 to around 19 now. So, you know, you have that set up. If you get the earnings that we're expecting, that becomes a clearing event for the market to rally into the end of the year.

43:08You know, kind of maybe even regardless of what's going on in geopolitics and what we just discussed. I mean, the other piece of this, we just talked about it with software, Jamie, but you're seeing it throughout tech overall right now is quite a lot of M &A activity, even as the IPO pipeline slows down or freezes up, at least here in the near term. I mean, just over the weekend, reports about Amazon and discussions to acquire Descartes and NVIDIA in talks to either outright acquire or perhaps partner with Reflection AI. I mean, is there a point at which you start to see more regulatory scrutiny of some of these deals or or does it just continue to fuel markets?

43:42And, by the way, fuel bank earnings here, too. Yeah, listen, I'm sort of surprised that there's not been more regulatory scrutiny. Not, you know, even though we know we have a Republican president, there's been, you know, there's been sort of great sort of MAGA populist skepticism about tech companies, about all these acquisitions. That doesn't seem to be the case. And certainly you're going to expect to be, you know, this to be a continuing story. But look, I think as long as like these stocks are doing well, markets up, good earnings, you know, profits driving this market. I mean, nobody wants to screw this thing up since this seems to be like the main tailwind right now for the American economy.

44:26Four years for the S &P 500 bull market here. I mean, we marked the bottom literally today. Since then, the S &P has more than doubled, has added$40 trillion in market cap. And you now have four companies that are worth more than$4 trillion apiece. It really sort of speaks to how AI has spurred all of this. We getting long in the tooth, though? It's an aging bull market. You can see in our CRU Group report this weekend. I mean, we've had almost a 16 % compounded return in U.S. equities for 15 years. The long-term return is 10. Someday, bear markets come. There's a payback. It doesn't have to be this coming year, the way earnings are being delivered.

45:05But earnings itself are so much stronger than trend. 30 percent is not something to count on forever. OK, Sylvia, your thoughts on this? I would agree with that. We'll see some softening, but not anytime soon. You know, we're looking for four trillion dollars of A.I. spend between now and 2030. You know, the amount of just electricity, energy power, the things we talked about before. Or it would take 20 New York cities to power what we need for AI. You know, so there's a lot of spend that's going to go in there. And then there's going to be a lot of, you know, filtering down into different industries, profit taking and things like this.

45:39And I just think that the next decade is about AI power and infrastructure. And that could potentially lead the markets to continue running because earnings are going to continue to grow on that as it comes to fruition. All right. We're going to leave the conversation there. And, of course, we'll continue to watch the debt markets and the bond markets overall in the midst of this spend, too. Thank you so much to our call crew. Great to have all of you here. Stock futures are mixed. Bond markets close. As a small business owner, sometimes it feels like no matter how much planning you do, there's always surprises, like an urgent, expensive repair.

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