Morning Call 10/28/26

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1:00Morgan Brennan: I'm Morgan Brennan, and this is your Morning Call.

1:17Morgan Brennan: Good Wednesday morning. Let's get a check on U.S. stock futures after another positive day for Wall Street yesterday that saw the Nasdaq rally about 1.2 percent. It's up two sessions in a row for the first time in a month. And you can see building on those gains here this morning with the Nasdaq poised to open higher by about 108 points. The S &P fractionally higher, up about seven points. And the Dow under some pressure again this morning, down 70 points. So a mixed picture there after the Dow basically finished flat yesterday. We're going to take a check on the bond market, too, because Treasury yields are in focus as we await today's Federal Reserve interest rate decision, which is going to happen this afternoon.

1:55Morgan Brennan: Largely expected to hold. We could see yields are climbing higher across the curve this morning. U.S. 10-year Treasury yielding 5.01 percent. So we're back above 5 percent here. Fed sensitive to your Treasury, 4.74 percent. And the 30-year Treasury, 5.31 percent. Calci users with near 100 percent certainty that the Fed will keep rates on hold today. Let's get a check on the dollar index, too, because the dollar is weaker against other major currencies, including the euro and the yen this morning. But you can see actually the dollar index is slightly higher. 102.38 is the level there. Also, keep an eye on the Kiwi in New Zealand after the central bank there surprised markets by holding rates steady.

2:37Morgan Brennan: The expectation hadn't been that they would hike this morning. And energy. Let's get a look there, too. Amid reports that the U.S. is telling Gulf allies to prepare for more Iran strikes after the midterm elections. You could see crude is climbing. WTI is up 1.8 percent right now, trading just below$102 a barrel. Brent crude is up 1.4 percent, and that is trading around$115.50 a barrel. Our Bob gasoline futures are higher. The diesel contract is a bit lower this morning. Let's turn to some of this morning's big stock movers, though. South Korea memory giant SK Hynix out with earnings, posting a record high quarterly net profit that easily beat street estimates, also announcing massive new shareholder rewards in the form of buybacks and dividends as AI infrastructure demand continues to drive up memory prices.

3:25Morgan Brennan: The company is saying that operating profits rose more than 630 percent compared to a year ago. And you can see shares of SK Hynix popped almost 11 percent in Korea trading overnight and pre-market here in the U.S. The ADRs are up about seven and a half percent. Let's check the rest of the chip trade in the wake of this as well. You can see right there The green on the screen continues. NVIDIA up about six tenths of one percent. You've got AMD up one and a half percent. ASML holdings up one percent. In general, that semi relief rally here continues. Let's also get a check on shares of Robinhood, though, because those are moving in the opposite direction.

4:06Morgan Brennan: Those are under pressure after reporting results after the close yesterday. Third quarter earnings coming in short of street estimates while sales were in line. The company flagging a slower crypto trading, higher expenses that overshadowed strong activity in options and prediction markets. Those shares are down more than 30 percent from their high that was hit in October of last year. You see they're down another 8 percent here pre-market. However, keep in mind there was a lot of commentary on the call about how they're diversifying above and beyond the crypto trading that they have been known for and that the stock has moved in tandem with over the years.

4:39Morgan Brennan: You're going to hear more about that, too, from CEO Vlad Tenev. It's going to be a squawk on the street in the 10 a.m. Eastern hour today with more. Also, those Trump accounts for kids playing a role here in earnings results, too. Other big earnings movers include paintmaker PPG Industries out with a Q3 profit beat, full year raise. And you can see those shares popping 4 percent. Solar panel maker Enphase Energy, though, moving the other way after missing street estimates for its most recent quarter. Also lowering its outlook due to weak residential demand. That is their core market amid high rates.

5:11Morgan Brennan: No more tax credits. And those shares down almost 18 percent right now. Seagate also falling despite a fiscal first quarter beat with better than expected current quarter guidance. See, those shares are down about three and a half percent. Good results, but perhaps not good enough. That seemed to have been the theme with tech earnings after the bell last night. Now, on the broader AI trade, the information is reporting that OpenAI plans to buy Google's AI chips to meet surge in compute demand. That move follows an announcement last week that OpenAI would make its frontier AI models available through Google Cloud.

5:42Morgan Brennan: And the report did not disclose terms of the deal. You can see shares of Alphabet up more than 1 % right now. And it's not just here at home in the U.S. We've got a very busy earnings morning overseas as well. So let's get to Karen Cho in London with more. Karen.

6:00Morgan, good morning to you. Certainly no midweek lull here. Asian equities have rallied amid optimism around AI following chipmaker SK Hynix's blockbuster earnings report. Now, the company's operating profit rose more than 630 percent year on year. Sales leapt almost 330 percent. Markets, though, are keenly watching the Fed decision later on today. But you did see very large ranges for the Cosby there. And here in Europe, equity markets are in a subtle holding pattern ahead of that Fed decision. The FTSE, though, in particular, is weaker today as investors eye earnings from heavyweights to GSK and Unilever right at the bottom of the index.

6:38But also we're awaiting updates from Chancellor Healy's first budget. We've had a slew of corporate earnings out, in particular in the banking sector. So let's take a look at the third quarter numbers. UBS pre-tax profit rose nearly 30 percent to just under$3.6 billion, largely in line with analysts' expectations. Attention has shifted to uncertainty around its future amid the stricter prospect of capital requirements. Now, Standard Chart had lifted its four-year targets after quarterly profit rose 27%, beating expectations. So we're seeing a move higher in that stock today. The lender said it's in a stronger performance in its wealth and global markets division.

7:14And Deutsche Bank reported a net profit beat, recording a 2 % increase against expectations for a decline amid a previously gloomy outlook. And just a couple of takeaways, Morgan. I was having a lot of conversations with the banks this morning, and it was Stan Charter was telling me in the operating leverage now, this is the quarter where you're starting to see some tangible impact from AI. Santander actually put a 200 million contribution in this quarter. So the bank's telling us AI is working for them. Back to you.

7:44Morgan Brennan: That is a key statement right there, Karen Cho, especially as investors do continue to focus on that return on investment and how that's going to play into corporate earnings overall. Karen joining us from London. Well, turning back to the action stateside, the tech trade riding a two-day win streak. This is We Await Results from Alphabet. Microsoft ServiceNow, Samsung after the close today. Around the world, we're on the brink of central bank decision. Triple threat, we'll call it, or triple hold, maybe. The Fed today, the European Central Bank tomorrow, Bank of Japan. Late Thursday night, year-to-date, it's been all about the Asian markets, with Japan's Nikkei 225 outperforming the U.S.

8:20Morgan Brennan: and Europe. More than double the S &P 500 performance since January. But joining me now to talk about all of it is Max Kentner, the chief multi-asset strategist at HSBC Bank. Max, it's great to have you back on the show. Here's what really got my attention looking at your notes this morning. The fact that you are urging clients to position for the midterms and maybe we'll say potential outcome for the midterms. How have your recommendations changed here?

8:50Yeah, good morning. Look, we were just hearing from Karen about this holding pattern of European markets. And let's be honest, when we look at global equity markets overall in the last couple of months, really in the last five months, that has been this holding pattern. So it is a question now, what can get us out of that holding pattern? Is that to the upside? Is that to the downside? And that's where I struggle, at least in the next couple of weeks. You would just talk about the central bank side of things. Maybe the Fed tonight is, you know, is a hold and is pretty uneventful. But when we look at these V tomorrow, for example, and we look around, obviously, they have to comment around France.

9:24Can they already comment and can say, look, whatever happens, we are there. We're there to really make that situation or make that situation go away already now, just because OAT spreads have widened a little bit. No, probably the widening in OAT spreads and overall price action hasn't become systemic yet. And that means, you know, I struggle to see what, for example, tomorrow the ECB can say that will calm down ready markets with regard to France. I struggle to see when you look at next week's midterms, you've just mentioned it, to see really a sort of really, really great outcome. I think actually on the midterms, there's a couple of things that keep me a bit cautious.

10:04Number one, it is incredibly consensus that the midterms are some sort of clearing event. And number two, I think the easier trade here is just to really sit this one out in rates and increase a little bit exposure to duration and developed market sovereigns. Because if we have a gridlock, if we do have a gridlock, then maybe there is a bit of, you know, a bit of hopes for fiscal restraint coming in. That's good for bonds. It's probably good for equities as well, because fears around AI regulation dissipate. But if we get a blue wave, it's those fears around AI regulation that will make developed market sovereigns rally as well.

10:37So in both scenarios, actually rates are probably working, but only in one of the two, equities will work. So I would argue just sitting that one out in developed market sovereigns over the next couple of weeks, that's the easier trade.

10:50Morgan Brennan: Yeah, and you're going to get paid to do that. I mean, the run up in rates globally this year has been pretty profound. When you say developed market sovereigns, I assume you mean still steering clear of France or something else?

11:03Yeah, absolutely. So we have no exposure to the euro, the non-core, as we call it. So Bonds, fine. But we're really, really liking actually in development market sovereigns. We have liked already gilts over the last couple of weeks. We've increased that even further. I think the budget probably is going to be some sort of, hopefully, some sort of non-event where then you can see actually, you know what, in the UK, things are looking a little bit more on the up. When you look, for example, at inflation surprises, not the outright level of inflation, but inflation surprises compared to consensus expectations year to date, that's been pretty much a straight line down.

11:39So that actually can then, even in the next couple of weeks, just tactically, I think can lend some support for guilt and also treasuries. Treasuries have been repriced so, so much. I think what people underestimate is two things in the U.S. It's that negative residual seasonality that we've seen particularly intensifying since COVID, that negative residual seasonality. in inflation data. That could really bring perhaps a little bit of downside surprises on inflation in the next three readings, number one. Number two, I think what we're overestimating is that strong growth impulse from the last six months.

12:10Let's not forget, we had 20 % higher tax refunds. We had tariff refunds. We had all these CapEx incentives from the one big beautiful bill. None of these things will repeat in the next six to nine months. So that means that the fiscal impulse is bound to be slightly negative. And that could bring a bit of negative growth surprises and that in turn would probably be quite a nice support for treasuries.

12:31Morgan Brennan: You know what the top story is, the top place story is on the Wall Street Journal's website right now. It's here. This is the headline. U.S. warns Gulf of possible short, intense renewal of Iran war after midterms. Do you think this is a market that is largely shrugging off all the geopolitical risk at this point? I mean, we have elevated crude and energy prices that seems to be priced into the market. Or is that add or inject some sort of uncertainty around this discussion we're having and what that can mean in terms of things like inflation surprises?

13:03Yeah, I think it depends which market we're talking about. If we're talking about equities, it's ultimately what is happening with the hyperscaler earnings in the next couple of days, right? It's ultimately really about the earnings and the growth outlook. So there, I don't think it plays that much of a role. Perhaps we can argue that with the level of oil prices where we are starting now, that if after the midterms we get some sort of flaring up again, that that temporarily is putting a bit of a dent in sentiment as well. But that would be the sort of dip that you would want to snap up really, really quickly because it doesn't affect the earnings outlook.

13:35It doesn't affect what you're actually buying in equities. I think for rates and for FX, that's probably different, right? For a particularly for the rate side of things, you know, it would probably call into question a little bit the calming down that we've seen on the front end in rates in the last two, three weeks, that would be called into question again. And then perhaps, you know, we would see a recorrelation between front end rates globally, not just in the U.S., but globally and oil prices again.

14:01Morgan Brennan: All right. Max Kettner, great to have you on to kick off the hour. Truly appreciate it. We've got a developing story in the high stakes election in Israel. It's seen as a referendum on sitting Prime Minister Benjamin Netanyahu with the polls closed and early exit data showing no clear winner. Perhaps not unexpected, but users on Calci appearing just as split as the electorate, with 59 percent saying no one will claim a majority with no new government. By October of, get this, next year, this is what folks are wagering on, on Calci. MS Now's Josh Eninger is live in Jerusalem with more. And what will happen if no one can claim victory?

14:41Morgan Brennan: Josh. Oh, well, Morgan, I think we're a long way away from that determination. This is just a few hours since the polls closed and Israelis woke up this morning to the word that they actually had been expecting. No one in the history of Israel has been able to win one of these elections outright on Election Day because it's a coalition government. It's a parliamentary democracy. There are 120 seats in the Knesset. The winner has to take 50 percent plus one. And there were more than three dozen political parties involved. So mathematically, it's essentially impossible for one person to run away with it or one party to run away with it on Election Day.

15:19But where things have ended up leaves the country's leaders in a bit of a pickle, because we basically have two coalitions. There's the coalition, the far-right coalition led by Benjamin Netanyahu, obviously the current prime minister. And then there's a coalition that's slightly more to the left, but still fairly to the right, led by Gadi Eisenkot. And both of those coalitions are on either sides of this spectrum. Neither has the number of seats they need to push over the top. And in the middle are an unusual number of Arab Israelis who turned out with record numbers yesterday and are sitting right in the middle.

15:55So now the Eisenkot team has really a decision to make. He had pledged a Zionist government free of any Arab Israelis in his government. So if he were to align himself with that bloc, he would be going back on a campaign promise and perhaps turn away some of his more right-wing voters who did support him yesterday. The other option for him is some sort of unity government. Look to the right, have Netanyahu work with him, and perhaps Benjamin Netanyahu throws off some of the more right-wing elements in his coalition. These would be the people who have been so aggressively pushing settlements in the West Bank.

16:34So that's the situation Israelis find themselves in. This could take weeks, if not more than a month, to resolve. And if it doesn't, they might be looking at another election, Morgan.

16:43Morgan Brennan: OK. Josh Heineger, thank you for joining us and bringing us the latest. We've got a lot more to come here on Morning Call, including a Morning Call exclusive with the CEO of the world's largest industrial and logistics real estate company, Prologis. What he's seeing on the front lines of the U.S. economy. Plus, a huge win for one big bank ahead of what's expected to be a record-breaking anthropic IPO. But first, it's a law firm that's handled some of the biggest bankruptcies in history, now possibly on the brink of its own. A very busy hour still ahead when Morning Call returns. Ever notice how every new AI tool asks you to explain your business to it all over again?

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18:33Morgan Brennan: Welcome back to Morning Call. A crisis at one of America's and Wall Street's biggest and most prestigious law firms appears to be intensifying. We've got reports saying that while Gottschall has tapped outside restructuring specialists to explore options, including a possible wind down after the departure of several top partners this summer led to merger talks that collapsed last week, That prompted even more high-level exits. It's a stunning fall for the nearly century-old firm, which has worked on such high-profile bankruptcy cases as Enron and Lehman Brothers and deals like Facebook's$19 billion takeover of WhatsApp.

19:08Morgan Brennan: Joining me now is Kay Wiggins, U.S. legal correspondent at the Financial Times. Kay, it's great to have you on. I mean, we framed it this way coming into the commercial break, but it is really one of the biggest law firms that's helped companies navigate bankruptcy and is now scrambling to avoid its own. How did we get here? Yes, it's really an incredible story. This is something that no one would have expected even just a few months ago. This is basically the story of how an exodus of top talent at a law firm can really throw that firm into crisis. This firm has had a series of senior lawyers departing in recent months.

19:47Essentially, a law firm is really just made up of people, the lawyers that work there, right? When those people and the revenue that they generate and the teams that they work with walk out the door, it really can throw a law firm into a complete state of crisis. And that's what we've seen here.

20:02Morgan Brennan: Is this a one-off and indicative of how management has run this firm specifically? Or is it a canary in the coal mine as you see broader change come to the law industry? Yeah, I think that's a really important question. And a lot of the people that we've been speaking to in recent days while we've been reporting on this have said this could possibly be a canary in the coal mine. One huge thing that's changed in the world of big law in recent years is that law firms are poaching each other's top partners really with extraordinary pay packages at a really rapid rate these days. It used to be the case that somebody would get a job as a partner at a top law firm and they would stay there for their whole career.

20:43And that has really fundamentally changed in recent years. And the talent awards are heating up. And Weil is the first really big bomb to suffer as a consequence of this.

20:53Morgan Brennan: That's interesting. And we talk so much about what we're seeing in terms of the aggressive nature of trying to recruit top talent in tech, in particular AI. It sounds like it's happening on the law side, too, right now. It's absolutely happening on the law side, too. Yeah. And some of the paid packages that these people are able to attract are really, really eye-watering. And it's really becoming an extraordinarily competitive market these days. So how is AI going to change all of this if it is? I mean, if talent is the lifeblood of law firms, but perhaps the AI piece of the equation and adoption is going to change what that incoming pipeline looks like, are we poised for greater disruption across the legal sector?

21:36this is something i spend a lot of time talking to people about and there are completely contrasting schools of thought on how ai might affect all of this you know there are some people who say ai can automate sort of lower level more junior work and the really senior lawyers who people value for their judgment for their skill for their advocacy in court will always be extremely valuable because people will always rely on those kind of very human skills that's one school of thought. The other school of thought is that may be all well and good. But if you, you know, law firms rely on those more junior lawyers to generate a lot of their revenue and if they just don't need as many of those anymore and if firms are no longer, if clients are no longer willing to pay the hour for the services of more junior lawyers, then how does the financial model work?

22:20Morgan Brennan: Yeah, maybe not thousands of dollars for all those billable hours. We'll have to see. Kay Wiggins, I appreciate you coming on. Thank you. Thank you. Straight ahead, a Morning Call exclusive with the CEO of Prologis talking about the U.S. AI buildout. This as the stock flirts with the flatline since taking over as CEO at the start of this year. They've got some big bets afoot, and what he describes in terms of fundamentals might surprise you. Morning Call is back after this. Ever notice how every new AI tool asks you to explain your business to it all over again? Google Workspace with Gemini skips that.

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23:35No matter your industry or role, your agent has the skills to help every team stay in their flow. Seriously, make work less work with Gemini on Google Cloud. Check response, subscription required.

23:46Morgan Brennan: Still waiting in line? Again? That's time you'll never get back. Save time and money with Stamps.com. Over 4 million businesses have skipped the line with Stamps.com. Join them to save up to 90 % off carrier rates from your computer or phone right now. Print postage for certified mail, registered mail, and packages in seconds. Then schedule a pickup right from your home or office. For a limited time, go to Stamps.com and use code podcast for a free welcome gift. Taxes and fees apply. Welcome back to Morning Call. I spoke exclusively with Prologis CEO Dan Letter, who took the helm in January. Prologis is the world's largest industrial and logistics real estate company.

24:26Morgan Brennan: So I asked what he's seeing on the front lines of the economy.

24:34We're seeing in our numbers is very healthy demand. We're going to see our largest leasing number since 2022. Since then, it's been a little sluggish between 23 to 25. So really good to see that. But then on top of that, the overall market as well. The market has very healthy demand numbers across the U.S. We're seeing that in Europe as well. And this will be the first year in five years that we see positive rent growth in the United States.

25:03Morgan Brennan: That's interesting. I mean, when you talk about some of those customers that are moving and storing goods in Prologis warehouses, what's driving it? You know, there are really three or four big drivers right now. Of course, e-commerce, big driver of logistics real estate. And the more penetration that e-commerce has into retail sales, the better it is for logistics real estate because e-commerce users use three times the space as a typical brick and mortar user. But we're also seeing advanced manufacturing growing throughout the United States. Interestingly, we're also seeing a big driver of demand through data center and the data center build out.

25:40Now, I'm not talking about the actual data centers themselves. I'm talking about the manufacturers and the vendors that are there to service both the build out of the data centers, but then also there to service those data centers over time. They're signing long term leases. And this is really a new demand driver responsible for over 10 percent of the leasing so far this year in the United States.

26:01Morgan Brennan: Now, Leiter says only two segments have been, quote, a bit sluggish, both tied to interest rates, housing and autos. As the Fed makes a policy decision today, he says as rates have risen and as construction costs climb, it's getting harder to build new supply. He estimates that the cost of new construction is now about 27 percent above current rents, meaning rent prices will go up. Prologis owns a lot of land and is a position to keep building. But Prologis is also expanding into another business line, and that is data center development, working directly with hyperscalers. We started energizing our land and buildings about six years ago or so, maybe even longer, maybe seven or eight years ago, before AI had this giant tailwind behind it.

26:50And so power is the driver for the next wave of data centers. We now control 5.8 gigawatts of power. That is about a gigawatt a year of new development starts, new data center starts that we expect to do over the next five years. As a matter of fact, we have one gigawatt right now under a letter of intent with various investment grade customers. So a lot of growth, a very long runway for us in that data center business.

27:18Morgan Brennan: Now, Letter says he's positioning Prologis for what's coming with inference. I would say if you look at our properties, that's where we're going to see huge growth opportunities in data centers because that latency will matter much more than what we see today. And the build out that you see happening in locations that may be in the outskirts or even in the middle of the country. This inference needs to be very close to those households. And that was the model. That's the blueprint for how we built this portfolio. So if we get check on shares of Prologis, basically flat here, pre-market and essentially flat for the year.

28:01Morgan Brennan: And that's in part because more broadly, you've seen REITs and the real estate trade move in tandem with what we've seen with rates. But bottom line here, the message from Prologis, very constructive, dare I say even bullish on the state of the economy through the rest of this year and beyond. Full interview where we get into all the details, including on that data center development, is on CNBC.com. Still on deck, from presidential disruptor to Brazilian exile. The dramatic turn of events in the wake of Brazil's general election for Flavio Bolsonaro. We've got those details when Morning Call returns.

28:35Morgan Brennan: I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures this Wednesday morning. You can see a mixed picture here. S &P poised to open up modestly higher, about four points. The Dow under a bit of pressure down, poised to open down 102 points. The Nasdaq up 82 points. That is after gains for the major averages yesterday. I mean, the Dow basically finishing flat. But a big rally in semi-stocks and other AI and tech-related names yesterday again sent the Nasdaq up more than 1.1 percent. And if we get to check on some of this morning's latest headlines, we continue with some of that theme.

29:11Morgan Brennan: Anthropic reportedly tapping JPMorgan Chase to lead its efforts, selling shares to retail investors for its upcoming IPO. According to the report, the company is weighing a retail offering of about 15 to 20 percent of the shares available in the IPO overall. The city reportedly set to lead international retail efforts. And the U.S. State Department says it will issue visas to Flavio Bolsonaro and his family as he reportedly arrived in Miami after fleeing his home country in the wake of his presidential election loss to incumbent Lula da Silva, Bolsonaro's self-exile to Florida, where his brother has lived for more than a year, comes amid reports that he is under investigation for corruption and money laundering in Brazil, and that a court order to surrender his passport to authorities, all coming to light in the hours after his loss.

30:01Morgan Brennan: Well, two earnings movers to watch, Visa coming in ahead of a Q4 estimate amid strong consumer spending, payments volume jumping at 9 percent, while processed transactions rose 10 percent. And you can see shares of Visa, though, down about 1.6 percent pre-market. NXP Semi, those shares falling as well, down about 7 percent. Current quarter sales outlook coming in line with expectations just wasn't enough for investors who had, I think, higher expectations coming into this report. We're also keeping an eye on shares of Boeing after that big stock slide in trading yesterday, the Dow component shaving more than 120 points off the index yesterday, now trading at a 52-week low, dropped almost 11 % in trading yesterday.

30:46Morgan Brennan: That's after the company said it will not significantly ramp up 737 max production until late 2027. That was later than street expectations. Also pushed back its long-term guidance for free cash flow as well. All of that happened on the call. Before the call, shares had actually been trading higher because of the Q3 results themselves. You can see shares are down fractionally this morning. Now, in India, a banner day for the country's largest telecom and digital services player, Geo Platforms, that surged in its public market debut. That was more than 22 times subscribed, oversubscribed. The company, backed by Meta and Google, raised$3.2 billion.

31:25Morgan Brennan: It's India's largest IPO to date. And you can see the trading right there on your screen popping 26%. Let's turn back to big tech and a big batch of earnings after the close today. We've got Microsoft, Alphabet, ServiceNow, and Samsung. Now, this after we heard from memory chip giant SK Hynix overnight reporting surging sales in operating income, saying it sold out of DRAM chips until 2029 on surging AI demand. SK results boosting memory peers Micron and SanDisk as well. You can see SK Hynix, the ADRs that trade here, up 7 % pre-market. And you can see SanDisk and Micron both popping about 4%, 3.5%, 4%.

32:03Morgan Brennan: Well, commentary like that is one reason the NASDAQ is on a tear this week and pointing to another strong open today. But on Mad Money last night, our Jim Cramer says while he is still bullish on the sector, it may be time for caution. I am pleased that people feel so comfortable. The tech is now all good to go because there is money flowing back in. My travel trust owns a lot of these companies. We need to see them rally. But tell me something. What the heck does that have to do with the coast being clear? But the bottom line is nothing has changed except bonds are tamed going into a Fed meeting, which will then be followed by an election and then the potential for a fresh bombing run over the skies of Tehran.

32:42I don't happen to think that's all of a reason to call all clear. I think it's a reason to look at other sectors in the economy.

32:49Morgan Brennan: Well, joining me now is Julian Emanuel, Senior Managing Director of Equity, Derivatives and Quantitative Strategy at Evercore ISI. It's great to have you here on set. Great to be here. We got you doing double duty today. I love it. When I think of you, I think of really one of the longest standing bulls when it comes to the AI trade. You focused in on it before it became the cool thing to do. Where do you stand now? We think it's got further to run. If you look at the news flow the last few days, what you're seeing is the push and pull. Kramer just said it perfectly. There's a lot of macro risk in front of us over the next week in particular.

33:22But what's driven this bull market and driven the AI trade and where we think it's still going is incredible earnings power and the liquidity in the capital markets. We doubted that several weeks ago. There are problems at the periphery. Less credible companies will have difficulty raising financing. But the majors, the markets are still open. And then we see great earnings last night from a major chip manufacturer in Korea. We see the world's largest social network come to market with more debt and equity offerings. The market receives it. And now we see plans for one of the largest AI companies to go public.

34:04All of that tells you the earnings power of the AI revolution has further run.

34:09Morgan Brennan: You know, it's interesting. A couple of months ago, we were talking about the possibility of an attempt at regulatory capture by the biggest AI companies when Anthropik sort of raised the alarms about cybersecurity threats and others piled in. When you look at the capital flow, should we be talking about capital capture? Because it is these biggest AI companies that are pulling in so much money right now. Well, and the numbers are mind-boggling. We joke about this, but literally the concept of billions over the last year or two has become trillions. It's a very interesting jump. But what's happened is over the last few months, the interest rate markets have imposed discipline on how this process is working.

34:53There was an idea a few weeks ago that capital was forever free flowing. And then all of a sudden we got to over 530 on the 10 year yield. And there was questions around that, as there should be in an efficient capital market distribution scheme. And we do think that there's likely to be a lot more raise. But again, liquidity is there. And the backdrop is both earnings and the economy are sound.

35:21Morgan Brennan: What would you be watching to sort of understand whether the liquidity is evaporating or continuing to remain here? I mean, does this take us back to the Fed and sort of central bank monetary policy decisions? Is it something else? The Fed is less of an issue. And I think Chair Warsh is actually happy about that right now. You know, we expect them to pass today, to hike in December, maybe once more. The biggest issue in our mind is to watch the credit markets. We've been credit market geeks long before it was fashionable. And to us, the story is, again, the credits at the periphery have been stressed.

36:01but the core in the overall health of the credit market remains robust. And the message from there is that the economy is in good shape. Consumer demand is still driving the bigger picture. And all that flows into the ability for these hyperscalers in particular to be able to raise capital.

36:22Morgan Brennan: What are you going to be watching as we start to get more earnings? I mean, we're going to get Alphabet, Microsoft after the bell today, Amazon tomorrow, I believe. I mean, what are sort of the key metrics or commentary you're looking for to know that things are still chugging along and we're still on a healthy trajectory? So the earnings reports are going to be great. We know that they've been consistently fantastic for quarters on end. We're going to certainly focus on commentary around what 2027 CapEx plans look like, whether that sort of$1.3 trillion number at the hyperscale as an aggregate has upside or downside.

37:02But I think we've got to be a little tempered here. Again, with the macro picture the way it is the next few days, you're not going to have these incredible share price reactions from good earnings that you had last quarter because you also had a stress unwind of positions that catalyzed those. So we're going to see, we think, you know, mild reactions, but positive.

37:25Morgan Brennan: All right. Julian, don't go too far. Stay with us. You're going to join us for the morning call crew in just a few moments. I appreciate it. Great. Straight ahead, as I just mentioned, he's going to join our morning call crew with more on the tech trade, the Fed. We're to set. That's going to set. That is set to drive the trading day ahead, she says. More coffee. First, a programming note. Don't miss morning call exclusive tomorrow with me. I'm going to sit down with the president and CEO of Charles Schwab. Rick Worcester is live from the company's annual impact conference in Boston. We're going to have a lot to cover.

37:57State of the markets, earnings, unpack that Fed decision, so much more.

38:03Morgan Brennan: Morning Call is back after this. Welcome back. Well, some relief at the pump with more potentially poised to come. Gasoline prices are already down 21 percent in the past month to an average of$4.27 a gallon nationally. That's according to AAA. One reason refining margins are starting to come down. The 3-2-1 crack spread is a key measure of what refiners earn, turning crude into gasoline, diesel and jet fuel. That has fallen to about$50 a barrel, down from more than$72 last month. Why? Well, there's been a shortage of refining capacity this year, and it had gotten worse amid two wars. But more supply may be beginning to come online globally, including you've got some diesel, albeit modest amounts, from Russia.

38:43Morgan Brennan: More capacity coming online in India next year and here in the U.S. efforts to quickly boost some refining capacity with the Defense Production Act, too. Something we talked about with the director of the National Energy Dominance Council here on this show last week. Now, all of that is adding to a narrowing of that crack spread that's starting to weigh on the stocks, too. Marathon Petroleum, that fell more than 7 percent yesterday. Valero was down 9 percent. These are big moves for these stocks. Their biggest one-day drops, actually, since April of last year amid all of the tariff stuff that was playing out in the markets.

39:14Morgan Brennan: It's bad news for refining margins, potentially, or at least we could say maybe we saw peak refining margins, but possibly also good news at the pump. Keep in mind, those refining stocks are what led the energy sector lower yesterday, too. It has worse day since, we'll call it mid-September. We're going to hear more on the earnings front from the likes of Exxon and Chevron later this week, too, when it comes to refining. Straight ahead, though, Morning Call crew teeing up the trading day ahead. We're back after this. Welcome back. It's time for your call sheet. The crew members today, Nick Frosty of VanEck Funds, Chris Hodge of Natixas CIV Americas, and back with us is Julian Emanuel.

39:52Morgan Brennan: All right, we've got a lot to get to today. Arguably one of the busiest days of the earnings season. Julian, I'm going to kick this off with you. What do you think matters more right now? Is it the Fed? Is it earnings? Or is it going back to the conversation we're having a few minutes ago? Is it the macro picture and some of these big things we need to get to over the coming days, including midterm elections? The macro really is the 800-pound gorilla in the room right now. Again, you had elections in Israel in the last 24 hours. You're going to have the midterms on Tuesday. There's been a lot of rhetoric around whether there's going to be kinetic escalation in Iran.

40:29And if that were to happen and you had an oil price spike, that throws off a lot of the AI narrative. And the strength of the earnings takes a backseat for geopolitics. But again, it's you could have the positive outcomes, could have a scenario where Iran decides to come to the negotiating table, in which case it'll be massively off to the races in a potentially very positive fourth quarter seasonal setup.

40:56Morgan Brennan: Nick, what are you watching right now? And there's no dearth of things to watch. Yes, there's no shortage of things to pay attention to. I think last night's overnight reports from Hynix, SK Hynix, and their earnings, not really unexpected. They continue to report that they're selling out for 2027, part of 2028. So these are all really positive signs for our kind of 10-year time horizon for AI. And I think if you look at it from like a common sense perspective, there's no world where I think we're using less AI in 10 years than we are today. So compute demand continues to be there. And I think a lot of these macro themes will affect us in the short term.

41:35But we're very constructive on the technology over the long term. And as it becomes more entrenched in enterprise adoption and consumer adoption, that just means more chips and more compute, right? So that's our perspective. And we're really constructive on semiconductors over the long term because, you know, there's such a supply and demand imbalance.

41:52Morgan Brennan: You know, we were just talking about it earlier in the show with our Karen Cho out of London, you know, big bank earnings out of Europe today. And one of the things she was reporting is the fact that you are starting to see the effects, the positive effects of AI move through to the profit line in Europe for the big banks. So certainly something to keep an eye on in terms of the earnings picture overall. Chris, I do want to get your thoughts. I want to understand what you're watching going into this Fed decision today. I mean, largely expected to hold. It's interesting. Everybody seems to be expected to hold this week, whether it's the Fed, whether it's the ECB, BOJ.

42:24Morgan Brennan: Even last night, New Zealand's central bank surprised everybody by holding. But are there still fireworks under the surface here, potentially? Probably not for today. You mentioned the graphic before. Futures have about a 5 percent chance of a hold. I actually think that that is underpriced. Now, I do think the Fed will hold, but I think the odds are greater than 5 percent of any sort of action today. I think Warsh would have the votes to push through a hike if he wanted to, but I don't think he will. As far as the press conference is concerned, I think we can continue to not get much. It's easy to not give forward guidance when you don't really know what's going to happen next.

43:02But I do expect it to be much shorter with no follow-up questions. That is a theme that continues since the September meeting.

43:11Morgan Brennan: What are you watching in terms of the bond market fixed income picture and how the Fed could affect that or not? Well, what we're watching is whether Chair Warsh extends at that half an hour mark or not, or whether he leaves early the way he did previously. You know, in our mind, it's really much more about the 10 year yield. OK, we're now getting comfortable with the fact that there isn't going to be forward guidance. We're not going to be permanently comfortable with it, but it is becoming part of the narrative. Again, for us, it's the importance of their ability to communicate that they can control inflation.

43:48And in that way, you keep the 10-year yield in check from running away.

43:54Morgan Brennan: I just want to get your thoughts on something we're talking about in the commercial break, and that is the fact that it's tech and it's energy outperforming this year. What is that signal? It's extraordinary. I mean, again, one of those things, if you were at this time last year and you had said that that was going to happen, everyone would have said you're crazy, particularly thinking that would be up 13, 12, 13 percent with$100 WTI. What it says is that this is an extraordinary time. This has only happened a few times. And it's a marker for more volatility, both downside and we think eventually upside in the year to come.

44:30Hmm.

44:32Morgan Brennan: Nick, energy, is that a buy right now? Do you see your clear? I mean, we're talking about rotation into other sectors here, too, amid earnings season. What do you think? Yeah, I think we would take it back to the data center supply chain, right? I think, you know, he made a good point. But if you look at where the bottlenecks lie for this compute build out, energy is a huge part of that. And I don't think anybody is unaware of that fact. So I think there's a lot of constructive tailwinds behind energy as we continue to build out these data centers. So we're looking at that as a huge opportunity moving forward because compared to the rest of the world, we've kind of slowed down on our electron build out.

45:13So there's a lot of opportunity there as we're going to need exponentially more compute for all these chips that we're bringing online.

45:20Morgan Brennan: Yeah, Chris, I spoke to the CEO of Prologis. What's really fascinating there is in addition to the warehousing and industrial real estate footprint, they're building out AI data centers and talking to hyperscalers to do it. They've even dedicated a team, I think something like 175 people, just to the power needs that they're seeing for their customers here too. I mean, he was very upbeat about the state of the economy. So what are you watching in terms of that as not only do we get a Fed decision today, oh, we're at the end of the show. Okay. Quick thoughts. Yeah, I think you're exactly right.

45:54But the economy is vulnerable to a slowdown in AI CapEx. So I think the Fed's going to be very mindful of the wobble in tech names that we've seen, higher yields and tighter financial conditions. So I think the Fed's going to be very hesitant to overdo it.

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