Morning Call 10/5/26

0:00At Edward Jones, we believe rich is more than caring about the latest and greatest. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are, with personalized financial strategies that help protect what matters, so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Let's find your rich together. Edward Jones, member SIPC. Pro save big with early Black Friday deals at Lowe's. Shop new select DeWalt 20-volt max nailers under$350 for a limited time, like the 18-gauge Brad nailer.

0:43Now just$269. Plus, get up to 50 % off select ladders. With deals like these, it's easy to keep your jobs moving all season long. Get Black Friday deals early at Lowe's, in-store and online. Valid through 1118, while supplies last. Selection varies by location.

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

1:16Morgan Brennan: Good Monday morning. I hope you had a great weekend. Let's get a check on U.S. stock futures with the Nasdaq looking to pull back from an all-time high, which is where we closed on Friday. You can see we're under a bit of pressure here, fractionally this morning across the major averages. The Dow is poised to open down about 95 points, the S &P down nine, and the Nasdaq 59 points. That is after a mixed week for the major averages, with the Nasdaq eking out gains. Let's take a look at what we're seeing in the bond market, too. Treasury is ahead of the latest Fed Minutes release later this week on Wednesday.

1:49Morgan Brennan: We're also going to get ISM services data this morning, a little later this morning. You can see yields a bit lower across the curve. The U.S. 10-year Treasury yielding 5.26 percent, Fed-sensitive two-year Treasury 4.8 percent, and the 30-year 5.62 percent. Let's also get a check on the dollar index with the dollar firmer against other major currencies. The euro is, in particular, in focus this morning, underperforming, hitting a 17-month low against the dollar. You could see dollar index level right now, 102.16. And finally, let's get a check on what we're seeing in the energy complex with Arbob Gasly near its lowest level since early September.

2:26Morgan Brennan: And you can see right there on your screen, no major moves coming out of a weekend that had headlines regarding the Middle East, but nothing major or monumental one way or the other. You can see WTI crude is down about half a percent right now, trading just below$91 a barrel. Brent crude is basically flat right now, $102 a barrel. A very busy morning shaping up, though, overseas between snap elections and a Merger Monday. Our Karen Cho is in London with more, as I think the entire world right now is focused on what's happening in Europe.

2:59Good morning to you, Morgan. Yes, a lot happening on this side of the world. But let me just start out with the Asian markets that closed out earlier. The first trading day of the week in the green for the Nikkei at a three-month closing high amid renewed AI optimism off the back of falling rate hike expectations from the Fed. That tech rally stateside Friday really spilling across to the Japanese stock market. But here in Europe sentiment is incredibly choppy. The major indices are swinging between solid green and red. The worst performer today has been France's CAC 40, which is also being dragged lower by one stock in particular, which I'll come back to in just a moment.

3:34But you can see down 1 % out of context with the rest of Europe. But meanwhile, big political news this morning in Spain. The local IBEX is higher, despite the Spanish Prime Minister Pedro Sanchez announcing a snap election for late November after a right-wing party voted down emergency measures tabled to help solve a rental housing crisis. That announcement adding to political uncertainty across Europe, which is contributing to the euro struggling around a 17-month low this morning. And if you take a look at that level, it's been the 111 handle, now 112. So we've climbed a fraction but still downbeat.

4:09And back to that big corporate news just to round it out for you, Schneider Electric is holding back the CAC this morning after taking a drubbing on the announcement that it will buy PTC for more than$22 billion in an all-cash deal. The move sending PTC shares surging before the bell. But another big play on software for Schneider, which, of course, is an AI name in Europe. Back to you, Morgan.

4:32Morgan Brennan: Let's turn back to U.S. markets. Friday's momentum on the back of the weaker-than-expected jobs report here in the U.S. and expectations that the Fed will hold steady on rates at its policy meeting later this month. The majority of users on Calci backing that view with just under 20 percent thinking the central bank could hike rates at that meeting. For more, let's bring in Alan McKnight, chief investment officer at Regions Wealth Management. Great to have you here on set to kick off the hour. I got to start with Europe. Your thoughts, especially as we hear, you know, growing chatter that that France is a real risk of contagion here.

5:04I think the bottom line is what we've thought about Europe for a long time, which is there's a reason it's cheap. And the reality is we're not getting this sort of consistency of policy efforts. And you see it right now in terms of with the fixed income markets, where you're seeing spreads widen in the French bonds versus, say, the German bonds and boons. And so our view on it is going to be we think we should hold off on really trying to put more money to work into Europe right now and wait till some of this settles. We don't think it's a contagion. We don't think we're about to come off the rails.

5:32but we just think there's going to be this economic malaise there for quite some time.

5:35Morgan Brennan: Well, and to that point, even just over the weekend, you had an interview, a media interview with Treasury Secretary Besson, and he basically dismissed concerns over rising bond yields. He said it's a global trend. You can't control the bond market, but can slow down investors' decisions. What are we seeing here in the U.S., especially as we do trade near multi-decade highs in treasuries? A bit of a tale of two cities. I mean, you think about the malaise in Europe versus what we're seeing in the U.S. The U.S. is being driven by technology and certainly the hyperscalers and really this mag seven that continues to be the case.

6:03And the one challenge we see in the U.S. markets right now is that it's not a very broad market rally. So if you look at the S &P 500 up over 13 percent year to date, the median stock in the S &P is up just over two percent and over 40 percent of S &P names are actually negative for the year. So you really have this imbalance. The small cap names have started to underperform versus large cap. So we're seeing a little choppiness right here, but we still think the economic fundamentals are good.

6:32Morgan Brennan: Yeah, I mean, to that point, S &P 500 lost$210 billion in market cap last week. NVIDIA added$214 billion. So the fact that that breath has been so poor here signals what? I think it signals that market participants want to wait a little bit, certainly as we go into the midterms and given everything going on with the FOMC. So we'll get the FOMC minutes this week. We're going into the month with the FOMC meeting. We're on the sidelines there. We don't think the Fed will actually raise rates going into that. But I think most market participants feel pretty good about the year to date, but they're feeling a little uneasy as we go into the end of the year.

7:05So really putting a pause and that's where the breath comes into it.

7:07Morgan Brennan: Yeah. So in light of that, where do you see opportunities? How should investors be positioned through the end of the year? As much as we're concerned about some of the choppiness, we're also a little bit excited to see that some of these markets are starting to bifurcate. So things such as small cap, underperforming, we see if we benefit from an economic growth trajectory next year, they can do well. We think high yield could start to do well after we've seen this bifurcation spreads have widened a little bit. We're not there yet, but we're getting closer. All right. So in light of all of that as well, then risks, as we do have investors climbing a wall of worry.

7:40That's right. Well, one is going to be the election. And it's not so much any one party or decision. It's about investors wanting the status quo. And if you look at market returns over the past hundred years, the best returns are in a bifurcated type of economic and policy outlook. And so as we go forward, we think that's a big risk in terms of what happens right up until the election. And on the other side of that is going to be, can we continue to grow earnings at the rate we've seen over the past three to six months? And we're just not convinced that earnings are going to be as good as in the second quarter.

8:12Morgan Brennan: Interesting. I want to go back to this idea that in a bifurcated scenario, things tend to perform better. Why? I think more than anything else, it's because investors like the status quo. They'd like to know what the runway is going to be. and with no one group necessarily making all the decisions, they're actually able to forecast that a little bit better. And if you look back since 1928, that's been the best possible scenario. Now, it doesn't mean that there's not going to be a lot of gnashing of teeth going into the election, but coming on the other side of that, you could see a scenario that's pretty positive.

8:41Morgan Brennan: Okay. Alan McKnight, great to have you here on set to kick off the hour. Well, we've got a lot more to come here on Morning Call, including new comments from an open AI CEO, Sam Altman, arguing we need to take the AI good with the AI bad. Plus, we're breaking out the value menu and what we're calling the overvalued menu for one underperforming Dow stock, asking two analysts if they are loving it or not. Can you guess what we're talking about? And later, a box office bust for Warner Brothers' final act as an independent studio. A very busy hour still ahead when Morning Call returns. This message comes from Wise Business, the only account your business needs to scale globally.

9:20You'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. Be 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.

9:59No 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. weren't agents supposed to take things off your plate building another to handle the others is a bit much don't make more work out of work Gemini is the one agent that knows all parts of your business and actually gets stuff done you give it a project close your laptop and when you come back the job's finished no 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

10:43Morgan Brennan: Welcome back to Morning Call. We've got some stocks that we're watching in the trading day ahead. Apple announcing that it will replace iPhone 18 Pro Maxes that have faced connection issues on AT &T's network. The company identifying a hardware problem as the source of that issue in a, quote, small number of phones. Those shares are down fractionally. But as Karen Cho was just mentioning, France's Schneider Electric announcing that it's buying PTC for around$22.6 billion in an all-cash deal. That breaks down to about$205 per share. That's a more than 42 % premium for the U.S. software company's closing price on Friday.

11:18Morgan Brennan: Schneider says the deal is expected to close in the third quarter of next year. You can see shares of Schneider are down 9%, PTC spiking about 34%. Keep an eye on this one and what it does to broader software. This is an industrial software deal, and at a time where you've started to see some green shoots in that trade, this could be an interesting Monday, merger Monday here. We're watching shares of Vistra as well. Reuters reporting the U.S. government will lend the company$4.2 billion to boost its nuclear power generation, including operating at least three of its four nuclear stations. The report says Energy Secretary Chris Wright will make an announcement today at Vistra's nuclear plant along Lake Erie in Ohio.

11:57Morgan Brennan: And straight ahead, the state of play in the Middle East as Saudi Arabia looks to stem the Houthi rebel influence and clear a critical waterway. But first, we've got shares of Qualcomm popping today as well. That's after it strikes a multi-year patent licensing deal with China's Huawei, covering AI, 5G computing and networking technology. This is Huawei's first patent deal with Qualcomm that covers 5G. US trade restrictions have limited its ability to buy advanced chips and software. You can see shares of Qualcomm are up 3 % this morning. We're back after this. This message comes from Wise Business, the only account your business needs to scale globally.

12:37You'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. Be smart. Get Wise Business. Download the app. T's and C's apply.

13:28slash workspace with Gemini. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work. Gemini is the one agent that knows all parts of your business and actually gets stuff done. You give it a project, close your laptop, and when you come back, the job's finished. No 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.

13:59Morgan Brennan: Welcome back. We're turning to a developing story. The U.S. rushing over the weekend to remove all of its B-1 bombers from the U.K.'s Rafair Ford Air Force Base. The move coming after the arrest of six people in connection with an effort to carry out an attack on the base. The Air Force has been using that base located northwest of London as a part of its operations to launch bomber strikes in Iran. Well, if we stick with the war in Iran and Yemen's Saudi-backed government launching a new military campaign to retake territory lost to Iranian-backed Houthi rebels over the weekend, our Dan Murphy joins us from Abu Dhabi with the latest.

14:35Morgan Brennan: Dan. Morgan, good morning. Well, oil prices slipping this morning. As you mentioned, Brent heading towards 101, U.S. crude also holding around 90 USD. The big signal isn't just Yemen. It's also from Saudi Arabia. We've just seen Saudi Aramco sharply cutting the price that it charges Asian buyers for its main export grade, which is called Arab light for November. So in plain English, that means the kingdom is basically trying to attract more buyers. And it's a sign, a signal to the market that more oil is finally hitting supply. The good news is that Saudi Arabia, the UAE and Kuwait are all moving more crude through Hormuz.

15:18The ship tracking firm Kepler saying Middle East exports actually rose above pre-war levels on four days last week. So that improving supply picture certainly outweighing this new escalation in Yemen. The Saudi-backed government launching a major offensive against Iran-backed Houthi rebels who have been targeting their shipping and energy facilities for months now. So we're watching this very closely. It has the potential to spike crude this week if the situation is evolved outside of Yemen. So far, it seems contained at this point. But of course, anything could happen in the region given the geopolitical backdrop.

15:56At the same time as well, also filtering into the price right now is the fact that we've just seen OPEC keeping its November output targets unchanged at the weekend. And the market may be less focused on those paper targets right now and more on whether actual barrels can keep flowing. And then finally, Morgan also wanted to update you on the Aramco CEO, Armin Nasser, who is also weighing in this morning. He says investors shouldn't get too comfortable right now. Actually, he told a conference in London this morning that global oil inventories are, quote, scarily thin. His message is until Hormuz fully reopens and confidence returns, the crude reality, he says, is that pressure at both ends of the barrel will intensify.

16:38Even then, replenishing inventories, he says, while meeting demand could take up to two years. So that's probably also part of the reason that we're seeing major economies now preparing to release up to 100 million barrels of emergency oil and products, particularly diesel. NASA also weighing in on that today. He says it basically buys time but doesn't solve the underlying supply problem. Morgan?

17:04Morgan Brennan: Yeah, two years. I mean, I'm just wrapping my head around that, Dan. Meantime, there was also a report out this weekend that Iraq is rearranging transits to offer oil outside the Persian Gulf, pursuing alternative export outlets as well. I mean, there have been reports of infrastructure investment, which is also going to take years, to bypass the Strait of Hormuz and some of these waterways. We talk about the daily TikToks and headlines. But five years from now, how different could things potentially look? Yeah, things could look very different from now, Morgan. We're seeing huge investment in the region going into alternative supply lines to reduce the Gulf's reliance on the Strait of Hormuz moving forward.

17:45That applies to everything, not just crude and products, but also general shipping out of the region as well to facilitate the flow of goods and services and trade. So we're seeing a real realignment in this part of the world, ultimately a concession that the Iran problem isn't going anywhere anytime soon. Back over to you.

18:04Morgan Brennan: All right, Dan Murphy. Great to have you here this morning. Appreciate it. Still on deck. Contagion fears front and center as pockets of European unrest start to spread, sending bond investors to the hills. Morning Call continues next. I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures, which are under a bit of pressure this morning. As you can see right there on your screen, the S &P poised to open down nine points, the Dow 103 points, and the Nasdaq 62 points. This is after gains for the major averages on Friday and a mixed picture for the week last week, with the Nasdaq not only closing at a new all-time high on Friday, but also eking out gains for the week.

18:42Morgan Brennan: Let's take a look at the Treasury market, too, and what we're seeing with bonds. We get the latest Fed minutes this week. This morning, a bit later this morning, we get ISM services data, too. You could see the 10-year Treasury yielding 5.27 percent right now, 30-year Treasury 5.63 percent, and the Fed-sensitive two-year 4.81 percent. Let's also get a check on the dollar index with the dollar stronger against other major currencies. This morning, what's in particular focus is weakness in the euro, which is at a 17-month low against the U.S. dollar level for dollar index, 102.10. Also going to get a check on what we're seeing in the energy complex.

19:18Morgan Brennan: Arbob Gasoline at its lowest level in about a month. And you can see crude prices under a bit of pressure again this morning, down 1 % for WTI, trading around$90 a barrel. And Brent crude down fractionally right now, trading around$101 a barrel. For global markets, it's a positive start to the trading week in Asia that was led by the Nikkei. And if we check, and that's because we've seen this big semi-stock surge. It started here in the U.S. and that is happening globally now, too. And if we get a check on Europe as well, you'd see the DAX is basically flat here. The French CAC is down about one percent.

19:54Morgan Brennan: France in particular has been in focus. We're going to get to that just in just a few more moments. But let's get a check on the morning's latest headlines as well. President Trump naming director of national intelligence Jay Clayton to be the new White House AI czar, leading a new task force, which he says will have 120 days to research and report on AI's risks and opportunities. Clayton's appointment coming after new comments from OpenAI CEO Sam Altman in an interview with Politico over the weekend that the risks around AI will be worth the reward, saying, quote, we believe that the world should accept some bad things happening for the benefits of this technology and people having the agency.

20:35Morgan Brennan: Well, speaking of OpenAI, members of its executive team, along with ones from Anthropic, Google and Meta, will be testifying in a full city council hearing in New York City today, examining the risks of unchecked AI development. Elon Musk's SpaceX AI was subpoenaed but did not confirm attendance. We also expect to hear from a number of other industry insiders and whistleblowers in downtown Manhattan today. Well, the Supreme Court kicks off its new nine-month term today, opening with a case involving big oil in the city of Boulder, Colorado, seeing monetary damages for harms caused by climate change.

21:10Morgan Brennan: This will be the first time the high court will directly rule on a climate accountability lawsuit. It's also in focus because what it means, federal versus state dynamics here. Axios reports the White House is monitoring a suspected plague outbreak and related quarantines in Russia. Russian health authorities are taking precautionary measures in response to the death of a woman who worked at an anti-plague research facility, but have not confirmed that she contracted the disease. Nearly 200 people who had come in contact with the researcher have been put into medical quarantine and call it into medical quarantine.

21:48Morgan Brennan: OK, we'll call it a box office blunder for Warner Brothers' swan song as a standalone studio.

21:57before the rest of us. That is why it is your problem. If we can't control the course of nature, at least we can control the narrative. But it happened. Mother Nature, she loved to win.

22:09Morgan Brennan: You're going to save the world. All right. Well, political satire Digger, starring Tom Cruise and John Goodman, opening to an estimated$8 million. That's right,$8 million in the U.S. and Canada over the weekend. On$125 million budget, Digger is the final film released by Warner Brothers before Paramount's$110 billion deal closes tomorrow. You can see shares of Paramount, though. Those are up 3 % pre-market. Warner Brothers is basically flat. And the closing of that deal is going to be in all the headlines associated with it, is really what's in focus this week. We turn attention overseas. Developing story in Brazil, where Senator Flavio Bolsonaro has taken a surprise lead over incumbent Lula da Silva in the first round of the country's presidential election.

22:56Morgan Brennan: The two men are now heading towards a runoff election on October 25th with most support for an eliminated candidate, she said, expected to fall behind Bolsonaro. ETFs and other assets tied to Brazil are surging overseas and in the pre-market here with investors seeing Bolsonaro shifting Brazil to the right, likely a boon for its economy, industries, U.S. relations, and lower interest rates. Across the Atlantic, though, Spain's Prime Minister Pedro Sanchez is calling for a snap election. That's now set for November 29th after the country's Congress rejected measures intended to cool public anger over the country's housing crisis.

23:33Morgan Brennan: Spain saw tens of thousands of demonstrators take to the streets over the weekend. You can see some of that video right there on your screen in protests that involved confrontations with police. Well, Spain is not alone. Political turmoil and unrest in France is also hitting markets, pushing the euro to a fresh 17-month low and pushing bond yields across the block sharply higher, reminiscent of market moves last seen during the 2011 European debt crisis. We have the best person here to talk about all of this. Michelle Caruso Cabrera, CEO at MCC Global Enterprises, a CNBC contributor. It's great to have you here on set.

24:06Morgan Brennan: Always great to be here. I mean, honestly, where should we start? I think let's start in Europe. You just got back from Spain. Your thoughts. So the housing crisis there comes from similar issues that we're seeing here in the United States. Rents and the price of homes have gone up nearly 100 percent over the last 10 years. That's what's causing issues here. The current government is a socialist government. And a lot of the laws that they would like to pass, traditional economists would suggest, would make the housing crisis even worse. But they are facing a lot of the same issues that we are here as well.

24:37So he's calling this election. If the election were to happen today, the numbers show that you might actually see a right wing government come to power. The question is, would the center right work with the far right? They haven't wanted to do so in the past, but maybe you might actually see Spain move to the right. That would mean Spain might actually increase its spending on NATO. The current leader of Spain refuses because it works for him politically to defy Trump when it comes to NATO spending, for example.

25:03Morgan Brennan: OK, so if we if we go from Spain to France and we're talking about political dynamics here, we're talking about fiscal dynamics here. There's been chatter that what we're seeing in France right now could potentially be contagion. Absolutely. So France is now the sick person of Europe. They're being compared to Greece, which went through its terrible crisis from 2010 to 2015. They have a spending problem. They spend far too much money. Their deficit to GDP ratio has violated the rules in Europe for a very long time. And they spend more on social spending than any other member of the OECD. They don't have more room to spend on social spending, even as they saw protests from students over the weekend who want even more social spending.

25:47They are constrained by their ability to raise taxes. They're already very high and their inability to cut spending. The thing with France is the ECB tends to step in whenever there is an issue. That was my next question for you. So I suspect that when push comes to shove, they're going to get help from the European Central Bank because no one wants to see the destruction of the euro. And once again, you're starting to hear whispers about whether or not this could lead to the downfall of the euro. It's early, but still.

26:15Morgan Brennan: Yeah. I mean, nonetheless, though, it's been pretty incredible to see French government debt at a higher yield than Greece. That's another situation that you covered very, very closely over the years. Yes. And so Greece trades much better now, but they took very, very hard reforms, the very same reforms that France needs to take. They need to make it easier to hire and fire. They need to be less interventionist in the economy. They need to do all kinds of things that would make them more competitive that everyone has told them that they need to do. By the way, across Europe, here's the thing you need to remember about Europe versus the United States.

26:46In the United States, everything is permitted until it is prohibited. In Europe, everything is prohibited until it is permitted. They live in a regulatory super state. They seem to be proud of that. But it hurts growth and it's leading to their issues with their debt.

27:04Morgan Brennan: OK, let's turn to Brazil, too, now, because that was pretty incredible, what we saw yesterday. And we're seeing the currency rally. You're seeing the bond market rally. You're seeing the stock market rally. So you're seeing a huge move in the EWZ, which is the way most Americans would play the Brazilian market. That's after it had all rallied quite a lot, as we saw Bolsonaro rising in the polls. The reason the rally is so sharp today is his outperformance. That means he's likely going to have a larger control of the legislature. We've already seen some of his supporters in the lower house actually crossing the 50 percent threshold so they don't need to go to a runoff.

27:37So he's going to have the ability to do a lot of things that economists are worried he wouldn't be able to do even if he wanted to. For example, a constitutional amendment to curtail spending. The issue that Brazil faces is that a lot of their spending is actually mandated by the Constitution. But they've got to cut their spending. They don't have the ability to grow enough because their economy isn't dynamic enough. And they've already got a very, very high tax load. So raising taxes is very difficult. They must control spending. And that's why you see such a huge move within the Brazilian markets and all of the assets there.

28:11What's interesting about Brazil, it is basically nearly the last country in Latin America that looks like it's going to swing right, with the exception of Mexico, with the exception of Nicaragua and Cuba. I don't know how to describe Venezuela. Almost all of Latin America has now gone to the right, which means you have far more pro-market and pro-business leadership. Citigroup put out a report late in August suggesting that we could be on the verge of a long decade of growth in Latin America if they get it right.

28:43Morgan Brennan: I'm glad you brought that up because, you know, there's so much focus on what's going on in terms of U.S. foreign policy in the Middle East. But actually, down the road, a couple of years from now, I think we may look back as 2026 as what was perhaps more influential, more consequential was the foreign policy here in the Western Hemisphere. It's been absolutely one of the critical hallmarks of the Trump administration has been to focus on the Western Hemisphere. Don't know doctrine. Yeah, the Don't know doctrine is the portmanteau from Monroe doctrine. They want to eliminate socialism from the Western Hemisphere.

29:14And they have strong alliances now and leaders that want to do the same thing, which is important for our national security because it's reducing migration flows. It's also led to, for example, Argentina actually producing natural gas and oil for the first time. So having more and more of the supplies that we need here in the Western Hemisphere and not having to rely on the Middle East for oil, being less reliant on China when it comes to critical materials. So this is extremely important. It doesn't get talked about very much because Iran just dominates coverage. But the focus on the Western Hemisphere is a critically important part of the foreign policy right now.

29:53Morgan Brennan: That's why we're talking about it here on Morning Call. Michelle Caruso Cabrera, great to have you here on set to break it all down. We got a lot more to come here on Morning Call, including finding an appetite for shares of McDonald's. What it'll take to put some shine back in the golden arches. It's one of the worst performing stocks in the Dow this year. Morning Call, we'll be right back. Welcome back to Morning Call. Shares of McDonald's are hovering just above a 52-week low, down 24 % on the year. The stock is the third worst performer in the Dow. It's trailing only IBM and Nike. It's down 7 % since management laid out a new turnaround strategy at an investor day just under two weeks ago, centering around remodeling restaurants, improving guest interactions and menu innovations.

30:34Morgan Brennan: But while investors largely turned their noses, our Jim Cramer points out that there's still plenty to like with McDonald's on what could be called a value menu. So McDonald's massive scale with more than 46 ,000 restaurants, 220 million active loyalty customers. Kramer likes management using AI to determine pricing strategy and streamlining operations. And the stock also trades at 17 times next year's earnings. But there are challenges, too, including getting franchisees on board with a turnaround plan, which is expected to cost$8.5 billion. Restaurants are also dealing with a stretched consumer and higher food prices.

31:09Morgan Brennan: And Kramer also points out that higher bond yields make McDonald's steady dividend yields 3.3 percent less attractive. So let's talk more about this now with John Tower, analyst at Citi, who has a buy rating on the stock, and Greg Frankfurt from Guggenheim, who is neutral on McDonald's. Gentlemen, it is great to have you here. We'll call this our bull bear debate. John, I'll kick it off with you. You have a buy rating. You think now is the time to actually be constructive on McDonald's. Why? Yeah. Hey, Morgan. Look, I think a lot of it's priced in today. And I think what we've seen across different industries over time, including the restaurant industry, is specifically that you need to have businesses reinvest back in in order to maintain leads or grow their leads.

31:53I mean, I think we're seeing that across AI right now. You've got to put the money in in order to address the consumer of the future. And that's what McDonald's is going to be doing. The beauty of their business model is that they control the real estate. They have the stick and the carrot, frankly, for their franchisees to buy into it. They're going to get aligned on value. They're mostly aligned. They just need to finish that entry-level price point in the U.S. And then over time, you'll see more and more products come in that will drive consumers to their stores, whether it's on chicken or on beef or on beverage.

32:23And then globally, they remain the dominant player across markets, IOM or mostly Europe in particular, which is important from a cash flow perspective. But they're going to frankly just widen their lead against their direct competitors in the U.S. by making these investments and then narrow the lead versus the specialists who have been kind of chipping away at some of their share over the past several years. And I think you're going to wake up in five to 10 years. The rest of the industry, particularly their direct competitors, are likely going to have smaller asset base, particularly in the core U.S.

32:54market. We've seen signs of that to date where many of them are already closing stores. And then globally, you'll see them narrow that gap versus those specialists. And they're going to be winning share from more affluent customers.

33:05Morgan Brennan: Greg, I want to get your reaction to that, especially since I know you have a hold on the stock. And part of that investment strategy is going to require franchisees to buy in. And yes, there are franchisees that hold and own hundreds of stores. But by and large, franchisees are small business owners as well. And they're feeling pretty stretched right now, too. Yeah, I mean, John makes a lot of good points. McDonald's has over time had a lot of, you know, really strong advantages as a business. I think one of the challenges that they face now, some of them are kind of restaurant related, where there's just been a lot of inflation that's been impacting their customer, both labor inflation and food inflation.

33:45And a lot of these franchise businesses have been kind of struggling to fully price through a lot of their cost inflation. And so McDonald's franchisees, you know, there's been a little bit of misalignment in terms of how much pricing corporate wants franchisees to take and how much pricing the franchisees have been taking. And so that's kind of been a big challenge for the business. You know, I think that as we look at how much they're spending, they just kind of went through a big wave of remodeling about 10 years ago. And they're asking franchisees to spend about$1.2 million,$1.3 million over the next several years back into their stores.

34:27We're going to be very intrigued to see whether or not franchisees actually are willing to make those investments or there's going to be a pushback. I think that's kind of the next shoe to drop or the next question mark is how aligned franchises are going to be on that reinvestment. You know, we just we like yum shares here. You can get about three, three, four percent more EPS growth for an extra turn and a half of the multiple. And a lot of a lot of the restaurants have been under pressure. And so there's a there's a lot of options to choose from in terms of which ones have come down. And, you know, we're just balancing across a couple of names here.

35:01Sure.

35:03Morgan Brennan: John, have you been surprised to see how negative the reaction has been coming out of Investor Day? To some extent, I mean, they did outline, I think going into it, most people understood that they were going to put a lot of money to work in the in the boxes over time. I think the biggest thing has been, frankly, the negative trade on consumer globally. McDonald's is not alone. Obviously, they're getting hammered quite a bit within the space. But whether it's oil, whether it's interest rates, whether it's lower income, whether it's GLP-1, the narrative broadly across restaurants has not been strong, as Greg mentioned earlier.

35:34So, you know, I'm not all that surprised. But at the same time, I think what will end up happening is as we move into the balance of this year and then into 2027, investors are going to come back to the name. They're going to say, OK, wait a minute. How much is already priced in here, particularly for McDonald's? And is it worsening from a low-income consumer standpoint? Is the population growth in the U.S. really changing all that much from 26 to 27? Are we starting to see signs of their initiatives working with respect to driving more consumers to their stores, whether it's on value chicken or on beverage?

36:09And if they're seeing some signs of life there, given where the stock is trading today, which is under about 17 times forward P.E., I think consumers, or excuse me, investors are going to jump back in. Mm.

36:20Morgan Brennan: Greg, what would change your mind about McDonald's and the fact that it's proving its mettle here with its turnaround strategy? Well, look, I think the big question what investors probably want a little bit more from the investor day is is whether or not the corporate, the franchise or can get the franchisees on board with some of its changes. You know, it's been I think corporate's been somewhat frustrated. They had a 10 items under three dollar menu that launched earlier this year and the franchisees were on board and then they roll out the platform and 40, 45 percent of these franchisees kind of just just don't do that.

37:01Don't execute the price points that they had agreed to and that corporate had laid out. And so I think trying to demonstrate to the market and to us that they're getting the franchisees confidence and their franchisees are more on board than they have with executing the plan that McDonald's is laying out, I think is probably going to be critical for us to maybe getting a little more positive on shares.

37:25Morgan Brennan: OK. Greg Frankfurt and John Tower, great to have you both here for this discussion. Thanks, Morgan. Straight ahead. The Morning Call crew teeing up the trading day ahead. and why one member says conditions may be taking shape for a rally in the weeks and months ahead. We're back in just a moment. Here's what to watch this week. Economic data, including fresh reads on consumer sentiment, services sector, trade. We get minutes from the FOMC's latest meeting. Speaking of the Fed, we're also going to hear from five Fed officials across the week. And on the earnings front, we get results from Delta, Pepsi, Levi's, Constellation Brands, Lam Westin.

37:59Morgan Brennan: And it's time for your call sheet, where we look at the topics driving the trading day ahead. The crew members today, Kevin Gordon of Schwab's Center for Financial Research, Jose Torres of Interactive Brokers, and Jeffrey Yu of BNY. It's great to have all of you here. Kevin, I'm going to kick this off with you. And actually, I'm not going to kick this off with what we're seeing in U.S. markets. I'm going to kick it off with what we're seeing in Europe right now. Hopefully you're watching that. Yeah, I do think this is a good example of fiscal concerns and social pushback kind of maybe melding into one crisis.

38:28In particular, it's not something that's terribly unique to Europe. We're seeing it very much in the U.S. in terms of larger deficits, structurally high deficit spending concerns about debt growing over time. But I think the difference and the important distinction is just the nominal growth environment and how strong it is in the U.S. versus how weak it is in parts of the world like Europe. So I do think that that's probably the bigger differential. The debt picture is not something that's new. It hasn't just cropped up recently. But I think some of the pushback against Europe is mainly resting on the growth side and how maybe rare it is to see stronger growth outperformance there versus a region like the U.S.

39:04Morgan Brennan: What do you think, Jose? Well, I think also in Europe, you've seen a lot higher inflation. That's also been driving interest rates north. Also, you have a much more restrictive regulatory regime. That's also been curbing growth, like what Kevin said. Ultimately, though, Morgan, I don't think it's a headwind for the U.S. I actually think more money would migrate over to us here in America. You're seeing the euro weakness also have an effect. And I think you're seeing yields here. Lower yields have a lot of different paths to sink from here, namely core inflation, 2.3 percent. You saw the non-farm payrolls miss.

39:40A lot of disinflationary details in there as well. Cooling wage pressures, higher unemployment, higher labor force, and increased evidence of AI adoption, which hopefully is a boom for productivity in the months to come.

39:53Morgan Brennan: Yeah, I do want to get into that a little bit more in just a moment here. But Jeffrey, first, I would love to have you weigh in on all of this, especially as we do, as Jose just mentioned, have the euro at a 17-month low versus the dollar right now. Well, I would agree with both Kevin and Jose. It's really one of those stories whereby what is the optimal policy path right now? People want fiscal reform but don't know how to push for it. And now with higher yields and in some sense, we've always wondered why the ECB, the European Central Bank, would be hiking rates in this kind of environment. Yes, they are focused on inflation, but it's a bit of a constraint towards growth as well.

40:32And now we are seeing that comes ahead. So the U.S. does have high nominal GDP growth. So you can even make a clear cut case that even though the U.S. has deficit concerns, they can grow its way out of it. Whereas in Europe, on top of fiscal issues, politics a factor as well. This morning, Spain has just called a snap election. So that's another political thing to watch out for in the months ahead.

40:58Morgan Brennan: Yeah, I mean, Jeffrey, Spain obviously in focus this morning, but in general, just a lot of chatter. We've been talking about it throughout the hour, this idea that France right now is the problem child, especially when you see government bonds at a higher yield than Greece, for example, which had been the problem child before now. So, whenever people say, oh, it's too hard to get out of debt, I do say look at Greece. It's been heroic in every sense of the word, their fiscal consolidation. Now, France's issues are not new. The deficit has been expanding. Even last year, OECD has highlighted these issues.

41:33Now, there are reforms coming through. We do think that fiscal consolidation will come through. But I think the market is now looking six to seven months ahead into the election next year. They don't know what the shape of the next presidency will be. But looking at the main contenders, it's possible that fiscal largesse could continue to feature. So that clearly is featuring. But do not underestimate the phrase, whatever it takes, they will make this work. Joint issuance will happen. They will consolidate around that to make sure that the euro survives.

42:07Morgan Brennan: OK. Brazil is also in focus this morning. We're seeing big rallies and assets there. But let's turn back to the U.S. Kevin, I do want to get your thoughts as well on what we saw in terms of the data picture last week and how it sets us up as you had just a major swing in terms of market expectations now for the Fed to be on hold for October. Yeah, you know, I think, well, a lot of that swing came post-jobs report because of how soft the headline number was relative to expectations and the continued deceleration in earnings growth, as Jose was pointing out. But I do think that that to me is not a swing factor in the Fed's decision making right now because it wasn't before.

42:39Inflation has been in the driver's seat. I think it still will be in the driver's seat. That's why I think this next batch of CPI data is going to be most important to watch for them. Not to say that the jobs report doesn't matter and it doesn't give them some breathing room in terms of an October decision, because I do think it helps in that area. But at the same time, you know, labor for the most part year to date really has not been a core issue for them. And even when you adjust for some of the compositions actually in the workforce and who's driving a bigger chunk of job gains, it's down the lower end of the spectrum in terms of earnings.

43:08So if you look at an adjusted measure like the one that comes from the Atlanta Fed, you actually do have wage growth that has been picking up over the past couple of months. Not egregious, but it's still been turning a corner.

43:18Morgan Brennan: That's interesting. So I've got to always dive in and get all the context under the hood here. You said something, Jose, that I was speaking of that I want to get into a little bit more, and that is you're saying that AI, productivity gains from AI are starting to show up in the data. Yeah, we saw that the professional business services, the financial activity sector, we saw reductions in employment as well as information. And those are the automation prone sectors that we're constantly watching throughout all the reports that we get from ADP, BLS, Challenger, Gray and Christmas to get a gauge on how the workforce is changing and what it signals for productivity going forward, as well as for corporate earnings momentum, which, of course, has been buoyant and has been carrying this terrific bull market.

44:01Morgan Brennan: Jeffrey, I want to get your thoughts on what we've seen coming out of the U.S. here, especially on a morning where we get ISM services data. We're going to get some other, I guess, softer data throughout the week ahead of CPI as well. So, you know, markets are saying, is the U.S. the safe haven right now, the dollar the safe haven? But now there is a case as long as tech continues to deliver and AI delivers, then maybe U.S. equities are the safe haven. And you very rarely associate equities with safe havens in general. But there are very few places to hide right now. You look at APAC, some of the funder names and China growth is still quite soft right now.

44:36So almost that lack of alternatives is driving money into the U.S. But too much of a good thing can be worrying as well. We look at our dollar positioning based on our data, equity positioning, and also fixed income treasury positioning. All of that is very, very high in the U.S. at this point. So people may need to adjust their risk management around the edges. But right now, I would say as long as growth and the numbers deliver, then, yes, the U.S. is the safe haven.

45:02Morgan Brennan: Kevin, there's a lot of chatter here as well about a bifurcated market here in the U.S. It's AI versus everything else. You know, case in point, you saw it with a surge in semi-stocks last week and all the focus that's been on poor breath. Do you want to get your thoughts on that and where we go from here? Yeah, it's fascinating because it has been that almost either or market that you just talked about, AI and everything else. Because if you look at over the past two months, the average member of the S &P 500 is at a maximum drawdown to 14 percent. Yet the market today, as we closed on Friday, it's within a percent of all time highs.

45:37So you've got that ballast from the tech sector really holding everything up at the expense of the rest of the market going through this pretty significant cyclical washout, which I think to some extent is tied with the Fed, you know, starting a hiking cycle, especially because small caps took the biggest hit. I think from here, though, a nice bridge could be getting back into earnings season, maybe moving outside of that macro exhaustion phase, seeing a little bit of a compression in bond market volatility. That, to me, I think could be a little bit of a catalyst to sort of help lift the rest of the market.

46:04If you don't get that and you have a further widening of that gap between what the cap weighted index is doing and what underlying breadth is doing, you start to introduce a scenario like late 2021 into 2022, where you run into a little bit bigger of a hurdle.

46:17Morgan Brennan: Okay, it is interesting to start to see some more M &A deals happen and beat down sectors like software with Schneider and PTC today as well. We're going to watch all of it. Thank you to our Morning Call crew. Great to have you here. Right now, there's a student that needs something. Maybe it's books, art supplies, or a science kit that will unlock their learning potential. And you can be the reason they get it. With DonorsChoose, you'll fund real classroom projects from real teachers so your gift goes exactly where it's needed most. because when students start with what they need, they're ready to build confidence, discover new ideas, and succeed all year long.

46:51Give what students need right when they need it at donorschoose.org slash local.