10AM Hour: Alphabet Shares Plunge Post-Earnings, Ares Management CEO Michael Arougheti, Doordash Delivers a Deal 10/29/26

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0:50Good Thursday morning. Welcome to Squawk on the Street. I'm Sarah Eisen with David Faber and Mike Santoli today. Live, as always, from Post 9 of the New York Stock Exchange. Carl Cantania is off. Big news for big tech this morning with Alphabet pacing for its worst day ever as investors see cracks in the core search business and the CapEx questions remain. We'll talk to an analyst who just cut his target on the stock, which is down more than 12 percent. Plus, we've got an exclusive interview with ahead for you with Aries management CEO Michael Arregetti after the alternative investment firm just posted earnings that topped Wall Street expectations.

1:21And we'll get to these major moves in Caterpillar, ServiceNow, DoorDash and a cyber sell off led by Fortnib. a lot of individual stock movers today. But guys, a lot of economic data as well. And the story with the economic data is the economy is rolling and it's in large part to all of the AI spending. It really directly relates to what we're seeing play out in these earnings pictures with these capital expenditure numbers soaring. Guess what? It's having an impact on the economy and it's having an impact on inflation. Let's start with inflation first. That was the big PCE number that the Fed watches very carefully.

1:56And, you know, these numbers are they're running hot. As you can see, we have a stair step higher now in PCE spending. Yes, a lot of the story here is the gasoline prices and the fact that the economy is just overall in solid shape. But you can pull out parts of the report that show outsized price growth in places where the AI build out is happening. We're talking about information processing equipment with prices up 15.2 % in September from last year. Computer, software, and accessories up 18 and a half. I mean, these are like double digit numbers that are clearly having a big impact. Personal computers and tablets, we know about the memory chip shortage and how everything is getting more expensive there.

2:39Electricity, which gets a lot of headline and political, I would say, backlash related to the AI data center build out, up 4.1 % year over year in September. It really showed up in the GDP report as well, just the amount of spending that is happening. Yes, we had a good 3.8 % consumer spending, but guess what? I mean, private non-residential investment, 12.7 % on the back of a 20.9 % increase in outlays on equipment, 5.4 % on structures, 8.4 % on intellectual property. Mike, I think the headline here is the AI boom is fueling this economy in a big way. It's not the only thing. Consumer spending is good and the economy is holding up otherwise.

3:23But boy, is this a big contributor. You have to, I guess, remember that this is the quarter that culminated with September 30th, which is basically when bond yields surged. So you had this impact in the entire stock and bond markets, this idea that we might have a CapEx driven an overheat. And what's interesting since then is we're almost trying to figure out if we are decelerating, coming off the boil. And some of the action today, in fact, suggests the market wants to see signs that companies are showing a little more fiscal discipline. For now, you're right. We have a high nominal growth economy, both inflation and real growth above trend in general.

3:59And then, you know, you obviously have the central bank response and the bond market response. By By the way, massive rally in bonds today. Yields are cracking. And it's because oil's down. And I also think it's a day when AI CapEx overheat is less the story. And it's almost like yields have traded along with the acceleration in AI spend. And when that dials back, yields come in as well. You have a$25 billion bond offering potentially from Microsoft today, of course, but generated real free cash flow. And then you had Oracle coming out with a number that wasn't very much in terms of what it needs to raise.

4:34It's only$20 billion, half in equity, half in debt. To your point, you really think, though, that's playing out in the bond market? No, I think oil's down as well. I mean, it's not really. Oil's down as well. And the short-term yields, we'll talk about it, Sarah, but short-term yields are coming in because I think the market picks up that Warsh wants to talk vigilant, but he wants to extend this process of tightening. In other words, we're not hiking every meeting. You want to hope to get lucky with the inflation numbers next year, so you might not have to do as much. And if you're eliminating a policy meeting next year, there's fewer opportunities for cuts.

5:10I think it's totally the wrong interpretation, by the way. I mean, if we put a mashup of how many times he said inflation, yes, he's talking vigilantly on inflation. But he doesn't want to give a lot of forward guidance or any forward guidance or any guidance at all. But listen to what he said. The committee believes that the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2 % goal. Americans, of course, are still dealing with inflation. It's our responsibility to get inflation down. Inflation is too high. Quashing inflation, inflation target.

5:48Some inflation target, inflation target. Economic growth is higher, but that doesn't tell me that economic growth is somehow causing inflation. Look, we got the inflation report today, 3.6 % from a year ago. Their target that he mentioned many, many times is 2 percent. So, yes, he wants to talk tough. I don't think he I'm not sure it was clear why he didn't raise rates yesterday. The explanation for that was we'll see what we'll get more data next time. Let's see. But if they're going to raise in December, not sure why they didn't raise in October. He very explicitly said it has nothing to do with the midterm elections.

6:25So I think that, you know, it's the evidence in today's economic data. Mike, contrary to what we're seeing in the bond market play out, and maybe they're just teeing off of oil, is that economy is in good shape. There are signs of overheating in pockets of the economy, like the AI build out that is filtering through into inflation. And the Fed will probably have to do something about it. That's absolutely true. That is all talking vigilant. It also is. He also gave a nod in the direction of the market has tightened financial conditions as well. So we're talking about GDP as of September 30th. And since then, the credit markets have clamped down a little bit.

7:03Volatility has gone up in markets. Overall yield levels are higher. So I do think that he's willing to say that. And by the way, it all happened since Jackson Hole. I hate when people say the market's doing the Fed's tightening for it. The market's doing the tightening because they think the Fed is going to be tighter. And so it all launched from Jackson Hole. From Jackson Hole, double B yields went from, you know, 585 to seven in five weeks. That's the market deciding who gets the capital and who doesn't. I mean, one dovish take could be just picking. I mean, it's so hard to interpret, I think, what he says.

7:38No, of course. As far as policy action. By design. By design. But that it doesn't feel like he's, like, super eager to be raising interest rates. You know, he said things like it doesn't look like the broader economy is creating too much inflation. still continues to bet on the productivity boom that's coming from AI. Took away a meeting, as you said, next year, which, I mean, I don't know. I guess it's one fewer meeting that they could be. The market immediately decided that there's just less room over the two-year span that the two-year note covers. There are going to be two fewer meetings in 2028.

8:09Right, so three fewer over two years, right? A long time away. So we'll see. It's a fun game. All right, let's get to the huge moves in tech. Google parent Alphabet tumbling after posting a revenue miss after the bill yesterday. Meantime, Microsoft is off its highs despite strong cloud growth and lower than expected CapEx. And check out ServiceNow, losing a quarter of its value on earnings and SaaSpocalypse fears. Let's bring in Scott Devitt, analyst at Rosenblatt Securities, who just lowered his target on Alphabet from$410 to$380 per share. And Tyler Radke, research director and co-head of U.S.

8:44Software Research at Citi, who covers Microsoft and ServiceNow. Al, thanks to you both for coming in for the postgame show here. Scott, in terms of Alphabet, very clear. The market really is rebelling against this deceleration in search growth. It seems to really kind of rub on a raw nerve that maybe the core business is more vulnerable to AI than we thought. How are you assessing it? Well, I think the setup is not good. The management team doesn't guide to search growth. and you had an acceleration over the last 12 months that's now confident. So expectations were literally out of line. That's part of it.

9:22But it feeds into this narrative that AI is problematic for Alphabet. And I think what the reality is is that their query volume is actually quite strong. It was the highest level in five years. But there's a monetization gap because more of the queries are going through AI overviews. And that's a gap that the management team says it can fill. It just hasn't filled yet. So I think over time, you're going to see their ability to better monetize AI overviews, an improvement in that growth rate, and a business that two years from now is going to be bigger in cloud than it is in advertising anymore.

9:54What gives you the confidence, Scott, that this is not some sort of sea change and that they will be able to increase the monetization when it comes to AI? Well, that's the risk. I don't think it's a sea change in terms of their relevance in terms of being an information gatherer for human beings, because their query volume is growing. The challenge is, can the company match advertising at a similar rate that it did with legacy search? And I think that's the question that's yet to be resolved. I'll say this, though, if it's a problem for Alphabet, it's a problem for any consumer-facing AI agent or LLM as well.

10:31And so it's a problem that I think is ultimately going to be resolved. And when it does, Alphabet, with its 4 billion search customers that become AI customers is in an enviable position. Yeah, that's a fair point, and it would be a problem for anybody. The problem is Google starts with just a massive market share and tremendous profitability in that business that might be a problem for everybody. True. Yeah. Tyler, Microsoft really seemed to, through its report, answer some of the open questions in terms of the ability of its platform to be a conduit for how AI is delivered and actually to monetize in its own way what's going on with enterprise AI.

11:15So how do you take that in and then talk about the market reaction to it?

11:20Michael Arougheti: Yeah, I think that characterization is absolutely right. AI is moving into production in the enterprise. You saw Microsoft's revenue growth accelerate. You saw Azure with one of its largest acceleration and beats on record. Copilot is driving their office and Microsoft 365 productivity suite growth higher. And we saw a very strong results on the bottom line. CapEx actually came in a little bit below expectations. And that makes the Azure number even more impressive. They had some third party capacity delays, yet they still beat Azure by four points and are guiding to 50 % growth, which is the fastest growth we've seen Azure deliver in well over five years.

12:06Michael Arougheti: You know, I think in terms of the market reaction, we were listening to the conference call last night. Amy Hood, the CFO, referenced this idea of financing flexibility, and the stock started to taper off a little bit. Obviously, it's a noisy day today. We've talked about Google and ServiceNow. But, yeah, they're raising$25 billion of debt this morning. I think the important thing to note is that Microsoft has not tapped the debt markets in a number of years. They are one of the highest investment-grade companies out there. They actually have$10 billion of debt maturing this current fiscal year.

12:43Michael Arougheti: And then they're going to remain pre-cash flow positive, I think, for the foreseeable future. So, you know, I think it's not so much to do with how the quarter and outlook look. It's just sort of, I think, this overall backdrop and maybe just some of the headlines around the debt. We know that's been a very sensitive area for the hyperscalers. How do you read the turn in the CapEx coming in below expectations? You said that's a positive. What was it,$42.5 billion? It was expected around$50 billion. Yeah. Does that signal some sort of broader inflection point for Microsoft and others? Yeah, so this was really a timely thing.

13:20Michael Arougheti: So they referenced third-party capacity. So what is that? That could be a NeoCloud or a third-party co-locator provider that Microsoft was relying on capacity to come in. And as we know, there's delays from power permitting, et cetera. My point was to get the level of Azure upside in their cloud business despite this delay is super impressive. Now, they're telling you that's going to show up in a few quarters as those, that CapEx will show up in a few quarters as those, you know, capacity comes online. But again, I think you're seeing increasing ROI on those CapEx dollars as evidenced by their revenue, earnings, Azure, M365 growth accelerated.

14:03Tyler, finally, it's not often you see a company lose almost a quarter of its market value, but that is the case for ServiceNow. I think you have a buy on the stock, obviously a very negative reaction of the quarter. What are you thinking now?

14:15Michael Arougheti: Yeah, look, I think this was an underwhelming quarter. I think it's always helpful to think about where was this stock coming from, right? And so shares had rallied, you know, well over 40 % off the lows and kind of post-last quarter. There was expectations for a larger beat. There was no, like, you know, miss or cutting of numbers. But I think this was a little bit uncharacteristic for ServiceNow standards just in terms of the lack of upside. Specifically, one of the things they called out is they're having to invest more in this forward-deployed engineer motion so that their customers can be more successful with AI.

14:57Michael Arougheti: That's a strategy we see a lot of companies do. We think it'll pay off. It's just going to be a little bit longer of a waiting game. And so I think the market wanted to see something a little bit sooner, but now I think you've got to wait until next year to really see that inflection. Got it, Tyler. Thanks very much. Scott, we mentioned you dropped your Alphabet target to 380. The stock actually bounced off 280. That was right around the March low. So we'll see how the rest of the day goes from there. Appreciate it, guys. Thanks. Thank you. All right. Here's our roadmap for the rest of the hour.

15:27After the break, one of the Dow's biggest recent winners gets a reality check. We'll talk about why shares of Caterpillar are sinking after posted what looked like solid results. Plus, as many tech names get hit today, we'll talk with one market expert who says concerns around the AI trade are only going to grow from here. And Aries Management CEO Michael Arragetti is going to join us in an exclusive interview. It follows results from the Alternative Asset Manager. We're going to talk about the quarter, data center investments, and a lot more. Squawk in the Streets right back. Legacy credit scores only look at a brief snapshot in time, and that limited view often leaves millions of qualified credit seekers out of the picture.

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17:43Welcome back. Caterpillar is a big draw on the Dow this morning, despite a beat on earnings and revenue from the company. Seema Modi has more on what is pressuring the stock. It is off the lows, I would point out. Seema? It is, David, but a small beat. That just wasn't enough to justify the monster move that we have seen in Caterpillar shares this year. Caterpillar did use the word moderate to describe future sales growth for the fourth quarter. And its yearly guidance remain unchanged, which is fueling concerns on the street that external factors like the political pushback to data centers across the U.S.

18:14and tariffs could be a factor in play. JP Morgan noting that its backlog of$78 billion, that is below the bull bar of$80 billion that sort of the buy side was expecting. Remember, Caterpillar does sell energy equipment to the hyperscalers that are building data centers across the U.S. And it comes as a few hyperscalers have signaled over the last 24 hours this level of restraint when it comes to CapEx. Oracle yesterday saying it only needs to raise about$20 billion and that it will return to positive free cash flow by 2028. Guys, the street has been using these CapEx targets as a way to gauge future sales of generators and other power equipment that Caterpillar manufactures.

18:53Sarah. Thank you, Seema. Joining us now to discuss the market action with all of these movers is Drew Mattis, MetLife Investment Management's chief market strategist. I mean, there are questions today, Drew, as I highlighted earlier, about just how much, how big of an effect the AI buildout is having on our economy and what sort of fresh signals we're getting. What are you watching? Well, I mean, we're certainly looking at the CapEx numbers. They came in in the GDP report today. Clearly, AI is driving CapEx and it's driving the consumer through the equity wealth effect. But what I think we're beginning to see here is what economists have known for a long time, which is there's an upper limit to how much you can actually spend in any given quarter.

19:36There are limits on how many machines are available, how many chips are available, how much land is available, how many workers are available. And I think what we're beginning to see is people begin to realize that, yes, you can say you're going to spend a trillion dollars on CapEx, but actually spending the trillion dollars becomes a little difficult. But that's the story about the supply constraints and why this is all potentially inflationary, isn't it? Well, it's inflationary if people keep trying to push it through, right? And whereas if people begin to pull back a little bit and say, you know what, like, let's let's build out what we have now and let's kind of start the planning process for the next one and just move things as we go or stay within the constraints that we have.

20:19And so we'll have to see how this plays out. We'll have to see whether people continue to try to push forward, draw more resources in, push prices higher, or whether they take a step back and maybe say, you know what, like, you know, does this have to be done in three months or could it be done in six? How lopsided is the economy right now? Because, yes, the AI boom is certainly powering a huge portion of it. But, you know, there's a lot of worry about the consumer with the high gas prices. Consumer spending in the third quarter GDP number looked pretty strong. Consumer spending has been pretty strong.

20:51But once again, it's kind of an AI story there. It is if you look at what's going on with the savings rate, savings rates coming down. So, you know, people are spending that money because they are getting it from somewhere else. And I think where they're getting it from is actually the equity wealth effect being driven by the AI story. And so all roads lead back to the AI story playing out in a reasonably benign, healthy, positive way for the U.S. economy. You know, that should be the way it works, but it tells you you're on a bit of a high wire. Right. And if you if you make a mistake in one direction or the other direction, you end up in a not so great place.

21:28And I think that that's the concern we have about the economy is that's very dependent on a single focus point. And that's an unstable stability. Yeah, I guess it's worth, I guess, the reminder, Drew, that this this time last year, all the talk was about, you know, the coming fiscal tailwinds. You're going to have a big bump in tax refunds and the A.I. CapEx boom was still kind of accelerating. And of course, oil prices and interest rates were much lower. So entering next year, do you actually think that there's downside risk to growth expectations? Are we going to just settle into kind of a Goldilocks phase?

22:06Our baseline view, I wouldn't quite call it a Goldilocks phase. It's just that this stability kind of is maintained, that we get enough investment, we get enough consumer spending to kind of keep the economy on an even keel. We don't expect the Fed to do a lot more. We do expect them to move rates another two times this cycle. But that's going to come over a very long period of time and it's probably not going to be overly disruptive. You know, the greater risk is that people begin to think about, you know, hey, how much how much of this build out do we need? How are people using it? And then, of course, the potential for the realization that any sort of tech build out usually leads to disruptions in the economy and other places, sometimes places we're not thinking about because, you know, new technology is by nature disruptive.

22:53Okay, that's a kind of skeptical take on it, Drew. Thank you for joining us. It's always good to have you. Thanks for having me. Drew Mattis from MetLife. All right, still to come, DoorDash to acquire Instacart for$17 billion. More details about that deal and a possible antitrust battle next. Plus, cyber investors not feeling very secure as results from Fortinet hit the entire sector. We'll look at what the options market is signaling about any dip buying opportunities.

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24:16Google Workspace with Gemini at go.gle slash workspace with Gemini. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast or find Schwab Market Update wherever you get your podcasts. Welcome back. We did get a large deal this morning, one that had been reported on previously when we first got reports that Instacart might be for sale, interest from DoorDash and potentially Uber dropping out.

25:05And DoorDash announcing the deal this morning to acquire the company for about$17 billion worth of cash in stock. It's a 75-25 split, 75 % being paid in cash, the rest in ratio of DoorDash shares, which, by the way, are up. They also had earnings this morning. The key here, though, is going to be the antitrust review, likely to be the FTC, though we don't know at this point, and how they're going to view the market for delivery of things from the supermarket, essentially, and overall. So if you think that that market is only limited to Uber and Instacart and DoorDash, well, you're going to have a problem with this deal because three going to two doesn't usually win the day.

25:49Even if you want to give a donation to the ballroom, it may not win the day, which, you know, to be fair, has been something that's happened. The CentOS deal, for example, people thought that would help that, but probably not. So that's going to be a tough one if, in fact, that is the way the market is defined. That said, Amazon and Walmart represent an enormous amount of the supermarket business. They are doing a lot of deliveries as well. So how the market will be viewed is going to be a key. I would note, Sarah, they are expecting a long review here, clearly, when they talk about this deal not closing potentially until the second half.

26:25I'm sorry, the first half of 2028. That is a way is a way. And that will be one of the keys. How do the likes of Kroger, a company you covered closely, and Albertsons react to it? What kind of feedback will they give the regulators? If they're in favor or they say this is beneficial to our business in some way or helps us in our fight against the likes of Walmart and Amazon, that could be very favorable to the deal. If not, it could do that. Interestingly, Kroger right now, we just talked to the new CEO. His first interview was talking about investing in the stores. They almost had over-invested and focused on e-commerce in the last few years after Amazon came in and bought Whole Foods and everyone thought the whole future of grocery buying was online.

27:08Turns out that that's not the case. There is a portion of people who buy their groceries online. And that's just what I was going to say about your antitrust thing. Instacart is groceries. DoorDash is restaurants, at least in my house. Yes, but not in everybody's house. They all want to say they all can get anything you want along the way. In any business. Perhaps not a surprise. A lot of the time on the conference call from DoorDash in which they announced the deal was focused on the benefits for grocers. Take a listen to the company's CEO. We expect a very positive response for grocers.

27:41Michael Arougheti: And, you know, a lot of what we talk about with grocers is just how can we together help them compete against the largest companies in the world, you know, online, offline. and how do we actually help them build the capabilities of great technology, a modern tech stack, as well as fast delivery? You really need all of these component parts to have a fighting chance. I mean, if you've seen what has happened in the grocery industry in particular, I mean, the largest companies are only getting larger and eating more of the pie. So there it is in terms of what they're going to be arguing. Again, key is going to be what those very customers actually have to say.

28:26And in a world in which affordability, Sarah, has become such an important issue as well, the idea that one company would have a lot more flexibility around price might not be particularly well taken. The other thing I wonder, and just on the antitrust thing, is whether we'll actually see it as it impacts the actual gig workers. Right. In other words, the monopsony question of if you have DoorDash and Instacart together, the people who actually do the delivering is a different constituency versus consumers or the big company. It's interesting. And you might have said this, but I mean, Instacart's whole business is they partner.

29:02Right. They have about eighteen hundred. Yes. Retail banners and many of the biggest grocers, including Kroger, Publix, Albertson, Sam's Club. They do the deliveries for them. Yes. Wegmans, CVS, I mean, all sorts of them. So maybe that's what Tony was referencing in that they'd be more supportive, that this would just empower them to do more if Instacart can expand. I hope it would get rid of this name confusion with Maple Bear. I know. I never understood that. I never understood that either. Mike, do you want to take us down history and explain why? No, I don't. I just want it to be done. Sounds like it will.

29:37It is ridiculous. What is a Maple Bear? I don't know. Yeah. Also watching another deal, ADT, Josh Kushner's Thrive Capital, planning to take the company private in a$15 billion deal. Thrive partner Kareem Zaki will join us next hour exclusively to talk about this transaction, which is interesting in a number of ways. Number one, I mean, Thrive has been extremely active lately, but they're known as a venture capital firm. They've done a number of rounds with OpenAI, just thought the Lakers are trying to. But this is kind of a different strategy, you know, taking out a public company in a private equity style deal financed by private credit.

30:16Apollo is participating in the financing here, which is also new and interesting. Well, no, private credit's been... But it's a large one. It is, but private credit's been there for a lot of these LBOs for some period of time. I think this might be one of the biggest. Maybe. It was private once. It was owned by Apollo. It was owned by Apollo, right? It was owned by Tyco. We go back long enough. But then Apollo. Talk about memory lane. Let's, you know, do the whole thing. We can go way deep. Well, time now for a CBC News update. Pippa Stevens has that for us. Hi, Pippa. Good morning, Mike. Alaska's governor ordered an investigation today into Democratic Senate candidate Mary Peltola's campaign.

30:56It comes a day after a New York Times report said people on the campaign helped to recruit a candidate with the same name as her main opponent. incumbent Republican Senator Dan Sullivan in an attempt to confuse voters. Patola's campaign has adamantly denied the allegations. Hong Kong's housing minister resigned today after an investigation into the city's deadliest fire in decades found inadequate regulatory oversight. The fire last November consumed seven buildings and killed 168 people. The city's chief executive also issued an apology today and promised comprehensive reforms would be carried out.

31:31And Meta will now alert parents if their child searches self-harm terms on Facebook. The feature has been available on Instagram since February. The tech giant says alerts will also be sent if the content is detected in conversations with Meta's chatbot across Facebook, Messenger, and Instagram. David? Thank you, Pippa. Your Aries Management CEO, Michael Arrighetti, is going to be joining us. It's an exclusive. It will follow, of course, the company's results and its conference call. They do expect another record year in fundraising. at Aries. Welcome back to Squawk on the Street. Aries Management reported third quarter results this morning, saying it is on pace for its biggest fundraising year ever, with$31 billion raised in the third quarter.

32:15Joining us here at Post 9 and a CNBC exclusive is Aries Management CEO, Mike Arrigan. Good to have you. Let me start off, since we had it in the intro, on deployment. I think you deployed$34.8 billion versus$41.7 billion a year ago. Credit deployment was actually down 33%. You talked about muted M &A, some seasonality. So can we expect that a lot of this is going to slip to the fourth quarter? That's what we're seeing. So it's interesting. The size of the global pipelines across all of our businesses, including credit, are actually sitting at record highs. The conversion rate in Q3 was lower than we've seen.

32:50I think that was a combination of muted M &A, as well as just some increased selectivity as we head into the fourth quarter. On our ARCC earnings call, my colleagues talked a lot about seeing that early conversion rolling through already in the beginning of Q4. So optimistic we'll see it pull through. Yeah. 83 % of your credit assets are floating rate. Higher rates obviously would help squeeze borrowers. Let's see. Coverage bottomed at 1.6 to 1.7 times when rates were 100 basis points higher. Yeah. I don't know. I'm curious as to what you think about how much more borrowers can absorb. We know that they can absorb at least 100 basis points because they've been there before.

33:31And so the sweet spot right now for us, and you're seeing this in the fundraising numbers, just in terms of the demand for floating rate credit, people are getting higher rates of return without taking incremental risk. The borrowers can absorb it. But then for Aries management, that 50 basis points or whatever we think the next hike is going to be really just drops down to the bottom line. So there's just a lot of embedded profit potential as rates start to drift higher. And overall, just in terms of how you're looking at things as an underwriter, and this overall concern that many investors have had with private credit as a group in terms of your due diligence, what are you seeing?

34:06We've probably talked about this for the last two years. Michael, this is a part of every interview we do. I can't see. There's a lot to be anxious about in the world. I get it. Geopolitics, rates, inflation, elections. But when you look at what's happening in the credit markets, bank loan market, high yield market, investment grade market, private credit, the banks, the card companies. You can't really find anybody who is saying that there are credit issues in the system. We just had a nice GDP print. The economy is strong. So I think the market is not differentiating well enough between forward-looking anxiety and what we're actually seeing in the core portfolios.

34:47So if you look at our private credit portfolios today, our non-accruals at cost are hovering around 2%. At fair value, they're about 1.5%, which is well below historical averages. Loan-to-value is sitting in the mid-40s. Interest coverage is between 2 and 2.5 times. So there's a lot of positive fundamental performance rolling through in these portfolios. Yeah, I guess, unless you're in the neocloud world, because then you're facing credit issues. How active are you involved right now in terms of financing data centers? So we're active financing data centers and developing data centers. We are not active financing GPUs or Frontier or NeoCloud.

35:28So we've made the conscious decision that we want to... Yeah, why the discrepancy? I think for us, we look at it's a$5 trillion plus CapEx demand right now. It's roughly$2 trillion of that$5 trillion is data centers, adjacent power, gen, and infrastructure. three plus trillion is chips. Our house view is we can actually structure really attractive risk on both the equity and the debt side, sticking to building the powered shell with the clients that we have around the globe. And so we just haven't really felt the need to push out on the tech risk or into the frontier of the way that we're doing the business.

36:07Do you have a take then on whether the GPU business will and should become a tradable commodity and get securitized and act as collateral for a large set of financing? There's a lot of people who are very bulled up on GPU financing. We are not. Part of that is we don't want to underwrite the technology curve. We don't know how quickly these will depreciate. We can't say when there will be a technological revolution or evolution that changes the useful life of these chips. So I don't want to say that all GPU financings are bad risk. I would simply say the excess return that you generate to take that set of risks to us doesn't justify allocating away from some of the easier parts of the day I spend.

36:52You do have a digital infrastructure fund. I think the first close slipped to later in the fourth quarter. Why the slippage? It's actually going to hit its cover and it will, when printed, be the largest infrastructure debt fund raised. So we're really excited about the progression of that business. It's just a timing of getting the final closings done, but that's imminent. You know, BDCs have not done particularly well, but yours have, actually. I'm curious as to how you differentiate what you're doing at your BDCs. I'm talking about, you know, what is it? AINV or... Yeah, the old AINV. It's actually really interesting.

37:35And now MFIC. Yeah. It's interesting. You go back. We did IPO'd ARCC, our BDC, which is the largest publicly traded BDC in 2004. And at the time, there were three large BDCs, Allied Capital, American Capital Strategies, and AINV, which is now MIFIC. Fast forward 22 years, Aries Capital Corporation has actually acquired and integrated those three platforms. I think what we have done differently, David, is we've been doing it longer than most. So we've just accumulated a set of competitive advantages in origination, in our relationship network, the diversification and size of our portfolios, the amount of resources that we can put behind portfolio management and technology.

38:23And so the benefits of scale are definitely showing through. And when you get into a market like the one that we're in now, ARCC, which is trading close to book value, is able to go in and deliver a really attractive premium to the mythic shareholder. And with a little bit of support from Aries Management, ARCC shareholders are able to buy a diversified book of 200-plus names accretively. So it was really a nice win for Apollo, win for Aries, and win for the ARCC shareholders. I was just talking about the ADT deal and the private credit component of it, how this could be, I think, one of the largest, if not the largest ever in terms of a take private, where it's non-bank, right?

39:01It's Apollo. How big, just like broadly speaking, how big can the private credit market get? And is that the future of your firm? It's one of the futures of our firm. I think we talked about this on our earnings call this morning, just before coming here. Aries is a very, very diversified manager. We have one of the largest real estate businesses in the market, one of the largest infrastructure businesses, growing insurance. Credit is what we've been doing the longest, and private credit, whether it's opportunistic, direct lending, asset-based, are all growing. It can get quite large because it's effectively open to financing the global GDP.

39:41It is taking share historically from the loan and bond market. It's taking share from the insurance and bank market. And it's now taking share from the securitization market. So when you look at the TAM, it's quite substantial. But I think people don't fully appreciate, we talked about this last time we were together, the symbiosis between the banks and the private credit managers is really, really strong. And so for Aries, this is not about private markets eating everything and displacing the banks and the capital markets. It's really just about structural innovation and continued evolution in the markets.

40:18The redemption story, so to speak, which has gotten plenty of airtime, seems to have died down a bit. But how much is it still having an impact in terms of your wealth inflows? We had our second largest quarter of wealth inflows this quarter in our history, about$4.2 billion of equity. Part of that is a reflection of the brand that we've built. Part of it's a reflection of the fact that we have eight different products in the market. And so when you see, for example, BDCs not growing, you see our core infrastructure fund, our sports fund, all growing and taking shares. So we are not seeing reduced demand in the channel, given some of the anxieties around private credit.

40:57But as I've said publicly, the private credit redemption story is misunderstood. The bulk of that redemption queue is sitting in a pretty small number of family offices and small institutions in the international markets. And that queue is working through. So if you look at the institutions that wanted their capital back in our non-traded BDC in Q1, they've gotten 80 % of their capital back as of the end of this quarter. And so that pick through the Python is moving pretty quickly, and I think you'll probably start to see it reverse itself in the new year. Finally, and Sarah just mentioned a private equity deal.

41:33I do remember when you guys used to actually do some of that, but not much. What are your expectations for the remainder of this year and into next when it comes to new potential transactions for private equity and the exits also. Yeah, we're seeing, as I said about just Q4 deployment, we are seeing the pipelines pick up. Private equity is a very large market. If you think about it, there's 32 ,000 private companies owned by private equity managers that need to get sold, bought, refinanced, restructured, need to invest in growth. and it's$3.5 trillion of private equity capital invested in those businesses.

42:13And there's about$1.5 trillion of dry powder that's looking for a home. So, you're going to have to see the velocity of transactions pick up. If it doesn't, it's going to show up in a really interesting investment opportunity in places like secondaries, opportunistic credit, even in direct lending. So, we're not as concerned if the transaction market is still pretty slow because I think that capital demand is going to have to come from somewhere. Michael, always appreciate you. Always good to see you. Stop by. Thank you. Of course, it's great to be here. Mike Ergetti, CEO of Aries. All right, up next, how options traders are thinking about the cyber trade right now as Fortinet drags down the entire sector following results.

42:52We'll talk about it then next hour. Do not miss the CEO of Shell. Quarterly profits nearly doubling year on year. We know about the high oil prices. We'll get the CEO's outlook for prices and the environment and where he's investing. When Squawk on the Street returns. Small caps are still the stars of 2026. The Russell 2000s outperforming both the S &P and the Dow. But over the near term, that has not been the case. Can small caps get back some of that momentum? We're going to speak with the CIO through the parts of the small cap trade worth focusing on. Tune into our Market Navigator segment later on today on Power Lunch for more on that story, 2 p.m.

43:29Eastern time. Welcome back. The cyber sector getting hit hard this morning as results from Fortinet disappoint. Let's get to Oliver Ennick at CBO in Chicago with a look at what the options market is signaling. Hey, Oliver. Hey, Mike. Stock's under pressure, something we've gotten used to seeing, but cybersecurity trade taking hits is a little new. It's mostly centered on Fortinet, stock that's down 20 % after earnings yesterday, and options traders scrambling to find a response. This is not typically a popular trading name, but today volume is more than 20 times the average. With 35 ,000 contracts traded, call selling the most popular position it looks like so far, and also three times as much money likely spent buying puts than calls.

44:15So this is a very sharp turn and sentiment negative for a stock that was up over 150 % this year coming into this month. There's a bit of a knock-on effect happening too as CrowdStrike and Palo Alto Networks both dropped 3 % to 4 % today. But the options flows do not look as panicky in either of those stocks. Palo Alto put-call premium is basically evenly split. And in CrowdStrike, it actually looks like there's a bit more of a bullish buy-the-dip bias in the action with 20 ,000 calls traded compared to 12 ,000 puts and about$30 million of the$40 million in total premium today in CrowdStrike tied to calls, guys.

44:56OK, thank you. Well, those stocks have been such winners lately as well. Oliver Rennick in Chicago. When we come back, Eli Lilly blowing past earnings estimates as the health care sector hits a record high. You'll hear what CEO Dave Ricks just said about demand for the company's weight loss drugs when we come right back. Welcome back. Here are three big movers we're watching. First up, Norwegian Cruise Line spiking this morning after a beaten raised quarter, even amid high fuel prices, shares up almost 13 percent. Then Chipotle rallying despite an earnings miss. Revenue did come in better than expected.

45:26And CEO Scott Boatwright said same store sales growth momentum would continue. Matt has been also saying the low-income consumer outperformed the high-income consumer for the first time this year. And Eli Lilly results blowing past estimates, hiking its sales outlook as demand for Zettbound and Manjaro surge. CEO Dave Ricks joining the show last hour, telling us he sees dramatic room for expansion in the obesity care market. I believe it's a new high for Lilly, a massive upside contributor to the S &P 500. It's basically the biggest non-Mag 7 name. Maybe we've got to change the classification.

46:04At$1.3 trillion now, I think, as you say, a new high. So kind of impressive. I mean, that's been the question, just exactly how high penetration can go there. Well, it was the third guidance raised this year. Eli Lilly shares up another almost 7%. When we come back, Citigroup's global head of tech and communications on the moves that we are seeing in names like Alphabet, Microsoft, and ServiceNow. Huge moves today. Look at ServiceNow down more than 25%. Squawk on the Street will be right back. All opinions expressed by Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium.

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