AI Sell-Off, Data Centers and Midterm Market Risks 11/2/26

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1:03Stocks are up, but we are well off session highs and the Nasdaq is lagging on another big sell-off in the AI trade. I'm Kelly Evans and welcome to the exchange. Anything that's not tech-related is holding up the markets today. The Dow up 475 points, the Nasdaq trying to stay green, the S &P, I should say, up a third of 1%. And the Nasdaq, it's up 66 points right now, about a quarter of 1%. Worst session since June it's coming off of, and the worst month since spring of 2025. Oil is the positive today. It's right near session lows, down almost 8 % for WTI, 96 a barrel. We'll have the latest from Washington on the potential for peace talks as opposed to strikes on Iran.

1:42That's coming up ahead. Yields are lower following oil down, and the 10-year is at 4875 today. That's a big turnaround that we've seen, taking us only back to September lows. But from the highs at 530, we're down almost half a point right now. The sell-off and the AI trade comes after Anthropik's amended S1 filing, IPO filing, which shows around$33 billion in third quarter revenue. Fine. But it also shows a nearly$900 billion bill for future compute. And even Lumentum is selling off today after reaching a deal to sell itself to the chipmaker Marvell. Take a look at these names. This would be one of the biggest deals of all time.

2:18$115 billion. And Lumentum's down 15%. Marvell, I should say, is down 9%. Keep an eye on SpaceX as well. and the telco SpaceX reportedly buying Boost Mobile. That's a big story. And Meta, S &P cutting the tech giant's outlook to negative. We also have Apple reporting after the bell today. Let's kick things off with the AI sell-off. And Mark Mahaney, he's Evercourse Head of Internet Research. He's joining us for today's opening exchange. Good to see you, Mark. You dug through the amended Anthropic filing. What did you think? Well, I'm not sure I saw a lot that was new. a lot of what was, we had seen a lot reported about their potentials, their September quarter results.

3:03And so that I didn't find new. We were sort of hunting for, I think the market's hoping for some read into the month of October. We didn't get that. So I'm sorry. I didn't see the anthropic reporting as the amended S1 as that material either way. No, I'm glad to hear it because we should walk through. Okay. So if it's not that, is it OpenAI? What was up with the fundraise, it was kind of, eh? You know, if it's not that, is it Lumentum and Marvell and the deal reaction? If it's not that, is it Google? I mean, what would you say is the catalyst for this ongoing sell-off? Well, it's funny you say that.

3:36I actually see some things that are kind of interesting to me. One of the most interesting trades out there today actually is Amazon. So remember, Amazon traded off as much as 10 % in the aftermarket last Thursday, then started coming back slowly in the aftermarket and then on Friday, and now it's up versus where it was when it printed. So I look at that as, you know, and I thought they gave you very healthy reads into the whole AI trade. I mean, when they talk about being able to sustain 40 % cloud revenue growth for two years in a row, going forward 27 and 28, and a lot of that is AI driven.

4:12That, along with Microsoft and Google's cloud results, there were other issues on some of these stocks. It's the capital raise from Meta, which raises this S &P debt issue. There's the ads issue with Google. But when it comes to the core cloud AI business, I think the read-through from the quarter is actually very positive. You mentioned meta. Let's just circle back to that for a second, because again, this downgrade, you know, could they be a... Let me show you, this was the cover of the Financial Times today. Route in market for riskiest junk debt sparks bloodbath for credit investors. Bloodbath, Okay, their word.

4:49Now, you look through some of the examples. Frankly, it has a telco ring to it. They're talking about Altice in Europe. They're talking about Virgin Media. You know, to your point, I don't really see anything here that tells me that the AI trade is collapsing. But I don't know, maybe the reason why this will get attention is people will say, oh, you know, junk, junk, dead, junk spreads. That's where it all starts. It's always this idea of canaries in the coal mine and it's spreading and so forth. I just am curious for your thoughts and reaction to that. So the question that really comes up and it came up in this S &P watch, whatever the report, is the financing capability of these companies.

5:28And so, you know, have Google, Amazon, Meta, Oracle, perhaps, have they raised enough money? Can they get through what's going to be a huge free cash flow hole? I mean, we step back a little bit. This is the biggest investment cycle I've ever seen in my career. And that's almost 30 years. And I think for most people, I think this is almost unprecedented, the trillion dollars in CapEx. And of course, these companies had to go out and raise money to get through that. The open question of what's in this S &P comment is whether these companies have done enough. Google has raised over$160 billion in the last 12 months.

6:02Amazon has raised over$100 billion. And Meta just raised close to$100 billion. And my bias is that these companies were probably pretty thoughtful when they figured out how much they wanted to raise. Meta's offering, by the way, last week was five times oversubscribed. Like there's appetite in the market. If they wanted to sell a lot more, I think they could have. The fact that they capped it where they did, that tells me that hopefully they're not stupid enough to have to come back to the market in three or six months for more equity and debt when they could do it now. So that's why I sort of think that some of these concerns are overrated.

6:34I may be wrong, but I think that these companies have warned about CapEx for next year. I think Street has appropriately brought up numbers. There may still be some upside risk to that CapEx, but I also think there's upside torque to the operating cash flow numbers that are out there. So I don't think we're going to have a major new financing crisis, at least amongst the major hyperscalers that I look at. We talked to Howard Marks on Friday at the Shadow FOMC. A lot of focus was on his comment that AI is the most uncertain thing he's ever seen. But he also stated quite plainly that all of the upside for AI is in the equities.

7:07Again, he's a credit shop. You know, like you said, there's demand for Meta's credit. That's fine. But how much upside do you think there could be when we start talking about these core holdings on days like today, months like we've seen? What kind of upside potential is there still? If Mark said this, everybody says if we're in early, early innings of the AI build out. Well, I'll stick with my point earlier, which is I think there's this overhang on some of these companies related to people want visibility. and when we're going to see the worst of the free cash flow losses. When do we know that we're going to get back to positive free cash flow?

7:41I mean, Google and Meta were free cash flow juggernauts up until this year. That's all changed. And the question is, when are we going to get back to that? To me, that's the correct overhang that the market has, which means that if they're actually able to prove that they can come out of this cycle, you've got upside in the stock. These things will re-rate. These things will, especially given their core revenue and earnings growth. And Meta is a top example of this. They're growing twice the rate of the market overall in terms of ad revenue. And they've got this incredibly new, powerful consumer agent that I am certain they're going to monetize.

8:13That was the question mark in the S &P 500 report, whether they could monetize. I've watched Meta monetize a lot of different things. They know what they're doing when it comes to that. So I'm not worried about the monetization. The question is, when do we get that? When do we get the light at the end of the free cash flow tunnel? And my guess is that we get that in the next 12 to 18 months. And when we do, it's not like they immediately turn positive free cash flow. But we are able to figure out that the worst is behind us. You've got a big re-rating potential on that moment. And I want to get ahead of that moment.

8:43I'm not exactly sure when it is, but I want to get ahead of that moment. I'm taking notes because I love the way that you said that. And I think you've put your finger on it. And in other words, those investors who are backing away. And there's huge trading shops that need to show profits every day, practically every week, every month. If they don't want to wait this out, that's fine. They don't have to. They can go to whatever part of the market they want to go to. But what you're saying is once these tech stocks show that these bets will pay off and their free cash flow is going to go positive again, that's when you think we could see more upside in the stocks.

9:17And maybe that's 12 or 18 months from now, maybe a little sooner the way things discount. So you're not denying that we might be in for a little bit of a rough patch between now and then. No, no, no. But, you know, as you and I both know, the market discounts everything. So I'm sure there'll be some hope rallies before the reality rally kicks in. So there's a little bit of that. And then also we're going to look at product cycles too. So it's not just we want free cash flow catalysts and we want product catalysts. And you've got a wonderful product catalyst unfolding right now. It's just starting to unfold with Meta and Muse.

9:48Google needs to come out with its own Muse competitor. They also need to ramp up and show us really what they can do with these TPU, these chip sales that they have. I think that's an interesting catalyst. And then if I just stick with the companies I look at, Amazon entering into space with this Project Leo, the competitor to Starlink, that should launch between now and the end of the year. That's a great product catalyst, too. So I want companies that can give me both, can give investors both product cycle catalyst and free cash flow catalyst. And I think this is just a, it's not a matter of if in my book, it's a matter of when.

10:20And I think they've raised enough capital to get through this so that they don't need If they had to come back in the next three to six months, you know, I'd be shocked that they were that inefficient in raising capital the first time. And I don't think they'll need to. We got to go. But I love this framing. Can I just sneak in one more kind of a personal note, but not really? I mean, there are a lot of investors who are frustrated. What about Uber? What happens to them? Why is it a 15 minute wait now every time? And people are telling me about all these rival services like impact. What is going on with Uber stock?

10:48Are we are we leaving it behind at this point? We've round-tripped. A year, year and a half ago, we had a great rally when they all of a sudden got the Waymo rollout, successful Waymo rollout on Uber's network in Austin and Atlanta. What Uber needs to do is to show that they can get other companies, not named Waymo, to successfully roll out on their platform in the next 12 to 18 months. I think that's going to happen. Uber is setting up highly attractive. It's not one of my top three picks now, but it's setting up awfully attractively. and setting up very attractively going into next year is what I call DHQ, dislocated high quality asset.

11:26DHQ, all right. DHQ, yes. I love it. Mark, really appreciate it. Thank you. Good to see you today. Thanks, Kelly. Mark Mahaney with Evercore ISI. Let's move along to Apple now, which had been holding up during the recent tech sell-off as it's become a bit of a safe haven, kind of an anti-AI stock even. Gear up for their first earnings report with new CEO John Turnus this afternoon. And my next guest is a little worried about the long-term risk here. Craig Moffitt is the co-founder of Moffitt Nathanson. Is that true, Craig? You've got a hold. I think we've talked about this a little bit. But what are your expectations for the quarter and reporting on a Monday, no less?

11:59Yeah, I think the quarter will be fine, Kelly. Although, remember that where consensus is and what this stock has been rallying into decelerating growth, That's simply partly because the iPhone 17 cycle last year was a strong cycle. The 18 cycle doesn't look like it will be as strong. So you're getting some decelerating growth. I think our bigger concerns are twofold. One is we keep getting hung up on the valuation. Remember, with a 36 times forward PE, you're looking at a stock that, if you think about it in terms of earnings yield, is offering you an earnings yield that's roughly half the 10-year treasury.

12:47So it's about a 2.8 % earnings yield. So it's a really, really rich stock. And if you look out longer, I don't know that this is going to be a theme or a particular concern in this call, but if you look out longer, Apple's biggest risk is probably from agents, right? Agents bypass the app ecosystem as we know it today. And really, if you think about the long-term impact of agents, it will significantly erode the lock-in or the moat around Apple to the point where Apple still makes the best devices. But you won't be so locked into an ecosystem if your agent gets rid of all the messiness of trying to deal with the differences between Apple and Android operating systems.

13:40So true. Great point. You know, anything else just more specifically around the metrics or whatever tonight or Ternus himself? Well, I think we're a lot of people are excited about the duo. The duo didn't even show up until the fourth quarter. So people will be looking for some commentary. The duo, of course, is the foldable iPhone. But the supply is so limited that anything they say, I'm sure they will talk about how long the wait times are and how great the market reception has been, notwithstanding the kind of embarrassing stories about some screens cracking. It seems like there's good demand, but it's not big enough to really move the needle.

14:23I think you're in the same boat with the new suite of Apple Home products. So realistically, what you're looking at is a smartphone cycle for the iPhone 18 that is suffering from the fact that you actually had some pull forward of demand last year with the 17. And you've got carriers offering less aggressive promotions. So there's a little less subsidy there. And the price has gone up. So you have some elasticity. The other thing I'd be watching for, Kelly, is the services. We've been back and forth about whether the Epic Games ruling and some of the limitations on how Apple can charge for transactions that go outside of the App Store.

15:13Will that start to show up in the earnings growth rate? And again, longer term, you have this same agentic issue of agents don't tap in and do payments and things through the apps. They bypass the apps and do it through APIs. Yes. And so it's a longer term concern, but it bypasses the services revenue that Apple gets today from a lot of those transactions. Maybe it gets more upside from selling a bunch of the Apple, what are they, the mini Macs that people are using to run their agents out? And that actually, you're absolutely right. in the studio, that those devices have become really popular for running AI in your home or in your office and are really good for that.

15:57So that's been a real bright spot. And we talked at length in the past about SpaceX and some of the problems they'd face trying to build out a real national cell network with the reliability that we all experience from the big three right now. But are they buying boost and does that change the game for you? And would it be a bigger threat for the existing players? Yeah. So what you're referring to is an article that Patience Hagen wrote in the Washington Post this morning saying that they are in talks. I guess first I would say the idea that boost sort of, if you'll forgive the pun, gives you a boost in getting into the wireless market, it's not quite correct.

16:37It does not appear that a transaction with Boost would give you access to the AT &T agreement, and the T-Mobile agreement at Boost runs out in another six months anyway, or seven months, so it's irrelevant. So I don't think you'd get a backdoor into the AT &T agreement. And while I've heard people say for the last few months that Boost would give you tower leases and equipment and that sort of thing that they had built, the reality is it actually wouldn't. Boost doesn't own any of that stuff anymore. Their bankruptcy put all of that back to the tower operators, so they don't own equipment. The equipment wasn't very good to begin with, but they don't own equipment.

17:18They don't have tower leases anymore. And you probably don't get access to an MVNO. So it's not really clear there's any there there in this idea. I was looking for a bigger impact on the stocks, which we see are all in the green. I thought, well, they had a big sell-off. But now, as you explain it, maybe they're going, all right, it's kind of a paper tiger, at least for this round. I think the one thing that the article did really clearly confirm was that SpaceX was really trying hard to get an MVNO agreement, which is what we've said all along. They really need an MVNO. And so the article opens with the idea that that Musk was petitioning all of Verizon AT &T for an MVNO, got turned away from all three of them.

18:00And this is kind of a plan B that doesn't look like it will work as a route to get to an MVNO. All right. Does Comcast have one, by the way? They have an MVNO with Verizon, but theirs is also not transferable. Yeah. All right. Just, you know, it's interesting to follow along as they clearly are trying to do something that's going to be difficult, but it's also a company that's used to doing difficult things. Craig, thank you for now. Really appreciate it. My pleasure, Kelly. Craig Moffitt with Moffitt Nathanson. Coming up, should you trust the rotation into cyclical names today or buy the dip in the high-flying tech names?

18:33We'll dig into that again. but first a once-in-a-generation opportunity to reach the upper middle class. That's how one union rep describes the data center boom in his area. Will tomorrow's midterms derail that dream? That's next on The Exchange. This is The Exchange on CNBC. Brooks Brothers, quality tailoring that lasts a lifetime. The 1818 Collection, Italian-crafted suiting for your important occasions. Explorer suit separates crafted from lightweight wool built for travel and ease. Brooks Brothers, tailored for the moments that matter. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

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20:28Welcome back. the data center debate is taking center stage this election cycle. Many framing the midterms as kind of a national referendum on the point. The individual governor races could be consequential for companies working on the AI buildout. Pippa Stevens is here with a closer look. Hi, Pippa. Hey, Kelly. So when it comes to utility policy and the data center buildout, state elections could prove much more important. Tomorrow, there are 36 gubernatorial elections, and 20 of those features some sort of pause or moratorium on data centers. And Texas is the most watched one, given the next governor will have to tackle an enormous backlog of projects waiting for a grid connection, 90 percent of which are data centers.

21:05Governor Greg Abbott and challenger Gina Hinojosa both calling for a pause on the buildout, potentially putting pressure on names like Sempera, Centerpoint and American Electric Power, which operate in the state. Now, Georgia is another race to watch since utility commissions are elected rather than appointed, and two of the five seats are on the ballot. A flip to Democratic control could tighten data center plans, hurting Southern Company, which has been a significant beneficiary of load growth. It's a similar story in Arizona, which has one of the U.S.'s strongest electricity demand outlooks, with two of its five utility commission seats on the ballot.

21:37Pinnacle West is the major operator there. And with so much uncertain policy, Bank of America is set to favor states where the large load framework was built ahead of all the data center power demand, potentially making the buildout less disputed. They point to names including Black Hills in Wyoming, Accel Energy in Minnesota, and IDA Kelly in Idaho with this idea that if you already have the framework in place, it's easier to build. But in Texas, this could be one to watch because they have so many data centers or potential data centers. And it looks like that race is tightening somewhat. That's right.

22:06And the idea that it could flip Democratic for the first time since the 1990s on the governor's side is really quite, quite, you know, this startling or headline grabbing rather than a lot of that comes down to this data center playbook. And, you know, Texas, of course, has always been very pro-growth both in pro-business. So it marks a little bit of a shift there. And clearly, Governor Greg Abbott was responding to the growing backlash nationwide and in Texas. And what's so interesting about Texas specifically is that, you know, the hyperscalers can really take a page out of some of these oil and gas companies' playbook and say, you know, when you want to build one of these projects, you have to get the community on board ahead of time.

22:38You can't do it after the fact. And I think that as the backlash has grown, we've seen hyperscalers do that more. They've come into communities saying, here we are, rather than using a shell company with a different name. and they've been more upfront about what they want. But clearly they've all gone to Texas because it was so pro-growth, and now people are saying, eh, maybe we should kind of pause a minute and kind of have a more thoughtful approach to how we do this build-out. All right, we'll see what happens. What's today? Monday. Tomorrow. All right, Pippa, thanks. Pippa Stevens. Our next guest has called the data center build-out a once-in-a-generation opportunity for workers to reach the upper middle class.

23:10He says he's seeing locals hiring HALF jump from 9 ,000 workers to more than 17 ,000, amid Northern Virginia's data center boom. Don Slayman is the political coordinator for the International Brotherhood of Electrical Workers Local 26. Don, it's good to circle back with you. We last spoke towards the end of the summer when you were first talking about this opportunity. Curious now what your concerns are, if you have concerns, about the midterm elections tomorrow. My concerns are that both parties are turning this tremendous source of growth for the working class into a ball of yarn to be toyed with.

23:50It's too important an issue to be used for electoral politics. And when actually you look at the voters, it may be salient, but it's not when they're being polled, but it's not what makes their decision on the upcoming election. And so what we'd like to have these politicians understand is that this$10.3 trillion represents such a large portion of our economy. We've never seen one industry be such a large portion of our economy before, 3.6 percent of our GDP between now and 10 and 2032. I mean, the whole electrification build out was only a half a percent at any one time. The highways were only 1.1 percent of our economy at any one time when we did the big highway build out.

24:38And the fiber optic build out, the Broadcom, was only 1.1. And the only thing comparable to this is railroads, 2.3. And that was very – we saw back when the railroads were built out, it was very disruptive. You had the Grange movement, the populist movement. You had both of the parties almost flipping their agendas. You had a lot of fear about what was going on back east and the railroads and stock exchange and the monopolies. And so there's a lot of this amount of money at one time creates a lot of uncertainty and fear among people. But what it means for working people, after having a rug pulled out from under us with our trade laws, now this is the first chance in the generations for the skilled trades folks to get into the upper middle class because there is so much work happening.

25:33You know, we have, as you said, have doubled our membership in the last 10 years. Last year, we worked 28 million hours. This year, we're going to work north of 33 million hours. But it's not just the skilled trades. I want to take a look at all the components that go into these data centers, the fiber, the cables, the switchgear, the servers. You know, there's an opportunity for workers to also to have a voice. You know, we would like to see the passage of the PRO Act and we'd like to see all these jobs organized and have their workers have a voice. We'd like to see tomorrow's election make our constitutional system strong again and bring back checks and balances so that we can have a voice in our government.

26:11But we'd also like to see these workplaces organized and all these workers have the opportunity to have a voice in this tremendous build out. Sure. So you're obviously down in northern Virginia, which began as the epicenter for data centers. Although, as we were just discussing, you know, it could shift to Texas. It could shift to bigger states with more open area to kind of finish this. If politics and local communities don't stand in the way, do you think it's because there's familiarity with data centers that we haven't seen more pushback in your area? that it's more of an unknown for other people?

26:42Or conversely, as people know more about it, does their resistance grow? No, I think it's the unknown. And you're right, Kelly. So here, we've been building data centers for over 25 years. The first hyperscale was built here. And we actually rebuilt that facility, doubled its capacity. There's never been a decommissioned data center. That's another, you know, some of the myths out there that you're going to decommission them or they're going to become obsolete. Data is just growing. 3.2 million people, a billion people were online when we first started this data center build out. 2.8 billion people have come online in the last decade, and 2.2 billion people are going to come online.

27:22And they're going to start using data the way we do. I mean, modern society is a seamless flow of data, electricity, and potable water. And here in our community, we've watched this industry grow. We've watched the developers become more, it evolve and become more, listen to the needs of the community. So today you'll see these developments where there'll be 20 to 25 % open space. You'll see most of these projects are closed loop, non-evaporative systems. The noise has been engineered out. And you're seeing all this progress. Stacks infrastructure, Cloud HQ, digital reality, powerhouse. These companies are all listening to the folks.

28:06I've seen it in all these communities. We represent 44 counties in Virginia. We're having our members show up to these meetings to express how important these jobs are to them. And we're seeing from all, showing up the last five or six years, how much these developers are listening to the general public and meeting their demands. And just the amount of revenue that it creates here, where, you know, 24 % of all operating capacity in North and South America was in our market as of 2024. Of course, that's changing with AI. and now it's booming everywhere. But we've seen the revenue,$1.3 billion annually to Loudoun County.

28:46Majority non-white county, Prince William County, the next epicenter of the data center movement here, has universal pre-K as a result of this data center investment. These things have been tremendous value to our communities. Don, thank you. Your knowledge of the details is incredible. But I know, as you said, look, your railroad analogy is great. It flipped a lot of parties back in the day and engendered a lot of fear and pushback. And now, you know, I'm happy to say for the most part we don't really think about it. But there's still a lot to be ironed out between now and then if that's where we're headed for data centers.

29:20So thank you. You know, you're on the front lines and you're helping us get a sense of what it is like for you and your workers. Really appreciate it. Thanks for making the time. Thank you so much. Thanks for the opportunity. We hope they all stay in my market. But if you're not going to have one, these are the jobs tomorrow. These are the future careers being performed today. It's going to be like if you don't have the railroads going through your community, you're missing out on the next generation of work. It's fascinating to hear someone come on and say, take them if you have to. But I want them all for me.

29:48Don Slayman, thank you very much. IBEW Local 26. Coming up, renewed hopes of a peace deal with Iran. Those are setting oil prices much lower today. We'll get the latest from the White House next.

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31:00market update podcast or find Schwab market update, wherever you get your podcasts. Where others see obstacles, you see opportunity. You collect wins. Even when no one's watching, this is what hustle looks like. So chase that degree and let your hustle make it happen. Capella university. What can't you do? Visit capella.edu to learn more. Oil prices are down sharply today. About 7 % right near session lows. WTI is at 96 a barrel, well below a hundred. It's as big as a client since July. All of this on renewed hopes of a peace deal with Iran after several days and weeks of concern about escalation.

31:36Megan Costello is at the White House with the latest. Megan, investors want to know if they can, I don't know, trust this one this time, especially because we had heard that potential attacks on Iran might be happening after the midterms. Absolutely, Kelly. Everybody's been waiting for these Tuesday midterms to figure out what's happening next. For now, all that optimism you described today is stemming from three straight days of negotiations that were held over the weekend between the Iranians and Qatari mediators. An official briefed on those talks told Reuters that they were aimed at finding a deal to end the war and that a draft proposal was being circulated.

32:07Then Iran's foreign minister told state media on Sunday that the discussions focused in part on what he described as a two-day proposal. Iran would reopen the Strait of Hormuz within two days of a potential agreement with the U.S. But he also said that no final conclusion had been reached and that Tehran is prepared for both defense and diplomacy. And then on the U.S. side, President Trump told reporters on Saturday that negotiations with Iran were going fine and that he was not in much of a hurry. He said he spoke with Israel's prime minister, Benjamin Netanyahu, on Saturday that they discussed Iran.

32:39The president described it simply as a good conversation. But Axios reported that Netanyahu was pressing President Trump in that call to strike Iran immediately after Tuesday's midterms, but that the president, President Trump, wants to let negotiations play out. That matches somewhat what Secretary of State Marco Rubio was saying over the weekend, which was that President Trump has not yet decided on a way forward on the strikes, but that he would prefer to resolve the conflict diplomatically. Kelly, so you're right. We've been hearing all these headlines for so many weeks and days now about preparing for more conflict.

33:10For now, it seems like the White House at least wants to see these negotiations play out a bit longer. Oil prices down. Those are about gas futures. Gasoline futures are down. So a lot. I mean, look, the market's usually ahead of this. You know, so I want to take it. you know, at face value. But there's, you know, we'll just have to see. Megan, thanks very much. Megan Casella. Let's get to Frank Holland now for the CNBC News Update. Hi, Frank. Good afternoon, Kelly. President Trump told a podcast that he would be willing to offer protective pardons to Elon Musk and his close aides if the Democrats take control of the midterms.

33:40Several Democrats have indicated potential investigations into Musk's work leading Doge and over some of his federal contracts. Musk has donated heavily to Republicans this cycle, spending hundreds of millions of dollars on GOP races. Jury selection set to begin today in the federal retrial. The man accused of starting what became the Palisades Fire, one of the deadliest and most destructive in L.A. history. His first trial ended in a hung jury with 10 jurors in favor of an acquittal. And supermarkets in Sweden, Belgium, Luxembourg, Ireland, and Estonia were hit by apparent cyber attacks today, which disabled freezers and fridges.

34:14It follows a similar incident last month when hackers took control of hundreds of refrigeration systems at supermarkets in France. No one has claimed responsibility for those attacks. Kelly, back over here. Here we go again. Frank, thank you. Thank you. Coming up, investors are sweating tomorrow's midterm elections, but should they? Despite the recent sell-off, the Nasdaq is up nearly 40 percent since the 2024 election, and history says you should just sit back and we'll tell you why next.

34:47tomorrow. The Dow is up 1%. It's leading the way. And bond yields are retreating with the 10-year below 4.9%. That's down from 5.3 % at the highs about a month ago. History suggests the stock market rally should also continue because since 1990, the 6-, 9-, and 12-month returns after midterm elections are positive 100 % of the time, according to J.P. Morgan. And the average gains are about 15 % in the following year. Our next guest says it's not just the election cycle that should support more upside from here. Let's bring in Arun Sundarum. He's a senior investment strategist at CFRA. Arun, it's good to see you.

35:25And first of all, do the midterms have this effect because almost by definition, a midterm election means the other party gains a little on the main, and so you kind of have this gridlock effect. Yeah, yeah. I mean, history kind of always tells you that the president's party tends to lose seats during the midterms. So especially in the House. So I think the odds are very high that in the House, Democrats take control there. There's a little bit more, I guess, debate on the Senate side. But at CFR, our firm, we think the Democrats also take the Senate as well. But interestingly for the markets, you know, the markets never completely cared about who won the midterms.

36:00It's more about, you know, everyone's kind of saying this, but it is true, I think, that the midterms are a bit of a clearing event. Markets tend to do better once we get past the midterms. An interesting statistic is that from October of midterm election years to the following October, the markets have never been down going all the way back to World War II. And on average, it's been up about 16 % year over year. And on top of that, Q1 of 2027 will be year three of this presidential cycle. And that's historically been the best quarter out of the 16-quarter presidential cycle. So I think the calendar is very much in our favor right now over the next quarter or two.

36:39Just going to point out the obvious. Everyone seems to be in agreement about kind of Democrats with the House and any with the Senate. If there's a red surprise, is that negative in any meaningful way across the financial markets or would it be a positive? Just hypothetically speaking, the Wall Street Journal is talking about this today as well. But hypothetically speaking, if there were a red surprise, what would the impact be? Would it still all be the same as far as you're concerned? Midterm elections, positive results? Yeah, I mean, I think if there's a red wave, I think there will certainly be policy implications, changes to policy outlooks.

37:16And I think that could be an upside surprise for markets, because actually, looking at historical data, too, under a Republican president and a Republican Congress, markets historically have performed better than under—especially under a blue Congress. And in fact, even under Congress, if we saw a blue House but a red Senate, that has historically been better for markets as well. So I think the worst case scenario for the markets is probably a blue sweep of Congress. But yet, like I said, still 12 months later, markets tend to be up. How are you thinking about oil prices here, fuel prices and this potential event in Iran or lack thereof?

37:57Yeah, I think geopolitics fuels the big wild card here. This is the one thing that's really hard to predict. Like I said, markets historically treated the midterms as a clearing event. But this year, we have a lot of geopolitical uncertainty, especially with the war in Iran. We actually did take up our oil price estimates for this year as well as next year. Next year, we see oil prices averaging about$85 a barrel. We were about$70 a barrel. We wouldn't be surprised if there is some escalation shortly after the midterms. not just U.S.-Iran escalation too, but you also have to remember that there's the Houthis that are attacking Saudi infrastructure.

38:37They're blocking the Red Sea. So I think there are some oil supply related risks heading into 2027, and I think that's a big wild card. All right. Arun, thanks for now. We appreciate it. Arun Sundarou with CFRA. Coming up, slopaganda. That's what campaign ads featuring AI-generated content are being called, and it's everywhere ahead of tomorrow's midterms. It could also have some repercussions for AI regulation. That's coming up next on The Exchange.

39:09He's seen them, and you might not even know it. Campaign ads featuring AI-generated clips. They've been rampant this election cycle, and that could have repercussions for tech's biggest names. Julia Borson has more in today's, yes, tech check. Julia? Kelly, AI-generated political ads are being called slopaganda. No federal laws govern the use or disclosure of AI in political ads, and candidates occasionally disregard the patchwork of 30 state laws about AI disclosures. New data from the Wesleyan Media Project finds campaigns and political groups deployed a record$187 million on nearly 300 AI-generated political ads this cycle, noting that the majority of them do not feature disclosures.

39:51This poses a challenge for Meta, YouTube, and X. For instance, Ken Paxton AI generated this video of opponent James Tallarico flashing a three-second disclosure. It's on YouTube, which says political candidates can request removal where their face appears to be altered or generated by AI. The video is also on X, which says advertisers must comply with applicable laws. Though we did find a number of AI generated ads on Twitter without disclosures, like a fake video of Kathy Hochul posted by her opponent. Now, Meta restricts new political ads in the week before the election, and it adds information to those it detects were created with third-party tools.

40:31There is also, though, another risk of AI platforms being used to generate misleading images. The Brennan Center for Justice reports that six popular AI tools produce fake election content. And they found that only ChatGPT has made progress in recent months. It now applies image stylation to requests for images depicting election interference or any images that may discourage voting. So now the images look like cartoons. There are four bills in Congress tackling deceptive AI ads, but none of them has advanced out of committee. Kelly? So I think Pangram, you know, that's what you can often use to detect AI writing.

41:10It's an incredible tool. Incredible. And I think if we had something like that for images and videos, wouldn't that be amazing? And it's pretty easy. Those who are trained to look for it kind of tell. So I wonder if there couldn't be sort of a pangram for image and video. Because as soon as that, you know, picks up on that content, immediately people are able to move on. Well, so for instance, Meta does have tools to identify if a video that's posted has been used with a third party, been created with a third party tool. So they can pick up if something has been generated with AI. But, Kelly, this technology is so sophisticated, and the more time passes, the more people are able to find workarounds.

41:51But I think that if you look at all the ways content is being shared and the fact that it is not legally mandated to necessarily disclose if you're using AI, it becomes a very complicated issue. And so I wouldn't be surprised if after the election, if there are examples of people being misled, if we could see some action around that federal legislation. All right. I'd love to see some companies get working on this, you know, just to try to make those detector tools, I guess we would call them. Julia, thanks. Julia Boorstin. Coming up ahead of the midterms tomorrow, we'll drill down on some key ballot initiatives in three swing states that could move markets.

42:27We're going to get specific when we come right back.

42:34Tomorrow's elections, we're taking a look at some of the state and local level ballot initiatives that could have big implications for especially the muni market. Here on set to walk us through it is Dan Close. He's the head of municipals at Nuveen. With this incredible graphical presentation, Dan, you're hired. No, this is the U.S. tax policy map that we're looking at. So the yellow raising income, wealth taxes, orange cutting taxes. So this is kind of giving us a sense of some of the bigger trends we might see. That's right. There's nine elections, nine ballot measures tomorrow that are going to dramatically impact tax policy.

43:08So you've got two states, California and as well Colorado, that are looking to either go from a flat tax to a graduated income tax. And California is certainly in the headlines for their well tax. And you care from a muni point of view because you think if taxes go up, more demand for munis, I would imagine. For sure. And what about with property taxes? Yeah, I mean, we're seeing bifurcated tax policies. So in red states, there are seven states that are going to go to the ballot tomorrow looking to roll back property taxes. And from the meaning perspective, you know, you could certainly have deteriorating credit quality if this is successful.

43:42So you think of property taxes, most municipalities, half of their revenues are from property taxes. So if this gets rolled back, states like Florida could see some very different outcomes. Let's talk about this. We have a couple of examples in Florida, Port St. Lucie being one. Sure. Talk a little bit about that issue. And can you hit clear there on the lower left of your screen? You betcha. Hit the button all the way with your finger. There, see, he's a natural. Look at this. Wow. Okay, what's going on in Port St. Lucie? So Port St. Lucie, so we picked two municipalities, both in the southeast part of the state, both AA, AA2 credits, both of them getting about 50 % of their revenue from property taxes.

44:16So if Florida is successful with Amendment No. 3, that would roll back or take property taxes and take the homestead exemption from$50 ,000 to$250 ,000. So a pretty big move in that. Right now, polls are showing about 50 percent in favor, 14 percent undecided. So, you know, remains to be seen if it passes. But a place like Port St. Lucie, 19 percent of their budget could be potentially impacted if this is successful. Because if you look at Port St. Lucie, they've got an average residential rate of about 380 per home. So if you move the exemption all the way up to 250, there's not as big of a gap to tax.

44:56Let's show Miami, and then we'll keep moving through to show some of these examples. So Miami here, you know, this would only be maybe 3 % of the budget as a revenue loss. Yeah, and two differences then versus Port St. Lucie. One is they have their property tax base, 55 % is residential. Port St. Lucie was around 80%. And the average home value is$980 ,000. So when you start here and you get the exemption from$50 ,000 to$250 ,000, there's a lot more of a gap. You can still raise a significant amount. Right. Let's jump over to California then, where we're now talking more about wealth taxes that are on the ballot.

45:31Yeah, a lot of headlines with this. Mark Zuckerberg was in the news recently with this initiative. California is looking to raise taxes or to have a one-time wealth tax for any taxpayer who has more than$1 billion of net worth. Right now, it's polling right around 46 percent or so. Pretty close with respect to where it is. And if this was to go into effect, Naveen estimates that there'd be about$100 billion in additional revenue over five years. But it's kind of tricky how you enforce it. And then what about Colorado? Because this isn't just a California issue. No, no. Colorado is another state which is looking to go and actually increase taxes, going from a flat tax to a graduated income tax.

46:11So 4.4 percent to 8.4. And that would have a very dramatic impact on Colorado paper. If you think this is going to pass, it's a good time to buy Colorado paper. Right. And so that's that's where we come down to this. So give us your takeaways. Good time to buy Colorado paper. You think if this passes. Certainly, certainly, because you see any time that there is an increase in the tax rate, the media exemptions worth that much more. Certainly in Florida, just be cautious if this is if this does indeed pass places, municipalities that have a good deal of residential ownership. And then you also have lower price points.

46:46Exactly. A lot more of an impact there. And then you think that we could actually see some credit quality issues. Absolutely. Because if you don't either cut services, which is really tough to do, it's not just parks and libraries, but cops and fire, or you don't raise other taxes, you're going to see a deterioration in credit quality. So much to it. This is, we say that, you know, nothing's going to change and it's gridlock and it's good for the markets. There are some really big changes potentially happening here. Dan, thanks. Good to have you on today. Thank you so much, Kelly. Dan Close of Nuveen.

47:14That's it for us. Thank you for watching The Exchange, and I'll walk over there and join Brian for Power Lunch right after this break.

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