Capital Concerns Hammer the AI Trade 10/22/26

0:00This 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. at Jared Jewelers we know it's about more than fine jewelry it's the moment they open the box that smile they can't hide knowing you chose exactly right because the right gift can bring a lifetime of meaning a promise, a milestone, a memory in the making make every moment unforgettable find great gifts starting at$250 Jared, make the holiday last forever shop Jared Jewelers You're listening to The Exchange.

1:01Here's today's show.

1:05Thank you very much, Scott. AI capital concerns and renewed midi's tensions are front and center this hour. I'm Kelly Evans and welcome to The Exchange. The Nasdaq, by far the biggest loser today, down more than 2.3%. AI financing concerns are driving that sell-up. We'll talk more about that in a second. Palantir founder Joe Lonsdale will weigh in on that. He's coming up a little bit later this hour. The S &P is off 1.2 % today. The Dow is only down 50 points. And oil prices are jumping on reports. The U.S. and Israel are planning a new round of strikes on Iran. WTI around 99 a barrel now. It is backing up a little bit more on the session today.

1:433 % higher for Brent. We'll have the latest ahead, plus risk-off sentiment, sending investors into safe havens. And that means yes. Right there on your screen, the 10-year U.S. Treasury yield well below 5%, 498. Big deal there that we finally pierced back down. Is it because of the AI trade broadly lower from semis to the neoclouds to big tech? Meta's down 7 % despite strong earnings last night. But those surging AI commitments and how to finance them still a concern for investors. And comments from NVIDIA's Jensen Wong, the capital is scarce. The demand for the neoclouds is off the charts. Their capabilities are extraordinary.

2:22And so what is missing in the middle is the working capital to fuel that growth, to fund that growth. And because there's just so much demand across so many sectors of AI, there's a scarcity of capital. The demand of the capital is much greater than the availability of the capital. That's going to get solved. Sounds bullish to me. I don't know. Let's start there. Our first guest says that while the AI trade is under pressure today, the build out is healthy. We might even have a Goldilocks scenario ahead. Gil Luria is an analyst at DA Davidson, and he joins us in today's opening exchange. Great to see you, Gil.

2:57Let's just start by unpacking why is Meta down 7 percent? Why are the neoclouds down again today? What's the catalyst? Well, Meta is down because they communicated that they're going to invest aggressively next year, which tells investors they're going to have to borrow a lot more. And then they issued these non-voting shares, which tell us they're going to issue a lot of equity, which is going to be dilutive. So that's where investors are concerned. The results were great. And the progress at Muse is great. They're going to have an enterprise platform that's going to succeed. So the plan is working for Meta.

3:30But Mr. Zuckerberg tends to invest ahead of demand. And he's communicating that he's going to do that again. And that's what investor didn't like about that report. What are your projections for free cash flow? Or we should say for free cash burn, I guess. Right now, both Meta, Google and Amazon are in a trajectory to continue to stay at negative cash flow. And Microsoft's cash flow will remain positive, but at a much lower rate than historically. And that's because all four of these companies are seeing good returns on their investment and they're willing to make that investment. And let's not forget, their cost of capital is quite low.

4:09We're talking about 5%, 6 % cost of capital. even if they're just getting 10 % to 15 % returns, which is lower than they would get in their core business, they're going to continue to do that. Because as of three years ago, all they could do is invest in treasuries and get 5%. Right now, if they could get 10 % to 15 % or more investing in the AI build-out, they're going to continue to do that. And they're willing to stay cash flow negative at least a little bit, borrow a little bit because they have so much capacity on their balance sheet. So those four companies are very healthy, have low cost of capital, good returns.

4:44They're likely to continue to invest. We were talking to your colleague on the street, Yusuf Squally, going into the print. And he said a couple of years ago he thought Meta's revenue growth now would be about mid-teens. And now we're talking mid-20s. So their investments are paying off, it seems, in terms of that. The free cash flow part, I mean, is that new or was it worse? Is that what changed last night or is it more about the non-voting shares? That felt like more of a surprise. Well, first, let's start with the fact that, yes, Meta has generated tremendous returns from AI for the simple reason is they were early in using that technology, and they've gotten quite good at selling more and better ads for higher prices.

5:24That's where they're seeing an acceleration in their digital ad revenue. Let's not forget, Meta grows twice as fast as Google. It is continuing to gain share year after year from Google while it trades at a discount. So that part of the business is doing great. And if that's all Meta was doing, just growing digital ad revenue, the stock would be far higher. The challenge with Meta is that they incinerate a lot of money in reality labs. And now they're incinerating a lot of money in building an AI business. And with Meta, you always just have to think about it as you're in it with Zock for the long term.

6:00In the short term, he's always going to be very aggressive and invest ahead of demand. And in the long term, he's creating a lot of value. And that's the reason to own Meta. Which you have a buy rating on,$700 price target. The NeoCloud action, Gil, what do you make of that? There's totally different business models here to pick from if you want exposure to the build out of AI. You could just have exposure to Anthropic. You could have exposure to Meta, as we've been discussing. You could have exposure to CoreWeb. But you don't have to. So I don't know if you cover the neoclouds, but that business model looks a whole lot different than some of these companies we're talking about.

6:38Is it just because it's the most vulnerable that it's selling off today? Yeah, I mean, CoreWeave is literally the subprime tranche of the AI trade. It is a poorly constructed business that gets poor returns and has very high cost of capital. All you have to do is go look at their financial statements, take their adjusted operating income on an annual basis, divided by their net property, plant, and equipment, which is the assets they've deployed. You'll see you only get, at the most, they got a 5 % return. Right now, they're at a 1 % return. Those are very poor returns. The cost for borrowing will likely be double digits the next time they have to go for unsecured debt.

7:16So it's a negative carry. It's a poorly constructed business. There's no reason to be there when you can buy AI compute at a market multiple with Microsoft, Amazon, and Google that have much better exposure, much better returns, much better margins. And those companies can upsell their software on top of the compute. So, yes, CoreWeave is absolutely a poorly constructed business that doesn't need to be there. It's being propped up for NVIDIA in order to diversify its customer base. But this is part of the bad behavior that people point to when they talk about a bubble. Why are you investing in your own customers?

7:55Why are we making speculative investments with very high cost of debt? Those things don't make sense. Those are diluting the good story, which is we're using AI so much. We're willing to pay so much more than we were willing to last year. We're likely going to spend a lot more on AI next year than we're spending on it this year. And that's the good part of the story. The bad part of the story is that greed leads to these types of businesses that are marginal from an operating basis. They're highly leveraged, highly risky. Now, on the way up, this looks great. This is like the Bitcoin miners five years ago when Bitcoin was doubling every few months.

8:37Bitcoin mining looked like a great business and the price for a computer now is so high in the spot markets that these businesses look great in the short term. But longer term, the type of business like CoreWeave is value destruction. It's a negative carry trade. Just to underscore what you're saying, you can be bullish on AI and bearish on CoreWeave at the same time. And I think what's happening is that with this whole phrasing about the canary in the coal mine, it's lumping everything together when these are different ways of coming out the same story. So a quick final question to you is, given your negativity on CoreWeave, what about Oracle, which, at least in terms of its capital structure, is often seen as a similarly, or maybe it's pretty too strong, somewhat of a weak link.

9:20Why are you still by-rated and see upside on Oracle? Because Oracle is better constructed. They're actually building a profitable data center business, and they have tremendous cash flow from their software business to fund that. So they're generating 50 % margin in their software business that's funding this build-out, and they're doing the build-out at much better returns. And then I do want to mention the other part of this, which is a lot of the concern around the bubble had to do with Anthropic and OpenAI. To be clear, we can have a successful AI ecosystem without those two companies. Those two companies may be overvalued.

9:58There may be a bubble there. That doesn't mean that overall AI is a bubble. If we end up all using open weight, we're still going to get it from Microsoft, Amazon and Google. It's an important point as we go into these IPOs. We'll be talking a lot more about them, obviously. Gil, appreciate it today. Demystifying the AI trade. Gil Luria from D.A. Davidson. Tesla shares. Let's turn our attention there. Sliding about 2 percent today despite beating third quarter estimates last night. They lowered full year CapEx guidance, but that's not what's getting most of the attention. It's Elon Musk's description of a potential merger with SpaceX.

10:33Here's what he said on the earnings call. With regard to a potential merger with SpaceX, I think I said everything that should be said yesterday. Tap dancing through a minefield there. Our next guest watching and listening to all of this closely. He says under a potential deal, Tesla shareholders could own nearly half of this combined company. Let's bring in RBC Capital Markets' Tom Narayan. Tom, good to see you. So why do you think the shares are down today? Or are we making too much of the 2 % drop? Yeah, I think we're making too much of a 2 % drop. I mean, remember, it was up quite a bit into yesterday's event.

11:09I think the SpaceX call the night before really stole all the thunder here. The focus on Tesla investors' minds is really the combination with SpaceX, not a lot of other stuff. So when we didn't hear anything last night, I think that's probably why I think the stock sold off a little bit. Bigger sell off yet in shares of SpaceX, down about 7 percent, because is that what people wanted was, OK, you you tease this by telling us there are these committees being formed to give us more. Right. That's what the market always does. It always wants more. Yeah, that's fair. I mean, but I mean, SpaceX had a pretty good run that the day before.

11:48Right. So maybe it's just a little give back there. I mean, I don't cover SpaceX, but I think it's their RBC analysts who do cover it. Thought it was really bullish, right? They raised their numbers, I think, by like$100 billion on the back of that SpaceX call. And by the way, what's good for SpaceX is really great for Tesla, right? Because it means that SpaceX can actually use their equity to buy Tesla. And the better SpaceX equity does, you know, the more likely that Tesla shareholders will get a premium. Tom, my spidey sense, very scientific from from talking to people and just conversations I'm having in everyday life.

12:29I hear about full self-driving from Tesla more than ever. I just wonder if we're getting towards an inflection point here where people understand the technology is for real. You just had a note on this as well, which caught my attention because you're talking about this flywheel going to five million. What did we learn last night? How important could this be to Tesla as as more people start to realize, wow, like this technology, its moment is arriving? Yeah, to me, this was the takeaway from the Tesla call. We've been really bullish on FSD. They even said on the call that people are going into, you know, Tesla dealerships and saying, hey, I want that FSD, not saying I want a Tesla.

13:08So like FSD is actually driving the sales there. That's really compelling because other automakers that we cover are not doing well with autonomy. So it's this weird dynamic of Tesla selling more cars. I mean, they got 75 percent take rate, attach rate on FSD. You know, three quarters, every person like going into a dealership is taking that and paying 99 bucks a month, whereas no other OEM is doing anything like that. some other car companies are abandoning some of their autonomy ventures. So it's showing you that their tech has an advantage over others. And their argument is they can go from 2 million cars a year to 5 million cars a year.

13:47And by the way, we have more valuation from FSD than we do on selling cars because it's a subscription business, right? It's 99 bucks a month at a super high profit margin. Could, you know, and again, this is an area where I've gone from skeptic to cautious believer as you just see and hear more and more of these stories where people are using it and enjoying the technology. So five million cars a year is your upside. At some point, if Tesla wanted to drop the price of the cars and just get more people in the full self-driving ecosystem, how high could that subscription number go? Yeah, that's a great question.

14:23I actually look at it the other way, where what if you cut the price of the FSD? You could sell even more cars, and just completely undercut the market. And there's a flywheel also on RoboTaxi. Let's not forget, most of the value of Tesla is really RoboTaxi and humanoid. And so I think as more people start appreciating this tech that they have for self-driving and there's a flywheel on the RoboTaxi, they have more confidence it works. Remember there was a whole issue with, oh, it doesn't have LIDAR or radar. I'm still there. I'm still at the no steering wheel part. I wonder if we're going to look back and full self-driving is robo-taxi.

15:03I mean, to put it differently, like maybe robo-taxi has its own inflection point, but people in the car, but the car kind of driving itself, that feels like more of the moment that we're in right now. Oh, yeah, absolutely. Absolutely. I was just speaking in terms of how this creates that future flywheel. You know, when it comes to this company, there's always something you're looking forward to in the future. But you're absolutely right. Right. We're definitely at some sort of inflection point on FSD. And if that re-accelerates car demand for them, that's a big story. All right. We got to go. But you have a$480 share price.

15:35Would you feel sad in any way if that ends up, you know, if you're swapping this for shares of space? I mean, I'm just curious, you know, given the upside that you're describing, that would be different in a world where there's a SpaceX Tesla merger. SpaceX is bigger. Obviously, that would probably be the funding, the equity partner, right? Right. Yeah. I mean, they would be issuing their equity for it if you're a Tesla holder, potentially now, especially with the appreciation in SpaceX, you'd be owning more SpaceX than you would with Tesla. But I think after that SpaceX call two days ago, I don't know, I think you'd be pretty bullish on those numbers.

16:13It was flip flop before Tesla was the one that had the revenues and the EBITDA. Now it's looking like it's SpaceX. So I actually think Tesla shareholders would be pretty happy to own some SpaceX. They clearly are excited based on that's all they want to talk about and how the shares behave as well. Tom, appreciate it. Thanks so much today. Tom Narayan from RBC. We also want to show you shares of Moderna, which are plunging right now amid reports that trial data for one of its cancer vaccine drugs was leaked. The results have been taken down, but the shares are down 24%. We've reached out to Moderna for comment on those leaked results, and we will bring you the latest as we have it.

16:49Ahead, Palantir co-founder and founding partner of 8VC, Joe Lonsdale, joins us with his take on AI and whether a lack of capital is holding back growth. But first, oil prices coming off back-to-back down days, inching back up towards$100 a barrel on worries of potential escalation in the Middle East. We'll have all the latest ahead on The Exchange.

17:13This is The Exchange on CNBC.

17:24Who's ready for a bike ride? Peppa Pig is learning to ride her bike. First, pop on her helmet. Safety first. Then, attach the push stick and give her bike a push. And watch Peppa pedal. Her legs go round and round as the wheels turn. With more than 75 sounds and phrases, every ride is a big adventure. Peppa Pig Ready Paddle Go, available at all major retailers now.

18:17market update podcast or find schwab market update wherever you get your podcasts at jared jewelers we know it's about more than fine jewelry it's the moment they open the box that smile they can't hide knowing you chose exactly right because the right gift can bring a lifetime of meaning a promise a milestone a memory in the making make every moment unforgettable find great gifts starting at$250. Jared, make the holiday last forever. Shop Jared Jewelers. Welcome back. We're less than two weeks from Election Day, 11 days, as you can see there, and the midterms could mark a major escalation in the Iran war as the U.S.

19:02and Israeli militaries reportedly draw up plans to renew strikes in the Middle East after the polls close. That has oil prices back on the rise today after falling sharply from their six-month high of 110 a barrel earlier this week. Eamon Javers has the latest out of Washington. Eamon? Hey there, Kelly. We're seeing a cluster of indicators that the U.S. and Iran could be heading back toward open warfare. Last night, we saw President Trump hinting as much to reporters when he was asked about what's coming next on Iran. He said, we are going to have something one way or the other that'll happen fairly soon.

19:36Most people seem to think it's after the election and we're going to see what happens. And this past hour on social media, the president tied the situation in Iran directly to these upcoming elections, writing, Iran is doing everything they can to drive up the price of oil prior to the U.S. midterm election. Reuters, meanwhile, is reporting that the U.S. State Department is preparing to order the departure of some personnel and family members at U.S. embassies across the Gulf region. And CBS News is reporting that the White House and the Pentagon have prepared plans to use the so-called mother-of-all bombs on military sites in Iran if they're so ordered by President Trump.

20:14And two senior UAE government officials tell MSNOW that the UAE has agreed to assist Saudi Arabia with their fight against the Houthis. That potentially widens that Saudi-Houthi conflict, which has had significant consequences so far for Saudi Arabia. And as for Iran, an official there saying its armed forces have prepared a more devastating plan as the country deals with increased threats from the U.S. and Israel. So all of these indicators, Kelly, do seem to show you a picture of a region where everybody is bracing for more military conflict in the weeks ahead. Yeah, we're barely reading into it.

20:51It's almost just taking it at face value at this point. Eamon, thank you, Eamon Javers. For more, let's bring in Jonathan Panikoff. He's director of the Atlantic Council's Scowcroft Middle East Security Initiative. Jonathan, it's great to see you again. You're just out with a new piece talking about how you think the new Middle East is going to be more modular. Does that mean that Washington's influence is ultimately going to be diminished? Great to be back with you. Look, I think it means that Washington's influence probably is going to be less than it was, but less leverage shouldn't be taken as zero leverage.

21:22And I think that's the case right now, frankly, with Iran, right? That's the exact point that we're seeing at the moment. The real challenge is that Washington has the ability to make a call right now, either going back to war, as many seem to expect, following the midterms, or to try to actually reach a negotiated settlement. We're pretty far from a negotiated settlement. My understanding is there's been almost no progress, despite efforts by mediators like the Qataris and the Pakistanis to try and advance some sort of deal. But we're going to have to wait and see a little bit. But certainly, as Ayman just said, all the indicators are pointing that the base cases, we're probably going to be heading back to some sort of conflict in the coming weeks.

22:05Vali Nasser, the Iranian expert, was warning on social media yesterday that Washington and Israel want to knock out Iran with bigger blows, but the likelihood of that is low. And he says there will be a lot of devastation before there is an end in sight. I think that's absolutely right. Look, I think if President Trump's goal of a renewed conflict in a really intense manner is to fundamentally compel Iran to capitulate as he's wanted it to for months, I still think that's a mystery just as it has been since the war began at the very end of February. The Iranians fundamentally want whatever this war ends up being, whether it resolves through negotiations or through military conflict, to be the last war they fight.

22:48What Iran really doesn't want is to have to fight another war after this. And so I think there's a little bit of misexpectations on both sides, frankly, still, about how much each side is going to be willing to give for what it is they want for their own domestic constituencies and for their own government. Finally, where does this leave Russia? As many would say, the bigger provocateur, again, more and more kind of write-ups of that Leipzig drone attack in Germany, the extent to which it's kind of in this, what do they call it, kind of this gray area with Europe, seems like kind of a big deal.

23:28You know, the Ukraine issue, far from settled, no matter what the president wants to do to make a deal. And so if we're going this fiercely against Iran, Shouldn't we be going at least as fiercely against Russia? Could that be next? Or is that a far cry? Well, from a European side, that's absolutely what they want. And I still think that even today, there's quite a bit of frustration and shock at how the U.S. has reacted not only to President Zelensky, but the decisions it's made, the Starlink decision, the slowing down, whether the U.S. government was involved, whether it was just Elon Musk and Starlink.

24:04I think that's still open. But the reality is there is a lot of frustration and a lot of concern in Ukraine itself, frankly, about what the U.S. has and hasn't been doing. And there is a real interesting point here because there's a convergence of factors between Russia and Iran that's starting to become more acute. And I think one of the things that you're going to see more of, and at least more analysts, myself including, looking at, is whether that convergence goes from something that's just tactical of cooperation between Moscow and Tehran in the coming years to something that's much more strategic.

24:38In other words, could you see a point where, frankly, in the coming years the Russians actually provide anti-aircraft systems back into Iran? Could you see that relationship getting tighter? And if so, then what is it that the U.S. is doing right now vis-a-vis Russia, vis-a-vis Ukraine? How does it make strategic sense when you think about the broader geostrategic challenges that we're facing across the world? That would be a nightmare, kind of Russian-provided weapons to Iran. Jonathan, thanks for now. Appreciate it. Thanks. Jonathan Panikoff of the Atlantic Council. Coming up, Apple pricing its iPhone Duo at$2 ,000, but some carriers are cutting the price by more than half to attract buyers.

25:21We have the details, what it tells us about demand, and more about tomorrow's in-store launch. Don't go anywhere.

25:34This message comes from Wise Business, the only account your business needs to scale globally. You're building a business with global ambitions, but hidden fees are eating into your margins. With Wise Business, you can pay overseas suppliers without exchange rate markups. Have customers worldwide get payment details in 22 currencies so you get more of each hard-earned payment without hidden conversion fees. Be smart. Get Wise Business. Download the app. T's and C's apply. Who's ready for a bike ride? Peppa Pig is learning to ride her bike. First, pop on her helmet. Safety first. Then attach the push stick and give her bike a push.

26:18And watch Peppa paddle. Her legs go round and round as the wheels turn. With more than 75 sounds and phrases, every ride is a big adventure. Peppa Pig Ready Paddle Go. Available at all major retailers now. 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.

27:03Welcome back to The Exchange. Pretty different picture today if you're in the Nasdaq or the Dow. Nasdaq's down 2.5 percent with big declines in the likes of CoreWeave. Dow's only down 90 points. Small caps are down fractionally as well, which is still kind of interesting given the decline we've seen in the 10-year yield below 5 percent. Procter & Gamble is one of the reasons the Dow is outperforming. It's having its best day in six years after a top and bottom line beat, fueled by strong demand for detergent and home care products. The company raising its 2027 sales growth outlook still warns consumer spending is uneven, With wealthier shoppers trading up to premium while low-income consumers are seeking value, PG is up nearly 6%.

27:41American and Southwest, those airlines are both in the green today. Despite cutting their full-year forecasts on higher fuel, Southwest CEO Bob Jordan telling CNBC, travel demand remains strong despite higher fares. American CEO says the carrier expects losses to deepen this year despite record revenue. They plan to slow capacity growth next year to boost profits. Again, the shares of Southwest up 4%, American almost 3%. And Southwest is nearly positive year to date, barely fractionally so. American is down 18 percent since Jan 1. Let's get to Frank Holland now for the CNBC News Update. Hi, Frank.

28:15Hey, good afternoon to you, Kelly. A federal judge ruled late last night that Homeland Security's practice of knocking on doors and asking people about their immigration status and whether they voted likely violates the Voting Rights Act. The judge said her order will remain in place until polls close on Election Day. It stayed the ruling until Friday so the government can appeal. The state of Rhode Island sued Meta today, accusing the social media giant of unlawfully profiting from and participating in billions of dollars in scam advertising. The lawsuit cites reporting from Reuters last year on internal documents that allegedly showed Meta was aware it was earning more from scam ads than it would pay in fines for allowing them.

28:51Meta called the reporting a selective view that distorts the company's approach to fraud and scams. And Airbnb says from now on, you won't have to do many household chores while staying at their properties. The company says it will now restrict what chores hosts can require of their guests, including stripping the beds and doing the dishes. The new policy coming after complaints about the requirements to clean up while also paying the cleaning fees. So, Kelly, if you do an Airbnb, you don't have to clean up. This is why I refuse to do an Airbnb. Obviously, it's too much work. It's fun in areas where there's not a lot of hotel inventory, but if you can get that best Western room, come on.

29:26But, you know, it's different if somebody just stands at your house. Yes, you should take the sheets off the bed if you're standing at a friend's house. But when you're paying and paying the fee, I can kind of see the argument. I know. Frank, thank you. Thank you. Frank Holland. Coming up, the tech stocks are in sell-off mode today. The Nasdaq down almost 2.5 percent. As CapEx concerns are at the forefront again, what does it mean for VCs? We'll talk to Palantir, co-founder and founding partner of 8BC, Joe Lonsdale, joins us next.

29:55Welcome back. What are we hearing on CNBC about AI today? First, Jensen Wong said compute demand is enormous, but there's not enough capital. Bill Ackman then told us something similar. Intelligence is one of the most, if not the most valuable asset in the world. And we're asymptotically approaching superintelligence. And the access to compute is critically important for every business model, every company. There is no question that the demand for compute is enormous. Asymptotically approaching super intelligent. I know who can explain this to me. Joe Lonsdale. He is the founder of 8VC, the co-founder of Palantir, just spoke at the Venture Dallas Conference and maybe is in a bus.

30:40Joe, on your way, where? Back to California? Where are you going? You know, I live in Austin, Texas, And I was just in the Middle East last night, and I was proud to speak in Dallas this morning. It's Ross Perot's place. It's Harlan Crowe's place. Great group in Dallas. I'm even more bullish on Austin, but I love Texas. We're building a lot here. I almost want to ask you about the Middle East. Can you tell us anything more about, you know, your vibe in the region last night? You know, there's a lot of leaders there that think we need to hit the bad guys again. But I don't know if that's something we're supposed to talk about yet.

31:12We'll see what happens next couple of weeks. I'll be watching them closely. Yeah, I mean, I don't know why. Do you think it makes sense to double down on some policy that's not necessarily working? Maybe it's working. I don't know. You know, I think it takes a lot of courage to do the right thing, even when it's not helpful for an election. And rather than be held hostage by the bad guys forever, I think there's some more actions to be taken there. But there's good people who disagree. All right. Let's move away from geopolitics and talk your bread and butter, which is asymptotically approaching superintelligence.

31:39Why is everyone in the Valley talking about asymptotes, Joe? Well, you know, things are accelerating. Last year in AI, it felt like it was four or five years. Things are getting faster. The models are being used to improve themselves faster. We have companies now, 10 people, and we have the equivalent of 800 virtual agents, 800 virtual employees, and they're building really, really quickly. So it's asymptotic in the sense that you make more progress every month and it gets better every month. The demand for intelligence this year, you'll see a few hundred billion revenue, give or take, in AI. The demand next year is closer to a trillion.

32:10There'll be two trillion the year after that. There's a huge demand for infrastructure and compute. What do you think the best way, the least risky way is for the average American to participate in this wealth building? I think the least risky way is to belong in the stock market, is to belong in the economy. Productivity is going up. I do not think you want to own bonds for the next 10 years because there's going to be a higher demand for money. There's going to be higher interest rates. That means bonds will not do as well the next 10 years. You want to own equities and you want to own equities in companies that have technical talents.

32:42and then own processes that are going to get more efficient. So in general, own the S &P 500. That's a great thing to do. Oting fixed income, I'd be very careful. Earlier, Gil Luria of DA Davidson, we were talking about, you know, today, again, there's some cracks in the AI trade, so to speak, but it's really a lot of core weave, a little bit of meta. On the issue of core weave, he said that core weave is the subprime tranche of the AI wave, that it's diluting the good story and propped up by NVIDIA. Does he have a point? Listen, I love the guys at core weave. I know them. I think they're working really hard to build more compute for people.

33:15And they're living on the edge, taking a lot of debt and pushing really, really hard. So this is going to be a very volatile asset. It could have a tough time, but I wouldn't be surprised if they make it work. Because you know what? There's just such huge demand that we need everyone building infrastructure. You know, the railroads, we invested 2.5 % of GDP for 30 years. AI right now is almost 3%. I don't know if you're going to need it for 30 years. You're definitely going to need it for multiple years, though, in order to fulfill the demand you're going to see. Yeah. All right. Well, since they're friends of yours, I won't press the point.

33:44Let's talk quickly about Meta, which is down today after last night. It's a little bit unclear. Is it concerns about negative free cash flow or is it this new share class that's going to dilute the equity holders? And is because Zuckerberg might have this huge California tax bill to pay? You know, I think that it's really smart what he's doing. The way we're going to fund the compute build out in America is going to be the balance sheets of our top tech companies. And it's really lucky for us that we have so much cash in our top companies, that we have such revenue and credit. And I think Meta and I think Google and Amazon and SpaceX and all of our most powerful and important tech companies should be contributing to build this out.

34:24And this is what they're going to do. And it's going to be good for them. It's going to be good for the country. So it's she's preparing to do it. He's thinking about how to do it right to keep control of this company. That's what I'd be doing, too. Yeah, well, in other words, we should be grateful that they're willing to risk their capital and their balance sheets in order to make products that we can all use and enjoy. I mean, have you used Muse? Are you big on kind of the agentic AI stuff? My wife has a GrokBot at home. She calls it the TradBot for TradBot. We have six little kids. And it's just telling us about our kids' health appointments, their activities, trying to figure out my two-year-old how to deprecate his Vinky right now.

34:56It's telling me when to and when not to give it to him. It's pretty funny. So my wife's definitely using it at home, but we're using a lot of work as well. Yeah, I don't think many people would say, yeah, no, I have six little kids, too, but not on top of things the way that she is. So I do want to ask you about Elon Musk and SpaceX and Tesla. It looks like they're heading in the direction of merging them. Fine. You know, the flying cars were awesome. Probably not a lot of practicality there. I was blown away. I was too. I thought it was AI. Yeah. Yeah. But what is the real, you know, the I guess the point for the investing audience is that this is what these companies could do together, even if it's impractical.

35:36What are your takeaways? Well, there's a lot of practical things that they're working on and that they're able to do now thanks to super intelligence faster. So I think Elon obviously has a lot of different things. He's doing really well. I'm very bullish on world models and robotics and what robots can do. I know Tesla has a lot of amazing progress there and a lot of really top talent. having the AI talent within Tesla and within SpaceX AI work together makes a lot of sense to me. So we'll see what they do with that. But I definitely wouldn't bet against them. I think this could be the most important company in the world by far over the next decade.

36:08And do you think Anthropic and OpenAI are waiting too long to go public? Do you have a kind of take on you have Anthropic forming this public benefit thing? You have Elon saying, I'm just going to donate shares directly, one for every American. We'll see if that actually happens, I guess, at some point next year. The IPOs, their valuations, I mean, you do, this is venture, this is your bread and butter. So would you be excited about, you know, OpenAI and Anthropic becoming$5 trillion companies? Are you more excited about kind of maybe the smaller things that you still see in the private markets or all of the above?

36:41Well, first of all, I think Elon giving away things to people and Michael Dell giving away things to people is much better than putting things in NGOs. So I'm really supportive of that side of that debate. I hope we can open it and reconsider and follow the lead, Michael Dell, and others there. And then in terms of, listen, I think the whole space is, like we said, there's massive demand for superintelligence. The demand for intelligence is only going to increase as we learn how to use it better. There's really two sides of this. There's the frontier models, and then there's everyone else. There's NVIDIA, there's Pognition, there's Palantir, there's everyone with, you know, using, benefiting in general from the space and productivity going up.

37:15I'm probably more on the side of the Pognition Palantir bowl than I am on. open AI anthropic, but open AI anthropic are critical for the ecosystem. It's really good for the APIs. It's really good if they go public well, and it's really good if they keep spending money and driving things ahead. So obviously it's benefiting us a lot. And there's companies you're investing in that we've never even probably heard of or talk about. Covenant building a new missile factory north of Dallas to build Tomahawk missiles more cheaply and a greater scale. Sironic breaking ground on a$3 billion Port Alpha in Brownsville, creating 10 ,000 new jobs.

37:47So I just wanted to call that out. Joe, thanks very much for making the time and we'll let you get back home. Sounds like it's busy back home. We appreciate it. It is. You're good to see it. Thanks so much. Joe Lonsdale of ABC. Coming up, the Dow and the S &P are both set to snap two day winning streaks. GE Vernova and Lamb Research are among the S &P laggards with the AI trade again being called into question. Caterpillar is the biggest drag on the Dow today, down five percent and down 14 percent over the past two weeks. But our market guest is sticking with both industrials and tech hardware.

38:18He'll tell us why next.

38:24Welcome back. The tech trade slipping again on renewed concerns around AI funding. But our next guest says there are still opportunities out there. Today's move is about spending discipline rather than a drop in demand, he says. Let's bring in Thomas Carroll. He's an equity strategist at Stiefel. Thomas, it's great to see you. And dive in. And where do you see the biggest opportunity right now? where might you say, yeah, there are some genuine concerns? Yeah, thank you, Kelly, first for having me back on. I think today's price action is really about what a hyperscaler earnings miss tends to look at, right?

38:59They beat on revenue, they beat on earnings, but yet the market has really latched onto that elevated capital spending figure and the questions, as you said, about financing it. We continue to see the ability for these companies to spend in an increasingly inflationary capital spending cycle, at least into 2027. So we ultimately think there is a worry that we need to hurdle here on the financing costs, but we still think that the spending will go up into next year, and therefore the earnings cycle should continue to be okay, and so will the economy hold up. But this is what I don't understand about the market today.

39:37We've been told for years that the second CapEx slows, watch out below. Today, CapEx evidently was higher than expected, and it's watch out below. Why? Well, I think it just has to do with the speed of how quickly it has gone up. And the question becomes for equity investors is they're going to actually be return on these investments in the near term, because as you mentioned, free cash flow has gone negative. So yes, we're seeing revenue rise for meta, but not quite at the pace that the capital spending is rising. And why is it occurring? Well, in our opinion, yes, a lot of it has to do with the volume of the overall spend, but increasingly it's becoming inflationary.

40:22And so that inflation, that cost push really comes into the question, the idea of will these companies be able to turn free cash flow positive into 2028 like they have been guiding to. Right. So that's what also explained why when they're unwinding, you know, we're unwinding bond yields, it's all kind of tied together. I'm just saying it seems a little curious to me that we're worried, worried, worried about what the first time those CapEx numbers come down. But then when the CapEx numbers go up, then we're worried, worried, worried. It just it seems like either both narratives are false or both that just they seem like narratives or trading action in search of a narrative is maybe the way that I'd put it.

41:00But then you have this big drop in the 10-year yield today, below 5%. So is that part of this as well? Well, we have noticed for some time that quite a bit of this overall capital spending trade has been moving higher with bond yields. So to your point, when there are fears that the capital spending will have to slow because simply we can't finance the level of spending that these companies are guiding to, it makes sense that that correlation that was moving in the other direction would also cause bond yields to fall. Our opinion, though, is that they will continue to spend. We think that they will be able to raise.

41:36Overall, it doesn't necessarily mean that that's our favorite part of the AI trade. But ultimately, we do think that that spending will be there well into the trillion, you know, over a trillion into next year. And so that will keep the economy afloat into 2027, which is bullish for the earnings picture. So finally, then what is your favorite part of the AI trade? Well, it's a good question. We really like what we call the run-hot cyclicals. So if we think about the AI trade, right, it's not only just the hyperscalers are doing the spending. It includes the hardware. It includes the semis. But increasingly, those shortages are moving into other areas of the economy as well, including power, which is bullish for energy, the material side, which has been interesting to us for some time, in addition to the capital goods companies that we talked about at first.

42:25But yes, in these periods of market correction, and I think an underrated factor of today is the action on Brent, which is causing valuations to come in. If we do see these abrupt rotations, then healthcare will be a beneficiary in those market environments. All right, the run-hot cyclicals and some healthcare. Thomas, thanks. Seafull's Thomas Carroll. Thank you, Carol. Coming up, they say the early bird gets the worm, but in the case of Apple's iPhone Duo, it might be the latecomers who luck out. We'll explain that next.

43:01Welcome back. Apple's foldable duo iPhone starts at about$2 ,000 a pop. Line item. It hits shelves tomorrow and it will hit shelves, we think. But carriers are already cutting prices. Mackenzie Cigalos has more in today's Tech Check. Mac and Kel, some of those carrier deals can bring the effective price of the duo down to around$800. AT &T gets there over three years with an eligible trade-in and plan, while the strongest T-Mobile and Verizon offers are closer to$1 ,000. Now, Apple is also softening the sticker shock with its new leasing program. An eligible trade-in can bring the upfront cost closer to$1 ,100, but the carriers may also have an availability advantage.

43:40Apple's delivery estimates are now pushed into late January, while several carrier windows are still showing November. The tradeoff, of course, is being tied to those service plans. Apple's marketing chief, Greg Joswiak, telling me that resale value is a big part of the affordability equation. iPhones typically hold up better in the secondary market than Android devices, helping customers offset the cost of a new phone when they trade it in or sell the one that they already own. And in terms of Apple's bottom line, the economics are especially attractive. Counterpoint telling me that its preliminary estimate for the cost of making the 512 gig duo puts gross margin above 55 % versus the mid 40s for a comparable 18 Pro Max.

44:21So with those margins, Apple doesn't need duo to become mass market because even at relatively low volumes, it can lift overall iPhone average selling prices and establish an entirely new tier above Pro Max. So there will be, we had said that the pre-orders, they were sold out, but you're saying there will be inventory if people want to go in the stores tomorrow and mess around with it or even get one. In most markets, including the U.S., yes. Now, we don't know how long the inventory will last. That's something that we're going to be asking tomorrow on the ground in front of the Fifth Avenue store.

44:49Oh, you are? Okay. So that'll be a barometer. And the barometer, at least to start with, was people were dazzled by the launch. They wanted one. Now the reviews are coming in, and they're a little bit more lackluster. And that's something that I asked about. One of the reviews was pointing to the fact that developers just haven't coded against this. So you've got these weird dimensions for certain apps. But it is almost reminiscent of the early days of the iPad, where app developers just had to catch up. We fully expect that they will in the next few weeks. I asked Apple that question. That was their answer to me.

45:19And what's especially interesting here is also just the demand equation, right? And so the marketing chief for Apple telling me that they are ramping production as we speak to try to meet the shortfall. because at this point, late January, if you're buying direct from Apple. And as you pointed out yesterday, it was Pennsylvania and Delaware, right, with some of the suppliers who are literally American suppliers who are trying to help them get these components. And there's a real question of, indeed, but not the components that are necessarily a part of this backlog. And that's something that Apple won't clarify.

45:46Now, there's reporting to suggest that potentially it's the display or the hinge where there's a holdup. Of course, memory is the most expensive piece of this, according to CounterPoint and their bill of materials math. So there's a lot to this equation. But if anything, the scarcity factor is helping the marketing around this device. You always want something that people can't get. Once it's available, forget it. The cool factor. So AT &T is offering up to$1 ,200 off with an eligible trade-in. It would bring the price down to about$22 a month. What's in it for AT &T? I mean, that may be a dumb question, but why would they subsidize a new phone to this extent?

46:17Does it think they're going to get them new customers or help with churn or something? You'd have to think so, right? Right, because at this point, the people who are really doing well by this equation are the customer, of course, with the effective prices, essentially what they're paying now. Apple gets to keep devices in channel that range from$2 ,000 to$3 ,200 if you max out at 2 terabytes. And then you've got the carriers that are really eating the cost on this in terms of the subsidies that they're offering. Now, what Apple will tell you is that the resale value is so high in the secondary market that they can actually use those trade-ins that they're getting from existing customers and derive most of the value from that.

46:49So ostensibly, they wouldn't feel it as much as we might think, seeing a$1 ,200 discount on a foldable. It's a big deal. No, it might get people to try it. I've heard what were some of the reviews saying it can run hot. It can run hot. You can't zoom. Oh, you can't zoom? Yeah. You have two different lenses, but you don't have that zoom feature that you have on the 18 - The telephoto? Exactly. Okay. And then what people really want to see is whether or not a crease shows up over time. And so you've got these reviews where they've built a device to do folds, 32 ,000 of them over the course of a week.

47:21That feels unfair. It held up pretty well, though. I don't think I would. 32 ,000 times how many. Mackenzie, thank you. We'll see you tomorrow for that launch. It'll be fun. Mackenzie Sigalos. Before we go, don't forget Western Digital CEO Irving Tan. Speaking of memory prices, he will join us tomorrow for an exclusive interview right after they report their results tonight. The shares are down about 7 % amid this AI sell-off, and they're down 55 % from their all-time highs. That's it for us. Thank you for watching The Exchange, and we'll pick it up with Brian Sullivan on PowerLunch right after this.

47:55You've been listening to The Exchange. Make sure you're subscribed to get each episode every day, same time, same place. 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.