The Exchange 10/23/26

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0:39and 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. You're listening to The Exchange. Here's today's show.

1:01Thank you very much, Scott. Oil, gold and bond yields all testing some key levels today. While cybersecurity stocks are helping the Nasdaq avoid deeper losses right now, I'm Kelly Evans and welcome to The Exchange. Dow is under pressure, down 557 points as oil is back above 100 a barrel for WTI today. That comes with some hot inflation readings in the flash PMI pushing up yields earlier. The 10-year crossing back above 5 percent, just a hair below that level now. And this comes after its biggest one-day drop yesterday, since the day that Silicon Valley bank collapsed. We'll have more on that in just a bit.

1:35The Nasdaq is the only index in the green at this hour, just barely so. By eight points right now, the S &P broadly is down a third of a percent. Western Digital is now lower after results last night, and CEO Irving Tan will join us with more ahead. The cyber names like CrowdStrike and Palo Alto are leading the way. And if you think defending against AI agents has been hard, imagine having to defend against future bioweapons. Jake Adler, the founder of medtech startup Pilgrim, is here with more on what steps we should be taking now to prevent another COVID or anthrax situation. But let's begin with the central focus of this market, which is the AI trade.

2:11The Nasdaq bouncing back, trying to today after its worst day since June yesterday, while the ex-AI S &P is breaking out this month. Our first guest today says we're moving from an AI infrastructure boom to a return on investment test. Tony Wang is a portfolio manager at T. Rowe Price. It's great to see you, Tony. And can we know now about the return on investment? Yeah, well, I think the near-term returns are really strong. But we're building so much infrastructure that I think the market is beginning to pressure test where that return is if you look out into 28, essentially. So I think that with rates going up, with cost of inflation, I think there's some ammo that the bears have.

2:50But if you take a step back and think about, like, where AI is going, I think the bulls have good points where, like, if we see another inflection, that could change the market a lot in terms of where the direction is going. So talk more about that and how you think that relates to what we're seeing play out today. Yeah, totally. So I think one is that we've had the Chacham ET moment, and we have news. And so I think we have another inflection that can come in biology or another area that drives that terminal value up that gives more confidence in the AI infrastructure build. Because I think that it is a lot of capital, and you're seeing some companies in the supply chain have kind of working capital struggles.

3:30And so to me, that can be solved with confidence and demand. and in terms of like where kind of, you know, the labs are going and they're growing nicely. Of course, like there's concerns of like that sustainability growth. But I think it's broader than that. There's open source that's growing well. And in addition, like, you know, other AI startups that are also going to be, you know, inflecting, I think. Are you on the T. Rowe Science and Tech Fund? Yeah, I'm the portfolio manager of that. OK, perfect. Because, you know, as I'm listening to the things you're talking about. So you're in the sweet spot.

4:04I was almost going to say the epicenter of this, although you could argue maybe memory and stuff like that is a little bit more so. Just restate your thesis. I mean, you own NVIDIA. You own, that's your biggest position. You've got Apple, Microsoft, Alphabet, Broadcom, AMD, Meta, Micron, Intel, Palantir. So these really are the stocks that are kind of the make or break, right? And so if we're moving from one phase to another of the AI trade, why are we still holding the same names that we were six months ago? Yeah, so I think that, you know, with the portfolio, you want to own like really high quality compounders, the ones that have really strong ecosystems and that have long runways for growth.

4:41And so, you know, those themes are the ones that are the core. And then there's like other areas where you're going to have like companies that really reflect. Right. And those could be like earlier S-curve stocks and bottleneck stocks and a more emerging tech. And so I think that from a portfolio construction standpoint, it's a combination of both. And I still think, you know, those companies that, you know, NVIDIA, Broadcom, you know, Google, Apple, like they still have a tremendous runway to essentially like incorporate AI and drive their businesses. You think about like what the reach of those companies, it's still very impressive.

5:19Oh, sure. And how long have you owned them, generally speaking? Because if you've had them for three or four years, that's that's, you know, a lot of people could retire to a beach in that case. And how long do you own them now? So maybe for those who are like, man, I wish I was in that. But Tony holds them now. Can they hold these names and compound wealth for a reasonably long period of time? Yeah, no, I think so. I mean, if you look at the growth rates, a lot of them have been accelerated by AI. I think the companies are set up well in terms of leveraging their big install base. They have the capital.

5:54I think data is also another area where it's becoming more and more important. In addition, the cost of bringing on compute is a barrier, right? So if you are well capitalized, that is the opportunity that you need to essentially, if you want to do it, you've got to have the capital. So I think that's where we've seen a lot of the new emerging players have trouble in terms of standing up compute and getting access to it. We will be speaking with Western Digital in a couple of minutes. I don't see that on the list here, although you do have Micron. Would you be, maybe you can just briefly talk about why.

6:28And also, in this pullback that we're seeing, in names like LAM Research and Lumentum, I mean, GE, Vernova, Vertiv, there's a lot of different places that you could talk about. But for the ones that are strictly in your mandate, science and technology, are you basically buying all of them on the dips and on these pullbacks? Well, I think that, you know, I don't think I'm buying where we buy, you know, formally across the universe on dips. But, you know, I think about it as like there are certain types of stocks that benefit at certain points of time in this build out. And, you know, at a certain time, they're, you know, they're cyclical, too.

7:05Right. So I think you have to manage that risk for your clients and, you know, and have a really good kind of valuation framework. And you have to think about long term, like, you know, what is the stable equilibrium of the gross profit that they can capture? So that all goes into kind of, you know, the portfolio construction. And so we're going to own, you know, parts of it, but we're not going to own uniformly just on a theme because we do look bottoms up, you know, and have a global analyst team that does all that work. Yeah. So is there any example that you would give of something you're not a buyer of here?

7:42Well, there's a lot of things that we don't own. And that can just be like not in our mandate, right? Or, you know, doesn't fit the framework that we have. But, you know, I would say that we are also like pretty nimble. And, you know, when the valuations become really attractive, when the fundamentals are inflecting, like we'll own stuff that, you know, we haven't owned in the past. Like I think software has been an area where we haven't owned a lot over the last few years. But recently, valuations have gotten more attractive. And I think that AI diffusion and enterprises are going to really rely on software.

8:15So there's an area where we haven't owned it, but we own it more in size today. All right, Tony, thanks very much. Hope to circle back soon. Appreciate it. Thank you. Tony Wang. Not hearing a lot of panic from him, by the way. The drop in the 10-year yield yesterday, also garnering quite a bit of tension amid that NASDAQ sell-off. It plunged 19 basis points, the most since the day after Silicon Valley Bank collapsed in 2023. Is the AI trade now the central driver of bond yields as well? From here, let's bring in Barry Knapp at Ironside's Macroeconomics. Barry, it's great to have you here and would love to just kind of break down how you're thinking about it.

8:52Sure. I found your framing of the move yesterday being close to or around the same as the Silicon Valley Bank. It's pretty interesting. You know, my broader thesis on the Fed's policy has been And the balance sheet has been overly accommodative and has clearly contributed to money flowing into private credit, money flowing into NEO, cloud providers, all sorts of places, and helping facilitate this build out to some extent. And with the questions about whether it's created some malinvestment and money's gone some places perhaps it shouldn't, while rate policy, on the other hand, is exceedingly tight and getting tighter.

9:35So what I was hoping they would do this year, they being the Fed, would be to start rebalancing policy. Warsh would come on board. They'd finalize their bank regulatory, capital loosening, change the liquidity requirements, start tightening the balance sheet, go back to shrinking the balance sheet and reinvesting into shorter term securities, not longer term securities, and lower the policy rate, not raise the policy rate. So Silicon Valley Bank was a manifestation of the Fed having pushed through 3%, which is the level I think is the neutral rate, and that leading to a collapse of a series of regional banks.

10:14Well, here we are again. The Fed thought financial conditions are really loose, right? No problem. I think they were overly dependent on looking at stock prices and looking at just investment-grade credit away from this whole build-out, ignoring the role of private credit in it. And boom, one hike and moving from expecting 50 basis points of cuts in March to getting 50 basis points of hikes, it appears now. And we have cracks in this whole credit cycle. So, you know, policy is definitely tighter than the Fed thinks it is. And, you know, and the market reaction is pretty profound. And the Fed should be, you know, looking at this quite closely as they go into the meeting.

10:59I hear you that you say you think the balance sheet is fueling the AI bubble, but that rates are too tight. Why wouldn't those two things just cancel each other out to somewhat of a neutral? And if if there are concerns like can you directly tie the balance sheet to some of the froth you've described in places like CoreWeave? Sure. Well, they were all able to borrow further out the curve. Right. So the balance sheet is providing accommodation in the back end of the curve. Term premium is, even with some widening since the war, is still well below its pre-QE regime era, right? And so if you can borrow further out the curve, the cost of capital was cheap.

11:41If you borrow on the front end, like a small bank or a mom-and-pop real estate developer, and we saw the housing data this week, oh, my goodness. Pending home sales at its all-time low, single-family housing starts. almost as low as they were in November 22. Again, back to that point when we went through, they are borrowers on the front end of the curve. Their conditions are really tight. So this is exacerbating the cake, Kel. You know, like doubling down on this unbalanced policy, tight rate policy, loose balance sheet allowed a lot of borrowing for this whole, you know, AI boom. And it's a question whether some of it was malinvestment or, you know, excessive.

12:21but it's putting a serious squeeze on the short-term rate sensitive parts of the economy. So how would you kind of unpack the 10-year yield at this point now? Because if the answer is to get the 10-year down, we need the AI investment cycle to stop. I'm not sure that's going to be a great outcome. And I guess it's telling us it's somewhat inflationary now, even if it delivers disinflation down the road. So you stop it now, you could actually have worse inflation. I just want you to bring it back to the level of the 10 year and that big drop yesterday. And also how then how should the Fed be looking at this and responding, if at all?

13:01I mean, if this is just driven by there's too much demand for, you know, it's the opposite of in the 2010s. Someone put this very well the other day. And the 2010s, we had so much kind of financial system capacity, very little demand for it, which I can see more clearly now, because now I'm looking at what it is when you have this huge demand for borrowing. And we're seeing that now. And if that's just why we have higher yields, then so be it. I don't know why they'd have to hike rates in response to that. That's only a portion of the story. And again, I'm not just kind of doing this to come up with my attribution for why the 10-year yield has moved as much as it has this year.

13:42The majority of the move is attributable, and this is regression analysis, not me making it up, to the Fed policy shift from 50 basis points of rate cuts, which was their forecast in March at the beginning of the war, to hiking 50 basis points. So, you know, you take a proxy for that, the near term forward spread, three month rate, 18 months forward, less of spot three month rate. Lots of Fed research about that and having the most information content and being a proxy for Fed policy. That explains almost 90 percent of the move in 10s this year. Yeah, there's some move in term premium. You can attribute that to, you know, foreign bond markets like our friend Pete Bookvar does.

14:24And it's a contributing factor or the demand for AI credit. But remember, that really peaked back in May. We had a big August borrowing, but that's actually fallen off now. So this big move in 10s was really about the Fed. So how do we stop it? The Fed stops tightening. Now, the Fed's in a position where if they keep tightening, they're obviously not going to do it in October. Really interesting Bill Dudley interview on Bloomberg this morning about how when he was part of the trika, he would have never given the speeches that Jefferson Waller and Williams gave without getting approval from the Fed chair.

15:02So they're probably not hiking in October. But if they're hiking again in December, this could turn out to be very much like 2018, where, you know, they hiked after a midterm. policy was getting tight and we had a pretty good thumping to end the year. Santa didn't come that year or he delivered, you know, coal. But then that setup for the next year was better. So, you know, like I don't think they should be tightening here. What I would much prefer they do. And I do think they will in December. They seem in a preset course. But what they really should be doing is finalizing the task forces. I hope we hear about that this year.

15:41Finalizing the bank regulatory, capital loosening, really making progress on the liquidity changes, loosening that up. Besson is very likely, and we've talked about this before, to change issuance, to decrease issuance in 20s and 30s, issue more in the belly of the curve, not bills. That would be reckless. That should take a lot of pressure off the back end. And if the Fed were to just, OK, we did two hikes and now we're going to move on. But now we're going to actually change our balance sheet policy and start rebalancing this alongside the Treasury issuing in the belly where we can sell those securities to banks.

16:19Then we have a much more stable situation. Reasonable cost of capital for AI build out, you know, not suppressing it any longer, but not putting the squeeze on, you know, small mom and pop home builders, houses living pay or households living paycheck to paycheck and small businesses generally. No, and that's why I like hearing the explanation because I'm not sure that the moves this year by the Fed have been vindicated in what we're seeing and the way things are playing out. So I do think it's worth considering, you know, these alternatives. Barry, thank you. Really appreciate it. All right, Kel.

16:52Barry Knapp from Ironside's Macro. Coming up, a solid earnings beat and strong profit margins. Not enough to give Western Digital shares a lift this hour. CEO Irving Tan joins us exclusively next. Plus, Apple in a new high today as the foldable iPhone duo hits store shelves. How much demand is priced in now? We'll go live to the flagship store as the shares now sell off into the afternoon. We'll get more read ahead on The Exchange.

17:21This is The Exchange on CNBC.

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18:16Schwab 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 market update podcast or find Schwab Market Update wherever you get your podcasts.

18:44Western Digital shares are down two and a half percent after their results last night. This is one of the companies that has been at the center of the AI infrastructure trade. The shares ran up to nearly$800 by mid-June, compared with$130 just a year ago. They've since pulled all the way back to around$345 today. Joining us now exclusively on the exchange is Western Digital CEO Irving Tan. Irving, it's great to have you back. Welcome. Kelly, thanks for having me on the show again. What is going on with AI demand? Well, you know, from our perspective, the AI demand for storage remains very durable and continues to grow.

19:21We see a compounded annual growth rate over the next five years of 25%. And, you know, every quarter as we engage with our customers, we see that demand signal continuing to be even more concrete and robust and growing. Okay, so 25 % demand over the next five years. Now, people might say, well,$800 a share, did that price it in? I mean, you're not an analyst, but maybe it did. Maybe now it hasn't. So what do you attribute the sell-off in the AI infrastructure trade to? If it's not a lack of demand, is it capital constraints? Yeah, I think that obviously we're caught up in a bit of a thematic situation the last few weeks around, you know, return of investment on AI, the financial variability of the neoclouds, especially with the potential of interest rates.

20:08I think your last segment talked to that as well. But from our perspective, we see that demand being robust and durable, particularly as a lot of our business is tied to big hyperscalers that not only are investing in AI, but we tend to forget have very big cloud businesses and cloud services that are generating lots of cash, generating lots of returns for them that gives them the balance sheet and the skill to be able to invest in AI on a durable basis going forward. Sure. Your revenue fiscal first quarter was up 55 percent year over year. Your operating margins were up. You know, you're expanding your quarterly cash dividend.

20:46So, you know, we talked about this a little bit earlier this week, this idea that the neoclouds are in some ways giving the AI trade a bad name. I mean, do you think there's some truth to that, that the sort of finance players whose business models may or may not support, you know, whatever future level, that that's not the same as what Western Digital as a company is expecting to experience either way? Yeah, from our perspective, we look at the market overall. We see clearly that data will continue to be a key part to enable AI because, you know, effectively AI is a data system. the fuel that powers AI, that fuels the compute, fuels the memory is data.

21:27And in order to have that data, you need to be able to generate and as a result store more of that data. So it's definitely good for our business. And from a customer standpoint, as I said, we segment the market. We really have strategic customers that we think have strong cash generating businesses that give them that ability to invest into AI at scale with strong balance sheets. We're also looking to support AI Frontier Labs particularly as we want to understand how they want to use hard drive technology to develop the next generation of AI data center architecture so we can be well positioned to support that growth going forward as well.

22:03And on the NeoClouds, we look at it on a very selective basis, really looking at players that have good business models, strong financial viability, and then sort of picking who we think the winners are going to be in that space. Right, and implying that there might be some losers there, and you're aware of that and kind of thinking about that. Irving, how exposed are you and the management team and a lot of the employees to the shares? Because for a lot of investors who might think about coming into the stock, but they know all the concerns. Can your profit margin stay at 60 percent? Can the pricing stay where it is?

22:30This is a cyclical business. Give them a sense to, quote, Warren Buffett, if you eat your own cooking or, you know, how exposed is everybody there to where the shares go from here? Look, I think, you know, one thing we have great confidence within the business. We've indicated that we see revenue growth continuing. We guided very strongly to the current quarter with gross margins continuing to increase from 58.1 % to 60 % to 61%. For the current quarter, EPS continues to grow cash flow, free cash flow margin at the over 30 % range. And we see that continuing for the foreseeable future. And we feel very convicted that that will continue to translate into strong EPS growth.

23:11and we'll let the market take care of itself in terms of what it means for market cap and valuation. But you haven't seen a lot of insider selling or anything. I mean, that's been something that's a red flag at other companies. No. You know the business model, honestly, better than anybody. You guys know what it probably feels like to go through peaks and that troughs might be coming. And so that's why I wanted to ask the question. No, we haven't seen any abnormal insider sales. In fact, if anything, a lot of our employees are very convicted about where we're heading and are retaining a lot of their stock.

23:42Interesting. So just to kind of bring it then back to this question about capital scarcity, this is what Jensen Wong was talking about a little bit yesterday. You know, there's concerns about the financing. And what would happen if all the hopes and dreams people have of using your hard drives and everything else to build this out, what if the market gets a little bit more discerning? Yeah, again, you know, as I mentioned, we are discerning as well, really looking at who are the customers we're betting on that we think will be winners in the marketplace. And if you look at the drivers of growth, there are really four drivers of growth, especially in our area in terms of storage and data demand.

24:18It's really the ongoing growth of the cloud, right, that we sometimes underappreciate that's driving a lot of demand for storage. Secondly, what we've been talking a lot about, AI sort of model training and development, we're actually entering into a phase where we're seeing real monetization happening. inferencing agentic systems are becoming big parts of demand in data storage starting with you know software development and then we see that in cyber security and i think the next big opportunity for the use case for ai to be applied is around biotech and then we see a fourth driver coming on the horizon and we see that actually much more pronounced in asia and i think we'll come to the u.s very soon is physical ai ai being used in autonomous vehicles being used in robotics as well.

25:05And that's going to drive a lot of demand for storage because you have to train new models specifically to support physical AI. A lot of that's going to be very video-based as well that will require a lot of storage demands. And that will actually drive, in my mind, a lot of return of investment for AI going forward as well. And I think that's something that Ed Jensen and NVIDIA has talked a lot about recently as well. Yeah, I love that all the data points are so helpful. Just kind of think about this story. So final question, Irving, is how fierce is competition in this space. There's a couple of different rivals you have, international and elsewhere.

25:38But is this an area where these margins are just going to invite more new entrants to come in and grab that from you? How comfortable do you feel that you can fend off competitors? We feel quite comfortable, and at the heart of it is our technology, right? It's not about just producing more units, which has traditionally been the case of how the industry has grown. We're very focused on delivering storage growth through delivering technology that enables what we call higher aerial density, that enables us to deliver higher capacities per drive. And why is that important? Because that delivers better total cost of ownership to our customers, giving them higher rack density, lower power consumption, and that's also economically the most beneficial return for our shareholders as well.

26:28And that's something we feel very comfortable about because of our investment into R &D and our manufacturing capabilities and our head and media technology that delivers aerial density and the vertical integration that we have within the company that some of our peers do not have. All right, Irving Tan, thank you so much for making the time. It's great to check in with you. Pleasure as always. CEO of Western Digital. Coming up, it's been a big week for the cyber stocks after AI discovered a security flaw that could impact most of the internet. Zscaler up more than 20 percent, CrowdStrike up 11.

27:01CEO George Kurtz telling Squawk on the street today that AI hacks are becoming increasingly common. AI attacks, we've seen double month over month from July, August and September at CrowdStrike. They've doubled every month. So it almost becomes unsustainable unless you're using defensive AI to be able to combat what the offense is doing. And that's, again, what the crowd strikes focused on. It's a different kind of threat that one of our next guests is trying to neutralize, bio threats. We'll speak with the CEO of Peter Thiel-backed Pilgrim with the med tech they're developing to keep us safe.

27:38Stay with us.

27:43With the Discover Cashback Card, it's payback time when you earn cash back on everyday purchases. Activate and earn 5 % cash back at different categories each quarter on up to$1 ,500 in purchases. That's 5 % cash back at different places each quarter, like grocery stores, on gas, and at restaurants. It pays to discover. Terms apply. See discover.com slash 5 for details.

28:12Oh, look. You just got added to a meeting. about coordinating another meeting to prepare for the pre-meeting ahead of the follow-up meeting, which will, of course, require a recap meeting and then another meeting. Hit your booking point, book with Southwest, and enter airplane mode. 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.

28:59Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. After a wild week, SpaceX is ending in the green today on reports. It's making another move to build out its own mobile network. Julia Boorstin has more on how that's impacting the telcos. Julia? Kelly, that's right. SpaceX's plans have carriers under pressure. Take a look at the shares. AT &T, T-Mobile, both down around 6 percent. Verizon shares down 1.5 percent, while the tower companies, American Tower and Crown Castle, both of those stocks are surging up 3.5 percent and 10 per spent, respectively.

29:45We have reached out to SpaceX. No comment from them on these headlines. Now, this comes after an AT &T's earnings call Wednesday. CEO John Stanky downplayed an immediate threat from SpaceX, saying, quote, it takes a lot of years and a huge level of investment to get to the kind of performance levels that customers have become accustomed to. Not all analysts are downplaying it, though. Citi saying, quote, the probability of a build scenario by SpaceX is rising significantly and now seems like the most likely option, but saying it could take, quote, at least three to five years to build and another five to 10 years to approach fair share, placing a national launch in 2029 at the earliest.

30:28Now, the FCC C-band Spectrum auction, which will be essential for SpaceX to be a true mobile player, is set to conclude by July 2027. And in the meantime, analysts are seeing more headwinds for telcos and more tailwinds for towers. Kelly? Good point. The tower companies are helped by this, by more demand, possibly. Julia, thank you very much, Julia Borstin. Let's get to Frank Holland now for a CNBC news update. Frank? Good afternoon, Kelly. Canadian Prime Minister Mark Carney said today there's, quote, no merit to allegations from the U.S. ambassador to Canada that Canadian politicians are interfering in next month's midterm elections.

31:05The embassy singled out the country's industry minister and Ontario Premier Doug Ford for airing an ad featuring former President Reagan criticizing tariffs. President Trump canceled trade talks after the ad aired during the World Series last year. Defense attorneys for the man accused of assassinating conservative activist Charlie Kirk, suggesting to the court that the trial should not start until 2029 because it could take that long to prepare the defense. Attorneys for Kirk's widow, Erica, called the defense schedule absurd and claimed the defendant, Tyler Robinson, was just trying to delay the proceedings.

31:37Hall of Fame running back Marshall Falk revealing this week he has been diagnosed with Parkinson's disease. Falk, who was 53, and now coaches the Southern University football team, says he's been living with that condition for 18 months and says he hopes his announcement will spur others to look out for early symptoms. Kelly, back over to you. Wow. All right, Frank, thank you very much. Coming up, the KBE bank ETF up 4 % this week nearly. And that's one area our next guest is bullish on in the current cycle. We'll talk about that and where else she's seeing opportunities next.

32:12Welcome back to The Exchange and what a difference the day makes. Yesterday's laggards are today's leaders while the so-called safe havens are under pressure. And it's not just investors trying to figure out what comes next. Valley National Bank CEO Ira Robbins told Squawk Box this morning that some of his clients also think things feel a little off right now. Take a listen. When I look at the balance sheets of my companies, profitability is through the roof. Balance sheets are very strong. When I talk to the CEOs of those companies, the proprietors, the business owners, they say there's an underlying feeling of something that's sort of off a little bit.

32:48Here on set to explain what that is, is Kreeti Gupta. She's the global investment strategist at J.P. Morgan Private Bank. It's great to have you here. Welcome. Thank you for having me. All right. Do you think things feel, I think if I were, you know, to try to explain what he might mean, love Ira, is probably that there's this uncertainty about where we go from here. And if our earlier strategist was saying the AI infrastructure hustle is giving way to more of the discernment phase, maybe clients are a little, you know, those borrowing from banks a little uneasy about that, too. What would you say is going on?

33:20I would say that a lot of the jitters that are baked into this market right now that you're seeing investors react to even in just today is really something that we've seen kind of on repeat since the year started. This is not an unusual situation to see in that the pace of innovation is faster than we've ever seen before. So why shouldn't investors be super scrutinizing when it comes to how the math actually works? But I will say, Kelly, we are looking at the same issues that we saw back in January. It's still financing. It's still ROI. It's still capex. It's still the future of how AI is regulated in this world.

33:52So I think it's natural to see this kind of attention paid, especially ahead of earnings. I love the way you said that. And here's why. Because I'm looking for what's new here. Meta's down 7 % this week. Why? Because they narrowed the range of their... That doesn't make any sense. Maybe it's because of Zuckerberg's share class and that's idiosyncratic, but then the whole trade is selling off. So you look for these catalysts. Earlier in the year, I think at least we had some clearer ones. Go back to DeepSeek, we had clearer ones. Lately, it just feels like, I don't know, this thing's taking a breather.

34:20But if you're somebody who was in Western Digital, to take the example just now, that stock's down more than 50 % from its highs. So that's more than a breather. Yeah, absolutely. But Kelly, that's where the opportunity lies. And that's what we're talking to our clients about. We are excited about this because we are still seeing earnings. We are big believers of the AI trade at J.P. Morgan. So to see an even more attractive entry point is great. I mean, the P.E. ratio right now is 21 times. When have we ever seen that? For the S &P. For the S &P broadly. in a world where earnings are actually growing, where margins are at records.

34:49So I think right now the market is pricing in these jitters, which again, to your point, it's not a new story, but it offers an attractive entry point. So you guys are leaning in, basically. It sounds like you're leaning in in both a broad way with just stock exposure relative to other asset classes. And then even within stocks, you're not necessarily looking to diversify away from the AI trade or anything. It sounds like you're leaning into it. We are leaning into it. We're doing new one better. We're looking at the second derivative of it. So if you're not excited about the hyperscalers or the semis, or you're saying, well, maybe Maybe there's a bit more volatility there than I would like.

35:17Take a look at some of the other sectors that are still very much trading in line with that trade. We are going big on utilities right now. One, because it has been such a big part of the AI trade and that momentum. But it's still a defensive asset class. It's still an underperforming asset class with the midterms overhang on it as well around the data center moratoriums. Take a look at industrials. A similar story. That exposure to the data center story, the nearshoring component, the logistics component. I mean, these are other sectors that are not traditionally tech. but have been trading in line with tech.

35:46So again, if you're looking and if you're nervous about that price action, there are other opportunities. All right, Kriti, thank you. Appreciate it. Are your clients giving you any pushback? Are they coming to you guys and saying, no, this is too scary. I want to hide out? Oh, absolutely. We answer this question every single day, but you got to go by the numbers. Again, a 21 times earnings with 17 % margins and still 30 % year-over-year earnings growth. I mean, those are numbers you can't fight. All right, Kriti Gupta, good to see you. Appreciate it. JPMorgan Private Bank. Coming up, Apple briefly topping NVIDIA's market cap yet again today as its foldable phone, the Duo, hits store shelves.

36:22Our McKenzie Cigalos has been at the Apple Store in New York City since before dawn, Mac, and that's a pretty big line behind you. Yesterday, these store doors have been open for nearly six hours, yet there are still crowds behind me, despite the fact that walk-in inventory for the iPhone Duo sold out by 10 a.m. I've been talking to these customers. I'll tell you after the break what these early reviews might signal about demand.

36:54Welcome back. This is the kind of day where the Apple chart kind of tells us, put my hand this way, no, this way, but this anyway, tells you the story. Shares of Apple touched a fresh all-time high earlier, but now as the foldable phone officially debuts, We had those pre-orders sold out. The early reviews were a little mixed. Let's get back out to Mackenzie Cigalos with how the crowds are looking, Mac, as the shares are now down about six-tenths of 1%. So, Kelly, those mixed reviews don't seem to have stopped the crowds today. Here at the Fifth Avenue flagship shop, the line wrapped around the block twice.

37:30So some customers waiting since Wednesday to get their hands on one. Now, by 10 a.m., people without pre-orders are being turned away after walk-in inventory sold out. Now, it was the same story in Austin, home to Apple's second largest corporate campus, where CEO John Ternus opened the doors this morning and walk-in supply went fast. Now, that$2 ,000 starting price isn't phasing anyone I've spoken to, in part because of the carrier subsidies that cut the effective cost by up to 60 percent. One customer at Apple's Palo Alto store put it this way. I knew when it did come out, it was going to be good.

38:05And obviously, it's for high quality and something worth paying this money for. So it is$2 ,000, but I think once you hold it, you start to earn it on why it's$2 ,000. So I think it's perfect. And this is just the first of several demand tests for Apple under John Ternus. We're expecting its first touchscreen laptop next week, followed by Home View hitting stores November 13th, potentially giving Apple three entirely new kinds of devices in less than two months with Ternus at the helm. But the duo is by far the most important financially. The iPhone remains Apple's biggest business, and this gives it a high-margin, premium-price device that can lift the average selling price, even if it never sells in the same volumes as the iPhone 18 Pro.

38:50Cal? Overall, and now Mackenzie, I know you haven't necessarily covered every Manhattan Apple product launch in the past 20 years, but you've done a fair number of them. How would you just describe the crowds and the buzz compared with prior launches? So last year when you had the iPhone 17 launch in September, we saw lines were probably even a little bit longer than this, and that was a real departure from the previous few years. This has been a super cycle for Apple. We still had people wrapped around the block twice here, and a lot of interest. Of course, some of the calculus has changed. A lot of people place their orders online.

39:26So a lot of analysts would argue that it's not as useful a metric as it once was. And that's why this weekend is actually so crucial in terms of reading what the sales picture actually looks like. So those sell-side analysts are kind of the gold standard, as my colleague Kiff Lesbing would say, in terms of gauging what the sales look like. I'm out to IDC, CounterPoint. This is what they're going to be doing all weekend, going out to their supply chain sources, talking to stores around the globe to kind of get some rough math. And then we'll put a figure to that, a revenue figure to that, when John Ternus is delivering his first earnings report as CEO a week from Monday.

39:59Yeah. And I think with this one in particular, people kind of want to see what it's like in that crease and that fold and in a lot of these new things that actually do matter to touch and feel. Mackenzie, thanks for now. We appreciate it. Mackenzie Cigalos. Coming up, increasingly capable AI agents, along with the recent death of a Russian lab worker, are reigniting concerns about bioweapons. We'll talk to the founder of a Peter Thiel-backed company developing hardware to detect viruses in the air and near real time. That's next on The Exchange.

40:36Welcome back. The arrival of artificial intelligence has created a scramble for companies and governments to enhance their cybersecurity defenses. Another area that urgently needs attention is biological threats. According to our next guest, his company, Pilgrim, says the U.S. needs to move quickly. And his recent investors include a pair of safety researchers from Anthropic, which last month disclosed alleged attempts to use its clawed models for biological weapons research. Joining us now is Pilgrim's founder, Jake Adler. Jake, it's great to have you on the show. Welcome. Thanks so much for having me, Callie.

41:09It's good to be here. And as I understand it, you're in, I guess, do I call it your lab, but where you're working on things that could help us really detect viruses in the air in real time? That's correct. Yeah, we're here in Redwood City. We moved out here about probably two or three years ago and stood up this space here to start working towards building hardware that would actually facilitate the real time detection of this wide array of emerging biological threats. And, you know, this is moving beyond a lot of the infrastructure that we saw, you know, stood up in the early 2000s, just around when the American anthrax attacks occurred.

41:40So, you know, this is one of our systems behind me here. And this unit moves beyond that current precedent where we're primarily detecting a small list of known agents. So we're looking for just a few things to something that would actually facilitate detection of anything. So any bacterial or viral threat in essentially near real time. Is this a capability, Jake, that the country already has? Or I would have thought the moment that COVID happened, there would be a scramble, perhaps a once in a generational opportunity to get capital from the government to fund tons of projects like this. Has that been the case in the past six years?

42:20You know, I think what's been consistent is that our posture around biological threats has maintained a very reactionary approach. You know, we are consistently responding. It's almost just a wait and see. So it's like how we think about like hurricanes or natural disasters, you know, and I think the parallel is also quite absurd. If we think about missiles that are heading towards the country, we don't just wait and see, you know, until they hit to know or to basically act or to prevent it. Right. So if we look towards a lot of the infrastructure that is deployed today, you know, a lot of these these programs haven't evolved in, you know, even since Facebook was invented.

42:55Some of the army programs today are even older than Google. Right. And they have yet to even deploy our operational capabilities. So as it pertains to things like COVID and we see the significance. So from a casualty basis, COVID was equivalent to 412 9-11 attacks on our country. That's American casualties alone. And yet we have yet to see any modernization or shift to be aware earlier and sooner so we can actually act in a timely fashion. And that's a lot of what we've been doing with Pilgrim. I think you guys have done a fundraise in September. You're still small, but your ambitions are quite large.

43:27You also have, I think, research into tourniquets and ambitions on the medical device front to kind of be a big disruptor there. And I have a feeling we'll see you on our disruptor 50 list for many years to come. But just talking about the near term threats, when you look through your sources, your news flow and the work that you're doing, are you picking up on things that are happening that the rest of us in the public may not know about? Or do you think a lot of these concerns are still hopefully in the future and not necessarily ones that we need to be worried about right now? Look, I think the concerns are certainly very immediate.

44:01You know, just a few days ago, we saw that letters were sent to over 32 different states containing suspicious white powder. And candidly, it doesn't really matter if these letters are a hope. They still have the propensity to cause massive chaos across our nation, you know, shutting down federal offices, requiring evacuation. There's a really clear and immediate requirement to have superior detection systems in place. And, you know, as you mentioned, Kelly, this is one part of a much, much wider vision. If we look towards a category like biotechnology and we see there's been all of these incredible innovations and technologies over the past 25 years, and they just sit around.

44:35They just languish, right? And if we look towards a category like aerospace and look towards how they've been able to take all these notable ideas and materialize them, bring them through the engineering process, deploy these technologies, comparatively with biotech, we have none of that. So I think that there's been a very clear requirement on our end to really come forward and take ownership of getting all these really notable technologies within bio and actually getting them deployed, getting them over the line, getting them in the battlefield to support the warfighter and also to support our nation, our civilians, against the emergence of these new threats.

45:06Sure. And Jake, as I'm going back over the notes here, I'm listening to you and then I read that you're 22 years old. Is that right? So how did you get so advanced in this field so quickly? I mean, your investors include Peter Thiel, Brian Armstrong, you know, Anthropics. I mean, you can kind of go down the list, but it's not as if you're just doing some coding and setting up a startup. I mean, you really have to know a lot about not just biothreats, medical device, the government relationship, but, you know, how it deploys funds, which is largely going to be one of your primary, I imagine, customers.

45:41How did this happen so quickly for you? You know, candidly, first off, you know, a lot of this comes down to bringing together a truly exceptional team, you know, spanning scientists, engineers. But more than anything, there has really just been no alternative. You know, the technology deployed today at the national level is older than me. Right. So as I think towards the threats that we saw during COVID and the amount of American lives that we lost, you know, at the global level, we're talking about wiping out all of Los Angeles, all of New York City, all of Chicago. It's clear that nobody else is going to take the action required to actually address this problem.

46:18And, you know, what it's really come down to is that direct exposure. You know, it's like throwing yourself into the cold and having to figure out very quickly how the federal government operates, what are their incentives, how are they thinking about the risk, what is the politics. And, you know, we've seen this firsthand. I've had to weed through a lot of this information. But I'm fortunate that, you know, we've been able to work very closely with federal partners. We just announced recently a partnership that we have with the CDC. It's a collaborative effort to work on a program to stand up systems like Argus.

46:44But we also do work, you know, across the defense and national security space, too. So there's a lot of really exciting things. And now the focus is really clear. We just need to expand. All right. We got to go, Jake. But quickly, I mean, do you view AI mostly as a fun opportunity, amazing opportunity? Or do you share some of these doomsday concerns about it quickly? Look, I think there's real concerns, but I think more than anything, it's a tool. I think it's an opportunity for us today to build systems that enable us to actually understand these threats better. And this is why, you know, we had people from Anthropics back in the company.

47:14So, you know, it's a very exciting moment. We're excited to see what comes back. Well, thanks for showing us a peek inside what you're working on. And thanks for doing so. Jake Adler, a pilgrim. Appreciate it. And that's it for us. Thanks for watching The Exchange. Power Lunch with Brian Sullivan is next.

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