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AI Spending Faces Its First Big Earnings Test · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Mike Armstrong and Paul Lane.
• 1:08
  Speaker 2: Good morning. Welcome back here to The Financial Exchange. It's
• 1:15
  Speaker 2: a Tuesday with earnings season kicking off here, and we've
• 1:19
  Speaker 2: got the banks who always precede everybody else kicking off
• 1:23
  Speaker 2: with earnings this morning around, when did we start getting released? 7,
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  Speaker 2: 8 a.m., and then press conferences thereafter. So we've gotten...
• 1:30
  Speaker 2: JP Morgan, Wells Fargo, Goldman Sachs. I think Citigroup also
• 1:34
  Speaker 2: reported just a little bit later than those three. Got
• 1:37
  Speaker 2: those to digest. Overnight, we had Korean markets sinking substantially
• 1:41
  Speaker 2: on chip fears. That was shown in yesterday's market here domestically,
• 1:45
  Speaker 2: but offset by some other tech gains that, you know,
• 1:47
  Speaker 2: led the Nasdaq to not really get hit too hard.
• 1:51
  Speaker 2: And we'll have inflation prints tomorrow to digest as well
• 1:55
  Speaker 2: as the Fed enters business. last couple of weeks before
• 1:59
  Speaker 2: their next meeting and debates around what they are going
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  Speaker 2: to do. And then, of course, this time of year,
• 2:04
  Speaker 2: all things election season and what's heading up with midterm
• 2:07
  Speaker 2: elections here. But as we sit at the moment, we've
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  Speaker 2: got markets relatively flat for the day. NASDAQ was up
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  Speaker 2: a little bit higher earlier. Dow was off a little
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  Speaker 2: bit more. We're now currently flat on the NASDAQ, slightly
• 2:21
  Speaker 2: down on both the Dow and S & P 500.
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  Speaker 2: And let's dive in there and to those bank earnings, Paul,
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  Speaker 2: which as we've talked about before, these banks at this
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  Speaker 2: point are such massive regulated conglomerates that it is frankly
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  Speaker 2: difficult for me to have any real opinion on their
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  Speaker 2: quarterly performance without a PhD in understanding how these things
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  Speaker 2: actually work. But you can tell from high levels, what
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  Speaker 2: are they hitting on? What are the key drivers of
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  Speaker 2: their business? What does that state about the larger economy?
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  Speaker 2: And that's what I find more interesting about these companies
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  Speaker 2: rather than, oh, did they hit or miss on the
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  Speaker 2: most recent quarter? What was the change in how much
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  Speaker 2: they are setting aside for loan losses? I don't find
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  Speaker 2: that terribly interesting, but you do have some swings in
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  Speaker 2: these stocks today, and I think that's worth getting into.
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  Speaker 2: So Where do you want to start off? Should we
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  Speaker 2: start off with the best and the greatest out there
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  Speaker 2: with J.P. Morgan and their continued.
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  Speaker 3: Let's lead off with them. J.P.
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  Speaker 4: Morgan came out with their earnings. I believe they were
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  Speaker 4: up about 2% or 3% in early market trading here.
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  Speaker 2: Now they're down 0.8%. Okay.
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  Speaker 4: Now they have printed a really significant net interest income
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  Speaker 4: margin for this year. They're predicting that they're going to
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  Speaker 4: come in with about $ 106 billion of net interest income.
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  Speaker 4: So just for listeners out there, the way that banks
• 3:45
  Speaker 4: make money is you put your deposits on there, and
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  Speaker 4: then they go out and lend it to somebody else,
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  Speaker 4: a corporation, any sorts of other lending activities. They make
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  Speaker 4: the spread between the interest that they pay you versus
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  Speaker 4: the interest that they loan out your deposits to other people.
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  Speaker 4: That is net interest income at its core.
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  Speaker 2: And that would be interesting, but that's not how big
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  Speaker 2: banks make money anymore. That's part of how they make money.
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  Speaker 2: That's the traditional bank. That's how your local bank makes money.
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  Speaker 2: But banks like JPMorgan Chase and why it's, you know,
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  Speaker 2: at any given point in time difficult to know what's
• 4:16
  Speaker 2: going to be going on underneath the hood, also make
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  Speaker 2: money by selling bonds to the public. They make money
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  Speaker 2: by taking private companies and bringing them public to their investors.
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  Speaker 2: They make money by managing wealth. They make money from
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  Speaker 2: their own proprietary trading desks. And so they are a
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  Speaker 2: very different type of bank than, say, yours.
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  Speaker 3: It's still a big line item.
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  Speaker 2: It is. The net interest income growing to these levels
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  Speaker 2: does move the needle.
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  Speaker 3: Yeah, absolutely.
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  Speaker 4: And then on the other front, so net interest income
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  Speaker 4: continues to be strong there. Stock trading was up quite significantly.
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  Speaker 4: So they make revenue from their trade just from a
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  Speaker 4: stock trading perspective. That was up about 49% from a
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  Speaker 4: year earlier. The common refrain, you'll hear this from all
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  Speaker 4: the banks here to sort of summarize what we saw
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  Speaker 4: this morning, is that stock trading, pretty good for a
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  Speaker 4: lot of these big banks on the fixed income side.
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  Speaker 4: They are dealing with the pressure that all of us
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  Speaker 4: have seen over the course of the last month or so.
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  Speaker 4: Interest rates have risen. And as a result of that,
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  Speaker 4: the fixed income deaths at these banks that make money
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  Speaker 4: off of trading activity, there's been less activity as rates
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  Speaker 4: have risen. And so as a result of that, their
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  Speaker 4: performance was a little bit weaker overall. But in general,
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  Speaker 4: a pretty strong quarter here from JP Morgan. You know,
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  Speaker 4: Diamond had his usual sort of, I wouldn't say doom
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  Speaker 4: and gloom, but usual sort of pessimistic take on the
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  Speaker 4: risks that loom out there. But nothing here that stood
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  Speaker 4: out to me, Mike, as alarming or concerning. Pretty good
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  Speaker 4: numbers that they came in with.
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  Speaker 2: The only thing that I thought was notable was that J.P.
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  Speaker 2: Morgan does not miss on earnings very often, and they did.
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  Speaker 2: They had a rare miss here on their overall earnings,
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  Speaker 2: part of that being driven by some unforeseen circumstances in
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  Speaker 2: the bond market, one of the worst quarters for bond
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  Speaker 2: trading in terms of the drop in revenue that they've seen.
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  Speaker 2: And so J.P. Morgan, again, this might have been predicted
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  Speaker 2: by investors, given that the stock's only down 0.8%, but
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  Speaker 2: they very rarely miss on their expectations, and they did
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  Speaker 2: this time around, which I find just notable. Wells Fargo,
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  Speaker 2: pretty similar story here. The difference here on Wells Fargo
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  Speaker 2: is they continue to be one of the most heavily
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  Speaker 2: regulated of the large banks in terms of their ability
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  Speaker 2: to expand and all of this. They've now gotten past
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  Speaker 2: some of those timelines where they are allowed to increase
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  Speaker 2: their balance sheet after being restricted for several quarters. And
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  Speaker 2: so I have heard of some analysts talking pretty bullishly
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  Speaker 2: about where that company could go in terms of growth.
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  Speaker 2: But in terms of the earnings this morning, stocks down
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  Speaker 2: about two and three quarters of percent in early trading.
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  Speaker 2: I'm assuming some of the similar scenarios that we saw
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  Speaker 2: from JP Morgan echoed here from Wells Fargo as well.
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  Speaker 4: Yeah, we saw good net interest income from Wells Fargo.
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  Speaker 4: I think on the negative side of things here, they
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  Speaker 4: took some losses on their bond portfolio. So like many
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  Speaker 4: other banks out there, they own different treasury instruments and
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  Speaker 4: other fixed income holdings. And when interest rates go up
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  Speaker 4: the way they have, where the U.S. 10-year treasury has
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  Speaker 4: risen from about... 4.1% to 5.25% in a short span
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  Speaker 4: of time. The bonds that they hold on their balance sheet,
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  Speaker 4: Wells Fargo, have gone down value. Again, they're not the
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  Speaker 4: only one dealing with this, but it was about $ 16. 5
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  Speaker 4: billion of unrealized losses that accumulated in their portfolio. That's
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  Speaker 4: double from last year. Again, that is a product of
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  Speaker 4: the interest rate environment, but still, that is something that
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  Speaker 4: is a little bit of a drag on Wells Fargo.
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  Speaker 4: Like you mentioned, Mike, they were basically in shackles for
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  Speaker 4: about 10 years here since 2017 when.
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  Speaker 3: The whole scam.
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  Speaker 2: For damn good reason.
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  Speaker 4: Yeah, for damn good reason. Since that whole scandal broke out,
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  Speaker 4: they couldn't grow their asset level past where they were
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  Speaker 4: in 2017. So they really were frozen for almost a decade.
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  Speaker 4: They now, like Mike was mentioning, are trying to thaw
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  Speaker 4: out of that period of time and to grow their
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  Speaker 4: business further. But it seems like they are, you know,
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  Speaker 4: writing the ship to a degree, but still a lot
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  Speaker 4: of work to be done there.
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  Speaker 2: Finally, most rosy, I would say, was Goldman Sachs today.
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  Speaker 2: They beat estimates. Shares initially rose. They're now flat in trading. Again,
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  Speaker 2: I don't think you should read too much into what
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  Speaker 2: traders are doing with a bank stock on a single day.
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  Speaker 2: But we saw from Goldman better execution on trading revenue,
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  Speaker 2: smaller losses on the fixed income side than J.P. Morgan,
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  Speaker 2: their biggest competitor in that space. and really strong performance
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  Speaker 2: from their investment banking side as well.
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  Speaker 4: That seemed to be really the standout here, is that
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  Speaker 4: the investment banking came in at about $ 3. 22 billion of revenue.
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  Speaker 4: That really helped drive the growth of the Q3 numbers here.
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  Speaker 4: They also had some benefits that were tied to some
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  Speaker 4: of the fees that they derive from helping wealth clients
• 9:02
  Speaker 4: get in late stage with SpaceX for some of the
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  Speaker 4: late venture projects. rounds before they went public. So in general,
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  Speaker 4: just for their investment banking division, really strong numbers. The
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  Speaker 4: other two that we just covered, Wells Fargo and JP Morgan,
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  Speaker 4: did not fare as well on the investment banking side.
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  Speaker 4: So it seemed like Goldman was the standout when it
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  Speaker 4: comes to investment banking. We've seen a little bit of
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  Speaker 4: slowing on the IPO market and the mergers and acquisitions
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  Speaker 4: side of things. It was a really rapid pace the
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  Speaker 4: first six months of the year. With some of the
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  Speaker 4: stuff going on now, you've got some of the big
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  Speaker 4: guys pushing back some of their IPOs.
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  Speaker 3: So that has cooled a bit.
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  Speaker 4: But of anybody, Goldman Sachs has benefited the most this
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  Speaker 4: year from some of the investment banking growth.
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  Speaker 5: Right.
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  Speaker 2: And keep in mind, this is in spite of the
• 9:44
  Speaker 2: fact that OpenAI, Anthropic, both were expected to maybe go
• 9:48
  Speaker 2: public this year. Anthropic still may, targeting November now, but
• 9:52
  Speaker 2: they would need to get that in line pretty quickly.
• 9:55
  Speaker 2: And you know, those those revenues weren't locked into these forecasts,
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  Speaker 2: but they were part of investor expectations that didn't come
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  Speaker 2: to fruition. So you could see a boost there or
• 10:05
  Speaker 2: you could see further drawback if it does not happen.
• 10:08
  Speaker 2: Anything else catching your eye on those bank earnings, Paul?
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  Speaker 2: I didn't really have much else to say on them
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  Speaker 2: other than, yeah, tough quarter for fixed income trading. No kidding.
• 10:16
  Speaker 3: Yeah, yeah. We hit all the major points.
• 10:19
  Speaker 2: So one other interesting tidbit that I saw in another
• 10:23
  Speaker 2: piece was that both JP Morgan and Goldman Sachs decided
• 10:27
  Speaker 2: to cut some of their exposure to a specific loan
• 10:32
  Speaker 2: for an AI startup. I want to take a quick
• 10:34
  Speaker 2: break and talk a little bit about A, the optimism
• 10:38
  Speaker 2: that investors see in earnings, but B, maybe some of
• 10:42
  Speaker 2: the cracks in the foundation showing up around the AI
• 10:44
  Speaker 2: trade and the concerns there. Let's take a quick break.
• 10:46
  Speaker 2: That's next here on The Financial Exchange.
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• 11:48
  Speaker 2: Paul, as we kick off earnings season here, the expectations
• 11:53
  Speaker 2: are unusually strong for third quarter earnings. There's a few
• 11:58
  Speaker 2: things contributing to this. One would be the one that
• 12:00
  Speaker 2: everybody's heard about over and over again, that major hyperscalers, Oracle, Facebook, Amazon, sorry, Meta, Microsoft,
• 12:09
  Speaker 2: and Alphabet, Google's parent company, are spending billions and billions
• 12:14
  Speaker 2: of dollars on building out data centers and are buying
• 12:16
  Speaker 2: up chips, energy, other components that go into data centers
• 12:23
  Speaker 2: that I'm less familiar with, really regardless of the price
• 12:26
  Speaker 2: it costs for them to do it. They're somewhat sensitive
• 12:28
  Speaker 2: to pricing, but they are most interested in doing this
• 12:32
  Speaker 2: as quickly as possible. And when your goal is to
• 12:34
  Speaker 2: build something as quickly as possible, sometimes you make it
• 12:38
  Speaker 2: without the highest quality, but oftentimes you make it at
• 12:42
  Speaker 2: a pretty high price. And so all sorts of component
• 12:44
  Speaker 2: makers are benefiting from that rush to build. The other component, though,
• 12:50
  Speaker 2: that's contributing massively in this quarter especially is are energy companies.
• 12:56
  Speaker 2: The current estimate is for growth of 121% in earnings,
• 12:59
  Speaker 2: and we've talked about this phenomenon quite a bit. If
• 13:02
  Speaker 2: you have the means of refining a barrel of oil
• 13:07
  Speaker 2: into diesel right now, then you can make more money
• 13:09
  Speaker 2: than we have ever seen in what's referred to as
• 13:13
  Speaker 2: the crack spread. And so, yes, we have this growing
• 13:16
  Speaker 2: component of tech, we have this concentrated market that is
• 13:20
  Speaker 2: hyper-focused on tech, but... in terms of the earnings growth,
• 13:25
  Speaker 2: energy is expected to play a big role here as well.
• 13:29
  Speaker 2: What else does Behrens point out here about the optimism
• 13:31
  Speaker 2: this quarter? And in reality here, in spite of the optimism,
• 13:37
  Speaker 2: it's going to take a lot to beat all of
• 13:40
  Speaker 2: these optimistic expectations about the quarter.
• 13:42
  Speaker 4: The bar has been raised incredibly high, but I think
• 13:44
  Speaker 4: it is important to note that for people who are
• 13:47
  Speaker 4: looking at the market performance year to date, why has
• 13:50
  Speaker 4: the market been so resilient in the face of a
• 13:53
  Speaker 4: lot of geopolitical events and inflationary pressure? It's been what
• 13:56
  Speaker 4: Mike alluded to first in describing the situation. It's all
• 13:59
  Speaker 4: the hyperscaler spending. But also what investors have been leaning
• 14:04
  Speaker 4: on a lot is we've seen earnings growth and we've
• 14:06
  Speaker 4: seen subsequent quarters of 25% plus earnings growth year over
• 14:10
  Speaker 4: year compared to where We were last year, this quarter,
• 14:13
  Speaker 4: no different. In fact, the bar being raised even higher
• 14:16
  Speaker 4: to almost 30% year over year earnings growth, which is
• 14:19
  Speaker 4: just incredible.
• 14:21
  Speaker 3: I mean, you don't see these numbers at all.
• 14:24
  Speaker 2: For some context here, during the entire 2010s decade, which
• 14:28
  Speaker 2: was a period of, albeit slow, but growth, right? It
• 14:32
  Speaker 2: was coming off of the worst recession since we had seen,
• 14:35
  Speaker 2: since the Great Depression. And the average earnings growth during
• 14:39
  Speaker 2: that period of time was about 11%.
• 14:40
  Speaker 1: Right.
• 14:42
  Speaker 2: Right? So we are nearly triple that if this quarter
• 14:46
  Speaker 2: comes to fruition in terms of expectations. So this is
• 14:50
  Speaker 2: fairly unprecedented. And to Paul's point, it would mark the
• 14:53
  Speaker 2: third quarter in a row of earnings growth above that
• 14:56
  Speaker 2: 25% mark, which is just incredible.
• 14:58
  Speaker 4: No, they are anticipated that some of this growth will
• 15:01
  Speaker 4: subside in future quarters heading into 2027. But however you
• 15:04
  Speaker 4: slice it, that is tremendous in terms of an earnings
• 15:06
  Speaker 4: growth perspective. If you look at Net profit margins. So yeah,
• 15:09
  Speaker 4: you can grow your earnings too, but what are your
• 15:11
  Speaker 4: net margins on the companies in the S & P 500?
• 15:14
  Speaker 4: Those have gone up significantly as well, aiming to clock
• 15:17
  Speaker 4: in around 15% for Q3. That would be up 2%
• 15:21
  Speaker 4: from where they were last year. What are the net
• 15:23
  Speaker 4: profit margins from all the companies in the S &
• 15:25
  Speaker 4: P 500? What is so fascinating to look at is
• 15:29
  Speaker 4: just how narrow the breadth of this growth is, though.
• 15:32
  Speaker 4: And we've talked about this before, but I was reading
• 15:35
  Speaker 4: something earlier this week about that of the earnings growth
• 15:37
  Speaker 4: that we will see for this Q3 numbers here, two
• 15:42
  Speaker 4: companies are responsible for a third of it, NVIDIA and Micron.
• 15:45
  Speaker 4: And we talked about Micron's numbers where they did net
• 15:49
  Speaker 4: income profit from $ 3 billion last year to $ 37 billion
• 15:53
  Speaker 4: in just one quarter year over year. And so what
• 15:57
  Speaker 4: you have is just a lot of weight being carried
• 16:00
  Speaker 4: by very few areas of the economy. Mike mentioned energy
• 16:03
  Speaker 4: and tech also. We all know that, too. That is
• 16:06
  Speaker 4: just doing a tremendous amount of the lifting. And the
• 16:09
  Speaker 4: question is, yes, Wall Street is anticipating that this earnings
• 16:12
  Speaker 4: growth will subside a bit heading into 2027. But how
• 16:16
  Speaker 4: long can you keep it up? How long can you
• 16:18
  Speaker 4: keep the momentum going for from these big companies?
• 16:22
  Speaker 2: Yeah, look, I think every day that goes by, the
• 16:24
  Speaker 2: questions keep coming. cropping up. Hey, is this massive investment
• 16:29
  Speaker 2: that you are making ever going to pay for itself?
• 16:32
  Speaker 2: And you see this not only from investors, but you
• 16:36
  Speaker 2: see it from other areas that are supplying the AI build-out.
• 16:40
  Speaker 2: So for example, during the dot-com bubble, one of the
• 16:44
  Speaker 2: things that defined it was this expectation that the build-out
• 16:49
  Speaker 2: of the internet was just going to continue to last.
• 16:51
  Speaker 2: It was going to continue to come. And what actually
• 16:53
  Speaker 2: happened is They laid a bunch of fiber wire, built
• 16:56
  Speaker 2: out the Internet and then realized, oh, yeah, we don't
• 16:58
  Speaker 2: need to do this every six months. Like, you know,
• 17:00
  Speaker 2: this is pretty good here. Out of some concern for that,
• 17:04
  Speaker 2: the semiconductor provider sellers, for instance, have said, yeah, we're
• 17:08
  Speaker 2: going to lock you in to buying our chips for
• 17:12
  Speaker 2: a 10 year time period. The utility companies that are
• 17:15
  Speaker 2: trying to that want to supply electricity to these data
• 17:18
  Speaker 2: centers are saying, OK, we'll go and build that new
• 17:22
  Speaker 2: power plant that you want. But we're going to require
• 17:25
  Speaker 2: a whole bunch of, you know, non-refundable deposits and contracts
• 17:30
  Speaker 2: saying that.
• 17:30
  Speaker 3: You're actually going to leave us holding the bag on this.
• 17:33
  Speaker 1: Right.
• 17:34
  Speaker 2: And so, you know, increasingly, that's what I'm hearing about
• 17:38
  Speaker 2: is it's not just, hey, I'm willing to pay this
• 17:41
  Speaker 2: price for this component today. It's I'm going to lock
• 17:44
  Speaker 2: myself into a contract to pay this price for this
• 17:47
  Speaker 2: component for the next decade. And that's how these things
• 17:51
  Speaker 2: are kind of inexorably being tied together. So I think
• 17:56
  Speaker 2: across the spectrum, people are questioning, hey, you know, is
• 18:00
  Speaker 2: this demand still going to be here one, two and
• 18:03
  Speaker 2: five years out? And I unfortunately just don't have a
• 18:07
  Speaker 2: good timeline for when that when the answer to that
• 18:10
  Speaker 2: question starts to matter. Chuck's identified the next 18 months
• 18:14
  Speaker 2: as being really crucial because you're going to see some
• 18:16
  Speaker 2: of this stuff slowed down in that time frame. I
• 18:18
  Speaker 2: just don't know.
• 18:19
  Speaker 4: No, I don't either. And there's so many variables that
• 18:22
  Speaker 4: can influence that. You have one, you have, you know,
• 18:26
  Speaker 4: certainly on the downside, there's plenty of risks that we
• 18:28
  Speaker 4: could point out. I continue to focus on some of
• 18:30
  Speaker 4: the debt issue and stuff. And if you look under
• 18:32
  Speaker 4: the hood, it's the way some of these buildups are
• 18:34
  Speaker 4: being financed.
• 18:35
  Speaker 3: It just requires.
• 18:37
  Speaker 4: To put it simply, to Mike's point, you need the
• 18:40
  Speaker 4: sustained spending to be there. And oftentimes when you have
• 18:44
  Speaker 4: a build out of this nature, it's not a linear
• 18:48
  Speaker 4: spend out. There tends to be peaks and troughs of spending,
• 18:51
  Speaker 4: and that's what we continue to be so focused on.
• 18:54
  Speaker 4: On the positive side, if you have some iterations of
• 18:57
  Speaker 4: AI just being adopted more greatly or more business case
• 19:00
  Speaker 4: uses in that 18-month period, maybe that gives this more legs,
• 19:04
  Speaker 4: but that's what we continue to to kick around every
• 19:07
  Speaker 4: day here.
• 19:08
  Speaker 2: Let's take a quick break. When we come back, we've
• 19:11
  Speaker 2: got a full market update with Wall Street Watch. And overnight,
• 19:14
  Speaker 2: we did see some pretty extreme volatility in Asian markets,
• 19:18
  Speaker 2: especially in the Korean KOSPI, which moved now below its
• 19:22
  Speaker 2: June levels and 200-day moving average. Quick break. Wall Street
• 19:26
  Speaker 2: Watch is next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:47
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:53
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:56
  Speaker 1: so far today. Right here on the Financial Exchange Radio Network.
• 20:00
  Speaker 5: Markets mostly quiet as third quarter earnings season officially kicked
• 20:03
  Speaker 5: off this morning with a flurry of big bank earnings.
• 20:06
  Speaker 5: Right now the Dow is flat, up one point. S
• 20:11
  Speaker 5: & P 500 down six points. NASDAQ down 37 points,
• 20:14
  Speaker 5: over a tenth of a percent lower. Russell 2000 is
• 20:17
  Speaker 5: down four tenths of a percent. Tenure Tresoril down two
• 20:20
  Speaker 5: basis points at 5.219 percent. And crude oil is flat today,
• 20:25
  Speaker 5: trading at $ 93, while Brent is down three quarters of
• 20:29
  Speaker 5: a percent, trading at $ 105 a barrel. JPMorgan shares are
• 20:33
  Speaker 5: edging higher after it missed third quarter earnings and revenue expectations. However,
• 20:37
  Speaker 5: the bank raised its net interest income outlook for the year.
• 20:41
  Speaker 5: Wells Fargo down 2% after mixed third quarter results. Goldman
• 20:44
  Speaker 5: Sachs up 1% after beating revenue forecast. Citigroup falling over
• 20:48
  Speaker 5: 1% despite reporting solid third quarter revenue driven results. by
• 20:53
  Speaker 5: fixed income traders outside of bank earning several memory chip
• 20:56
  Speaker 5: makers are seeing losses after a tech round overnight in
• 20:59
  Speaker 5: asia driven by china's cxmt saying it plans to roll
• 21:03
  Speaker 5: out a new type of dram chip micron western digital
• 21:06
  Speaker 5: seagate and sandisk are down anywhere between two and four
• 21:09
  Speaker 5: percent united health beat expectations and rate is its guidance
• 21:14
  Speaker 5: however the stock is down half a percent Johnson &
• 21:17
  Speaker 5: Johnson reported better than expected third quarter results, but said
• 21:20
  Speaker 5: it is leaning towards spinning out its hips and knees business.
• 21:23
  Speaker 5: Shares are down 4%. And Domino's Pizza disappointed investors as
• 21:29
  Speaker 5: its same-store sales only modestly rose during the quarter. Pizza
• 21:33
  Speaker 5: giant stock is down over 3%. I'm Tucker Sullivan. That
• 21:38
  Speaker 5: is Wall Street Watch.
• 21:39
  Speaker 2: I'll talk about inflation or the cracks showing in the
• 21:43
  Speaker 2: AI memory trade. I know we talked a little bit
• 21:45
  Speaker 2: on the... I'll go AI trade. So I'm going to
• 21:50
  Speaker 2: ignore for a moment the biggest concern that I have
• 21:54
  Speaker 2: with this, and my biggest concern stems from probably the
• 21:57
  Speaker 2: podcast I listen to. Can I pump another podcast that's
• 22:01
  Speaker 2: not our own, Tucker? No.
• 22:03
  Speaker 3: Absolutely not.
• 22:05
  Speaker 5: You can only pump the Financial Exchange podcast.
• 22:07
  Speaker 2: Well, you can check out the Financial Exchange podcast.
• 22:08
  Speaker 3: Specifically YouTube, too.
• 22:10
  Speaker 2: If you're looking for something very different from our podcast,
• 22:12
  Speaker 2: because our podcast is... And our show, as you know,
• 22:14
  Speaker 2: covers a litany of different subjects. There's a podcast put
• 22:17
  Speaker 2: on by Bloomberg called Odd Lots that just dives deep
• 22:20
  Speaker 2: into one very deep subject. And they interviewed an author about,
• 22:24
  Speaker 2: you know, the end of the world from AI. And
• 22:26
  Speaker 2: he had some very valuable points that were terrifying, I think,
• 22:30
  Speaker 2: in his hour-long interview with the folks over at Odd Lots. So, sorry, Tucker,
• 22:34
  Speaker 2: but I did.
• 22:35
  Speaker 3: No, that's fine. That's a national podcast.
• 22:39
  Speaker 2: And so my mind's there again today, like, oh yeah,
• 22:42
  Speaker 2: these engineers actually don't seem to have any idea what
• 22:44
  Speaker 2: it is they're building or any of the safety constraints
• 22:47
  Speaker 2: that they're trying to put around it. And what if
• 22:49
  Speaker 2: this happens? What if that happens? But in terms of
• 22:53
  Speaker 2: what we are seeing out there, I think it's increased
• 22:55
  Speaker 2: scrutiny on the idea that we've been talking about for
• 22:59
  Speaker 2: over a year now, which is eventually, I think that
• 23:04
  Speaker 2: semiconductors are going to become a commodity just like every
• 23:08
  Speaker 2: other piece of hardware that we've ever invented in the
• 23:13
  Speaker 2: United States and I don't think that it has let
• 23:18
  Speaker 2: me see I don't think that it's the same for
• 23:19
  Speaker 2: instance as an Apple iPhone because I don't think that
• 23:23
  Speaker 2: the users of these semiconductors care whether or not they're
• 23:27
  Speaker 2: carrying an Nvidia chip or a Samsung chip or some
• 23:31
  Speaker 2: new Chinese startup chip so long as it gets the
• 23:34
  Speaker 2: job that they're looking to get done done at the
• 23:37
  Speaker 2: best possible price and the most possible efficiency and I
• 23:40
  Speaker 2: think that to me is the overall concern that people
• 23:43
  Speaker 2: have when they talk about chip stocks is, hey, eventually
• 23:46
  Speaker 2: do you get to commoditization here where these companies just
• 23:49
  Speaker 2: can't maintain profit margins?
• 23:51
  Speaker 4: Yeah, less of the commoditization, but just the demand weakening
• 23:55
  Speaker 4: is really what my concern would be is that you
• 23:59
  Speaker 4: have– The scale of this build out, whether you want
• 24:03
  Speaker 4: to look at the hyperscaler numbers or just the corporate
• 24:06
  Speaker 4: bond debt issuance, there is now numerous executives out there,
• 24:10
  Speaker 4: whether it's Broadcom CEO or Intel CEO, mentioning that there
• 24:13
  Speaker 4: just almost isn't enough money at this point, enough capital
• 24:17
  Speaker 4: to finance what they're looking to build out. So those
• 24:19
  Speaker 4: semiconductor stocks that we're looking at are running businesses with
• 24:24
  Speaker 4: unprecedented demand. Basically, there is almost just more demand than
• 24:28
  Speaker 4: there is supply. And what ultimately happens, whether it's chips
• 24:32
  Speaker 4: or any layer of the stack here that you want
• 24:34
  Speaker 4: to talk about, data centers, we're going to talk about
• 24:36
  Speaker 4: utilities and the demand for electricity. is that what I
• 24:39
  Speaker 4: continue to come back to, and I had read a
• 24:41
  Speaker 4: piece from Aries, which is a big insurer in the
• 24:47
  Speaker 4: debt space and also do some private equity as well,
• 24:50
  Speaker 4: where just the means that companies are going to to
• 24:54
  Speaker 4: finance this build-out through these JV ventures that we've talked
• 24:58
  Speaker 4: about before, taking debt off the balance sheets, really trying
• 25:01
  Speaker 4: to pump together a lot in order to get a
• 25:04
  Speaker 4: single A rating, so an investment-grade rating, so you can
• 25:07
  Speaker 4: raise debt, The maneuvers that are being made underneath the
• 25:10
  Speaker 4: surface to finance this all out, so much of it
• 25:13
  Speaker 4: is predicated on just perfection and continued enthusiasm and spending.
• 25:19
  Speaker 4: And Mike, you mentioned there's just so many concerns out there.
• 25:22
  Speaker 4: The biggest one is this sort of societal concern, right,
• 25:25
  Speaker 4: that we've talked about on the show and that has
• 25:27
  Speaker 4: become more and more of a theme. And we'll cover
• 25:29
  Speaker 4: a piece from Anthropic today. They continue to come out
• 25:33
  Speaker 4: with messages of saying that this could go all so wrong.
• 25:36
  Speaker 3: So you have that.
• 25:37
  Speaker 4: You've got the regulatory pushback from data centers that could loom.
• 25:41
  Speaker 4: And then you have the business risk of a lot
• 25:43
  Speaker 4: of companies are spending just undiscretionary amounts of money, just
• 25:47
  Speaker 4: throwing it out there to try and figure out how
• 25:49
  Speaker 4: they harness this technology. What if eventually there's this redeployment
• 25:54
  Speaker 4: of capital where these big businesses say, you know what?
• 25:56
  Speaker 4: We're going to pump the brakes. You throw all those together.
• 25:59
  Speaker 4: There's a lot of things that loom out there as risk.
• 26:01
  Speaker 4: We don't know when they are going to come to fruition,
• 26:04
  Speaker 4: but now you have two things in play. A lot
• 26:06
  Speaker 4: of risks on the table and a financing structure that
• 26:09
  Speaker 4: requires almost perfection from an execution standpoint. And that's what
• 26:15
  Speaker 4: is concerning on the crack fund. And that's why I
• 26:17
  Speaker 4: think you see the volatility on a daily basis. Investors
• 26:21
  Speaker 4: are constantly trying to sort out when are those risks
• 26:24
  Speaker 4: going to bubble to the surface.
• 26:25
  Speaker 2: Yesterday, we talked about how the Korean KOSPI took a
• 26:29
  Speaker 2: big hit, down 5.5%, one of its, you know, back
• 26:33
  Speaker 2: to some pretty low levels from before this summer. That
• 26:36
  Speaker 2: was on an announcement from China's CXMT Corporation declaring it
• 26:41
  Speaker 2: achieved a breakthrough in chip technology that, you know, everybody
• 26:44
  Speaker 2: had been pursuing for years and planned to be selling
• 26:46
  Speaker 2: those to the public by year end. We have no
• 26:48
  Speaker 2: means of knowing if that's true or not, but when
• 26:51
  Speaker 2: you talk about the Korean market, which has dominated almost
• 26:54
  Speaker 2: half of that index is Samsung and SK Hynix, there's just,
• 26:58
  Speaker 2: you know, No real way to diversify out of that market.
• 27:02
  Speaker 2: Whereas yesterday in the U.S. markets, and granted, yesterday was
• 27:06
  Speaker 2: a pretty low volume day with Columbus Day and bond
• 27:09
  Speaker 2: markets being closed. But you had, what was it, NVIDIA
• 27:14
  Speaker 2: and another chip maker whose name is escaping me right now.
• 27:18
  Speaker 2: Oracle Broadcom. Might have been Broadcom. Both down for the
• 27:22
  Speaker 2: day substantially, but almost dollar for dollar offset in increases
• 27:26
  Speaker 2: in the Apple market. And meta stocks, because continuously what
• 27:30
  Speaker 2: we're seeing in the U.S. market is any day that
• 27:33
  Speaker 2: hardware has a problem, the chip makers are having a problem,
• 27:36
  Speaker 2: people flee to the non-meta, still an AI stock, but
• 27:40
  Speaker 2: non-directly AI chip-making stocks and say, okay, yeah, we don't
• 27:44
  Speaker 2: like this area of tech, but we like this area
• 27:46
  Speaker 2: of tech instead. The Korean market just doesn't have that. Hmm.
• 27:49
  Speaker 2: I mean, yes, Samsung makes TVs and phones and other
• 27:52
  Speaker 2: things too, but they are directly one of the biggest
• 27:56
  Speaker 2: beneficiaries of the AI trade, and there's really no escaping that.
• 27:58
  Speaker 3: Yeah, the memory chips.
• 28:00
  Speaker 2: Let's take a quick break. When we return, as always,
• 28:06
  Speaker 2: this midterm election is all about the economy, and when
• 28:09
  Speaker 2: it's all about the economy, it's usually all about prices
• 28:11
  Speaker 2: and inflation. CNBC has a piece about inflation, perhaps having
• 28:16
  Speaker 2: peaked already in 2026. We'll talk about that and election
• 28:19
  Speaker 2: consequences next.
• 28:34
  Speaker 1: Miss the Financial Exchange? Catch up anytime on YouTube with
• 28:38
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• 28:41
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• 28:43
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• 28:43
  Speaker 1: Youtube.com slash thefinancialexchange. This is the Financial Exchange Media Network.
• 29:00
  Speaker 2: Call. We'll get an inflation reading tomorrow. Traders are expecting
• 29:05
  Speaker 2: a headline CPI print of 3.6%. I've seen 3.6% to 3.7%
• 29:10
  Speaker 2: out there in terms of forecasts. The headline was only 3.4%
• 29:15
  Speaker 2: in August. We've obviously seen that continued climb on energy
• 29:18
  Speaker 2: prices and now seeping into other areas of the markets.
• 29:23
  Speaker 2: It's I don't really think that it's worth talking about
• 29:27
  Speaker 2: whether or not inflation has likely peaked for 2026, because
• 29:32
  Speaker 2: unless you know what's going to happen with energy prices,
• 29:35
  Speaker 2: then you don't know whether or not inflation has peaked
• 29:37
  Speaker 2: for 2026. It's a useless exercise. If gas prices hit
• 29:43
  Speaker 2: $ 5 a gallon by year end, then inflation has not
• 29:46
  Speaker 2: peaked yet.
• 29:46
  Speaker 3: No, definitely not.
• 29:47
  Speaker 4: It's interesting that Kalshi is now being quoted as a
• 29:52
  Speaker 4: reliable source on where inflation is going from trading activity standpoints.
• 29:57
  Speaker 2: I don't think I don't think it is, first and foremost,
• 30:02
  Speaker 2: a useful source. We'll talk about a piece later about a,
• 30:07
  Speaker 2: you know, a theater director who is, a former theater
• 30:10
  Speaker 2: director who's making a killing on, screenwriter, sorry, on placing
• 30:14
  Speaker 2: bets on Kalshi on inflation and, you know, the interesting
• 30:17
  Speaker 2: piece here. So I think it is largely made up
• 30:19
  Speaker 2: of amateurs betting on inflation rates, but I think if
• 30:25
  Speaker 2: phrased properly, right, like I've quoted, you know, the odds
• 30:28
  Speaker 2: on places like Kalshi just as an interesting data point of, okay,
• 30:32
  Speaker 2: this is where people are actually placing their bets. And
• 30:37
  Speaker 2: in any case, this is going to be, while it's
• 30:39
  Speaker 2: not the Fed's preferred measure of inflation, it certainly is
• 30:43
  Speaker 2: the measure of inflation that is most built into consumer
• 30:47
  Speaker 2: expectations and that people pay the most attention to. And
• 30:50
  Speaker 2: so the Fed talks frequently about their concerns about expectations,
• 30:55
  Speaker 2: inflation expectations feeding into everything else. And so they most
• 30:59
  Speaker 2: certainly care about this report. Speaking of the Fed, they've
• 31:03
  Speaker 2: got a meeting. I don't know exactly what. OK, so
• 31:06
  Speaker 2: 15 days from now. what are expectations currently in terms
• 31:12
  Speaker 2: of their actions at that next meeting?
• 31:14
  Speaker 4: It seems, looking at the probability market done by the
• 31:17
  Speaker 4: CME group that tries to assess whether or not the
• 31:20
  Speaker 4: Fed will raise or stay where they are from a
• 31:23
  Speaker 4: rate perspective, about a 76% probability, Mike, that they will
• 31:27
  Speaker 4: keep rates where they are between 3.75% and 4%, only
• 31:30
  Speaker 4: about a 24% chance that they would hike again in
• 31:37
  Speaker 4: this end of October meeting. So this has moved around
• 31:41
  Speaker 4: a lot. If you looked at this about a month ago,
• 31:43
  Speaker 4: it was more of a closer to a 50-50 shot
• 31:47
  Speaker 4: that they would potentially hike rates, but that has now
• 31:52
  Speaker 4: subsided the concern of potentially seeing another rate hike. It
• 31:55
  Speaker 4: does seem like, again, this is going out another meeting here,
• 31:58
  Speaker 4: but in early December would be the next meeting that
• 32:01
  Speaker 4: there is a pretty strong probability that we would see
• 32:05
  Speaker 4: a quarter of a percent hike there. So that would
• 32:07
  Speaker 4: make it a half percent hike. We had just had
• 32:10
  Speaker 4: one in the month of September, taking a pause for
• 32:12
  Speaker 4: the month of October and then picking back up again
• 32:15
  Speaker 4: in December. This inflation report, among other data points that
• 32:19
  Speaker 4: we'll get here, Really, the inflation report is going to
• 32:22
  Speaker 4: be the last one that they'll have, I would think,
• 32:24
  Speaker 4: before the October 28th meeting. We'll decide whether or not
• 32:28
  Speaker 4: they continue with the rate hiking cycle. All indications at
• 32:31
  Speaker 4: the moment that they pause for the month of October.
• 32:34
  Speaker 5: Giving assets to your children can be part of an
• 32:37
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• 32:52
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• 33:14
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• 33:25
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• 33:38
  Speaker 1: The proceeding was paid for and the views expressed are
• 33:40
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 33:42
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• 33:45
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 33:47
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• 33:49
  Speaker 2: According to, we talked a bit about midterm elections during
• 33:52
  Speaker 2: that last segment, and according to the Pew Research Center
• 33:55
  Speaker 2: data that they put out just last week, the issues
• 34:00
  Speaker 2: that Republican voters consider to be, quote, very important to
• 34:04
  Speaker 2: their vote in 2026, in this order are the economy, immigration,
• 34:10
  Speaker 2: and the future of democracy. 82% say the economy, 72%
• 34:13
  Speaker 2: say immigration, 69% say the future of democracy. On the
• 34:15
  Speaker 2: Democrat side, 88% say the economy, 85% say the future
• 34:19
  Speaker 2: of democracy, 82% healthcare. So again, these are not You
• 34:31
  Speaker 2: can't add these together, obviously. It's well over 100%, but
• 34:33
  Speaker 2: it's the percentage of registered voters who say those issues
• 34:36
  Speaker 2: are very important to them. What you'll obviously notice is,
• 34:40
  Speaker 2: once again, it's the economy, stupid, that matters most to
• 34:43
  Speaker 2: voters on both sides of the aisle. As such, the
• 34:48
  Speaker 2: inflation piece, I think, is critically important. We have talked
• 34:52
  Speaker 2: at length about how, while I think the most important
• 34:55
  Speaker 2: price to the global economy is the U.S. 10-year Treasury
• 34:58
  Speaker 2: price and the yield on that bond, I think very
• 35:01
  Speaker 2: clearly the most important price to the American psyche is
• 35:05
  Speaker 2: a gallon of gasoline, and that's been quite a bit higher,
• 35:08
  Speaker 2: although not anywhere near the all-time highs that we're seeing
• 35:11
  Speaker 2: with diesel prices. When we take a look out at
• 35:15
  Speaker 2: different means of guessing at election outcomes, Kalshi just talked
• 35:20
  Speaker 2: about this. They are pricing in a 62% chance of
• 35:23
  Speaker 2: Democrats taking the Senate. All of these places have a
• 35:27
  Speaker 2: much higher odds of the House winning. On Predict It,
• 35:30
  Speaker 2: another betting website, it's about the same, sitting at 64%.
• 35:35
  Speaker 2: And just in terms of another source here, Nate Silver
• 35:40
  Speaker 2: still publishes his own model, which most recently put the
• 35:44
  Speaker 2: odds of Democrats taking the Senate at 73.9%. So you
• 35:49
  Speaker 2: can read these any number of different ways, but I
• 35:51
  Speaker 2: think especially since the, what was the first election where
• 35:55
  Speaker 2: people started really looking much more closely at betting markets,
• 35:58
  Speaker 2: like 20 2016 election?
• 36:01
  Speaker 3: I would think so.
• 36:02
  Speaker 2: I think that was the first time, you know, when
• 36:05
  Speaker 2: Trump really surprised the Clinton voters out there, I think
• 36:08
  Speaker 2: that was the first time people started taking a look at, okay, yeah,
• 36:10
  Speaker 2: the polls were saying this, but betting markets were saying
• 36:12
  Speaker 2: something completely different. And they still are, right? You know,
• 36:16
  Speaker 2: the polls are saying, you know, a very strong likelihood
• 36:20
  Speaker 2: of Democrats taking the Senate. The betting markets are much
• 36:23
  Speaker 2: closer to 50-50, I mean, not 50-50 odds, it's 62-65%
• 36:25
  Speaker 2: in terms of favoring Democrats in the Senate, but that's,
• 36:31
  Speaker 2: you know, I think a heck of a lot closer
• 36:33
  Speaker 2: than what we're seeing on those polling forecasts. So we
• 36:37
  Speaker 2: will see if, you know, the economy is the real
• 36:41
  Speaker 2: driver and, you know, really whether or not those polls
• 36:45
  Speaker 2: about what people say they feel about the economy actually
• 36:49
  Speaker 2: leads them to vote one direction or another or just
• 36:52
  Speaker 2: stay home. in a midterm election where turnout is, you know,
• 36:56
  Speaker 2: usually lower than otherwise, uh, during, during presidential elections. So, uh,
• 37:02
  Speaker 2: I suspect that in the end, inflation is going to
• 37:06
  Speaker 2: be the single most important thing that matters to voters, uh,
• 37:09
  Speaker 2: when it comes to them going to the polling, because yeah,
• 37:12
  Speaker 2: the price of a Certainly has been an issue for
• 37:17
  Speaker 2: the last six years. It hasn't been fixed over the
• 37:19
  Speaker 2: last two. And I think that's ultimately what people care
• 37:22
  Speaker 2: most about.
• 37:22
  Speaker 4: No, it's ultimately leading to the most frustration out there.
• 37:25
  Speaker 4: And we've talked about all the economic sentiment pieces, whether
• 37:29
  Speaker 4: it's the Michigan Consumer Index or other metrics out there.
• 37:33
  Speaker 4: People have been really upset with the economy for the
• 37:35
  Speaker 4: last four or five years. The reason for that is
• 37:37
  Speaker 4: because things are more expensive than they were six or
• 37:41
  Speaker 4: seven years ago. That has certainly been the number one
• 37:44
  Speaker 4: problem with the economy amidst a very good stock market
• 37:47
  Speaker 4: over the same period of time.
• 37:49
  Speaker 2: Oil prices are falling very slightly in early trading today
• 37:52
  Speaker 2: on West Texas crude. We're sitting at just shy of
• 37:54
  Speaker 2: $ 94 a barrel. The yield on the 10-year treasury today
• 37:58
  Speaker 2: falling also in line with those energy prices down to 5.215%.
• 38:03
  Speaker 2: And across the board, we've got equities basically flat to
• 38:06
  Speaker 2: slightly negative territory. We'll be right back with a heck
• 38:09
  Speaker 2: of a lot more here on the Financial Exchange.