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Bearish on Berkshire, Shutdown Risks and Big Tech on Deck 10/27/25
00:44:05
Berkshire Hathaway gets a rare downgrade. How much pain the government shutdown could inflict on airlines. Plus, the big tech names to buy ahead of earnings this week.
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Anchor/Host
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Dan Clifton
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Dan Clifton
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Morgan Brennan
Welcome to the Exchange. I'm Morgan Brennan in for Kelly Evans. Stocks starting the last week of October at record highs amid optimism around a China trade deal. The S&P 500 on track to close above 6,800 for the first time ever. It's also on Track for its sixth straight monthly gain. The Nasdaq on track for its seventh. Big tech broadly higher with five of the mag seven reporting this week, including Apple. We're still on $4 trillion market cap watch for that name. The magic number, $269.53 per share. Chip stocks paring earlier gains initially seeing or getting a nice, nice bump on those China headlines off the best levels now. The big standout in the space today is Qualcomm. That's up 13% on news it new AI cheap chips to compete with Nvidia and AMD. Also, we're watching rare Earths names. Those are heading in the opposite direction as the US Expects China to delay export controls. Plus gold sharply lower again to start this week. It's down more than 3%, dipping back below $4,000 an ounce earlier. But we begin with US China trade talks as the two sides have reached what Treasury Secretary Besant called a quote, very substantial framework for, for a deal. Eamon Javers joins us with the latest. Hi, Eamon.
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Jamie Baker
Hey there, Morgan.
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Reporter/Correspondent
First, though, some non China trade news that's out this hour. Mexico's President Claudia Sheinbaum saying in a news conference that President Trump has agreed, she says, to delay the deadline for Mexico trade talks by a few weeks. The Mexican president said she spoke with Trump by phone on Saturday about trade. No confirmation yet from the US Side on that one. And President Trump arrived in Japan this morning after a whirlwind weekend in Malaysia where he reached trade and mineral deals with Malaysia and Cambodia. Cambodia and set up frameworks for trade agreements with Thailand and Vietnam. In Tokyo, the president began with a handshake and a courtesy visit with the emperor and will later have a meeting with the new Japanese Prime Minister, Sana Takeuchi, who is the first woman to hold that role on Air Force One. President Trump spoke extensively with reporters, but he said he didn't want to share details of what officials are calling a framework economic agreement between the US And China that could be signed by by President Trump and Chinese President Xi Jinping later this week.
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Anchor/Host
I don't want to tell you what.
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Meyer Shields
The understanding is because what we understood yesterday or two days ago or even today is not going to be necessarily.
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Dan Clifton
What it's going to be in two days.
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Meyer Shields
We're going to have a great talk. I have a lot of respect for President Xi. I like him a lot. He likes me a lot, I believe and respects me. And I think he respects our country.
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Reporter/Correspondent
So we expect to see two big items on the agenda this evening when the Asian Workday begins. That meeting with the Japanese prime Minister that I just talked about, as well as a business event with CEOs. Not exactly clear yet who all is attending, but it should be an all star list of executives on hand for the event.
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Morgan Brennan
Morgan? Yeah. Meantime, we've seen another 10% in tariffs on Canada. There have been some positive headlines about the possibility of getting to some sort of trade deal with Brazil as well. How to think about all of these deals to make deals potentially coming into this deal to make a deal with China?
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Reporter/Correspondent
Well, there's a lot of analysts out there who are pointing to these framework agreements that were signed over the weekend with all the various Asian countries sort of buttressing the United States side before it goes into those talks with China later in the week. Of course, there are some other analysts who are saying we need to see a lot more details from those agreements, which are not legally binding before we can really evaluate whether they're effective or not. On the Canada issue, you know, that one is fascinating to watch because we saw White House officials, even after President Trump blew up over that TV ad featuring Ronald Reagan, which he said was unfair and unfairly edited. We saw White House officials come out and say, you know, they're still going to have talks. You know, President Trump is still going to talk with Mark Carney when they're both in Asia. The president has continued to hammer this point through the weekend. And so the question is, will that Canada meeting actually happen this week? Or not. And if it does, can Carney kind of redirect and say, well, that was just the provincial government running those ads. We're the national government. We don't have anything to do with that. We can, we can keep talking. If he can get that back on track, I think markets will be welcoming that with open arms.
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Morgan Brennan
No dearth of news this week on Taps. Iman Jabbers, thank you. Well, while Wall street is focused on getting a US China trade deal done, our next guest says the real winners of Trump's trade policies are Canada and Mexico. For that and a whole lot more, we've got a lot more to dig into. Dan Clifton joins me, head of policy research at Strategus Research Partners. This is a Baird company. Dan, it's great to have you on. Let's start right there with trade and all of these headlines.
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Jamie Baker
Yes.
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Anchor/Host
So first, thanks for having me on. I think we're going through a pretty significant couple of weeks here on policy where you trade, the Fed, the shutdown, but on trade first, if you just think about China, I think there was a risk a couple of weeks ago where China was talking about pulling those supply chains on rare earths. The US Was talking about high tariffs. What you're facing here is a status quo type of an agreement where they're going to delay their rare earth restrictions. The US not going to put tariffs in there. You don't get much good out of it, but you've protected your downside risk. That's all the markets really need to see going into this. And the surprise upside would come from, say, reducing tariffs. If there's an agreement on fentanyl, I think that's a lower probability. But that's where the upside would come from. From that China trade deal, I think, to the point that even Javors was just making in. A very good point is that Trump is signing a whole bunch of smaller agreements with other countries in the Asian region that start to put restrictions on China being able to transship those goods through those countries and into the US So a lot of these agreements are really strengthening Trump's hands going into those discussions. And I think they're very important. And then finally on Canada and Mexico, the president hasn't said that he's putting a 10% tariff on all goods coming in from Canada. We believe he's talking about the non USMCA goods. Those are very small portion of goods that come into America and that is somewhat declining. And it's part of the negotiations. And the reason why we believe that Canada, Mexico will be the greatest beneficiaries on the trade front is largely because they will be the only two countries without a reciprocal tariff rate. They will have the lowest effective tariff rates in the world. And that's the president trying to bring the supply chains closer to the US as we start to move into a globalized world. So a lot of headlines, a lot of noise, but when you break through it, you know, getting resolution on these are going to be quite positive for, for equity markets.
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Morgan Brennan
You just said a lot there. I want to go back to China though, especially because I think investors are very eager to see some sort of, I'll call it a trade truce. But I know people are using the word deal struck between the two countries. But to your point, when you see some of these other deals starting to potentially take shape that involve cracking down on trans shipments, even here domestically, you start to see investments into key supply chains, like for example, rare earths, which, yes, are going to take a couple years to stand up, but sort of go to this idea of countering China. Are we ever going back to a big, broad, meaningful trade deal with China or is that in the past?
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Anchor/Host
No, I think that's in the past. We're moving into a globalized world. It is not bearish. But Covid was just this moment where you realize that there's risk of having your supply chains located outside the United States. Can you get pharmaceuticals, can you get the minerals that you need? So what you see is a, a truce, as you call it, where they are slowly building their chip industry, we're slowly building our rare earth industry. And we're trying to do it in a gradual way so that there's not a disruption to the global economy. But each country is becoming more self sufficient to deal with that globalized world. And the risk is that there is some flare up over Taiwan or over whatever it's going to be, and then you have a major disruptive event to the global economy. And I think both leaders are trying to avoid that. I get nervous sometimes where you read in the Wall Street Journal last week that China is going to ask for Trump to change his position on Taiwan, which is extremely unlikely to happen. But you know, it seems like both leaders want a gradual process and that's why it's more of a truce than a deal. And it's soybeans and shipbuilding and TikTok and kind of these minor issues that keep the status quo in place.
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Morgan Brennan
Yeah. What position? Strategic ambiguity. Right. So, so, so if we shift from around the world back to here, domestically, we're closing in on a month of a government shutdown. Here you have the country's largest union representing federal workers basically calling on law lawmakers to just go ahead and pass a clean continuing resolution bill and get that done. Here you make the argument that the math is not making sense here. The longer we stay shut down.
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Anchor/Host
That's correct. I have been first. I've been very much of the view the shutdown wasn't a big economic event. The longer it goes on, though, the more those costs are going to start to increase. So how did we get here? The Democrats said, look, we're not going to vote to fund the government unless we get the Affordable Care act subsidies extended. Those subsidies expire at the end of the year. They wanted to use their leverage to have that shutdown. Those subsidies cost about $30 billion a year. And that went on for about three weeks. And then last week, federal employees didn't get paid. Military pay is going to run up because the US doesn't have the resources. And on November 1, the Trump administration is warning that food stamps are going to run out. When you add those three up, you're talking about $400 billion of costs to federal workers, the U.S. military and Income support, lower income consumers, which is more than 10 times the cost of those ACA subsidies. So what you're beginning to see is the balance of power beginning to shift here to reopen the government. I think what the largest federal government employee union did today is say, look, we can have these policy debates about health care later, but federal workers need to get paid for the work that they're doing. And that seems to be one of the major pressure points that are building in. And I would remind you that congressional staff are not getting paid, so his own employees or congressional members own employees. So when you put that together, those are usually the catalysts that begin to get you a resolution. I know it's very hard to look at what's going on in Washington, be like, hey, this government is going to reopen. Washington is paralyzed right now. But you seeing these pressures build in. And I don't think anybody wants the military not to get paid. And I do think that over the next week or so, you're going to start to see this government shut down, at least temporarily, getting resolved.
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Morgan Brennan
Yeah. It is worth noting lawmakers themselves, though, do get paid even as everybody else doesn't if I stick with Washington here. But I shift gears to monetary policy. We have a quartet of rate decisions from major central banks around the world. But I think investors are most keyed in on what the Fed does this week, all but guaranteed we're going to get a 25 basis point cut. Is that thing to be watching here or should be taking a closer eye on something like the runoff of quantitative tightening potentially and what that means for the longer end of the bond market?
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Anchor/Host
Absolutely. I think quantitative tightening is the big takeaway from Wednesday's meeting at the Federal Reserve. You know, they haven't explicitly said that they were going to end Kutty, but what you are seeing is that the cost of funding is going up, bank reserves are going down, financial conditions are tightening underneath the surface. These are in the overnight market, so they're not really showing up in those broad indexes that you look at. But the Fed is actually destroying bank reserves by doing quantitative tightening. So one way to ease those pressures is to end quantitative tightening. Fed Chairman Powell gave a speech last week, two weeks ago, and said, we're going to end this in the next few months. Only since then have we seen these pressures continue to build. So we think that quantitative tightening is going to go away at this meeting at least be announced. And you are beginning a Fed rate cut cycle. I know there's some focus on other central banks that are in their meetings, but a lot of those central banks around the world have already cut and have been cutting all year. The US Is getting into this rate cut cycle and when you pull it together, you now have the Federal Reserve cutting rates, ending Kutty and you have a lot of business and consumer tax cuts coming from the one big beautiful tax bill that passed in July. So, so this is a massive amount of stimulus. And I think why this is important is that if you get a status quo truce with China, you get the government reopened, you're taking away some of those negatives and you're allowing all that kind of stimulus to be able to power the US economy into 2026.
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Morgan Brennan
Plus possibly some trade deals that could, in the case of maybe perhaps Korea, include more investment here in the US Dan Clifton from Strategus, thank you. We covered a lot there.
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Anchor/Host
Thank you, Morgan.
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Morgan Brennan
Trade is just one part of the equation for the markets. This week we've also had a massive week. We will have a massive week of earnings for the world's biggest tech companies reporting and a Fed rate decision. So is this a make or break few days for this rally? Well, joining me now is Kate Moore, Chief Investment Officer at Citi Wealth. Kate, it's great to have you on. We got stocks at record highs. Does it keep going?
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Kate Moore
Look, I think so much of what happens to the equity market into the back end of this year is going to be about earnings. You know, one of the key things that we've anchored on on has been that, you know, most of the return this year has been driven by earnings. And this week because of the big tech names, the mega caps that everyone has really anchored in their portfolios are reporting, I think it's going to be really, really important for sentiment, perhaps as important for sentiment or even more than the policy decision from the Fed where of course the market's pricing in close to 100% probability of a 25 basis point cut. I do think that we need to hear consistently from that market leaders as well as from companies leading their sectors and industries across the that they're getting benefits from the AI and technology investment they've made throughout the course of 2025 and they have great hope and expectation for what that will be into 2026 and may cite productivity gains or enhancements that will lead to better earnings and stronger margins over quarters ahead.
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Morgan Brennan
So if you see robust capex numbers or even revised upward capex numbers from the like of likes of Microsoft and Amazon and Alphabet and some of the other meta names that are reporting this week, is that good for those stocks specifically or is that good for the broader infrastructure, infrastructure trade, how to, how to think about the read through there.
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Kate Moore
I think it's good for both. But I will say the expectation I think from the street and from the buy side at this point is that we will get continuous upward revisions to capex spending targets. I think if we were to have even flatlining that would be a little bit of a negative sentiment hit. What I will say is that, that we want to see the companies that are benefiting from the investment sort of the makers of hardware and the enablers continue to expect higher revenues than analysts are currently forecasting and we want to see the adoption rate of AI and technology continue to increase across sectors and industries. Again as I was saying, we want use cases, we want to see productivity enhancements coming down the pike and expectations for further margin enhancement into 2026 when it may not be as easy to slam dunk later in the cycle.
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Morgan Brennan
Is this still the place to put your money to work in this market or are there others?
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Kate Moore
Look, it's uncomfortable to continue to want to own these large cap leaders, right? I would love to raise my hand and say I see a huge breadth of opportunities and Dan was talking about a number of areas where there might be stimulus of course and then benefiting the US economy into the end of the year in the beginning part of next. I think some of these areas, like the financial services space, particularly the banks, are also seeing a significant amount of ownership right now. And I want to see actually consistency from the industrial complex and from the manufacturers into the beginning of next year. I think that kind of cyclical area of the market is something that is less well owned. We're not necessarily adding to risk there, but we'll be watching very closely for guidance from those companies as they report this season.
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Morgan Brennan
Do you stay domestic or do you look internationally?
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Kate Moore
Gosh, I think the US still has the highest quality companies and frankly from a fundamental perspective looks the strongest. You know, one of the things we focus a lot on is earnings revision ratios. We look at the number of upgrades relative to downgrades over both a one month and a three month period where the momentum is in terms of the overall expectations. And here's what I would say. The US still looks head and shoulders above the rest of the world. We're watching very closely expectations for better earnings out of Japan, of course, with a change in government and expectations around a significant fiscal policy stimulus over the course of the next couple of quarters and years potentially. But we are seeing more idiosyncratic and specific opportunities in Europe and in other regions less so, adding to significant regional weights. We have had a little bit of an overweight in China. We continue to like the technology story in China. The government, of course, supporting this industry and encouraging additional investment not just for their own domestic workforce but also as a competition with the U.S. and so we expect that to continue to perform well over the next six years.
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Reporter/Correspondent
Months.
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Morgan Brennan
Okay. Kate Moore with Citi wealth, thanks for joining me.
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Kate Moore
Yep, thanks for having me.
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Morgan Brennan
With all the major averages up this Monday afternoon, the S and P up 1% right now. 6857 is your level there. We're trading at record high. Coming up, shares of Berkshire Hathaway. These are down 10% since Warren Buffett announced his retirement in May. KBW says that's one headwind, but that there are several more. The firm downgrading Berkshire today. The analyst behind that call joins us next. Flush air travel disruptions were the catalyst that ended the 2019 government shutdown. Could we be close? Getting close to that point again. We're going to get a gut check on the sector. The potential impact to airlines, bottom lines. That's also ahead. The exchange is back after this.
- [19:01]
Meyer Shields
This is the exchange on cnbc.
- [19:10]
Jamie Baker
The.
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Anchor/Host
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Morgan Brennan
Nominate them now@cnbc.com changemakers. Welcome back. Shares of Berkshire Hathaway, you're down today off nearly 10% since Warren Buffett announced his retirement back in May. My next guest doesn't think that's the only headwind the company is facing, though. He slashed his rating to the equivalent of sell from neutral today and cut his price target on Berkshire's Class A shares to 700,000, down from $740,000. We should note one Class A share is equal to 1,500 Class B shares. Joining me now is Meyer Shields, managing director at kbw, covering the property and casualty insurance stocks. And Maya, it's great to speak with you.
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Meyer Shields
Thanks so much for having me.
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Morgan Brennan
So why downgrade and why downgrade now?
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Meyer Shields
Okay. Why downgrade? Because there are a number of elements of earnings that we think are going to come in weaker than the street anticipates or there's some risk associated with that. And we don't think that those are really factored into the share price based on the model that we use for valuing Berkshire Hathaway stock. Why now? It was really a matter of looking at the individual segments of Berkshire, which we try and do regularly because there's a lot going on there saying, you know what, car insurance is probably going to be much less profitable next year. Property tax free reinsurance will probably be less profitable next year, short term interest rates and the investment income that they generate going down. So there were a number of concerns that seem to, I don't see, leap off the page, but seem to warrant a rethink of the appropriate rating for Berkshire.
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Morgan Brennan
I got to go back to the insurance piece of this because auto insurance in particular, and yes, we've seen it with homeowners insurance too, but auto insurance has been such a sticky piece more broadly of the inflation picture. When I hear you say that it's going to be less profitable, does that mean that we're going to see a normalization in rates market the in here?
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Meyer Shields
I would say we actually already are. If you go back, we had Covid, which was this phenomenal period of profitability for car insurance companies, followed by supply chain disruption and followed by inflation that was actually really, really painful. And the most recent wave of it, the rate increases that you're talking about, those are in response to that prolonged inflation. And it happens to be that over the last, let's say six months. What we've seen is a combination of those higher rates flowing through, but some alleviation of the inflation. And so the insurance industry, the car insur industry has been really profitable over the last six to nine months. So it does seem like we can say confidently at least that the major rate increases are behind us, barring a new catalyst.
- [22:43]
Morgan Brennan
Okay, so maybe some good news for consumers, if not for investors in Berkshire. We don't always talk about it very much, just how big the Berkshire Book of Insurance business is and how much of a flywheel it is to everything else. So why is this so important to them when you see, when you see these businesses becoming less profitable bond.
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Meyer Shields
So I would say without taking anything away from Warren Buffett's track record as an investor, the insurance business is actually a secret sauce because as he's commented multiple times, you get premiums. Day one, you sell a policy, you get the premiums and you only pay off the losses in the Future. Maybe it's six months, maybe it's 10 years. In the interim, you can invest it in whatever you think appropriate and you get to keep the returns. So to the extent that you have less profitability on the insurance side or lower premium volume volumes, you're getting less of that capital to invest for free. And it's also generating a lower return than it had been in a higher profitability environment.
- [23:39]
Morgan Brennan
Does Berkshire Hathaway need to do another big deal? I realize that they just struck a chemicals related deal, but do they, do they need some big M and a sort of get the ball rolling and to recitalize the stock here?
- [23:51]
Meyer Shields
So it's an interesting question. I'm not sure that would make a difference because with Warren Buffett stepping back, I think that's probably the major catalyst right now. They do have a ton of cash so obviously they could do something. And I agree with you that the most recent deal was fairly small. Probably that is the only catalyst we can imagine right now that would really make a difference. But in an expensive equity environment, I'm not sure that the Berkshire Hathaway focus on value really implies a near term deal.
- [24:19]
Morgan Brennan
Okay, Myers Shields of kbw, great to see you. Thanks.
- [24:23]
Meyer Shields
Thanks so much.
- [24:24]
Morgan Brennan
Coming in up Big Tech's big week is here. Five Mag 7 names on deck to report between tomorrow and Thursday. So which should investors snap up ahead of the print? We're going to ask our trader next. And before we head to break, check out shares of Newmont Core the Gold miner. Down nearly 7% as gold futures continue to drop. The stock is now on pace for its worst two day period since October of 2024. The exchange is back in two. The heaviest metal credit card of all.
- [24:58]
Anchor/Host
Time, rumored to be one of only 18 in existence, plated with the very same tungsten that forged the International space Station.
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Morgan Brennan
And wielded at business dinners like a samurai sword.
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Anchor/Host
It's a classic corporate power move, but the real power move having end to end visibility on your most critical shipments.
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Morgan Brennan
FedEx the new power Move Ever wonder.
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- [26:14]
Morgan Brennan
Welcome back to the Exchange. Take a look at markets right now because it's a lot of green on your screen as we have all the major averages trading at record highs to kick off this final week of trading for the month of October. This is also peak earnings week for both the S and P and the NASDAQ with 45 actually of the MAG7 set to report this week we have President Trump in Asia. We have four central bank decisions and lots more here to drive stocks. But right now a lot of positive sentiment with the S and p up about 1%.6856 is the level there. Well, here are some of the movers this hour. Keurig, Dr. Pepper. Those shares are higher as the company lifts its annual sales forecast, provides more details about its recent purchase of JD Pete's. The company also secured $7 billion from private equity to split its coffee and beverage business into two public companies. Those shares are on pace for their best day since 2020, up 7% right now. Harley Davidson moving lower after Morgan Stanley downgraded the stock to underweight and lowered its price target to $25, implying an 11 from here. The firm calling out weak pricing power, unfavorable long term trends, rising competition as the reasons for that downgrade. Those shares are down about 4%. And finally, take a look at Argentina's merval index. That's up 20%. Pacing for its best day since November of 2023. This is as President Xavier Milei's coalition wins midterm elections in a landslide, Argentina ETF argt is on pace for its best day ever. Well, now let's turn to Bertha Coombs for a CNBC news update. Hi Bertha.
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Leslie Picker
Hi Morgan. Hurricane Melissa is now a Category 5 storm and is expected to make a direct hit on Jamaica tomorrow, according to accuweather. If it comes ashore with maximum sustained winds of more than 157 miles an hour, as expected, it would be the strongest storm to hit Jamaica since record keeping began in 1851. Forecasters warned that parts of the island nation could see up to 40 inches of rain. The storm is not expected to threaten the US in the wake of last week's indictments in an NBA gambling scandal. The league notified all 30 teams today that it is reviewing league policies on gambling, including prop bets, injury reporting and the training and education of players and personnel on the dangers of gambling. And Meta today launched what it's calling ghost posts on threads, its competitor to Elon Musk's X, similar to one of Snapchat's signature features. The more than 400 million users on threads will now be able to have conversations automatically archived after 24 hours, when they will disappear from the timeline but remain in a user's archive. I guess ghosts ahead of Halloween is the timing.
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Morgan Brennan
It would seem that way. Bertha Coombs thank you. Coming up, the FAA issuing air traffic advisories late this morning due to staffing shortages at control towers serving the Atlanta and Los Angeles airports. That's after yesterday's temporary ground stop at LAX due to staffing issues. What the shutdown means for the airlines themselves ahead of the busy holiday travel season that's next. Stay with us. Welcome back. The government shutdown impacting everything from IPOs to airports. Transportation Secretary Sean Duffy warning there could be more flight delays and cancellations as air traffic controllers and TSA agents work without pay. Shares of the three big carriers are lower today, but Southwest managing to eke out a gain. So for more on what the shutdown means for those companies, let's bring in Jamie Baker, senior airline analyst at JPMorgan. Jamie, it's great to have you on and I think let's start the conversation right there. What does the shutdown mean as you start to see more employees perhaps calling out from work, more delays at airports, more canceled flights, et cetera? What does it mean for the airline, airlines?
- [30:23]
Jamie Baker
Well, look, I spend a lot of time thinking about this as a passenger. I'm flying later this week. I don't want my security experience to take more time than it needs to. But as a financial analyst, it's not really something that we're leaning that aggressively into. I mean, the losses associated with this are negligible at this point and it doesn't really detract from the structural narrative of the industry industry. It's also really hard to be here in New York and imagine, you know, somebody deciding to drive to San Francisco for Thanksgiving because they're worried about the security cues. So it's definitely on our mind, collectively on our minds, but it's not something that we're meaningfully preoccupied with.
- [31:06]
Morgan Brennan
So what are you preoccupied with when you look at these companies and these stocks?
- [31:11]
Jamie Baker
Well, the structure of the industry. You know, had an investor asked me in 2018 or 2019, you know, if I could envision a scenario where United was, you know, approaching double digit pre tax margins and Spirit was not in its first but its second bankruptcy. Like I don't know how I would have even fielded that question pre Covid, but it's exactly where we are today. So that's really what we're focused on. The structural shifts that have taken place at the industry level, how much of.
- [31:43]
Morgan Brennan
Those structural shifts are a reflection of, of this so called K shaped economy and who's traveling and who isn't.
- [31:49]
Jamie Baker
That absolutely does contribute to it. I mean, the airlines that are, you know, most prosperous at the moment are the ones that lean aggressively into their loyalty programs, into international travel and into premium markets and premium products. The airlines that are struggling tend to be the one size fits all, you know, kind of in flight experience that targets the real low end consumer. I do think that that consumer. Consumer is in hibernation or in recession, however you want to describe it. So yes, it's the upper end of the economy. That's, that's, you know, contributing the bulk of industry revenue at this point.
- [32:25]
Morgan Brennan
Do you think we're going to see more M and A come back into the sector?
- [32:28]
Jamie Baker
You know, that's a good question. We are focused on Spirit Airlines right now, but we're really focused on capacity. Spirit is expected to reject about half of its aircraft and those planes are going to leave the United States. What happens to the other half, we don't really care about going forward. Maybe Spirit, you know, muddles along. Maybe they're taken out by a competitor or maybe they, you hit the wall at some point, cease operations, in which case it's game over. We don't really care whether those planes are painted yellow or they have a white speckled barn owl on the tail. We're modeling for them to stay here in the United States. So we're a little bit ambivalent as to whether further M and A takes place.
- [33:09]
Morgan Brennan
Okay, how about when you talk about capacity, how about these carriers being able to get the aircraft that they've ordered and that they're looking for?
- [33:17]
Jamie Baker
That has been a big part of it. If the OEM situation wasn't so challenged as it has been, you know, since COVID there would be more airplanes flying that would add to capacity, that would, you know, potentially diminish returns. So, you know, just as we were sort of of fans, for lack of a better term, of the one time pilot shortage, we are fans of the fact that even if the industry wanted to fall off the wagon and go on a growth bender, for the most part, you can't get airplanes.
- [33:47]
Morgan Brennan
So if I take this full circle back to where this conversation started, is there a point at which shutdown could have begin to become. Begin to have a financial impact on these companies as we round the corner here on a month?
- [34:00]
Jamie Baker
Sure. I mean, look, if there are major disruptions and meaningful cancellations, that adds complexity to an already complex business because you're going to have flight crews that are out of position. You can have aircraft out of position. We don't really see that happening. I think the bigger issue is whether it impacts traveler demand. And again, I just can't imagine, you know, turning to my kids and saying, you know, we're not going to go on spring break this year year because we're worried about a government shutdown that I think we all agree will be solved by then.
- [34:32]
Morgan Brennan
Okay, Jamie Baker of JP Morgan, thank you for joining me. Thanks Morgan and safe travels to yourself. Well, coming up, shares of this software company down more than 12% since the last earnings report. Could there be more pain ahead as Open Air pushes further into enterprise? We're going to dig into that ahead of the company's Q3 results next. Next, our mystery chart. Stay with us. Welcome back Twilio. That was our mystery chart. So Twilio and ServiceNow's report this week and the launch of enterprise products from some AI companies could soon threaten some of those software names. Seem a MODI takes a look at the companies that could be most impacted into today's tech check.
- [35:22]
Seema Modi
Hi Sima Morgan, this is a key debate, right. You have OpenAI just in the past month unveiling a suite of advanced artificial intelligence tools for not just customers but corporations. And the goal of CEO Sam Altman is to connect Jet CBT to enterprise data. Key question is which software companies could be displaced? Now there's been this active debate. KeyBank says Asana is one of those names recently selling off on this very concern that AI is getting good at basic task management. And then there's companies that focus on robotic automation like elasticsearch DA Davidson analysts say this makes it much more vulnerable the specific company to AI disruption. Take a look at HubSpot. It is among the hardest hit software names this year. Videos from OpenAI recently revealing an internal marketing tool that could challenge the company. Stock is down about 31%. And then there's the call center names NICE and Five9 that analysts say are becoming increasingly challenged by AI's advances. Salesforce out with new agents in the past couple of months that is going after this specific market market. And then there's mixed opinions on Adobe. While OpenAI's Sora can create these customized videos right. Analysts say corporations still need Adobe to then ensure those graphics can live across the work stream and help clients troubleshoot issues. Bottom line RBC Capital Rishi Juluria says earnings will give us the clarity on whether software names can really change this narrative. Morgan, which ones can share that they are making the advancements they need to get ahead of AI and other that could be challenged.
- [36:47]
Morgan Brennan
Yeah. And I guess in light of that and in light of some of the names we get reporting this week then I mean ServiceNow has been very loud and proud in terms of being able sort of to help lay the groundwork if you will in the infrastructure to be able to create this application layer for AI. So how much of the devil is in the details in terms of guidance and Outlook and the technicals that are laid out on the calls versus what we actually see in the results themselves.
- [37:10]
Seema Modi
That's a great point, especially with a company like ServiceNow recently coming out with this new AI agent platform similar to SA Salesforce. There's now so many companies in software, Morgan, that have these agents and I think at this point there's still proof of concept versus being deployed by companies. So the color on the earnings call to your point will be much more important than the actual numbers because at this point, no one really sees the future of profitability or it's not able to conceptualize future profitability at this point. We'll wait for what the CEOs have to say on the call.
- [37:37]
Morgan Brennan
All right. Seema Modi, thank you. It's good to have you here on set.
- [37:41]
Seema Modi
Thank you.
- [37:42]
Morgan Brennan
Well, coming up, sticking with tech earnings, Metta, Alphabet, Microsoft, Apple was also report this week. Up next, our trader reveals how she's positioned in those mega cap names ahead of results. Exchange will be right back. Welcome back to exchange. The MAG7 index is up nearly 2% ahead of a big week of tech earnings. Earnings, Alphabet, Microsoft, Metta, Amazon, Apple, those are all reporting this week. So which name should you buy and which should you avoid ahead of those prints? Well, let's ask Victoria Green, chief investment officer at G Squared Private wealth and a CNBC contributor. Victoria, it's great to speak with you. And I'm looking to do a little, you know, I don't know, tea leaves. Yeah, let's just, let's just go through here Wildfire. So I think maybe let's start with Google.
- [38:34]
Dan Clifton
Yeah. Google has to show and protect its search. They need to say, hey, I know TikTok's out there. Social media search is growing. Chat GDP is growing. We are protecting search. We're going to have 50 billion plus here. Like they need to show that they really have AI moving. They were a little slow considering what the markets thought about Gemini out, a few bumpy rollouts. They really seem to be hitting on all cylinders now. So yes, the expectations are high. We really want to see that. Google is saying, man, ise helping search, ise driving higher ad revenue and higher spend there and we're seeing better results. And we're not worried about people going to social media or to chat, GTP to search because we're better than them. And I really want that we're better than them at search attitude from Google on the call.
- [39:14]
Morgan Brennan
Okay. How about Metta, speaking of social media.
- [39:17]
Dan Clifton
Meta is going to be more of the same they're one of the best actual users of AI and you can see that with their ad revenue spend their ad growth, I mean it's all about ads revenue. That's 99% of their revenue. They are a large global firm so some of the things those have attitudes change towards Meadow as Mark Zuckerberg has obviously become a lot closer with Trump. We are expecting to see growth, are expected to user growth. I think you could see a massive quarter for them. I think you're going to see 50 plus billion, I think 51, 52 billion in revenue. Absolutely. And Meta has well and successfully defended against TikTok, they've defended against Snapchat and for me they're so well positioned in like one third of the entire global population uses some sort of metal family of brands app like every month. So to me they're a behemoth and I'll be curious about any commentary obviously Reality Labs, we'd love to see the burn rate there maybe drop a little bit. What are they spending on Capex? That's always the big question now is it a black, black hole or not? Is Capex constrained? You know he's talked about the, the AI spending arms race and lastly the Ray Ban stuff is pretty cool. What's happening with that? Is that a new, a new pathway of, of real revenue growth outside of ads? And so for us we're really excited about metal.
- [40:24]
Morgan Brennan
Yeah, the hardware to deliver the software. I think we see more and more of that type of trends playing out here as we look to next year and beyond. Microsoft, what are your thoughts there?
- [40:33]
Dan Clifton
Microsoft to me is a little bit more of a hold. I'm excited about Azure and we're going to see what they do there. They had a blowout quarter on that last quarter quarter. Stocks trading really high. Microsoft, there's a lot to like here. It's just a little expensive. Very, very high bar. They've had two consecutive strong Azure and cloud beats. We're going to need to see azure beating around 3840% total, cloud around 25% growth. I mean they are large numbers. Microsoft can certainly do it. They're well positioned. They've been raising fees on their subscription for Office365. They're a behemoth without a doubt. Wonderful quality company. Just a really high bar especially with what's Azure has done the last two quarters. They may be eating the lunch there and that's where they're picking up mar market share and certainly the total addressable market for cloud and cloud compute continues to Grow and they're a massive player there. But everybody's going to be so hyper focused on the Azure growth trajectory.
- [41:23]
Morgan Brennan
Okay, so if they're eating, possibly eating lunch here, then is Amazon a hold.
- [41:28]
Dan Clifton
To Amazon to hold for me, man, they've had a little bit of a messy quarter in my opinion. I think they're going to blow it out of the water. But they may have some issues with us. Obviously they had the outage last week. We're going to want to hear some commentary on that and I think us is a bit of a sticking point. We need to see it more towards 20% growth and I feel like they are at risk of losing market share. And so that one has been what the investors have been hyper focused on. I tend to say look more broadly especially with what's happening with ads because ads is now almost 10% of their revenue. ADS is no longer inconsequential to Amazon. And what they're doing with AI to, to drive the products, what they're doing with AI for ads, what they're growing with their media platform, with their subscription platforms. I mean I might not really like that 299 prime fee but I certainly pay it, you know. And so I look at this and this company is so much beyond us but that is where investors have been focused. I'm a little worried it might come in soft. I love this company but for this earnings to me is a bit of a risk potentially.
- [42:23]
Morgan Brennan
Okay. And finally the catch up trade here when we talk about these Mag 7 names. Apple.
- [42:29]
Dan Clifton
Yeah, Apple join the rally party.
- [42:31]
Morgan Brennan
Absolutely.
- [42:32]
Dan Clifton
And it looks like data coming out of China showed shows sales, showed that phone sales maybe grew about 14%. That's great. And their base phone is what's selling the most and that's still $800 a pop. You want to pro you're 1100. The base phones 800. If they are actually truly selling more and they're selling more in China and they've got a strong US market I see this as a stock that that's on the rise. Absolutely. Because they have pricing power, their ecosystem in their services. Don't forget about services, their subscription services. Apple TV just inked that new deal with Formula one. They've had some great content there plus we all play them for for little odds and ends either with music or, or cloud based services and storage. And so I see Apple is not only about the iPhone which we will be very focused on how is this selling and what is the holiday season look like but also what's, what's the scenes. What other products are coming out? AirPods refresh. You know, we've got the Mac, I think they've got a new refresh on that. And so we'd love to see continued sales growth there. It is going to be hyper focused on the iPhone, but there is a lot beyond the iPhone for Apple and a lot to like in there. And I think they're going to keep playing catch up on performance here. I'm pretty bullish on them going into this. Earnings.
- [43:39]
Morgan Brennan
Okay. Rapid fire. That was the term I was looking for before and we did it. We accomplished it.
- [43:44]
Dan Clifton
Rapid fire.
- [43:45]
Morgan Brennan
All right. Victoria Greene, your fire. Thanks. Thank you. Well, still ahead, Morgan, Huntington bank shares to buy Cadence bank in a deal valued at more than $7 billion. Now this comes just weeks after Fifth Third struck a deal with Comerica. We're going to dig into the names that could be next and there could be some that are next. That's when the exchange returns. Welcome back to the exchange. The third quarter was the busiest for US Bank M&A in four years. Years. Analyst Mike Mayo says the next 12 months present a window of opportunity for banks that, quote, want to pursue mergers of size. Leslie Picker joins me now with the names that could be next in line for deals. Leslie.
- [44:31]
Leslie Picker
Hey, Morgan. Yeah. There are plenty of reasons why that window is open now. Experts believe there will be fewer antitrust challenges and faster regulatory reviews. Additionally, the unrealized losses on bank balance sheet sheets have come down a bit, making them more suitable as acquisition targets. And of course, scale has become increasingly necessary in the quest for deposits and for absorbing the cost of things like regulation and technology. And that's why we're seeing more deals like today with Huntington announcing that all stock $7.4 billion takeover of Cadence bank shortly after its $2 billion purchase, a Veritax Cloud closed. We asked Huntington CEO Steven Steinhor earlier on Money Movers about the industry appetite to consolidate right now.
- [45:17]
Anchor/Host
Well, I think this, this administration not.
- [45:20]
Reporter/Correspondent
Just for bankings but, but, but, but constructive in terms of, of, of business and business generation. And I think you'll see a bit more combinations in the banking industry, but I don't think there's like a flood of things about to happen happen.
- [45:35]
Leslie Picker
Steinhauer added there's likely to be more banks that will combine. I asked if his bank would be one of them that would continue consolidating from here to which he said, quote, we have a lot on our plate right now. That's pretty understandable, Morgan. But there have been some analysts that have dug into at least the most accretive potential combinations that they might see. Jefferies did that kind of due diligence a couple of months ago where they said the most accretive combination would be a Valley national and Flagstar, to which they say it would be 21% EPS accretion if they were to combine. So you can kind of do the math and see who might be a good combination together. But obviously, given the state of things right now, there's a lot in play despite some of the turmoil we've seen in recent weeks, which again, could even provide an opportunity at better prices for, for some potential acquirers.
- [46:26]
Morgan Brennan
All right, Leslie Picker, thank you. Continue to keep our eye on the banks and on the financials in general. I'll see you all a little bit later today. Closing Bell Overtime, which kicks off at 4pm Eastern, will be on S&P 500 6800. Watch into the close. We're going to break it all down with Liz Ann Saunders of Charles Schwab. By the way, we have all the major averages trading at record highs right now. Plus we're going to talk to the CEO of Perpetua. This is the first company to receive an investment from JP Morgan's recently announced 1.5 trillion doll trillion dollar pledge to invest in industries critical to national security and economic resilience. This is going to be one to watch because we're talking about mining and materials. What else? As you're building out a domestic supply chain, that's it for us. Thank you for watching the Exchange. Power Lunch starts now.
- [47:12]
Dan Clifton
You've been listening to the Exchange. Make sure you're subscribed to get each.
- [47:16]
Morgan Brennan
Episode every day, same time, same place.
- [47:20]
Anchor/Host
The next Fed decision.
- [47:21]
Meyer Shields
With two more Fed meetings left this year, should we expect two more rates, rate cuts? How will the Fed navigate without key economic data?
- [47:29]
Morgan Brennan
Powell's message to investors.
- [47:31]
Meyer Shields
Power Lunch Wednesday, two Eastern and streaming on cnbc. Plus.