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Semis Suffer, Capex Concerns Crop Up, and Bullish Bets 7/24/26
00:43:59
Intel’s massive quarter not enough to boost chip stocks. AI spending concerns cropping up in both the equity and the credit markets--and that could be good for Apple. Plus, the bullish options action ahead of the busiest week of this earnings season.
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Brian Sullivan
You're listening to the Exchange. Here's today's show and welcome to the Exchange. Everybody. Happy Friday. I am Brian Kelly is off today. She will be back on Monday after a rough week. A pretty nice turn today, at least for the industrials. We are right now just at or near the highs of the day, at least on the Dow and the S and P, real estate, communications, consumer staples, some of the leaders, the MAG7 and the NASDAQ though, they're a mixed bag. Big earnings from intel, not enough to bring stability to a volatile trade. Apple and Netflix are higher. Tesla down again. Some good news around oil prices a little bit lower today, but Overall still up 20 bucks a barrel since the July 3rd low. What's not easing the price you pay at the pump. The national average now at $4.10, a 12 cent jump in just a week. All right. Hi everybody. We have got a big hour ahead and let's kick it off with your money and what may be a make or break week next week. Because not only is next week the busiest week overall for earnings, look at all those names that we're showing you there. It's also arguably the most important week for earnings because you've got Metta, Microsoft, Apple and Amazon all reporting. Oh, and by the way, you've also got a Federal Reserve meeting on Wednesday as well. And who knows exactly where the Iran war might be in just five days. Joining us right now to talk about all of it is Ellen Hazen, chief market strategist and portfolio manager at FL Putnam Investment Management. Ellen, it's good to have you on the program again. We're not looking past today to next week, but right now what are the most one or two important things on your radar?
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Ellen Hazen
Well, it's great to see you, Brian. Thanks for having me. So what we're looking at more than anything else is number one, AI Hyperscaler Capex, because that is still going up and that is driving so much of the economy and so much of those earnings estimates right now. And number two, of course, the price of oil and the degree to which that flows through to higher gas prices at the pump and then whether or not that ends up impacting the consumer hasn't happened too much yet. But those are the most important things we're watching. And of course the way we monitor those one way is just through earnings
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Brian Sullivan
estimate revisions and how those come in.
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Kate Rooney
So far earnings have been great.
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Ellen Hazen
So far we've had about a quarter of the S and P reporting. We've had 70% revenue beats 80% earnings beats. It looks like the earnings are going to come in at over 20% year over year growth, which is also going to set us up for over 20% year over year growth for the full year and even next year looks pretty solid as well. So so far so good. Still early days, but very happy with what we've seen so far.
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Brian Sullivan
You know, it's interesting because we've got three of your picks and I love getting these stock picks. I kind of colloquially call it Opportunity Friday. Why not? Two of them are directly tied to the consumer. You've got Brinker International. Ticker is Eat. Their main company is Chili's, the restaurant chain. And you've got Target as well. These are direct consumer names which I believe should be impacted by consumer spending and the price of gas. You obviously, at least not now, Ellen, not that worried.
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Ellen Hazen
I think that they're in fact, I would look at it the other way. There might be upside from here if oil comes down, if peace breaks out, if the hostilities decline and if gas prices come down. So I think that we're already pricing in a little bit of hesitancy. But if you look for example at Brinker International, they're growing earnings solid double digits, maybe even as high as 20% and it's trading for 15 times earnings. They're gaining market share. They're putting up over 6% comps. It's really hard to see how a stock like that doesn't work and any lower gas prices would be a Bonus. If we look at Target, they had four straight years of declining earnings estimates but in the last four months have started to turn up again as the merchandising has really taken off and you're seeing positive estimate revisions, very reasonably valued. And that's a franchise company that has a long history of management execution and it looks as though they're exiting their long winter.
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Brian Sullivan
I want to go back to Brinker for a second. You said lower gas would sort of just be a bonus. So even with gas where it is right now, Ellen doesn't sound like you're that concerned.
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Ellen Hazen
Of course we all want lower gas prices. But right now if you look at Chili's, right, that is a value casual dining opportunity for the consumer. And comps have been solid and as you look at their record over the last several quarters it's been beaten, raised, beat and raised. The traffic is there, the ticket is there. And so of course we would rather see the consumer in even better shape than are even in a neutral gas environment they are executing. I think that bodes well for the stock.
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Brian Sullivan
Yeah, you know what, and McDonald's hitting like multi year lows. You wonder if people are shifting to more the fast casual than fast food. We mentioned Target as well. I want to go on Target. No doubt. Gets a lot of its stuff from a rail company, a Union Pacific, another one of your picks. You think pricing power is finally back for a lot of these railroads? How come?
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Ellen Hazen
I'm just looking at the numbers, I'm looking at estimate revisions and I'm looking at what companies are saying on their conference calls. And finally pricing is turning around. So will it continue? Remains to be seen. But as we look at it again, rail is very oligopolistic. Generally good margins as long as you have pricing. I think the declines in coal volumes are long behind us at this point. So volume is okay and pricing is getting better. And of course that drops straight to the bottom line.
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Brian Sullivan
And again not trying to talk my book here as the energy person, but I would say that this is a diesel fuel in some ways related play as well. Higher fuel, lower margins, I think.
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Ellen Hazen
Well, well that's true, that's true. Of course it helps that we are energy independent in this country. So that helps a little bit with the fuel costs. But that's a, that's a risk. If we see brent go to 120 the way I think Goldman called out recently or even higher, then of course all of these are at risk. I don't know if that's going to happen, but I think that what we've seen over the last four months has been on again, off again, on again, off again. Right now oil's at the high. I think it's more likely to bounce down for a little while than to go even higher from here absent an escalation of the hostilities.
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Brian Sullivan
Okay, so outside of that, we got Brinker, we got Target, we've got Union Pacific. I love it. Next week, all the earnings we just referenced. Also though, the Federal Reserve Kelly and I will be in D.C. special two hour show on Fed Day on Wednesday.
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Ellen Hazen
Right.
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Brian Sullivan
I don't think we're going to get a rate hike, but what do I know? What do you think?
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Ellen Hazen
I think that I agree with you. I think it could go the other way. We could see a hike, but I don't think it's likely to. I think that so far what Chair Wash is attempting to do is to establish his inflation fighting cred. However, he has bought himself some time with these task force forces and the labor market looks healthy. So there's no reason to do anything because of that. And of course the key question is what happens with inflation. And one of the task forces is looking at inflation and whether or not we're measuring it correctly. There are arguments to be made that inflation might fade in the second half of the year. First of all, because year over year rent increases have already declined and that will be factored in. And also because the government is recalculating the PCE formula and that's going to just mathematically because of the adjustments caused PCE to decline a little bit. Personal consumer expenditures, which is of course the rate that the Fed prefers to look at. So I think that the most likely outcome is that they will give it some time. And I'm very much looking for an update on how the task forces are doing and when he expects to hear final results.
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Brian Sullivan
I guess no hike is the new cut. It kind of feels like where we are right now. Ellen Hazen, always love having you on. Thank you. Have a great weekend.
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Ellen Hazen
Have a great weekend, Brian.
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Brian Sullivan
All right. Thank you. All right, now let's hone in on the semiconductor sector because intel today down 5%, not getting any love at all for a big quarter company topping second quarter expectations. It reported its fastest revenue growth in 15 years and the stock is down almost 5%. Some of that weakness spreading across the group today. Broadcom, Micron, they are both lower. But remember folks, context is always key. And let's remember intel has already soared 161% this year. For more on all of this let's bring in Stacey Razgarn of Bernstein. Stacey, is that kind of the story? Listen, sales were great. I mean they blew estimates away, gross margin blue estimates away, stocks down. Is that just because it's had such a big year or something else?
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Stacey Razgarn
Yeah, it's maybe a little of both. And you have to, it's not just that it's down. It was up, you know, 10% or so in the aftermarket at one point. So it's like a 15 point swing off of where it was. And it was up that much at first because you're right, like the numbers were really good. It was actually a fantastic quarter on a reported basis. I actually think it's, it's two things that are causing this. It's the CapEx outlook and some other comments they made that I'll get to in a minute that relate. But Capex is going up. It's really funny because if you fundamentally believe in the intel story, Capex going up should be a good thing for you. They've been very clear they're not going to invest unless they think that they can utilize that capacity at a very high roi. And they took the Capex for this year up to $20 billion I think from up from 16 or so before, so 20 now. And all they said for 27 was it's going to go up like significantly in 27. So that's part of the problem. We don't know actually how much it's going to go up in 27. And capex stories in general, this earnings cycle of the hyperscalers and some of the others have not been all that rewarded. So I think that's part of it.
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Brian Sullivan
Well, let me stop there because I'm starting to feel a little bit like Yogi Berra. If you remember Yogi Berra where he said it's deja vu all over again.
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Jonathan Panikoff
Right.
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Brian Sullivan
I feel like we just talked about this, not you and I but on this network like yesterday with Alphabet where basically, you know, basically raised capital spending and the stock fell 5% but we kind of established other people that if they didn't they cut spending estimates it would have fallen even more. Like is there a just right level here, Stacy?
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Stacey Razgarn
Look, you know, at the end of the day, you know, investors, we want all the growth for free, right? Everything for free like that in the real world, like if you're going to grow you have to invest in at least Intel. Like if you go back a few years, intel was, was much more non conservative on their outlook. It was, they very much had an if we build it, they will come perspective. And that bit them. And you can see it on the stock charter. That's part of the reason it was trading where it was. The new intel under lip, the new CEO is much more cautious. They've been very clear that they will not invest if they don't think they can use that capacity. So the fact that they are investing does suggest that they, that they see a need for it. So that's, that's all good and fundamentally that's good. But at the same time, you know, investors are like, they want it for free and like the real world just doesn't work like that. They have to invest.
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Brian Sullivan
You know, that's a really, really interesting point. And listen, I'm not an analyst obviously, but I've been doing this a long time and you deal with companies and I'll say it if you don't want to, I would say that maybe the old intel got cocky.
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Stacey Razgarn
Oh, they absolutely got more than cocky. I mean like arrogant is absolutely the right word to describe how they were. Again, they've had a change of heart, I think on that. Like they're turning over a new leaf. The culture there is changing. But I mean, I think they clearly were arrogant. I mean, look, I think I use the words in writing to describe their history. I think I used the words fat, dumb and lazy at one point. And that's really.
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Brian Sullivan
There's no way to go through life, by the way. No way to go through life.
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Kate Rooney
Life.
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Brian Sullivan
I think that was a movie line. But do you like the new, quieter, a little more humble intel under the helm of LIP Bhutan?
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Stacey Razgarn
I do look like it's always better to under promise and over deliver. I think LIPO recognizes that. And you know, I even wrote this in today's note. And I've said this before, I made my career being negative on, on this stock. We're not negative on it right now per se. We're neutral on it from a rating standpoint. And I think I wrote this in today's note. I feel better about it than I have in a long, long time because again, you can kind of see what they're doing and they are executing and they've got some things going on. The market is working for them. I think they actually got lucky, frankly on the server upside, that is really helping them right now. But look, take lucky over good. I mean they, they were maybe due for a break. It's been a while and you take that. I also think the narrative is also working for them. The fact that supply Right now is very, very tight. It brings the foundry narrative back into play. Look, I'll be honest, customers are probably giving them a harder look than they ordinarily would because of the nature of the current supply situations. All those things I think are lining up for them. It is still a bit of a slog.
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Oliver Renick
Right.
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Stacey Razgarn
They've got a lot of work to do and they have not denied that at all. And I think they are trying to, you know, to under promise and over deliver against those expectations. And I think the fact that they are now putting the capex in place does suggest that they are kind of more positive about the trajectory. But you know, I'm not maybe in my heart of hearts, I'm not surprised with the reaction today either. I mean, it's going to be what it's going to be.
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Brian Sullivan
Yeah. And again, stock up 161% this year. It's had a heck of a run. It's made a lot of people a lot of money. Stacey Raz, got a Bernstein. Appreciate it. Stacy, thank you very much.
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Stacey Razgarn
You bet.
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Brian Sullivan
All right folks, hold on everybody, because we've got a news alert right now on Anthropic. K. Rooney, what's going on with Anthropic?
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Kate Rooney
So, Brian, Anthropic just released its newest AI model. The headline here is really about cost. Company claiming Opus 5, as it's called, performs within 0.5% of the best AI model that it's got out there, but about half the cost when you look at cost per task. This does appear to be anthropic response to growing complaints that we hear from CFOs, CEOs as well around the price of tokens and building on AI. It also comes as Anthropic now fends off new open source versions out of China, which the company has accused of copying its own technology. Anthropic product executive Diane Penn told us that the feedback company is getting from customers is more about value at this point. She said if it's just a cheaper model, it's not accomplishing a quality outcome. It's actually not useful. So she called this model a quote, daily driver for many enterprise customers out there. Anthropic does have the most expensive option out there on the market right now. There's also a wave of cost pressure coming for a lot of the giants. A lot of those are coming out of China. Brian, specifically, back to you.
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Brian Sullivan
Yeah. What do we make of this? First off, we get a lot of new models rolling out, but I think the question now becomes, Kate, when do these companies that are spending all the money, the alphabets, the world, the metas, the world. When do they make money on AI? They're spending hundreds of billions of trillions of dollars. When do they make it back? We want price increases, not cuts.
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Kate Rooney
I think the thing about Anthropic that's been interesting is its revenue growth and there have been reports, especially early this quarter, we have talked to sources who say that they were on track to turn a profit. So as far as making money on this technology, Anthropic has actually been seen as one of the leaders here and has had the revenue growth that just has not existed at any point in Silicon Valley. The thing about it is now that there's more cost pressure and more of a realization from a lot of CEOs that while anthropic may have the best model, they want to look to other cheaper versions. That's where the tension comes in and the threat comes in. Anthropic has figured out ways to monetize AI, but there are so many new entrants. This threat out of China. And also you mentioned big tech. Microsoft is one of the companies out there, Google as well that are trying to undercut on price. So they're seeing it from all areas. I should also mention this is an almost trillion dollar company that's going public at some point in the next 12 months. We're hearing and that's on deck.
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Brian Sullivan
Hey Rooney, I'm guessing knowing a little bit about K. Rooney that you use, you know, like Spotify and you know, stream a little bit streamer, every couple of weeks somebody's raising their price. Nobody's cutting prices.
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Kate Rooney
They are. Well, it's interesting. They are. Well if you look at streamers and tech in general, they're trying to raise prices to raise margins on, on.
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Brian Sullivan
I wouldn't be the same thing is my point, right? As it becomes more ubiquitous, raise the price.
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Kate Rooney
So we are as consumers, if you're talking to ChatGPT or Cloud, the price has been pretty stagnant, around 20 bucks a month for enterprises. They're really doing this complicated way of essentially charging enterprises and that's been where the rub is. I mean it's the most profitable area for these companies. That's where the cost discussion really actually happens. It's less on the, the monthly price that a lot of the average Joe's like you and I, Brian are paying for our subscriptions versus on the back end the power players, the heavy hitters, the ones using this for coding and you know, building companies on this are the ones that are dealing with the cost of what we call tokens. And that's really where I think the cost discussion is.
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Brian Sullivan
You're saying that the $20 a month that you and I pay like and a couple other 10 million more people, that's not going to. That's not going to do it. No, please.
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Kate Rooney
For these companies, I mean, OpenAI is a prime example of that. They are the leader in chat cbt. All of a sudden they decided, wait a minute, that's actually not enough to turn a profit. And they sprinted after enterprise and they're trying to diversify a bit. But the cost discussion, anthropics trying to raise price, lower prices, I should say, but also make it really nuanced. I keep using this analogy and forgive me, but the, the drive to the grocery store, you have a Ferrari, you maybe have a minivan. You don't need to bring the Ferrari to the, to the grocery store every day, even though I don't have a Ferrari. But if you did the best version of this tech would, you know, you
- [18:55]
Brian Sullivan
know, why is many that you wouldn't take the Ferrari to the grocery store?
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Seema Modi
Why?
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Brian Sullivan
Because unless you have a specific model, you wouldn't have any place to put the groceries.
- [19:04]
Kate Rooney
It's true.
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Brian Sullivan
A passenger seat, I guess, in your corduroy shorts and your Detroit Tigers hat. Kate Rooney, thank you.
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Kate Rooney
Good to see you.
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Brian Sullivan
All right, take care. Have a great weekend. All right, on deck. Tariffs. They are back. The president levying new duties on a bunch of trade partners. We'll get more details ahead. But before that, why is oil lower? Even after the Trump administration says more attacks on Iran may be coming, there is a reason. We'll talk about it coming up.
- [19:37]
Announcer
This is the exchange on cnbc.
- [19:43]
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- [20:08]
Announcer
This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Landsford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com MarketUpdatePodcast or find Schwab Market Update wherever you get your podcasts.
- [20:37]
Ellen Hazen
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- [20:54]
Brian Sullivan
All right, welcome back. Let's talk about oil and energy. Crude oil right now is down about 4%. This despite the fact that President Trump saying yesterday he is close to deciding whether to launch an even larger attack on Iran. It may have to do with a couple of things, hopefully some good ish news and calming chatter anyway around a couple things. Number one, the Red Sea, the market's hopeful, maybe the Houthis will not try to fully block the region. And number two, some chatter out there about the possibility for more mediation through Pakistan, about maybe another go at a peace deal or a deal to get a peace deal. Let's talk about what we know and what we don't know and bring in Jonathan Panikoff. He's director of the Atlantic Council's Scowcroft Middle East Security Initiative. Not really sure where to start, Jonathan, because it changes by the hour. I guess maybe that's where I'll start, which is asking you, where do you think we are at this hour?
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Jonathan Panikoff
Brian, great to be with you. Look, I think as you said, it's going back and forth and it's changing pretty consistently. I think there's kind of three things to look at. If Pakistan and there's rumors China actually may get involved as well, yes, that could help prompt new rounds of a negotiation. But the Iranians are going to start from the same place. And so that's going to make it very, very difficult when it comes to actually getting a solution on the Strait of Hormutz. I think there's a second chapter challenge of this right now that for the Saudis, especially Yonder, has been now how they've moved a lot of the oil out with the strait closed, if that closes and if the Houthis don't allow, frankly, Saudi exports to Asia, you're talking about huge time and costs increase. And I think we've got to calculate that. And then the third thing is really, look, I think there's some confusion and challenges within the Iranian system itself. They are clearly not united internally. And that's also going to be something that's going to have to be factored in here.
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Brian Sullivan
Yes, yes, I know somebody has been talking about that. I know I've been a broken record on this. Some people on Twitter like really keep saying the same thing. Tell us what we know, what you know, what we. I know there's a lot we don't know. That's what I'm. The only thing I'm actually convinced of is that I don't know everything and I'm not sure how this is going to play out. What do you think?
- [23:07]
Stacey Razgarn
Yeah.
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Jonathan Panikoff
So look, I think there's two possibilities that are kind of more immediate. One is yes, you could try to get to a temporary cease fire. There were some rumors that you were the Qataris were looking at a 10 day cease fire. I don't totally know what that would accomplish and I think it's a challenge and we haven't quite got in there. I think if there's something more holistic the question is going to be how does it come about? Does it come about because it's actually through force that President Trump tries to de escalate by escalating in the short term. I know that some people believe that that's a possibility and could work. I'm skeptical of that fundamentally because I don't believe it's going to change Iranian leadership thinking. I guess it would harden it. There's UK US meeting on a possible international maritime coalition that's going to happen next week. It's just been reported out that could be a possibility but you probably have to get the money is on board. That might be a creative outlet here. But I think ultimately at the end of the day this is still going to come back to some sort of diplomatic negotiation. Whether it's next week, next month or next year, you're still going to have to end with some sort of diplomatic resolution and that includes for the Strait and probably for Ron who's got to
- [24:23]
Brian Sullivan
be in that room to get that deal done. Okay, the U.S. israel and Iran have beef fighting. Right. People are dying. Okay, who's got to be in the room to get a real peace solution? My guess is you need China in there, you're probably going to need Saudi Arabia in there. Many the gcc, the Gulf Cooperation Council leaders. Who's in the room that could convince everybody to not fight?
- [24:52]
Jonathan Panikoff
I don't think there's a single country that's going to convince everybody not to fight, which is why you've seen these strange groupings that you've had already. So look, I think you're certainly going to need the Chinese who are the only ones with actual leverage. And for China, we know, look, demand slowed from China. It helped keep oil prices lower when you combine that with their reserves of what they had. But if this continues for another six months. That bulwark is going to start to fade as well. And so China has greater incentive here now to actually help to try to influence Iran. At the same time, the Gulf is very, very frustrated. You're going to need probably the Saudis to at least be represented in some way, whether it's directly or through Pakistan, through the Qataris. And then, yes, look, the Israelis are not going to be in the same room with the Iranians. It's just not going to happen. But the US Is going to be in there. And the problem is for the Iranians, they don't trust that the Israelis are not going to strike again, even without US Permission six months from now. And so I think the meeting between Prime Minister Netanyahu and President Trump next week is also going to be pretty important here to see how we go forward.
- [26:02]
Brian Sullivan
Yeah, listen, there's a lot of stuff happening in the UN Here in New York and let's hope that actually the UN can get something done. Maybe we get, we get Iran, Israel, maybe actually something can get done. The world is hoping for peace. Jonathan Panikoff, Atlantic Council Jonathan, thank you. Have a great weekend.
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Jonathan Panikoff
Thanks so much.
- [26:19]
Brian Sullivan
All right, coming up, we're going to go back to earnings because we are gearing up for a big week of super duper cap earnings. But we'll get a look at it from a different side. What does the options market say? Oliver Renick knows and he's coming up.
- [26:37]
Discover Advertiser
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- [27:03]
Announcer
This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com Market Update podcast or find Schwab Market Update wherever you get your podcasts.
- [27:31]
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- [28:15]
Seema Modi
Welcome back to the Exchange. I'm Seema Modi with your CNBC news update. Wisconsin voters are suing to protect absentee ballots delayed in the mail. The lawsuit asks a judge to let voters cast provisional ballots on election Day if their mailed ballot has not arrived. Right now, Wisconsin absentee ballots must be received by poll closing to count. Sean Diddy Combs was reportedly sent to solitary confinement after a fight with another inmate at Fort Dixie in New Jersey. No word if he was injured during the altercation. Combs is serving a 50 month sentence after his conviction on prostitution related charges. And the wait is over. LeBron James is reportedly heading to Philadelphia. The NBA's all time leading scorer is signing with the 76ers after eight seasons with the Lakers. The deal would mark one of the biggest player moves in recent NBA history. Brian, big news. Back to you.
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Brian Sullivan
It is taking his talents to Philadelphia.
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Seema Modi
Yeah.
- [29:07]
Brian Sullivan
All right. We'll see what happens if that changes the Sixers odds. Siva, thank you very much. All right. Still ahead, we're going to take a pretty deep dive into the tariff impact on the oil markets and the ripple effects on Wednesday's Fed decision. Will they raise rates? Will they keep them the same? Will there be more talk of lowering rates? We'll talk more about that coming up. All right. Welcome back to the Exchange. And guess what else is back? Tariffs. The Trump administration imposing new tariffs on dozens of countries overnight. This as the temporary tariffs expire. Listen, we know it's difficult to track all this stuff, so we are doing most of the legwork for you. And Eamon Javers joining us now with the details. The legwork and a bit of news as well. The graphic says Eamon.
- [29:55]
Eamon Javers
That's right, Brian. Before we get to the tariffs, the president just taken to social media just a couple of moments ago and he is going after the European Union. He is very critical of fines that they have put in against Apple, Meta, Amazon and others. Now he says we've just been informed that Google has been fined another billion dollars. The president says the United States of America is not a piggy bank for Europe, nor will we allow it to be. Please let this truth serve to represent that. We will immediately initiate a 301 investigation into the practice of robbing American companies And in turn, the American taxpayer. The President going on to say here, the European Union will pay a very big price for this illegal and highly unethical conduct, which I have consistently warned them about. So the President, venting some frustration here about these fines against American tech companies, says he sees the Europeans treating American tech companies as a piggy bank. And he's going to launch a trade investigation about it. And that's how he got to these tariffs. A trade investigation ultimately ended up just a few hours before those 10% global tariffs expired. Overnight, the White House announced the results of its trade investigation and a new round of tariffs that will effectively replace those worldwide duties with a new set. Now, this new round of tariffs announced last night that went into effect overnight applies to the top 60 U.S. trade partners and covers 99.4% of U.S. imports. But it's not clear how much revenue it's going to generate. The office of the U.S. trade Representative says it can't provide an estimate that for us. These new tariffs are being imposed under section 301 of the Trade act of 74. This is one of several trade authorities that the President has used during the course of the second term. These tariffs, they did take effect at 12:01am this morning. They imposed duties of 10 to 12.5% as a result of what the U.S. is describing here as concerns about forced labor practices in these markets around the world. A senior administration official tells CNBC, these Section 301 tariffs will not stack on top of existing 232 tariffs. And this announcement, guys, obviously it marks this administration's latest tariff action after suffering this major legal setback earlier this year. We saw the Supreme Court largely strike down the President's reciprocal tariffs. Then we had these temporary tariffs. Now we have this to replace the temporary tariffs which had to expire today. So you can see the administration, you know, putting into place whatever it can to keep that tariff moat up around the United States.
- [32:24]
Brian Sullivan
Okay. And then just to be clear, because there's the 301s and the 232 and the 517s. There's numbers everywhere.
- [32:30]
Eamon Javers
Yeah.
- [32:30]
Brian Sullivan
So to go to. So basically those are. That was happening today, but now moments ago, you've got the EU and they've been fining American companies for years. It's not some new thing that they, they don't like something. They find it.
- [32:43]
Announcer
Right.
- [32:43]
Brian Sullivan
But it sounds like the President doesn't like it and he's sort of semi threatening to go back after Europe economically because they're whacking Google with A fine.
- [32:52]
Announcer
Right.
- [32:53]
Eamon Javers
And he's threatening to launch another one of these so called 301 investigations. What that means, Brian, generally under the statute, there's a time period where this investigation has to take, I think it's 90 days or sometimes 180 days. It can be a lengthy time. There has to be a process followed and at the end, a report written in which the investigators decide, you know, was this thing a violation of trade law or not and should we then impose the tariffs and then it's up to the President to impose the tariffs if he wants to or not. That's the statutory process for imposing tariffs. That's what the President wanted to get around, by the way, with that whole Supreme Court decision. What the President wanted was to be able to immediately slap tariffs on just by his say so. He didn't want to have to go through this long and convoluted process. But what you've got now is the United States going through this process sort of simultaneously on several different issues so that these things will mature over time. And the President then will then have that authority to use if he wants in the future. Once those investigations are done and the reports have been written up, you know, critics will say, look, it's coming to a foreordained conclusion here. The President is just using these things as a pretext to put tariffs in. But he's going through the legal process and they feel in the administration that'll make it more bulletproof for any future legal challenges.
- [34:10]
Brian Sullivan
I'm glad you're on it, Eamon. I don't think I keep up. It's a lot of work.
- [34:14]
Eamon Javers
Yes, you could, Brian.
- [34:16]
Brian Sullivan
I don't know. Eamon Javors, appreciate it. Thank you very much. All right. Joining us now to talk about this in the macro economy is Jeff Korzenik, chief economist at Fifth Third Commercial Bank. We're talking about the Fed talking about all this stuff. I get it. But Jeff, I'm going to ask you, any economics or economists reaction to the news you just heard?
- [34:34]
Jeff Korzenik
We found it not too productive to react too quickly to the President's tweet, tweets and statements online. Better to wait and see. As your reporter noted, there's a process in place here. We'll let the process play out.
- [34:47]
Brian Sullivan
Has there been a huge macro negative economic impact either way, good or bad? I guess from the tariffs that we've had?
- [34:57]
Jeff Korzenik
Not really, but we do think it's significant in that it's part and parcel of what we've been talking about for some time at Fifth, third, this is a structural economic environment in the United States that doesn't lend itself to the fed meeting its 2% target. The thirst for globalization that we saw in the preceding decade that helped was one of several factors that helped dampen prices and kept inflation so low, low in the preceding decade is no longer present. So there. It's not an accident that the Fed has failed to achieve its 2% target for over five years. There's something structural going on in the United States and in the global economy. Part of that is a loss of desire for globalization.
- [35:38]
Brian Sullivan
We keep hearing that the Iran war and the rise in energy costs, not just oil, but all the refined products and everything, kind of the trickle down helium, things like that. Those are inflationary. We hear that all the time that this is impacting affordability. If that's the case, and I believe it is, if that is the case, then, Jeff, if that goes away, what then? Because if I'm the Federal Reserve, I'm thinking, well, how do I make a policy decision on something that might be, I don't want to say transitory, it's a bad word, but temporary.
- [36:16]
Carl's Jr. Advertiser
Yeah.
- [36:17]
Jeff Korzenik
We've also learned not to put the words transitory and inflation into the same sentence.
- [36:21]
Brian Sullivan
That was a mistake a couple of years ago.
- [36:22]
Jonathan Panikoff
Not by you.
- [36:23]
Stacey Razgarn
My.
- [36:23]
Jeff Korzenik
Yes, yes, I understand. I think it's important to note that the Fed's core measure excludes energy prices just for this reason, because of the variability of it. Plus, energy prices are something that doesn't really lend itself to solving through monetary policy. So we believe the wash Fed is going to try at least very hard not to focus on short term moves in the energy market. We believe that they would prefer to wait for their task forces to conclude their business and issue their reports by year end before they make any change to policy.
- [36:59]
Brian Sullivan
What would you do if you were on that Fed panel?
- [37:02]
Jeff Korzenik
I would, I would wait.
- [37:04]
Brian Sullivan
I actually cry and maybe skip the meeting. I'm joking. Yeah.
- [37:08]
Jeff Korzenik
You know, I'll tell you, we've talked about this before on, on this show. We think the Fed probably has the wrong target and it's very hard to back out at this point because Fed Warsh has inherited this target. But if I could go back to say the 90s or the Greenspan Fed in the 80s we didn't have hard targets. This is something new. The 2% hard target was put in in 2012. That was to address a deflationary environment. That's not where we are today. Doesn't mean you let runaway inflation go, but it means that you can be a little bit more flexible and have a 2ish target rather than a hard 2 target. That's what I'd do if I were on the panel.
- [37:47]
Jonathan Panikoff
Yeah.
- [37:47]
Brian Sullivan
And you know, we're the only country major, I guess industrialized nation in the world that has the dual mandate targets. Most Feds just focus on inflation. They don't really focus on jobs. Should we do that? Should we change that, we kill that second mandate?
- [38:04]
Jeff Korzenik
You know, it's tempting, but I think that's not going to happen. So to be pragmatic, we do have to accept that. I do think that the Fed is going to be forced to do some tightening next year, not just because of inflation issues, but a tightening labor force. One of the dampening factors last decade that kept inflation so low that's not present is we had excess labor last last decade we patched a demographic problem with open borders from 21 through 24. That policy has changed. So we're starting to feel a tightening of the labor market with very little job growth. You're seeing the unemployment rate come down. We think that's going to continue and that's going to be a challenge for the Fed as well.
- [38:46]
Brian Sullivan
All right, well said. Jeff Corzen, leave it there. 5th 3rd Commercial Break J. Jeff have a good weekend. Thank you very much.
- [38:52]
Stacey Razgarn
Thanks.
- [38:52]
Jeff Korzenik
Thank you.
- [38:52]
Brian Sullivan
All right, coming up, it's not just the Fed meeting next week. You've got a huge week for tech. Apple, Amazon, Microsoft, Meta, all reporting their numbers. What's the options market saying? Oliver Renick has that next. All right, welcome back. You got earnings out of Tesla and Google this week. Week next year's even bigger. We're going to get earnings. Next week is even bigger. We're going to get earnings out of four big names as well. We just named them. We won't name them again, but we will name Oliver Renick. He's at the cbo. He is tracking the options trades ahead of those results. Oliver, good to see you. What's the options market saying?
- [39:36]
Oliver Renick
Likewise, Brian, Traders are looking more optimistic in options about Mag 7 earnings next week as the stock market holds its ground today. In particular, we see similarly bullish options flows in Microsoft down 20% on the year, as in Apple, up 20% and near highs as we speak. The key difference is there's almost one and a half million more options traded in Apple, over a million of them calls, with twice as many calls bought as puts and call volume running more than twice its daily average right now. Options currently imply an almost 4% move for Apple after earnings much bigger than the average 1% swing the past year. What's interesting about Microsoft is that the top four most popular contracts expiring next Friday are all calls. The two most popular are the 435 and 430 strikes, which need more than a 10% rally to pay off. There's also a lot of zero DTE float in all the Mag 7 right now, Brian.
- [40:35]
Brian Sullivan
All right, so how do we those numbers we're looking at the figures, I get it. Is there one that we could point to and say, wow, the market's really seeing some huge potential moves here or are they're all kind of in the the same mag seven sack, if you will?
- [40:53]
Oliver Renick
No, I think that's a very fair point because this market has seen a lot of different stocks going in different directions. I think of all the of of them, it's Apple because number one, it's outperforming as the market has been struggling here. Usually the stock market doesn't drift too far southward when Apple is breaking out, and it's almost doing that. So you combine the chart with the implied move of 4% right now, that's way bigger than Apple usually moves. So with the momentum behind it, if you get that implied move to the upside, Brian, I think that's a pretty big boon to bulls at a time when we could use it.
- [41:23]
Brian Sullivan
All right, good stuff. And I know we're going to keep you busy as well next week. The options options market is very busy these days. Oliver, thank you very much. All right, coming up, as we count you down to power lunch, how capital spending concerns are counting outside of just stocks. All right, welcome back. In the olden times, that is like a few weeks ago, a company was usually rewarded when it raised its capital spending spending. But as those numbers keep going up and the companies issue more debt to pay for some of that, some investors are getting a little bit jumpy. And that might give the company, widely seen as an AI laggard, a bit of an edge. We've got both of those angles as part of today's Tech check. Sima Modi tracking just where those concerns are showing up in the credit markets. Mackenzie Segalos looking at how Apple sort of anti cap ex bet is gaining momentum. Seema, we're going to start with you. Talk to us about the debt side.
- [42:28]
Seema Modi
Well, what's clear, Brian, is investors are getting increasingly uncomfortable with the amount of capital needed to make their AI dreams become a reality. And it's playing out real time in the bond market where the biggest names involved in the artificial intelligence build out. Think about Google, Amazon, Metta. They're seeing their credit spreads widen. So in other words, fixed income investors are demanding more reward to lend to these companies that have all raised their spending targets in the last few months and are on track to collectively spend more on capex than they generate in free cash flow by next year. Mizuho writing this morning that investors are starting to ask where the limit is. And just today the FTSE reporting that bond investors are requiring a 7.5% rate to finance Meta's 1 gigawatt data center in Texas. Brian, that's higher than previous projects. Projects. And just to gauge how concerned bond investors are getting about CapEx, you got to watch Oracle's five year credit default swap, Barclays writing that it's no longer just trading on company fundamentals but sort of seen as a liquid hedge on concerns tied to capex spending and yes, its reliance on open air.
- [43:32]
Brian Sullivan
And we've got that chart up right alongside you see, I don't know if you have a monitor there, but we know the credit default swaps which we talked a lot about in 2007, 2008 and 2000, 2009, when they go up, that tends to be a bad thing. Right? Up is not good when it comes to seed, it's good when it comes to stocks. But CBS is going up means risk is rising.
- [43:51]
Kate Rooney
Yes, exactly.
- [43:52]
Seema Modi
The cost to insure against the prospect of a default rises. And that's exactly what is being telegraphed in this chart. You know what's so interesting Brian, is when the investment cycle kicked off, hyperscaler bonds and as well as Oracle were seen as an attractive bet for fixed income investors. For most of these companies they're investment grade. Take a look at Microsoft. Microsoft, better rating than the US government. But now as you point out, the CapEx targets continue to get raised. Wall street has questions about just how much more they can tolerate and how that's going to impact their balance sheet. I'm very interested 12 months from now, Brian, what these balance sheets look like and how much debt they take on.
- [44:28]
Brian Sullivan
Yeah, usually when charts go up like oh it's a good thing, but not cdc like if your car insurance or home insurance rates go up, not a good thing, it means your perceived risk is higher. CDS the same way. Seema, glad you're on the story. Thank you very much.
- [44:41]
Ellen Hazen
Much thank you.
- [44:42]
Seema Modi
Thank you.
- [44:42]
Brian Sullivan
All right, let's turn now to part two. MacKenzie Seagalas with how Apple's approach to AI spending might actually give it a leg up Because I guess in this case if the chart goes down less spending, some people are happy.
- [44:57]
Mackenzie Segalos
Exactly. So you've got Apple heading into earnings with its anti capex strategy, really gaining fresh validation as these Chinese open source models show that companies companies don't need frontier level models to win in generative AI. Now, after years of taking heat for moving too slowly with its AI strategy, Apple's virtually nonexistent infrastructure spending is now working in its favor. Alphabet beat nearly every measure of the return on its AI spending and still had its worst day in three years, dragging the broader hyperscaler group lower on Thursday as investors focused on how much more cash the build out will consume. The group is now on pace to spend 800 billion on infrastructure this year, another 1.2 trillion next year. But Apple, it's tracking toward 14 billion in capex for all of 2026 and has returned more than a trillion to shareholders since its capital return program began. That makes Apple the clearest alternative among mega cap tech to the infrastructure trade. Its capex was below 2 billion last quarter. That is 4% of what Alpha Bet spent in Q2 and it's used as playbook. Before Apple outsourced search to Google, collected billions for the distribution and then avoided the cost of building a rival search engine. And now it's doing the exact same thing. And I relying on Alphabet for the models and heavier cloud workloads, then distributing that tech across more than two and a half billion devices and monetizing it through hardware and services. And that Capital Light model, a big reason the shares are up more than 30% since March.
- [46:26]
Brian Sullivan
Brian, everybody's then selling their own model, right? Or Capital Light. That's a good thing. Other companies are capital heavy, that's a good thing. Everybody's trying to get the investor interest on what they're choosing to do.
- [46:38]
Mackenzie Segalos
And Apple said hey, we're open to whichever model works best. So in the case of Gemini, they're actually, it's the only sanctioned use of these outputs from Gemini, something that we've been talking about distillation. It's actually sanctioned in the case of what Apple, Apple is doing and then in China to make sure that Apple Intelligence can be used in devices in that market, they're opening it up to Alibaba models and Baidu models. And that's the point Apple realized pretty early on they don't need a 2 trillion parameter model in house in order to win at generative AI. They just need to open up Apple Intelligence and Siri to whatever tech is most competitive and can be competitive on
- [47:11]
Brian Sullivan
pricing capital spending on GLP1. Mackenzie Sagalos thank you. Appreciate that, folks. Folks, thank you all for watching the Exchange markets mostly higher. I'll join Contessa Brewer for Power Lunch right after this.
- [47:26]
Seema Modi
You've been listening to the Exchange.
- [47:28]
Brian Sullivan
Make sure you're subscribed to get each
- [47:30]
Kate Rooney
episode every day, same time, same place.
- [47:33]
Announcer
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