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U.S. Blockade, China's Role in Iran, and Bank Earnings Underway 4/13/26
00:44:00
Oil prices spike as the blockade of Iranian ports begins. As Trump threatens 50% tariffs on China for a reported arms sale to Iran, The Council on Foreign Relations' Charles Kupchan says the Chinese are enjoying every minute of the conflict as it distracts the U.S. and fractures its relationship with NATO. Plus, Goldman Sachs kicks off bank earnings.
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- [00:01]
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Leslie Picker
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- [00:59]
Leslie Picker
You're listening to the Exchange. Here's today's show. Scott, thank you. Welcome to THE Exchange. I'm Leslie Picker in for Kelly Evans Today, Stocks paring losses at this hour but still not making much headway with the president confirming a few moments ago that a U.S. blockade of Iran's ports is now in place. The Dow the relative underperformer, Goldman Sachs, a big reason why. And more on that ahead. Software rebounding today. Today, the IGV software ETF up more than 4%. Oracle leading to gains up 10% and on pace for its best day since last September. And we're closely watching the price of oil as we do every day now. Crude had been up as much as 8% to $104 a barrel earlier, but now back down, hovering right around $100 level. And Iran is where we start with the president addressing reporters at the White House a few moments ago. Megan Casella is live in Washington with the latest. Hey, Megan.
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Megan Casella
Hey, Leslie. That's right. President Trump telling reporters just a few minutes ago that the US has heard from the Iranians this morning and that the Iranians want to make a deal. The president, speaking with reporters, sidestepped a question about whether another round of negotiations was planned. He said only that the US had gotten a call from what he described as the right people. News of it, though, comes less than three hours after the US Began blocking all maritime traffic entering and exiting Iranian ports and coastal areas. So here's what we know about that blockade. It will be enforced in the Gulf of Oman and Arabian Sea east of the strait of Hormuz. U.S. central Command says that any vessel entering or exiting the blockaded area will be subject to interception, diversion and capture, but the US Will not be impeding neutral traffic to or from non Iranian destinations. That said, though, the Iranians will be An Iranian military spokesperson saying in response to the US Actions that if Iranian ports are threatened, then, quote, no port in the Persian Gulf and Sea of Oman will be safe. But for now, Leslie, the fragile cease fire does remain in effect. Both sides, though, are suggesting a willingness to return to military action if necessary. Before he spoke with reporters, President Trump this morning was warning that any Iranian ships that come anywhere close to the blockade will be immediately eliminated using the same system of kill he says that we use against drug dealers on boats at sea. Now, a spokesperson for Iran's Ministry of Defense later said that any military intervention by foreign powers in the security of the Strait of Hormuz would escalate the crisis and instability in global energy security. Leslie, so much more to watch here, but at least some news that the two sides are now in touch.
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Leslie Picker
Yeah, it seems very tenuous indeed. Megan, what happens here in terms of next steps, assuming that things don't worsen and escalate?
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Megan Casella
You know, we don't know. For all the action over the weekend, there wasn't any update to the timeline. The cease fire as of now is set to expire next Tuesday, the 21st. The President was asked if there was another round of talks planned. All he said was that the other side wants to make a deal. He was asked what happened if there wouldn't, if there weren't any sort of deal reached before the end of the cease fire. He said he didn't want to comment on it, but that it would just be very unpleasant for the other side. There has been some reporting from the Wall Street Journal and others about whether the president was looking into military actions potentially before the end of that cease fire. No confirmation from the White House on any of that. The last most concrete thing we heard from the president himself was in a Sunday interview he did sort of renew threats on Iran's infrastructure if there weren't any sort of a deal reached. So they're kind of preserving their options and we just don't know yet if the diplomacy or military will be the next step forward.
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Leslie Picker
Yeah, yeah. The potential to escalate militarily versus, you know, continue these diplomatic talks. Megan, thank you. Meghan Casella, for us, crude coming off the highs and now below $100 a barrel in March. My next guest said the Ongoing loss of energy supply to the global economy is so large that it simply must be solved either militarily or diplomatically. And he expected that it would be done by mid April, which is. Yeah, today. Now. Well, we are in mid April, talks have failed and a blockade is in place. So let's ask him how that timeline has changed. Let's bring back Citi's global head of commodities research, Max Layton. Max, thanks for being here. So it is mid April. At this point in time, the two sides still seem to be pretty far apart on the major issues. What do you think ultimately gets them over the finish line, especially given, as you mentioned, the necessity of the world's oil supply and the ability to traffic through the Strait?
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Max Layton
Yeah, I mean, in some ways they seem pretty far apart still, but it's possible. You know, President Trump talked about it today. It's possible. And the fact that they met both sides, US and Iran or the regime met with the US delegates over the weekend, it suggests that after facing the kind of worst possible escalation, which was mutual energy infrastructure destruction, that both sides didn't want to go there. That, that, that meeting itself kind of suggests that. I wouldn't say the worst case is off the table because we could certainly still go there. But, you know, with facing that, both sides meeting this, this, that we're heading towards a deal of some sort. Having said that, it hasn't happened yet. Both sides weren't ready to make the deal over the weekend and now we have kind of like a mini escalation at the moment, a testing of the ceasefire. Both sides seem to have different takes on exactly what was agreed on the ceasefire. And I haven't seen anything written down. So, you know, we're kind of testing that cease fire at the moment. But, yeah, look, the good news, I guess is, and the equity market seems to be looking at that good news side of the coin, that the kind of mutual energy destruction scenario is neither side wants that.
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Leslie Picker
So how then are you handicapping the likelihood of a major escalation, especially in light of the reports that say that the US side at least just preserving all optionality on that front, the Iranian side as well, given that talks did take place, you know, do you still think a potential escalation is a tail risk at this point?
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Max Layton
So, yeah, our central case scenario near term is that things are escalating in a moderate way. And then we have like a bull case scenario which is that they remain, that the disruptions on the Strait remain for months, or we have the kind of, the Worst case, mutual energy destruction in the region, the base case. Both of those scenarios are bullish and we put an 80% probability on them in total. So 50% central scenario, 30% bull case. So near term, we're kind of set up that this gets worse before it gets better. You mentioned at the start that we said that we were expecting it would get better, central case by mid April. We kind of extended that to mid to late April. So we've got a couple of weeks in this central scenario still. And yeah, look, it's still the base case that, yeah, we go it gets worse before it gets better because moderately higher. We've got it going to 120 on Brent front month contract in the next. Well now in very near term of next week or so. And then the situation improved significantly. But, you know, we're certainly not out of the woods yet. And I would say, you know, we're still very concerned about the situation.
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Leslie Picker
How are you thinking about which side has the leverage at this point in time? Because you think about just the overall policing through the strait and all it takes is one of the actors to say, no, we're not going to let this happen and no one's going to move forward if they can't ensure their own safety. So, you know, what does that mean for just the overall picture of leverage to get through this, to get through the diplomatic talks and come up with some sort of a resolution here?
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Max Layton
Yeah, the move to blockade the strait is an attempt to gain some leverage over Iran. And I think the administration has been, I mean, we don't know what's going on behind closed doors, but publicly been pretty clear in saying that one of the core objectives or one of the most important is the nuclear situation. So I think some further give on that from Iran and, you know, some, some further give from the US and we can have a deal. I think that's what this leverage is trying to create, whether or not it works. I mean, it's just super difficult to call. It's super, super difficult.
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Leslie Picker
Absolutely. Well, we'll look forward to the next two weeks. Hopefully that leverage comes front and center and there is some sort of a resolution here. Citi's Max Layton, appreciate your time today.
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Charles Kupchen
Thanks.
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Leslie Picker
Let's turn now to the markets. With stocks recovering losses as the major averages all turned positive after those comments from the president. But my next guest says the risk to the markets is still to the downside and it's okay to be late to the rally. Joining me now is David Hardin, CEO and chief officer at Summit Global investments. David, it sounds like you believe there's some asymmetric risk at play here. Why do you think it's more tilted to the downside?
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David Hardin
Well, Leslie, thanks for having me on the show again. I appreciate being here. The market is always able in the long term, I think, to climb many walls of worry. But in the short term, there's a lot of volatility and there's a lot of risk on the table. And so I think being in the right stocks and having the right combination of stocks, holding the ones that make sense and have high profitability and high earnings, probably a good play, and getting rid of those that are creating more volatility in your portfolio is what you want to do here. So managing risk is key in this
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Leslie Picker
environment, but it does still feel like the path of least resistance, assuming no bad news, is to the upside for equities. Is that a fair characterization of sentiment?
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David Hardin
I think there's some really good equities out there that you could pick through and say, absolutely. As a whole, it doesn't mean that you're out of your equities, it just means that you need to manage them better. I think you need to have a protection side in your portfolio. Not overly defensive, not all defensive, and certainly not all out of the market. But you need to manage risk. And that's really, really key for investors. Investors, let's face it, downside returns or negative returns hurt way worse than upside down.
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Leslie Picker
Absolutely. So what specific stocks do you think fall into that characterization, both in protecting the downside and then how would you balance a portfolio or hedge a portfolio amid all of this volatility?
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David Hardin
So first, you know, I think the cease fire, just going to that real quick, is something that we definitely should pray for, but it doesn't seem inevitable. And so having that in your back pocket and knowing there's some volatility that's still going to play out, I would look for a company like Microsoft is a really good company that has, I would think, very high quality earnings, high profitability. It has a low PE right now around 22. It's off significantly from its highs. And so over a three to five year, its average PE has been about 33. So I think its earnings yields around 4% plus. This is a company that where, if you're looking for some, it's already off its high some, you know, ability to kind of weather the storm. The this is a company I would look to right now in the portfolio
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Leslie Picker
and in terms of portfolio allocation, you know, obviously you've got the commodity side of things with, with energy continuing its move higher, how do you think about just the current geopolitical environment and setting aside an appropriate asset allocation?
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David Hardin
Well, definitely I think that the environment's very volatile and we said about a month ago that people should have some exposure to energy because if things go really bad, energy is going to continue to go up. So it's right now acting in some ways as a counter market to the volatility that's out there. The risk is though is that there's downside there and if the ceasefire holds and things happen and your prayers are answered, then hey, we have a lot of opportunity to get out of energy. That's why I think from an asset allocation perspective you do need to have some still definitely for long term investors and even midterm investors allocation to equities. And in your equities, I would say one of the stocks that you have to have a little bit of risk on the table is Micron. Micron's a stock that's off today. It's a stock that's been off its highs but its growth rate of over 300% earnings per share growth rate is tremendous. Its PE is still around 7. This is a stock if you're going to take some risk in your portfolio and have some equity exposure and maybe want to play with a little bit of your money, that's a trade that's worth, worth looking at.
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Leslie Picker
All right, David Hardin with Summit Global Investments, thank you so much for your time today. Coming up, Goldman Sachs lower despite a beat on the top and bottom lines but posting big declines in one division and that's hitting sentiment. The details and what it means for the rest of the banks on deck report plus Microsoft the standout gainer in the mag 7 today open air throwing some shade at the tech giant but Bernstein still calling it one of their favorite air names. The analyst joins us to make his case. The exchange is back after this.
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- [16:31]
Charles Kupchen
If you take a very tough cycle. The global financial crisis, the cumulative default rates across the entire leverage lending space, the entire leverage lending space during the global financial crisis was 10%. Recoveries were about 50%. So the cumulative loss was 5 to
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Ibrahim Punawala
6% against coupons of 9 to 10%.
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Charles Kupchen
And so that is the business model of this.
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Ibrahim Punawala
I think institutional investors understand that.
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Charles Kupchen
You know, I think there's going to continue to be, you know, some noise around, you know, around, you know, the retail space.
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Leslie Picker
I think you should watch that carefully. That was Goldman CEO David Solomon answering the question our next guest had on the bank's earnings call about private credit and what the recent turmoil means for the firm's growth outlook. Joining me now is Ibrahim Punawala, head of North American Banks Research at B of A securities. Ibrahim Abraham, Good to have you here. And I wanted to start with private credit. I thought your question was a really good one because it has kind of taken over at least this call expected to be a big topic of conversation on the banks that have yet to report. How do you think Goldman is impacted on a go forward basis because they have financing two private credit funds. They are affected obviously by the private credit funds that they have in their own portfolio as well as the broader capital markets and the sponsor space and ensuring that that flywheel gets turned on. So you know, how do you think the executives answered questions on the calls and how are you feeling on the call and how are you feeling about the go forward basis with Goldman and as it pertains to private credit?
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Ibrahim Punawala
Leslie, good to be with you. And so I was talking about this walking in to speak to you ahead of this. I do think they did a good job. Means I think again, credit cycles are credit cycles. You can't run away from them but I think David did a great job I think contextualizing what it means, what the debates are in the market around private credit. I know you've spent a lot of time covering the space in the last few months and I think in terms of what's a liquidity issue versus a credit quality issue and how some of the the asset class has performed through different cycles including the gfc, I do think again you can't run away from it. As you rightly pointed out of all the stocks we cover I think Goldman probably has the most attached points to private credit beat sponsored activity, their own fixed financing business as well as their own private credit business which honestly is could be a market share gain opportunity for Goldman as you look out due to some of the dislocations we are seeing. So I think net net again it was, it was good perspective provided by the management team which I think investors should somewhat feel better coming out of this. But again we just need to see how the private credit firms themselves do and whether we see more headlines around credit losses over the coming weeks and months.
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Leslie Picker
They had a bit of an increase in provisions in the quarter set aside for potentially bad loans. A lot of that has to do with the increase in activity which was somewhat surprising perhaps to see an increase in FICC financing during the quarter which some of that has to do with financing for private credit funds. How concerned are you about just the overall environment, overall credit quality? I think they mentioned just a few smaller impairments during the quarter but just looking forward into the future do you feel like credit quality at least given the current macro backdrop appears to be intact?
- [20:09]
Ibrahim Punawala
So how concerned are we here on high alert on credit and again means again I'm a banks person having done this for 20 plus years and I think the fact that we've not seen a full scale credit cycle since 0809 I think that has to keep all of us on high alert around looking for canaries in the coal mine. Are there any weak spots? So absolutely I think you're watching. You're right. I think some of the credit impairments that they called out, it sounded like at least on the call comments, they weren't quite directly related to private credit lending. So it's a tough time where credit losses generally are relatively low for the banking sector. So could these be a few bumps along the way given how good things are? Sure. But at the same time we are as a result very closely watching the macro to see if there's a greater sort of softness patch coming for the US economy. And if that does happen, then I do think the likelihood of some of these areas delivering higher credit losses over the next year or so begin to increase. But again comes down to what the macro does.
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Leslie Picker
Yeah, one of the biggest downside surprises in the quarter was just the FICC business overall, fixed income currencies and commodities, largely due to trading around rates and mortgages and credit. You know, what did you make of that that? Ms. I think it was nearly $1 billion, about $900 million relative to street expectations. You know, what do you think the the gap was between the street and what the firm reported?
- [21:46]
Ibrahim Punawala
So you could cut out that a little bit, Leslie, but I think I got the got your question in terms of you're right, I think the gap, I mean part of it is I think analysts gone a little bit wild. So I think there's maybe a lot of excitement discounted in that FIC number. We will have a better sense though, having said that like FICC revenues were down 14% year over year and we will have a better sense by Wednesday after all the big banks have reported whether or not Goldman was truly an underperformer or some of the areas that they highlighted such as interest rates, credit, mortgage trading were a bit of a soft spot across the street. I would not be surprised if that turns out to be the case. But again, with a sample of one, it's tough today. I think it's definitely gotten a lot of attention and we know better in the next 48 hours.
- [22:34]
Leslie Picker
Absolutely. A busy 48 hours indeed. Ibrahim, really appreciate your time today. Look forward to your continued coverage over the next couple of days with these big bank earnings. All right, coming up, CrowdStrike rising nearly 6% after Anthropic's mythos threat took a bite out of the overall sector last week. Palo Alto, Zscaler and Fortinet also higher. We'll look at what's at stake for the sector as AI continues pose a threat. The exchange is back after this.
- [23:08]
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David Hardin
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- [24:23]
Leslie Picker
Welcome back to the Exchange Markets. Right now, all in the green to start off this week, you can see the Dow closer to the flat line, but the Nasdaq the clear stunt standout up about 0.7% the Russell up nearly 1%, near their best levels of the session. And here are some of the movers this hour. Revolution Medicine soaring after its pancreatic cancer drug succeeded in a highly anticipated Phase three trial. The drug nearly doubled the typical length of survival and cut the risk of death by 60% versus chemotherapy, according to the company. Revmed said it will soon seek FDA approval for the drug using a Commissioner's National Priority Voucher for quicker review. Shares of Dell moving higher today after the company announced that AMD had added the company as a commercial PC customer for the first time. The stock hitting an all time high back to its relisting sting in 2018. Shares of AMD flat on the news, but you can see Dell up more than 6% and SanDisk higher after the Nasdaq said late Friday that the company would join the NASDAQ 100 before the bell on April 20, replacing software company Atlassian SanDisk up nearly 7% on that news, and the Cybersecurity ETF bug making a comeback today after closing down more than 5% last week on the elevated threat from Anthropic's Mythos model. But there's still a lot on the line for the companies looking to prove their relevance in the face of advanced AI arc. Seema Modi is following this story closely. Seems like a really high bar and increasingly high bar for them to prove that moat still exists.
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Seema Modi
Yeah, and time is of the essence now, Leslie. We Both have both CrowdStrike and Palo Alto Networks. These are the two biggest names in cybersecurity. They were among the 40 companies that got to preview Anthropic's Mythos model. This is the AI model That is deemed so powerful that if it's released to the public right now, it could essentially break the Internet. Now, the street is anticipating updates from both cybersecurity giants Palo Alto Networks and CrowdStrike this week. Upgrades that they're making to their security architecture to counter any cyber event tied to the release of Mythos. Their update could give the market a better timing on when this specific model would go live. And it comes, as Goldman Sachs CEO David Solomon telling investors this morning on the company's earnings call, that it's working closely with Anthropic and all of its security vendors, adding that the bank is accelerating investments in security, which echoes what Wall street has been saying for a while. With methods presenting a greater risk, analysts at Wolf see customers really across Fortune 500 clients increasing their near term spending as enterprises rush to bolster cyber defenses ahead of an impending cyber battle. So there's been this big debate that if there is a cyber event related to Mythos, Leslie, who's going to be able to fix it? Is the incumbents in cyber, in the cybersecurity world that we cover, or is it actually the large language language model that created the AI model? And now we're expecting an update from the incumbents on what they can do to mitigate any type of risk.
- [27:25]
Leslie Picker
And also pressing, of course, is what if that threat doesn't come from Mythos, but comes from something that's being worked on broad, maybe the Chinese or another actor elsewhere. Given, given your technological know how in the space, how well equipped do you think the incumbents are to ensure that the system is secure at this point in time, especially as this technology, you know, innovation is changing so rapidly.
- [27:51]
Seema Modi
Yeah, the evolution is happening at machine speed. So the cybersecurity companies, what they're telling us is that they're making all the updates they can on a daily and monthly basis to ensure that they're customers, which are across every sector, have the tools in place to identify the attacks, the vulnerabilities, and also the fixes that they can happen real time. And I will also point out the two biggest players there, CrowdStrike and Palo Alto Networks, have been on an acquisition spree over the last 12 months, Leslie, to be able to ensure that they have the AI capabilities to counter these new types of risks, risks that are being presented right now. So again, the latest update we get this week, that will be key because this is going to be following the preview they got of Mythos. They'll have a better take on what can be done by their companies.
- [28:33]
Leslie Picker
Yeah. Solomon was actually asked on their earnings call about the convening of bank CEOs last week as it pertains to this. And he did insinuate it's not the first time they've been kind of pulled together to talk about cyber risks facing the industry. But obviously they were in D.C. for something separate. And so it was kind of a convenient time to talk about these newer risks that the industry could potentially face if it's unleashed into the wild.
- [28:58]
Seema Modi
Essentially, that's why it included that comment only because it's the first company to actually say there was a meeting officially. And here's what we're doing right now to ensure that we've got what it takes to reduce any likelihood of a cybersecurity.
- [29:11]
Leslie Picker
Absolutely. So important to secure that very critical, critical material data. Sima, thank you so much.
- [29:17]
Megan Casella
Appreciate it.
- [29:19]
Leslie Picker
Now to Pippa Stevens for a CNBC news update.
- [29:21]
Megan Casella
Hey, Pippa.
- [29:21]
Eunice Yoon
Hey, Leslie. Minnesota officials will investigate the actions of federal officers, including kidnapping and false imprisonment charges. According to the ap, the Ramsey county attorney general and sheriff said they will release more details at a press conference today. Ramsey county includes St. Paul, which was a major target of ICE agents just a few months ago. Representative Eric Swalwell dropped his bid for for California governor late last night amid sexual assault and misconduct allegations. One former staffer alleged that she had multiple sexual encounters with Swalwell while working for him, including two in which she was too intoxicated to consent. Falwell has consistently denied the allegations, saying last night that he will fight the serious false allegations that have been made and there could be a new king in the ad space. Research firm E Marketer says Metta will surpass global Google and digital advertising revenue by the end of this year. Google has long relied on its search business, while E Marketer says Met as AI powered Advantage plus ad suite will drive the social media behemoth past Google. Leslie, I'll send it back to you.
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Leslie Picker
Wow, what an inflection point there. Pippa, thank you. Coming up, President Trump threatening to slap a 50% tariff on China over a reported arms shipment to Iran. We'll discuss the country's role role in the war next. Welcome back. Speculation mounting over China's role in the Middle east conflict, reportedly preparing to send arms to Iran. President Trump threatening a 50% tariff in response. Eunice Yoon joins us live from Beijing with more. Eunice.
- [31:00]
Eunice Yoon
Thanks, Leslie. Well, President Trump made those remarks to Fox News amid reports that China was preparing to send anti shoulder anti aircraft missiles to Iran. The Foreign Ministry denounced those reports as groundless smears and criticized President Trump's tariff threat as unproductive. When asked about President Trump's blockade of the Strait of Hormuz that the Chinese government urged for unimpeded navigation. Now, China is one of the main countries that would be mostly affected by this blockade. Not only is it an important economic and trading partner of Tehran, but Iran accounts for 13.4% of China's seaborne crude. So from an economic standpoint, that might not sound critical, but the blockade could potentially upset this very tenuous detente between the US And China and one that both sides, Leslie, had been very much not wanting to see escalate into further tensions, especially before President Trump arrives here in China in exactly one month.
- [32:11]
Leslie Picker
Yeah, I think tenuous is the perfect description for it. Eunice, thank you so much. Eunice Yoon, live in Beijing for us there. My next guest says there's no light at the end of the tunnel in the Middle east and that's good for China since it fractures NATO and the US Joining me now is Charles Kupchen, senior fellow at the Council of Foreign Relations and professor of International affairs at Georgetown. Thank you for being here, sir. So what do you mean by that and how do you see kind of the balance of power as it plays out right now?
- [32:45]
Charles Kupchen
Well, I think China is kind of divided in its own mind about the conflict. On the one hand, the United States is again mired in a Middle east war. It's distracted from its so called pivot to the Indo Pacific. This is a war that's unpopular in the United States and among American allies. So it's kind of fracturing NATO and the Western community of democracies. That's all good for China. On the other hand, China imports about 70% of of its oil, around 14%, as your correspondent just said, comes from Iran. This is a war that's disrupting the global economy. Everything else being equal, China wants this war to end and wants the price of oil to go back down. So I think right now they're calling for restraint, they're calling for calm. They want to see this truce last. I think on the arms issue that you just mentioned, Leslie, Trump is simply trying to head off at the pass any consideration in Beijing of sending weapons to Iran.
- [33:48]
Leslie Picker
Yeah, it definitely feels like they kind of reached that pressure point. What do you think the notion of 50% tariffs would do? You know, from the perspective of the Chinese, do you think it would enlist them to put more pressure on the Iranians to come up with some sort of agreement with the US or do you think it ratchets things higher from here?
- [34:09]
Charles Kupchen
Well, I think it is a bit of an idle threat in the sense that Trump still does plan to go to Beijing sometime soon, even if that trip is postponed again. I think he wants some kind of trade deal with the Chinese. A 50% tariff on Chinese goods would have a very significant impact upon the global economy. Ramp up even further prices here, consumer prices here in the United States. So I don't think we're going to, we're going to go there. But yeah, the Chinese, at least as far as we know, did play an important role in convincing Iran to say yes to this ceasefire. Now, hopefully they can play an important role in closing the gap between Iran and the United States on the terms of a durable settlement. Because at least judging by where we were when that Those talks, those 20 hour talks in Pakistan came to an end, Iran and the United States are still miles apart.
- [35:09]
Leslie Picker
And can you help us better understand just the relationship between Iran and China? Obviously, China, big importer of Iranian oil, but beyond that, what does their diplomatic relationship look like at this point in time?
- [35:25]
Charles Kupchen
You know, in some ways, China is Iran's diplomatic and economic lifeline. The Iranians have been selling a lot of oil to China. They have very good relations with China. They are part of what we call the axis of autocracies that emerged after the Russians went into Ukraine, Russia, China, Iran and North Korea. Iran is now in trouble and neither Russia nor China is really able to step in to help them. And in some ways, I think you're seeing the limits of Russian and Chinese power because Iran is more or less on its own. But I do think that everything else being equal, the Chinese want this war to come to an end, but they're going to keep their powder dry. They're going to keep their distance from this war as they've done with, with other conflicts, because they're more interested in trade, they're mercantilous power. They're not out there trying to solve big geopolitical problems.
- [36:25]
Leslie Picker
Yeah, I was wondering if they're not stepping in because they can't or because they don't want to and don't see it as being the most economically viable solution for them. Obviously, Russia is fighting its own war with Ukraine. I can imagine it wouldn't want to get involved in another war that further distances that country from the rest of the world as well.
- [36:45]
Charles Kupchen
Well, I think, Leslie, that your comment begs the question of what's the operational theory of the case here? How is this blockade going to work? We don't yet know. I'm guessing that the US Navy is going to wait outside the Strait of Hormuz and inspect ships, board ships, try to block ships that are coming from Iranian ports. Nobody really wants to send tankers or warships into the Strait of Hormuz now because it's too dangerous because the Iranians could hit them as they have done in the past. So I think in Some ways the $6 billion question today is how is Iran going to respond? Will they let this blockade take effect? Will they let Trump shut down Iranian shipping? Or are they going to start taking shots at tankers and US Warships that are implementing the blockade? If if so, I think we're going to see that full scale war break out very soon.
- [37:42]
Leslie Picker
Yeah, that sounds like it would be a massive escalation if that were to transl. But obviously a very fragile situation at this point in time, a potentially dangerous one. Charles, we appreciate your time today, helping make some sense of what is in many ways nonsensical, but really appreciate it from the Council of Foreign Relations there.
- [38:01]
Charles Kupchen
Bye bye. Pleasure to be with you.
- [38:03]
Leslie Picker
Coming up, another week, another open air memo. Last week the company sent a letter to shareholders blasting anthropic. This week, OpenAI takes a swipe at Micro Microsoft in a message to employees. Those details next.
- [38:17]
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- [40:24]
Leslie Picker
Welcome back. Open Air touting its relationship with Amazon in an internal memo while simultaneously taking a bit of a dig at Microsoft. Our own Kate Rooney scooped that story and has the details in today's Tech check. Hey, Kate.
- [40:37]
Kate Rooney
Hi, Leslie. So this is all according to an internal memo that we saw. It was from a top Open Air executives sent out to employees on Sunday. Denise Dresser, chief revenue officer over at OpenAI, talks up OpenAI's new deal with Amazon as a way that the company could win contracts with other companies looking to use chatbots for business while at the same time downplaying Microsoft. So Dresser, also the former CEO of Slack, writes that our Microsoft partnership has been foundational to the company's success. But it has also, she says, limited our ability to meet enterprises where they are. She says for many, that is bedrock. She's referring there to Amazon's AI offering. Says since they announced that deal, inbound demand from customers for this offering, speaking about Amazon, has been frankly staggering. The memo does come a couple of months after Amazon announced a $50 billion investment into OpenAI does also underline Leslie some efforts we've seen to reduce the reliance on Microsoft. It's a longtime backer, of course, of OpenAI has invested more than $13 billion since 2019. Finally, Dresser also slams OpenAI's rival Anthropic, and talks about this $30 billion revenue run rate that the company put out for context. OpenAI's run rate is closer to $25 billion, at least according to its latest update. Dresser, though, claims that Anthropic's run rate is inflated her words, she says, by around $8 billion. Argues that it uses accounting treatments that make the revenue actually look bigger than it is, including grossing up revenue share with Amazon and Google. She says they report Microsoft revenue as net revenue. She says that's more in line with standards that would be held to as a public company. Anthropic, though, has pushed back hard on this as it all comes down to anthropic actually being the principal in some of those deals as the accounting is consistent with gap practices does also depend on the circumstances for each deal. Less like the latest back and forth between those companies.
- [42:29]
Leslie Picker
Yeah ever the competitive environment between those two and now the hyperscalers coming into the forefront as well. Kate Rooney, great reporting there. Thank you so much.
- [42:39]
Heather Gerken
Thanks.
- [42:40]
Leslie Picker
Coming up, OpenAI not too enthusiastic about Microsoft and neither are investors lately. Shares down 21% so far this year, but Bernstein says the bear case could be the bull case. That analyst explains next. And a quick programming note. General Atlantic CEO Bill Ford will join me for an exclusive interview live from the firm's annual investor summit in New York City tomorrow. That is happening at 12:15pm Eastern Time. The exchange is back in two minutes. Welcome back. Tech the best performer today as software comes roaring back. Microsoft riding that wave, up nearly 3% at this moment, but down more than 20% this year, battling Tesla for the worst performer on the mag 7. Bernstein pushing back on the recent bearishness, writing in a new note that concerns heavy capex won't translate into revenue growth. Well, they're overblown. Joining me now is Mark Murdler, senior analyst at Bernstein. You've got a price target here of $641 per share. I think that implies more than a 70% upside from the current stock price. That's a pretty big jump, especially given all the uncertainty in the world. But you say it's one of your favorite names because you think the AI concerns are overblown. Can you explain that?
- [44:00]
Charles Kupchen
Sure.
- [44:00]
Mark Murdler
Absolutely. So if you look at the enterprise world, you look at what runs in corporations around the world, it's predominantly Microsoft technology, whether it's the Office products, whether it's Windows Server, whether it's SQL Server, Azure is the predominant environment in which enterprises run their work workloads. As workloads have moved to the cloud, Microsoft is a big have been a big benefit. They were very early in the move to AI and you saw that in the relationship with OpenAI and the fact that Azure has has generated substantial amount of AI revenue, likely much more than their competitors of an Amazon or a Google. If you look at the moment in time we're in today, everyone is very worried about the threat of AI to software. But if you're worried about the fact that AI could become huge, that it could be major impact on traditional software environment, which I believe is also overstated. But if you look at the move of enterprises to the cloud, they move predominantly their production workloads to Microsoft and therefore most likely they're going to run their AI app, Microsoft. So you're sitting there with a company, Microsoft, that has far more AI revenue than its competitors in the enterprise world. You have a company that has a very deep, very powerful technology stack for AI. You have a lot of capabilities, you have a wide range of models that are available and you have all this enterprise data that enterprises are going to want to leverage to use for AI. So as we look at the bear case, whether it is Microsoft is using all this capex and spending it on model building or whether they're giving away free usage of Office, we go through it point by point in the note and we show that the fact is that's not what Microsoft is doing. What's happening right now is that Microsoft is building capacity. They started by building AI data centers capable of supporting a mixture of inferencing and traditional workloads and capable of supporting agentic AI. And those data centers are starting to come online. And more recently they started adding significant amount of hardware and there's a delay from when you buy hardware until the hardware goes online. And so as that hardware comes online and becomes available, Microsoft is going to be able to deliver a lot more capabilities to their clients and they have a huge backlog that they will be able to convert to convert into revenue.
- [46:38]
Leslie Picker
Yeah, this idea of the timing mismatch. Real quickly, Mark. We've seen so many capabilities launched by Anthropic over the past few months. Do you feel like at this point Copilot is better than say Claude for Excel?
- [46:52]
Mark Murdler
Anthropic does a great job, as does OpenAI in developing AI specific capabilities. And they've done a good job with their with with Claude and they've done a good job with their Excel plugin. They're coming out with a Word plugin. But Microsoft's forte is building highly and tightly integrated applications. That's what the Office is. And so what they're going to do over time is add all of the capabilities you see from all of these add on.
- [47:20]
Leslie Picker
So sorry to cut you off, Mark. We'll have you back on and fortunately we're running up at the end of the show. That is it for us today. Thank you so much for watching. Power Lunch is up. You've been listening to the Exchange. Make sure you're subscribed to get each episode every day, same time, same place.
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