Full Transcript for Bloomberg Surveillance TV: October 22nd, 2026

a lot of these earnings and say they're fantastic. You're starting to see free cash flow come out of places like Meta. You're going like this, maybe not so much, but you're starting to see the monetization that people have been asking for in places like Meta. Select places. But I'm just wondering, what is the negativity there? Is it really coming from this question of constraints on CapEx? Is it just the acceleration of growth, the sort of rate of change that you're talking about? Or is there a sense that, frankly, the multiples have just gotten too high based on the backdrop that we're looking at? 00:03:00 Speaker 4: I think the biggest question comes down to margins because what has driven the biggest delta to the upside of this earnings growth has been the fact that you've had massive operating leverage that's driven huge margin expansion for the AI infrastructure trade. Look at the stocks index. It's gone from a 16% margin to a 42% EBIT margin this year. And the street's expecting that to expand even further. But if you see things like micron capacity coming online in mid-2027, more capacity in 2028, it raises the question if you can see a sustainment of things like 85% gross margins at Micron. So there is a world where you could still see AI adoption accelerating. You could still see the AI infrastructure build out, still be very strong, but the earnings start to come under pressure just because we are normalizing margins, which brings us back to a really important point is that the stocks are likely going to peak before the adoption peaks, which is something that we see in every technology adoption cycle. 00:04:02 Speaker 1: Is this why tech can't rescue the rest of the market from the fears of higher oil prices and some sort of shock that's going to really threaten the rest of the economy? 00:04:11 Speaker 4: Well, the reason why tech has been able to rescue the market and insulate the market away from any kind of macro headwind is just because the earnings have been so strong. If you had said, look, we're going to push rates higher by over 100 basis points and we're going to have one of the greatest energy shocks that we have seen in our lifetime, the answer probably wouldn't have been that we are going to revise higher earnings estimates by 17% through the year. You would have seen something like in 2022, where in the face of those macro shocks, you were cutting earnings estimates. And so if you start to get to a point where you're no longer raising tech estimates, and it's really important, it's the delta of the estimates moving higher, not just the fact that growth is strong. You want growth to get even stronger to drive the upside to the equities. So if you're not raising those estimates and maybe they stall out, that's where you get to the point where it's not as insulating to the market. 00:05:01 Speaker 2: So cam there's one disconnect that i'd love some input from you on so the outlook for tech has shaped the outlook for the economy because of the capital markets boom and the capex boom that's underpinned the profits that shape nominal gdp that's pushed yields higher now you're starting to see the tech trade stumble yields have come in and now yields have come in the rest of the market started to improve but that's the more cyclical part of the market so if i'm looking for a deceleration in growth off the back of a tech story stumbling and yields are lower why is the rest of the market still okay Well, I would make. 00:05:26 Speaker 4: An amendment to that, which is that the strength that you've seen, at least in the last week, the broadening out that you've seen in breadth indicators or the equal weight S & P 500 has come from rallies in some of the most defensive parts of the market. 00:05:39 Speaker 2: So what's up? 00:05:41 Speaker 4: It's not banks. It's insurance companies. So cyclicals are not doing as well, but defensives are doing very well. 00:05:47 Speaker 2: Look at utilities. 00:05:48 Speaker 4: Look at Staples doing much better than what we're seeing within discretionary. So the bid in this market has not been flocking to the things that have been left behind, including cyclicals. It's been flocked to safeties, flocked to that earning stability. And so we really shouldn't be celebrating an improvement in breadth driven by a rotation into defensives because you're not seeing it out of industrials. You're not seeing it out of banks. Other cyclical parts of the market are really sitting out. 00:06:13 Speaker 2: I'm seeing it in discretionary of 6% so far this month. Does that make sense? 00:06:17 Speaker 4: Well, remember that discretionary is largely driven by Amazon and Tesla. So if you look at an equal weight basis, what you're seeing is that equal weight discretionary versus staples is starting to wobble. And I think what's interesting when you layer that into oil prices is that even though we've seen this oil price shock, you've seen household consumption forecasts for GDP actually go up this year, which is very surprising. Typically, you wouldn't see that. So that ratio of equal weight discretionary versus staples has held in. Now that we're seeing oil prices move up again, could that be a place where the market starts to tell us that we're growing more concerned about the consumer? 00:06:51 Speaker 5: Well, how do you view the consumer right now? Healthy enough? 00:06:53 Speaker 4: Well, it has been holding in, but this brings us back to the whole AI trade likely is very important for the consumer. Appreciate that households have more of their wealth in equities today than they do in their homes, which means that household consumption is incredibly sensitive to the vagaries of the equity market. which means that if you were to see more volatility or a protracted slowdown, this will hit consumption. And important to remember, there was a strong correlation between retail sales and the NASDAQ back in the early 2000s. So if we were to see this kind of

sell-off continue, it likely will filter into overall consumption. 00:07:29 Speaker 2: Stay with us. More Bloomberg Surveillance coming up after this. So here's the latest this morning. AI data centers facing increasing public opposition, according to research group Data Center Watch. Forty five projects worth 68 billion were delayed in the second quarter of this year because of backlash. Torsten Slocke of Apollo picking the winners and losers of the lag, writing a delay would favor assets tied to scarce physical capacity. Torsten joins us now for more. Torsten, good morning. 00:08:04 Speaker 3: Morning. 00:08:05 Speaker 2: What is an economist doing covering data centers? Can we start there? 00:08:08 Speaker 3: Yeah, absolutely. I mean, my job and economies on the street, we normally talk about inflation, unemployment, and that's it. But at the moment, of course, because there's so much going on with AI and AI build-out, and because the data center build-out and associated energy build-out has had such a significant contribution to GDP growth, that line in our GDP forecast is just getting more attention than ever before. And given, if I type ECFC, go on Bloomberg, the consensus expects that to be around 4% growth, quarter over quarter, annualized for the next 18 months. This issue has become really, really important if you want to predict what the economy will be doing. So from that perspective, it is a very, very critical driver of growth. 00:08:45 Speaker 2: At the moment. 00:08:45 Speaker 3: In fact, growth normally is 2%. And now one percentage point of growth is coming from AI spending. So for that reason, we just need to spend a lot of time, all of us, in literally all parts of financial markets, on understanding what's going on with the AI trade. 00:08:58 Speaker 2: Does that explain the link between, say, the NASDAQ and long-end rates? 00:09:01 Speaker 3: Absolutely. Because now there's much more discussion. For a long time, we have debated, oh, rates are going up because inflation is going up. Why is inflation going up? It's going up because of oil prices going up. It's going up because of tariffs. It's going up because of restrictions on immigration. And we also have fiscal problems. We also have structurally less demand for treasuries in the long end. So a lot of that is just a long, long story of, well, rates are going higher, higher, higher. But suddenly, if the AI trade begins to roll over, we will have a counterweight on the scale, which is that if the GDP forecast begins to roll over because the data center build-out is delayed, and there's a lot of talk in energy circles about that only 25% to 50% of data centers may ultimately end up being built Because the risk is that there's just enough power. And if there's not enough power, then, of course, that means also GDP forecast for the CapEx numbers will also be weaker. 00:09:47 Speaker 1: There are a lot of connections being made just to sort of unpack this. It's one thing for the

stocks to fall. It's another thing for the data centers not to be built and for there not to be still the same ramifications for economic growth. Are you seeing anything with respect to yields going up in credit markets or pushback by investors to data centers that could curtail some of the spending aside from even regulatory pressure? 00:10:10 Speaker 3: Yeah, so we've been talking for a while about that AI is not rate sensitive. But what is the reality is that rates are maybe not important for AI, but yields are important for AI. And spreads on a lot of different things in AI have widened out now where they are absolutely beginning to matter. That's why a lot of data center bonds are trading down. That's why, of course, the new cloud is trading wider. Because we're now seeing it's not so much about the Fed hiking a little bit here and there. It really is much more about credit markets beginning to worry about this issue that what is the economics of AI? Where is the payoff for the S & P 493? The payoff is clearly there for the Magnificent Seven. But what are the signs that the S & P 493 are actually generating strong productivity gains? And at the moment, we're just not quite seeing that yet. So it still is a debate about do you think that will come or do you think that will come slower or do you think that that will not come at all? 00:10:57 Speaker 1: Just to put a bow on this, are you saying we have reached the point of a credit market sell-off, particularly tied to AI, where it will curtail some of the ambitions and the issuance plans by certain AI players substantially more than currently what's projected? 00:11:10 Speaker 3: Yes, because I think that this is not so much because of the Fed hiking 25 basis points or even 50 basis points over this cycle. But it has much more to do with credit markets are beginning to root with their feet. So what really is going on that you and I normally talk about the business cycle, things going up and down, inflation, unemployment moving higher or lower. But at the moment, we have had a structural force in AI that was completely unrelated to this because we all viewed AI as revolutionary. And it is truly revolutionary in so many different ways. But the question now is, is that story of AI being just a structural issue completely unrelated to what's going on with rates? Or are we now beginning to see spreads widen out in a way where, yes, rates may have gone up a little bit from the Fed, but what really is driving the more slow worries about what's going on in AI is that credit spreads have been widening out quite substantially, especially in hyperscalers. 00:11:56 Speaker 5: So November 3rd, are you looking at more of the individual ballot measures in terms of what's, say, going on? One in California, prohibit data centers in the city. Another, advise the city to impose a moratorium on building large-scale data centers. Are you looking at these individual members voting jurisdictions over potentially the

composition of Congress? 00:12:17 Speaker 3: So we don't spend time on looking at that part, but we do spend time on thinking about, well, what's going to happen after the midterm election? Because the risks are, of course, that... There is a moratorium, there is a pause, there's an audit in a number of states. Is that going to continue? Are we going to get back to, well, now we can build data centers again? What are sort of the political considerations? Because it's very obvious, as you also played in the introduction, that both Democrat and Republican voters are generally not happy with data centers. So that's why the question becomes politically, what's going to happen after the midterm election becomes very important to this question. 00:12:47 Speaker 2: Can we finish on the Federal Reserve? The data says hike. This conversation says something else. What do they do? 00:12:53 Speaker 3: Yeah, because the people at the Fed, they live inside the Taylor Rule, which says I should look at two things. The labor market, which is very strong. ADP, the weekly data has been going up. Jobless claims has been going down. Job openings has been going up. And non-farm payrolls has generally been strong. So let's just agree that part of the dual mandate is still looking good. Inflation, it was a truly ugly number that we got. It was broadening out to a number of categories. It's becoming very problematic in many different ways. So both these two parts of the dual mandate would say, of course, the Fed should even be hiking next week. So the question now becomes, well, now we're debating something that's outside the near term of thinking about the dual mandate, namely what's going on with AI. And I'm sure the Fed also thinks really hard and looks very, very hard at what's going on with CDS on AI names, what's going on with credit spreads for AI names, and thinking about, well, how do I take my usual framework as a Fed staffer for thinking about what I should do with rates and now weigh that on the scale relative to the risk that maybe AI, especially the data center build-out, could begin to slow down. 00:13:47 Speaker 2: Aren't they the types of financial conditions that they desire right now on the FOMC? 00:13:51 Speaker 3: Well, there is a survey from the Richmond Fed where they ask businesses across the country, are monetary policy restrictive or not for your decisions in CapEx? And 80% of business people say, no, monetary policy is not restrictive. So a very different way of saying the answer to that question is that monetary policy at the moment is not restrictive because businesses are saying financing costs are not a problem if we want to take out a loan. 00:14:14 Speaker 2: Why aren't we moving this small into October? What's that about? 00:14:18 Speaker 3: So I think that, of course, the FOMC has been managing expectations quite well now. But it is rather unusual that your table rule, your math equation for what the Fed should be doing, should say that

rates should actually be going higher, including at the October meeting. But now we are breaking and saying, no, we don't want to do that right now. So that, of course, means that there's some catch up likely coming later on, especially if we look into December in 2027. 00:14:39 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Airlines across the board struggling under the weight of these higher fuel costs. We've seen it repeatedly from Delta to American to United and to Southwest too. Cutting its guidance for the full year, underscoring the weaker forecast we've seen across the industry. The Southwest Airlines CFO, Tom Doxey, joins us now for more. Tom, appreciate your time. Of course, these challenges are not unique to you. We've seen it across the industry, as I say, across United, Delta and American. Tom, can you help us all understand how much harder it has become to manage this issue of higher fuel costs? Well, great to be with you this morning. 00:15:23 Speaker 6: You know, I'm incredibly pleased, first with our team. We've got an incredible team here. And in the face of this incremental fuel price, so in the third quarter, we paid. 00:15:34 Speaker 2: Over $ 800 million more year over year. 00:15:38 Speaker 6: In fuel expense but in spite of that we improved our margins so we were just shy of five points of up margin improvement from the third quarter of 25 to the third quarter of 26 and so we're navigating this really well of course we don't know where fuel prices are going to go so we're focused on controlling the things that we can control we've done a lot of product enhancements here as well and it's resonating with customers and really working on the financial side as well Tom, this. 00:16:05 Speaker 1: Really speaks to a question of pricing power. And your CFO, you, last month talked about how there is still room to go for fare increases. At what point are you reaching sort of peak pricing, or do you feel like there still is a lot of room to ask consumers to plug the gap that's left. 00:16:23 Speaker 6: By higher oil prices? So I think there's a couple of layers to this. So for one, we're not yet back to where we were pre-pandemic. And so I think that's one really important data point. And you're right, we've seen a lot of industry strength, but there are a lot of things that are specific to Southwest Airlines as well that are helping us. You look at the year-over-year improvements that we've had on the revenue side, and we're leading there when it comes to the major airlines. And so Everything from the extra legroom seats and the seat assignments that we've had. 00:16:56 Speaker 2: We've launched Starlink. 00:16:57 Speaker 6: We had a media day last week where we unveiled some of the details of the Southwest Icon Lounge Network. 00:17:06 Speaker 2: So there's so much that's going well on the product side. 00:17:09 Speaker 6: Business revenues, for example, or managed business revenues are breaking records.

The third quarter, this is actually the highest increase that we've had in any third quarter on the business side. So what we had seen happening previously is um, is wallet splitting where, you know, Hey, I'll fly you Southwest if I'm flying from this city to this city. But, you know, if it's a longer haul flight, for example, you know, I might consider somebody else because I'm wanting that assigned seat. So what we've done over the past year, year and a half has taken away a lot of those reasons for somebody to split the wallet. 00:17:40 Speaker 2: So yeah, you're, you're right. 00:17:41 Speaker 6: There's industry strength, but there's so much happening that's specific to Southwest, uh, that has helped us to achieve the results that you're seeing. 00:17:49 Speaker 1: And Tom, you're in a pretty unique position because you're not one of the three majors. You don't have the same kind of network that they do and global reach. How are you attracting business travelers, premium travelers, without having that same kind of size and scope? 00:18:04 Speaker 6: So we're the largest carrier domestically, and that network that we have is a huge differentiator for us. So of the top 50 markets in the U.S., we are the number one carrier in just about half of those markets, and we're number two in a bunch of the others. And so having the nation's largest point-to-point network domestically gives a tremendous amount of flexibility for customers that live around the country. 00:18:27 Speaker 2: So there's that. 00:18:30 Speaker 6: But then on top of that, it's how you feel when you're on our airplanes. The hospitality that we have is unmatched. When I tell people where I work, typically the first response I get back is, oh, let me tell you about this amazing experience I had with one of your people. So those two things together are powerful. That's a differentiator for us And then when you can layer on all of the things that we've done here lately, again, whether it's the assigned seats, the extra legroom seats, the lounges that we've announced, Starlink will be the first carrier to have Starlink on all of our aircraft by about this time next year. All of these things are really resonating with leisure customers and also with business travelers as well. 00:19:08 Speaker 1: Tom, given the fact that a number of airlines are really struggling that are more domestic-focused carriers, are you interested in consolidation at all and making acquisitions if there is some real spots of trouble? 00:19:20 Speaker 6: We're focused on doing the things that we can do ourselves to make ourselves better. And that strategy has been working for us. 00:19:30 Speaker 2: Tom, can we talk about customer interaction? We've asked a range of companies and C-suites over the last week or two whether they're open to interaction with Meta's Muse. What's your approach to this and how as a company are you thinking about this over the next year or so? 00:19:46 Speaker 6: Yeah, as far as the interactions for us, that direct interaction that we have with our customers, whether it's out on the front line, whether it's with the technology that we have, has been a strength for us. During the quarter, we actually launched a platform that would allow bookings and the communication through ChatGPT, and we're the first airline to be able to do that. So while that personal interaction is and I think will always be a huge part of the differentiator for us, with our incredible people, we are ensuring that we are leaning into where the world may be heading when it comes to those types of technologies. 00:20:24 Speaker 2: Tom, what can you share with us about that relationship with ChatGPT? What are you expecting? How big are you expecting that to be? 00:20:30 Speaker 6: Yeah, so specifically what it is is it's creating the platform so that we can interact with ChatGPT as people are using that to be able to book. So it's about having the capability here to have those interactions is really what it's about. 00:20:48 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business Hour.