Oil and energy prices continued to influence the market on a daily basis. The inflation data was worse than expected. There was negative news about CoreWeave, and that news caused tech stocks and the market to decline. The news from France is particularly bad these days. France's debt to GDP is at 120%, a dangerous level. The banks kicked off earnings season. Let me just explain the concern some investors have with respect to the impact of agentic AI on banks and other financials. We've had 17 years of amazingly benign credit quality, and investors are wondering if the good times are over. And this brings me to my conclusion about the state of the US economy. Let's get started.
Hi, this is Steve Eisman, and this is another edition of the weekly wrap. This is for the week ending Friday, October 16, but recorded Thursday night, October 15. I just want to repeat an announcement about a change we made recently. Monday and Friday episodes are available to premium Substack subscribers earlier. The Monday interviews are released 12:00 p.m. Eastern Standard Time every Sunday, and the Friday wrap is released at 12:00 p.m. Eastern Standard Time every Friday. The Monday and Friday episodes will still be available on YouTube and all audio channels at their usual times, Monday at noon and Friday at 4:15 p.m. For Substack Premium, this Wednesday, we had returning guests Gretchen Morganson and Tom Gober to discuss life insurance susceptibility to being defrauded. And next Wednesday, we have another returning guest, Dwight Collins, head of sales at Autonomous Research, for his thoughts and insights on the impact of AI on financial companies. On this week's wrap, we will discuss, as usual: number one, the war in the Middle East; number two, the telecom apocalypse; number three, the CoreWeave correction; number four, bad news in France; five, the impact of agentic AI on financial institutions; six, and last, earnings season began with, of course, the banks. Let's get started.
The war is still in a stalemate. Oil and energy prices continue to influence the market on a daily basis. On Wednesday, the inflation data was worse than expected. Interestingly, though, interest rates declined on Wednesday. Why? There was negative news about CoreWeave, which I'll discuss in a bit, and that news caused tech stocks and the market to decline, and some investors purchased Treasuries as a safety play despite the inflation news. Now, you've heard of the SaaS apocalypse. We've spoken about it many times, and now there is a new apocalypse, and I think I have coined this term, and I call it the telecom apocalypse. This is not an AI story, but an Elon Musk tale. On Friday, last week, October 9, AT&T, Verizon, and T-Mobile were down 9 to 13%. Why? SpaceX's most profitable division is called Starlink. It is a company that uses satellites to provide cellular service all over the globe. Sounds great, but the service is not nearly as good as the service provided by telecom providers. Now, Starlink announced that it was acquiring Grain Management's 14 megahertz of 800 megahertz spectrum. Now, I don't want to get too technical, but this will definitely improve Starlink service in the US. However, as best as I can tell, this is still not nearly good enough. Starlink needs to build a terrestrial network, and that can be unbelievably expensive. The most economic way for Starlink to do this is to reach an agreement with one of the big three in the US and use their rails to provide service. And none of the big three, believe me, have any interest in helping Starlink. So, the telecom apocalypse narratives are powerful, and this one is not going away. By the way, between the big three, T-Mobile is down the most this year, down 25%, whereas Verizon is up 5% and AT&T is down 9% this year. I think the reason for T-Mobile's poor performance is that it used to have a high multiple. It's been a much better company than Verizon and AT&T, and so used to have a multiple in the 20s, which was double the multiple of its two competitors. But now that the entire landscape has changed, T-Mobile's 2026 PE multiple is only 14 times.
Moving on, and this is probably the key news of the week. There was a very interesting piece of news about AI that is indicating stress in the AI narrative. CoreWeave is a public company that operates data centers devoted solely to AI. It's called a neocloud company. It is competing with the hyperscalers, all of whom have much, much larger balance sheets to build these data centers. CoreWeave has had to take on a lot of debt. Its market cap is only 43 billion, but it has taken on 35 billion plus in debt, and it has additional capital lease obligations of 10 billion. This is not a company with a great balance sheet, to say the least. When it raised its debt, the coupon it had to pay was 9%, which is very high. However, it looks like the fixed income markets are getting really nervous about CoreWeave. Recently, the debt has declined in price below 90 cents on the dollar, so that the yield is around 15%, and that means the fixed income markets are quickly losing confidence in CoreWeave. On this news on Wednesday, CoreWeave was down 15%. Nebius, another neocloud company, was down 10%, and the entire AI complex went down on Wednesday as suddenly investors are becoming afraid of AI debt levels. Last week, the Financial Times reported that OpenAI claims to have 50 billion in annualized revenue as of the end of September. Now, I have to say, I have no idea what that means. Is that 1 day x 365, or 1 week x 52, or 1 month x 12? Who knows? To me, this annualized revenue data point that both Anthropic and OpenAI employ is merely designed to help them raise money. Regardless, the most important part of the story was that previously OpenAI had claimed that it had 70 billion in annualized revenue, and I have no idea how 20 billion evaporated, but that is not a good sign.
Moving on, the news from France is particularly bad these days, and I'm not just talking about the riots. Investors are losing confidence in France's ability to manage its deficit. The spread between the French 10-year and German 10-year bunds is at 140 basis points, a multi-year high. The problem is that France's debt to GDP is at 120%, a dangerous level. There is no consensus or desire by French politicians to cut expenditures. In fact, Marine Le Pen, who may become the next president, is advocating cutting the retirement age from 62 to 60. Of course, someone could immediately point out that US debt to GDP is also 120%. So, isn't that a problem, too? Well, of course, it's a problem, but it's a lesser problem. Why? The dollar is the reserve currency of the world. More importantly, the entire global financial system functions on Treasuries. The repo market, which is a multi-trillion dollar market for banks, only uses Treasuries. When large institutions want to park money, they buy Treasuries until there is a large, safe, and liquid alternative to Treasuries. The US has the luxury of time, but not endless time. In other words, no one needs to own French sovereign bonds, but many large institutions need to own US Treasuries.
And now for the banks. The banks kicked off earnings season. But before we get to the banks, let me just explain the concern some investors have with respect to the impact of agentic AI on banks and other financials. When you put your money in a bank, generally you put it in a checking account that pays nothing or a savings account that pays little. In actuality, for most people, not all people, but for most people, you only need a limited amount of cash in the bank. The extra, you could put it in a money market fund that pays more. Now, hold that thought for a second. Now, my wife and I have our investment accounts at Schwab, and we are very happy with Schwab. I have no complaints. Now, I have some amount of cash in my account. Now, if I do nothing, Schwab sweeps my cash, pays me very little, and earns the short-term interest rate for itself. However, if I execute a trade and buy a money market fund through Schwab with my cash, I earn the interest. Now, Schwab does not make this hard, but I have to execute the trade. The important point here is that because of consumer laziness, banks and brokers like Schwab have access to cheap sources of funding. For a typical bank, for example, checking and savings accounts are the most important parts of the bank's funding and therefore the most important sources of its net interest margin. Now, let's think about agentic AI. What investors are worried about is the idea that consumers will use agentic AI to sweep their excess cash out of banks and brokers into higher-paying money market funds. If this were to happen, it would seriously impair the net interest margins of banks. Of course, banks aren't stupid. They are going to try and protect their franchises. This week, JP Morgan announced that it would not allow outside agents access to its customer accounts. The fight begins. Now, that is the long-term risk for banks, but that risk extends to other parts of financials such as personal, auto, and homeowners insurance. Companies like Progressive and Geico wield powerful brand names. They are very price competitive, and consumers flock to them because of their brands. Agentic AI does not care about brands. It cares about credit ratings and price. Imagine asking an agentic AI to find for you auto insurance on your new car. Leaving aside credit ratings, agentic AI only cares about price. And this could seriously impair the franchise value of personal lines insurers. Progressive reported some numbers on Wednesday. Progressive does something no other company does, at least not that I know of. Instead of reporting quarterly, it reports monthly, and the September report was disappointing in that new premium volume declined for the first time since November 2023. Now, the most likely culprit is that pricing is soft. So, Progressive is pulling back. I doubt agentic AI has gotten big enough yet to make a material difference, but that will not stop investors from speculating. And Progressive was down 4% on Wednesday.
Now, I'm going to share some thoughts on a bunch of the large banks that reported this week, and then show you how to think about valuation given the results. For the large banks, the major variables in terms of revenue and earnings are fixed income and equity trading, investment banking, which is composed of M&A fees and equity and fixed income underwriting, net interest income, which is a function of loan growth and the net interest margin, and of course, credit quality statistics. All of these variables are important in understanding earnings results. However, credit quality statistics are the most important variable in terms of drawing implications about the overall economy. To summarize this quarter's results briefly: credit quality remains benign. As for revenue, the overall results were good, but not as good as prior quarters. The problem was that for most companies, fixed income trading was weaker because rising rates put a crimp on client volume. Before we discuss valuation, I want to focus on how the large bank results are of particular importance because they provide great insight into the state of the current credit cycle. The four large banks, JP Morgan, Citi, Wells, and Bank of America, have large and broad-based lending businesses. I'd note that credit quality is a less important metric for Goldman Sachs and Morgan Stanley. On the consumer side, the big four provide credit cards, auto loans, and several other types of consumer loans. On the commercial side, they make commercial real estate and corporate loans and other types of commercial loans as well. They don't do everything, but they're big enough and broad enough to provide a window, though not a complete window, into the health of the US economy. Now, there is growing fear that credit losses will start to mount for the first time since the Great Financial Crisis. We've had 17 years of amazingly benign credit quality, and investors are wondering if the good times are over. Yes, private credit is exposed to software, and software is getting hit by AI, but are there signs of broad credit problems emerging in the actual data? When the major banks report, they provide reams of data. JP Morgan's quarterly earnings release supplement is actually 29 pages long and is filled with data on every page. That is typical of how all the banks report. To see trends in credit quality, the best place to look is to examine consumer and commercial non-accrualing loans. Now, a non-accrualing loan is a loan that is seriously delinquent, usually 90-plus days. A bank no longer reports interest income from these loans and reserves for future losses. I am putting on the screen consumer and commercial non-accrualing loan data for JP Morgan, Wells Fargo, Citi, and Bank of America for the third quarter of last year, the second quarter of this year, and this third quarter for this year. These four banks combined provide a large window into credit quality trends. If there was a serious trend of deteriorating credit, we would see increases in non-accrualing consumer or commercial loans, or both, on a year-over-year basis and on a quarterly sequential basis. We certainly saw large increases in consumer non-accruals leading up to the GFC. We are not seeing that now at all. The credit data is benign in both consumer and commercial. Now, for those of you who are audio listeners, I'll just focus on JP Morgan and Bank of America. For JP Morgan, total non-accruing loans were 9.4 billion in the third quarter of this year. They were down 7% versus last year and flat versus the second quarter. The numbers at Bank of America were also very benign. Total non-accruals were 5.7 billion, up 3% versus last year and down 4% versus the second quarter.
Conclusion: the credit trends reported by the large banks are very benign. Now, maybe a credit cycle will emerge, but we are not seeing it in the banks. That's an important data point. The banks have the broadest credit exposure, so their results are a concurrent indicator. And this brings me to my conclusion about the state of the US economy. Since the GFC, many commentators have tried to predict the next crisis. This is it, they say, and then it isn't. Perhaps the most important story of the past 17 years is how powerful and resilient the US economy has become. Yes, there are definite problems in private credit with respect to overexposure to software. And perhaps these software issues are harbingers of an approaching credit cycle. Yet the banks have shown once again that credit quality in the US is still okay. Whatever bad happens in the future, I don't think it will be in the banking system. It could emerge in private credit, or it could emerge in AI-related debt like CoreWeave. That's why I'm now much more focused on the fixed income markets' continued reaction to CoreWeave and whether there is contagion to other parts of AI. Again, in my view, the banks are not leading indicators this time. In the past, I have said, as the banks go, so goes the economy. Not this time. The banks are extremely well capitalized, and their credit quality is still benign. The potential issues in AI and in private credit will determine whether and when there will be a recession. It would be much easier to predict the future if the banks were the leading indicators, because the data that banks produce is voluminous and transparent, while private credit is much more opaque, making future economic weakness much trickier to foresee. Frankly, I'm starting to think that the entire future of the US economy hinges on the success or failure of AI. That's why I talk about it so much.
As for the financial results of the banks this quarter, they once again posted strong results, largely because of extremely strong investment banking and trading. The banks are partial beneficiaries of the AI boom, as companies with AI financing needs are going to Wall Street for help. These results produce record levels of returns, or almost record levels of returns. Here's a brief synopsis. JP Morgan earnings per share was 557 versus 507, 10% growth. Both revenue and earnings per share, get this, missed, which is a very, very rare event for this company. There was a lack of operating leverage, as revenue was up 10% but expenses were up 12%. Also, the buyback was a paltry 700 million, and fixed income trading was down 4% versus last year. The return on tangible common equity was a strong 20%. Bank of America reported a poor quarter. It missed on revenue because fixed income trading declined by 17% versus last year. It also missed on earnings because of a government fine. The company paid a $1.2 billion fine because of failures with respect to anti-money laundering, a big no-no. AML is something regulators are very strict about, and it's kind of shocking that a bank of the quality of Bank of America is still having problems in this area. The market was quite shocked by this fine, as the stock was down over 4% on Wednesday. Still, Bank of America's return on tangible common equity is a very respectable 15%. So long-term, the company's fine. Wells Fargo has a history of occasionally disappointing in a quarter, and it did so once again this quarter. It beat on earnings but missed on revenue. Now, I really don't understand why Wells Fargo seems to miss every other quarter or so. I just don't get it. But they just do it. Earnings per share was $1.87 versus $1.66, up 13% versus last year. That was a beat. Revenue missed. Total revenue was up only 2% versus last year. In fact, Wells has not grown revenue in multiple quarters. The company just seems to have trouble growing its revenue. If you are interested in investing in a large bank, this is not the one I would look at.
Let's move on. Under the leadership of Jane Fraser, Citi continues to report good results. The company reported earnings per share of $2.85 versus $1.86, up 53% versus last year. And while higher rates hurt the fixed income results of Goldman, Citi did fine. The return on tangible common equity was at 11.5%. That was lower than the recent 13% achieved in the last two quarters, but still pretty good for Citi. Right now, we are in a pretty golden age for investment banking. Trading volumes are high, AI is creating massive financing needs, and M&A is strong. And that's why, despite the weakness in fixed income trading, investment banking results remain strong at Goldman and Morgan Stanley. Goldman reported a good quarter of $17.01 earnings per share versus $12.25, so that's 39% growth. The overall results were good, but if you want to get nitpicky, FIC, which stands for fixed income trading, was weaker than expected. On the other hand, equities did very well, up 72% versus last year. Goldman's results indicate that higher rates can hurt the fixed income trading business as clients take a pause because higher rates scare them. And like Goldman, Morgan Stanley produced powerful numbers. Revenue, while not at record levels, was up 12% versus last year. EPS of $3.03 was up 8% versus last year, and the return on tangible common equity was a very strong 23%. As for how to value banks, the easiest and most common and consistent way is to look at the return on tangible common equity. The higher that percentage, the higher the price to tangible common equity. That's why Goldman, JP Morgan, and Morgan Stanley are valued at 2.6 to 3.4 times tangible book. Their return on tangible common equities exceed 20%. At the same time, Wells Fargo, Bank of America, and Citi are at 1.2 to 1.8 times because their return on tangible common equity is 12 to 16%. What should you do about investing in the banking sector right now? Now, some of the froth has come out since the July peak, but frankly, not that much. To invest in banks at these valuation levels requires you assuming that the investment banking cycle remains very strong. I said exactly that when the banks reported second quarter results, and I reiterated there is just not much margin for error at these valuation levels. To me, it's just not that great an entry point.
This week on October 12th on our free service, we posted an interview with recurring guest Gary Marcus. We discussed all the controversies surrounding AI, what's real and what's not. Next week on October 17th on our free service, we will release an interview with Danny Moses, my former partner from my Big Short days. Danny now runs his own podcast called On the Tape, and we had a broad-ranging discussion about the deficit, the Fed, and controversies surrounding AI. The best way to support The Real Eisman Playbook is to subscribe to Substack through steveisman.com. And we greatly appreciate your support. And that's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
