00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour, which starts kicking off the week higher ahead of a massive slate of tech kearning. Savita Subramani with Bank of America has a street low seventy one hundred year end price Tiger on the SMPN writes the following underlying Girning's growth remain strong, but good results are no longer enough to move the needle in tech. Savita joins us now for more. Savita, welcome to the program. I start with a large question, and I imagine it involves a complex long gun and you'll have spice for that. But why is the outlook for the index right now? In your mind, so compromised. 00:01:06 Speaker 3: Yeah, lots of different reasons, but one is what we've been talking about, what I've been listening to on the show so far. The good news for tech seems to be priced in. The companies are no longer rallying and outperforming on beats on earnings and revenues. In fact, they've sold off on earnings and revenues. 00:01:27 Speaker 4: We've had an. 00:01:27 Speaker 3: Environment where the rest of the market is actually pretty healthy, but I think it's all been obscured by the elephant in the room, which is megacaf tech and the idea that these stocks are going to. 00:01:39 Speaker 4: Continue to lead us to new highs. 00:01:41 Speaker 3: I think is is no longer the case. Look, I like tech, I think tech is the future. But I think right now we're in an air pocket. And we've been talking about this all year. You know, the idea that we're in an environment where we know that Chad, you know, we know AI, We are bullish on AI. We know that companies are spending a ton of money. Ism is above fifty, well above fifty. You know, capex is strong, the economy is strong. 00:02:08 Speaker 4: Inflation is pretty healthy, maybe even overheating a little bit. 00:02:13 Speaker 3: But the idea that we're going to see that same leadership from the ballast of the market, I just think is very. 00:02:20 Speaker 4: Hard to paint. 00:02:21 Speaker 3: On top of that, you've got an environment where the consumer has been chugging along, defying all expectations, and maybe that continues, but this year, I think what we've seen so. 00:02:33 Speaker 4: Far is a little bit less bullish. 00:02:35 Speaker 3: So for example, if you look at layoffs in January, they were primarily in high paying jobs, in tech jobs. It's been an environment where the highest, the higher income cohort of the smp sorry of the US economy is not necessarily failing as healthy as they were a couple of years ago, whereas lower income is now getting a boost. So I think that's healthy in terms of broadening, but it's not necessarily you know, kind of the same story we've seen for the last three years. 00:03:08 Speaker 1: I'm just curious, is your seventy one hundred expectation just that tech has further to sell off and the rest of the market can keep up performing or chugging along here, but it won't be enough to offset those losses. 00:03:19 Speaker 4: Yeah, exactly. 00:03:20 Speaker 3: And I think we've kind of seen that in you know, in certain weeks where you have really negative tech moves, you haven't necessarily seen the market hold up as well. Ideally, we get to the end of the year and you know, we're at a point where the concentration risk in tech is lesser and you can kind of set yourself up for a healthy twenty twenty seven in terms of broadening, in terms of you know, kind of cyclicals just outperforming. But I think this year we're still in an environment where tech is contributing the lion's share of earnings. They're no longer rallying on good news. We're seeing capex penalized, and we talked about this earlier in the year as well. You're still in an environment where the pot where you're getting positive returns on your CAPEX if you're a big tech company, but those returns are thinning, and the idea that we're going to pay such a high multiple for mega cap tech today is hard to sell if your returns on invested capital are actually starting to get depressed. 00:04:26 Speaker 1: Saviina, I just wonder the sort of counter argument to this is what happened with Meta and Alphabet late last year when they announced a lot of capex and they were punished severely for it, and then they delivered these incredible earnings on an ongoing basis, and once again their stocks outperformed. Why are we not set up in the same way if people are just getting nervous and they see still see companies delivering well beyond any expectations. 00:04:53 Speaker 4: Yeah, I think that it's partly positioning, right. I mean, you look at when. 00:04:58 Speaker 3: Tech sells off, then you see it kind of comeback because investors are like, Okay, these companies aren't broken. I still want them as core holdings in my portfolio. Maybe I'm going to add a little exposure. 00:05:10 Speaker 4: So I think liquidity has. 00:05:12 Speaker 3: Been a big driver of tech really holding up better than one might expect. 00:05:21 Speaker 4: Liquidity has been amazing. 00:05:23 Speaker 3: I mean, if you think about it, last year, this year, we've had pretty low, pretty low levels of volatility in the market. We've had you know, a shock or two in terms of geopolitics, but the market has held up quite well. And I think that starts to change today because if you think about inflows into equity markets, we're at a point where asset allocations are pretty pretty healthy. Inequities maybe not as healthy as they were in the tech bubble, but we've got you know, less cash outside of equities except for in retiree balance sheets. And I think the idea that you're going to continue to see that machine of cash risking up and going after tech stocks, that narrative to me just seems like it's less less likely in the years to come. I do think there is one one pocket of the market that is going to catch a very strong bid, and that is inflation protected equity. 00:06:31 Speaker 4: And here's the idea. 00:06:32 Speaker 3: If I'm a retiree and I've got, you know, like seven trillion in cash just sitting there, It's been sitting there since the FED started hiking interest rates, that cash right now has a negative real return. Cash is the worst place to be during periods of higher inflation. So retirees, I think, are going to start to look for inflation protected income. Are they going to get it in tech? Not necessarily. I think they go back to things they used to own, like reeds and utilities MLPs, you know, kind of the yieldier cyclical areas of the market that can actually grow with inflation and keep up and return capital to retirees. 00:07:14 Speaker 4: Who need income basically. 00:07:15 Speaker 3: So I think that's one area of the market that hasn't moved as much as it should and that's where we would really be, you know, very bullish. So I guess, just to put a point on it, if you had to pick an index, it would be large cap value, yieldier kind of cheaper stocks that offer some inflation protection. 00:07:36 Speaker 2: Stay with US mul Bloomberg Surveillance coming up after this. So here's the lass. This morning, the US at around pausing strikes for a third straight night. The Trump administration Benign reports the breaking attacks is due to falling stock piles of a defense missiles. 00:08:00 Speaker 5: That's right when it comes to what's going on when it comes to Iran. We have seen this before. The president has taken pauses, but we've as seen actual diplomatic discussions. 00:08:09 Speaker 4: Right now. 00:08:09 Speaker 5: The reporting is really lending hand to the fact that we just have depleted too many of our munitions and they're concerned, especially when it comes to the Patriot missile system. At the same time, we also have the fact that this president potentially is a little bit nervous as well as where oil prices were near one hundred dollars a barrel is when we decided to take this tactical pause. So there's a lot of potential issues going into this decision. Well, one thing is for sure, there is still a conflict right now when it comes to the Strait of her Most in the Middle East, no vessels are getting through the Strait of her Most. And the discussions i Ron is having right now, they say with Amon is just about of control. 00:08:47 Speaker 4: Of the waterway. 00:08:47 Speaker 2: So which one is it? 00:08:48 Speaker 5: Right now? 00:08:48 Speaker 2: You've got markets, You've got midterms. I think they're wanted two of the same thing right now. One informs the other to some extent. And then you've got stock piles, And stock piles have lingered as a reason an issue shaping how we approach this particular conflict. It's linger for the last five months. 00:09:02 Speaker 1: And it's not exactly a question of whether they have enough munitions to actually keep going. There was a Wall Street Journal article that I thought was really telling about General Kin, General dan Kin going to the White House and saying, look, longer term, there are low inventories in particular of air defense and interceptors, and that longer term this could present a problem for the United States and even the medium term should there be a conflagration in the region. 00:09:27 Speaker 4: Or anywhere else. 00:09:28 Speaker 1: At a certain point, that is a risk that is weighing on the side of maybe not taking action, especially if there isn't a clear outcome that can be accomplished. 00:09:36 Speaker 2: Turbermarcus of All for Research Rights in the following he says, a durable diplomatic helfram is even harder to envision this time. We wouldn't felt anyone who prefers to tune this all out. They're not alone, but we do suspect it'll get worse before it gets better. They're not alone. It's my word's not Tobin's. I'm sure he agrees to hope and welcome to the program. It's important for us in financial markets to try and get an understanding of what this president is sensitive to and what why shape out come. In the Middle East. This is the reporting from the New York Times. Among the worries is that expanded hostilities could dangerously drain the diminished stock part of our defense munitions in the Middle East. Tobin, how much way should we put on that reporting over the weekend. 00:10:13 Speaker 6: I think it's a very significant consideration, and one that we've been talking about since May, if not before, is you know, a factor that could cause a de escalation in mid May before we got what I think was the sort of final turn towards the negotiation of the MoU we were flagging both spiking bond yields, you know, which then topped out around four point six seven on the tenure you know, levels that we've breached and are still near even after the rally yesterday, and the depleting stockpile of air defense musicians munitions is two things that could essentially force some kind of a you know, a durable diplomatic turn, a de escalation, a deal. 00:10:50 Speaker 7: And I think those two. 00:10:51 Speaker 6: Factors are still very very live and are driving a lot of what we saw at the end of last. 00:10:55 Speaker 5: Week, but alive for how long, Tobin, until the President decides that it's time to escalate or do you actually see a diplomatic off ramp at this moment? 00:11:05 Speaker 6: Well, yeah, I mean it's easy to just stop shooting, which is what both sides have done for now. I think, you know, Iran telling Lee is saying they're going to stop strikes on US bases as long as the US strikes stop. But I don't see any indication that they're going to stop strikes on ships if necessary to try and force them to accept their leadership in the Strait. 00:11:26 Speaker 7: So you know. I mean, we already saw the best attempt to finesse. 00:11:30 Speaker 6: The differences between the US and Iran on control of the straight of horror moves in the MU and it immediately fell apart. So it's it is challenging for me to see what a permanent solution could look like unless the US just becomes willing to accept Iran's assertion of control over the street, and thus far we really have not been doing that. 00:11:48 Speaker 5: There's other reports out, especially about late Center Lindsay Graham in this footage that's now starting to come out from a documentary he was filming, and he allegedly told Jake Sullivan that I not believe Trump's envoys Jared Kushner, Er and Steve Wickcoff could manage the negotiations because of what he considered conflict of interest. Do we have the right personnel at the table? 00:12:09 Speaker 6: Well, it's been a very kind of multifactorial process all through the diplomatic track. We have these multiple third countries mediating The messages coming into the White House seem to be going not just through Wickoff and Kushner, but also through Rubio, through Vance, who's been very frontally involved at various stages. 00:12:26 Speaker 7: So I don't really see any of. 00:12:27 Speaker 6: The diplomatic challenges as being just down to the composition of the negotiating team. I think basically the challenge is how far apart the two sides are substantively, and whether or not they can come together absent more pain for. 00:12:39 Speaker 7: One side or the other. 00:12:40 Speaker 1: Tobin. This administration is seeing a real loss and popularity as a result of the Iran War. At the same time, Democrats don't have a significant popularity when it comes to the view of how they would handle the situation of Iran. What is the democratic proposal and how to extract the United States and create some sort of status quo in the region. 00:13:00 Speaker 6: Oh, I certainly would not say that there's a kind of a cohesive democratic strategy at this point. 00:13:06 Speaker 4: You know. 00:13:07 Speaker 6: I think the position from most Democratic leaders is the problem is that we're in this situation already. You know, we're starting this war with a mistake at this point. There's no kind of cleaner, easy. 00:13:17 Speaker 7: Way out of it. Which I think it's true. 00:13:19 Speaker 6: You know, if they have the luxury is the opposition party of just being able to point to the president and say, look at how badly he's managing this conflict, and I think that message is working just fine with voters. But you know, if you know, God forbid, we're still in the middle of this, you know, two and a half years from now, and a Democratic president comes in and has to try and uncrack the egg. 00:13:37 Speaker 7: I think that'll be really challenging. 00:13:39 Speaker 1: How does this really factor into congressional support for increases in budgets, for creating some sort of backstop to support the military. And this really raises some real questions. 00:13:48 Speaker 4: Operationally. 00:13:49 Speaker 1: It's one thing, and this happens every single cycle, whether it's Republicans or Democrats. If they don't like the policy, they won't vote for it. 00:13:54 Speaker 4: But at a certain point, how. 00:13:55 Speaker 1: Do you end up with some sort of cohesive policy that can gracefully extract the United States while all so having the resources to restock the ammunition stockpiles. 00:14:07 Speaker 6: Yeah, on the defense funding front, I think we're in for a relatively unexciting outcome. I mean, we've seen these very large numbers thrown around the President proposing a total budget of one point five trillion dollars. 00:14:16 Speaker 7: We're not going to come anywhere closet to that. 00:14:18 Speaker 6: I think the base defense budget we're going to get a basically status quo outcome kind of low single digit growth that's out of the biparisan negotiations that will. 00:14:25 Speaker 7: Eventually kind of pick up in the Senate. 00:14:27 Speaker 6: Then they're using reconciliation to get through a really quite modest slug of money in the sixty sixty five billion dollar range, and I think that's all that they're going to get. You know, I don't think that they're also going to get a bipartisan supplemental in addition to that reconciliation bill. I don't think they have the votes to move a bigger number through reconciliation. So, you know, we can all see the problem now in terms of the defense industrial base, the adequacy. 00:14:50 Speaker 7: Of our munition stock files. 00:14:52 Speaker 6: But getting the funding to like really structurally change that I think will be very challenging. 00:14:56 Speaker 2: This always of serreal just been thrown across trading flaws the world over. When Tobin Marcus said, if we're talking about this in two and a half years, can you imagine two and a half years still talking about this? Stay with us more Bloomberg surveillance coming up after this. Vindcy Panx has been busy. She runs the following over a stile for policy. Just as in politics, conflict often begets gridlock. As such, rates are likely to remain on hold, at least for some time longer. Lindsay joins us now for more Lindsay, welcome to the program on hold, Dan, but just describe what the debate might sound like that starts tomorrow and concludes on Wednesday. 00:15:38 Speaker 8: Well, I think Mike really laid out a lot of the factors. When you look at the latest inflation data, the disinflation data, I think that clearly swings the pendulum into the Dubvish camp, giving them credence for the fact that price pressures may abate into the end of the year, if we do see the impact of tariffs fall off, and if we can see some sort of normalization in the energy market. On the flip side, even with this recent cooling from peak levels, inflation is still double the Fed's intended target, and with the risk of upside pressure further rising tensions overseas resulting in additional upside pressure and energy costs. This puts the FED, the more hawkish members at an easy position that we should take this more aggressive action and reverse some of that policy easing that we saw into the end of last year. So, as I suggested, this ongoing conflict, this clear divide between the hawkish and more Dubbs members, is likely to result in policy simply remaining steady on hold for the next several meetings. 00:16:40 Speaker 1: Lindsey, what do you make of the point that Krishna Guhau is making earlier, which is the fedword to hike rates at this meeting, that the market would price in three or four rate hikes immediately, that they would shoot first and ask questions later. Do you think that that's the likely path of travel should they move this week? 00:16:56 Speaker 8: Well, I think it depends on the communication that accompanies that decision. But if they're there's a lack of communication and the Fed simply comes out makes that aggressive move higher without any guidance, any forward guidance for what we can expect going forward, I think the market would anticipate that the FED has shifted their line of thinking to the prospect that inflation is rising, it's not under control, and if that's the case, it would be unlikely that one rate hike would quell that concern and convince the Committee that inflation was back on a pathway to that two percent target. 00:17:30 Speaker 1: Lizzie it's incredibly unusual. And you know this very well that when you see an increase in energy prices to this degree in the face of a shock, that you get a sudden real expansion in the labor market, that you see a real acceleration in terms of job creation. 00:17:46 Speaker 8: How do you. 00:17:46 Speaker 1: Understand that, because that is exactly what's happened this year, and it's incredibly unusual. 00:17:50 Speaker 8: It is because typically when we think about the economy, the fastest way to derail the US consumer is by sustained heightened energy prices. And as the consumer based economy, if the consumer isn't happy and healthy out in the marketplacee spending, we can't expect much expansion or much growth then from the broader economy. But you're right, we're not necessarily seeing that. We're continuing to see this pressure at the pump higher energy prices, but the economy is still expanding now certainly not at an overly robust pace by any means, but we maintain this decent pace, and as we look out to the second quarter, we're likely to continue around this two is ish percent with still stable conditions in the labor market. Again, we have lost some momentum, but the average pace around one hundred thousand per month does suggest that the latest pathway of higher energy prices has not yet derailed the consumer or the broader economy. 00:18:44 Speaker 5: Lindsay, do you expect dissenters this week? 00:18:47 Speaker 8: I think it depends again on that rate decision. If for some reason we see the Fed come out and decide to make a policy move, absolutely I would expect to see some dissensions. However, if we see the Fed take the more steady pathway maintain the current level of policy, as I expect, the descents may be rained in if there is a very ample conversation around a potential move in one direction or the other down the line. 00:19:13 Speaker 5: We've been having this conversation all morning and Blake Glenn of RBC was talking about it that he actually thinks the dissenters, if they hold, could help Kevin Worsh. Do you think that gives them him cover? 00:19:24 Speaker 8: I think right now Kevin Worsh very much would like to steer the monetary policy ship to a lower interest rate environment. But I think right now he recognizes that that's a more medium to longer term outcome given the level of inflation. Given still the upside risks. I think at best, worsh can expect to hold policy study, and along the way, simply downplay any prospect for interest rate hikes, even if the conversation begins to move in that direction. 00:19:52 Speaker 2: This is the Bloomberg's Events podcast, bringing you the best in markets, economics, antiopolitics. You can watch the show live on Bloomberg weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.