Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Mike Wilson's capitulated, he's moved from forty five hundred to
Speaker 2: fifty four hundred and all of that. Can we just
Speaker 2: start with the skub the wide range of outcomes, because
Speaker 2: that was the headline of the piece, the back case
Speaker 2: versus the bull case. Has it ever been this wide?
Speaker 3: Well, not for us, I think for other people they've
Speaker 3: had wider skews. And look, it just reflects the uncertainty
Speaker 3: that has been the case for the last several years.
Speaker 3: And quite frankly, I wouldn't be surprised if we hit
Speaker 3: both sides, you know, I mean, like, that's kind of
Speaker 3: the world we're in, which is, you know, think about
Speaker 3: this year, and we talked about this at the beginning
Speaker 3: of the year, which is we had three sort of
Speaker 3: equally similar opera you know, sort of outcomes. One was
Speaker 3: a soft landing is the goldilax, which is kind of
Speaker 3: consents us now and that's our house view. Then you
Speaker 3: have the no landing, which is kind of a reacceleration,
Speaker 3: the stickier inflation even maybe a stagflationary outcome, which is
Speaker 3: what the market was thinking about in April and now
Speaker 3: you're back to a soft link, but you still can't
Speaker 3: rule out of recession either, right, So like all these
Speaker 3: are very possible, and you know they could help. All
Speaker 3: happened with a higher than normal degree of certainty.
Speaker 4: So that's that's really.
Speaker 3: The headline that should have been out is that, look,
Speaker 3: nobody knows anything, right, I mean, and particularly at a
Speaker 3: point in time. And I think maybe maybe our mistake
Speaker 3: is just admitting that we don't know as much as
Speaker 3: maybe everybody else claims to. That's called humility, something that
Speaker 3: we've learned the hard way over life.
Speaker 4: But anyways, the point here.
Speaker 3: Is that the meat of our report this year or
Speaker 3: this this update was really more about how do you
Speaker 3: make money in an environment we have basically zero percent
Speaker 3: upside and the base case and you could have twenty
Speaker 3: percent upside or twenty percent downside.
Speaker 4: And that's what clients pay us for, right. It's the process.
Speaker 3: It's understanding, Okay, what kind of environment and how are
Speaker 3: we going to navigate that and manage that. So we
Speaker 3: spent a large part of the report yesterday talking about
Speaker 3: trade ideas, specific sector ideas. That's not the headline that
Speaker 3: people wanted to write about. That's fine, and it's your prerogative,
Speaker 3: but that's what we want to talk.
Speaker 2: About that was never going to fit in the headline.
Speaker 2: We will talk about some of that stuff in just
Speaker 2: a moment. Let's talk about the headline just brieflake Sure
Speaker 2: a youth the emphasize in the fifty four hundred. Are
Speaker 2: you saying it's a price target? It's not actually that
Speaker 2: important to you in affirm what is that?
Speaker 4: Well, it's not important to most clients.
Speaker 3: Institial clients don't care about the target on the S
Speaker 3: and P five phnals to being honest say they're trying
Speaker 3: to pick stocks and look. One of the most important
Speaker 3: things we talked about in the report is alpha generation.
Speaker 3: This year has been spectacular. The way we measure it
Speaker 3: with our client our client base, which is significant. Is
Speaker 3: this the best alpha generation alpha capture we've seen since
Speaker 3: we've started recording it since twenty ten.
Speaker 4: So that's what people care about.
Speaker 3: We're trying to help them in their process of Okay,
Speaker 3: what kinds of stocks work in this environment? Oh, by
Speaker 3: the way, when we skew from these different outcomes, you
Speaker 3: need to be ready to pivot towards different types of
Speaker 3: securities right now, like our house call is it's a
Speaker 3: soft landing goldilocks outcome. We're not that confident that we
Speaker 3: want to make that bet fully, like, we think it's
Speaker 3: still late cycle, which means quality okay, large caps over
Speaker 3: small caps. Still, we like staples over discretionary. We have
Speaker 3: two defensive sectors overweight utilities and staples because that kind
Speaker 3: of protects against slowing growth risk. So there's a bunch
Speaker 3: of different things, but the main factor.
Speaker 4: That's been working is quality.
Speaker 3: Quality has been the most consistent factor, and we don't
Speaker 3: see that changing.
Speaker 1: I just want to say that if you wrote a
Speaker 1: headline saying nobody knows anything, I mean, we could do
Speaker 1: that every day, but it probably wouldn't really gain that
Speaker 1: much attraction. I am wondering if there are certain areas
Speaker 1: that would win in either scenario, the fifty four hundred
Speaker 1: or the forty five hundred.
Speaker 3: Well, I think that we laid it out once again,
Speaker 3: that's our bare case. A forty five hundred scenario is
Speaker 3: that's not really our bare case. That's our base case
Speaker 3: for a year end Originally that obviously has proven to
Speaker 3: be wrong, mainly because of multiples. Right, I think this
Speaker 3: is the main thing said that people have either gotten
Speaker 3: right or wrong in the last twelve months. Is that
Speaker 3: I mean, a twenty one multiple is in the top
Speaker 3: death style of the last eighty years. I mean, that
Speaker 3: is an expensive multiple. So the question I think investors
Speaker 3: have to ask themselves is is that a fair multiple
Speaker 3: to be paying well in the goaldilocks, you know, perfect
Speaker 3: soft landing. I think that's plausible, but that's where we're trading,
Speaker 3: and that's why there's not a lot of upside at
Speaker 3: the index level.
Speaker 1: Which raises this question, are there specific sectors that win
Speaker 1: regardless of the overall index? Do you see certain areas
Speaker 1: that are kind of independent of this overall shift of
Speaker 1: whether there is this momentum and international money that pours
Speaker 1: in and keeps valuations high and sends them higher.
Speaker 4: It's large camp quality.
Speaker 3: I mean that, I mean that is what's continues to
Speaker 3: and by the way, it's not just high growth. It's
Speaker 3: also cyclicals can work in that. But it's still up
Speaker 3: the quality curve, and we show it in the note
Speaker 3: very clearly. I mean, it's just it's it's the it's
Speaker 3: been the best carry factor for the last year, year
Speaker 3: and a half, which is a classic late cycle winner,
Speaker 3: which is where we are so you know, don't overthink
Speaker 3: that and don't try to be cute and say, well,
Speaker 3: I'm going to jump over here because I think there's
Speaker 3: better returns there could be. Look in the small cap
Speaker 3: and in the lower quality areas. You can't own nothing.
Speaker 3: I mean, but it's very idiosyncratic.
Speaker 4: It's very idiosyncratic. It's not a.
Speaker 3: Factor that's carrying well, it's a okay, I have a
Speaker 3: stock specific idea. It's a low quality stock potentially that
Speaker 3: has a very unique story to itself.
Speaker 2: Next me still for this mall case. You know it's
Speaker 2: tomorrow afternoon. We get numbers from and Vidia, megacap Tech.
Speaker 2: What supports that fifty four hundred? What supports it for you?
Speaker 2: Is it mega cap tech? The in videos of this world?
Speaker 2: Is it elsewhere?
Speaker 3: Well, it's basically you're assuming that multiple stay elevated.
Speaker 4: Right.
Speaker 3: You know, we didn't change our earnings forecasts in this report.
Speaker 3: We've had this sort of boom idea that we had
Speaker 3: the boom bust thesis for a while. We probably were
Speaker 3: early in calling for a recovery and earnings this year
Speaker 3: in twenty twenty five, so that didn't change. So you
Speaker 3: have earnings coming from a lot of different groups. Now,
Speaker 3: I would say the biggest contributors have been technology. Energy
Speaker 3: has been a big contributor surprisingly, industrials because of all
Speaker 3: the spending that's going on fiscally. So those are three
Speaker 3: major sectors that are contributed to the earning story. But
Speaker 3: ultimately the fifty four hundred is being supported by policy,
Speaker 3: right by very loose fiscal and monetary policy. Now you
Speaker 3: may say, well, monetary policy is tight, not really. I
Speaker 3: mean we have an incredible amount of liquidity coming in
Speaker 3: to pay for that fiscal So, to me, the risk
Speaker 3: in the story for the next six to twelve months
Speaker 3: is do the market start to balk at this unsustainable
Speaker 3: fiscal policy and the way that they're funding it.
Speaker 4: And we wrote about this, you know in detail.
Speaker 3: We have these liquidity provisions in place now, the reverse
Speaker 3: repo which everybody knows about. The Treasury General Account can
Speaker 3: be drained if necessary to pay for fiscal stemus in
Speaker 3: a budget if they need to. And the Fed has
Speaker 3: already said they're going to start tapering QT. Well, that's
Speaker 3: like a trillion dollars of liquidity that's pretty loose right
Speaker 3: to pay for the fiscal So to me, does of
Speaker 3: the market and I think this is. This is something
Speaker 3: we're watching very carefully. Last fall, when multiples came down hard,
Speaker 3: it was because rates were going up due to term
Speaker 3: premium widening, meaning the bond market we're starting to push
Speaker 3: back on this strategy right now.
Speaker 4: That's not a problem.
Speaker 3: So one of the things we're going to be watching this,
Speaker 3: you know, to change our view on how things trade
Speaker 3: at the index level is does the term premium start
Speaker 3: to widen again?
Speaker 4: We don't know, but that's what we're gonna be watching.
Speaker 2: So big risk factor is in the bond market, and
Speaker 2: in the bond market, the big focus is November. Does
Speaker 2: this have a political twist to it? An election co
Speaker 2: embedded in it?
Speaker 3: Well, I mean yes and no, because I wouldn't say
Speaker 3: either party has shown any fiscal discipline right So in
Speaker 3: other words, I think we're going to get a strong
Speaker 3: fiscal support no matter who wins the election, both in
Speaker 3: Congress or at the presidential level. The real question for
Speaker 3: markets is how does it get funded?
Speaker 4: How is it funded?
Speaker 3: Can they fund it at a reasonable rate? Right now,
Speaker 3: the bondb market seems very relaxed about that feature, which
Speaker 3: is why multiples have expanded again.
Speaker 1: So if the bond market stays relaxed about this, but
Speaker 1: there's a lot of people prick that it will and
Speaker 1: believe me, I get very excited about auctions, but every
Speaker 1: week people tell me that I shouldn't because there's plenty
Speaker 1: of interest at these levels. If there isn't pushback, then
Speaker 1: fifty four hundred is that too conservative?
Speaker 4: Maybe it could be.
Speaker 3: I mean, look, I can make a case for seventeen times,
Speaker 3: which is when our target was originally for this year,
Speaker 3: seventeen eighteen times. I can make a case for twenty
Speaker 3: one times. I can make case for twenty two times.
Speaker 3: That's the problem, right, We don't know, so that's why
Speaker 3: we have a wider skew.
Speaker 4: And I would say this Lisa, that.
Speaker 3: The target will be more determined, probably by multiples than
Speaker 3: we're going to be wildly surprised on earnings. Okay, unless
Speaker 3: it's recession, of course, then you'll be surprising the downside.
Speaker 3: But I don't like the earnings haven't really moved that
Speaker 3: much for twenty twenty four and twenty five. Right, if
Speaker 3: you think about since October, which is with the low
Speaker 3: last fall, twenty twenty four, earnings estimates are a couple percent.
Speaker 3: You know, the markets at twenty five thirty. So it's
Speaker 3: all multiple. So this is why you just need to
Speaker 3: be alert to things changing potentially in the bombing market
Speaker 3: first and then that will feed into the equity multiples.
Speaker 5: When you talk about fiscal spending, to go back to
Speaker 5: John's point earlier in the election, it's very different what
Speaker 5: the fiscal spending may be used on depending on who
Speaker 5: wins the White House. You're talking about potentially industrials, the
Speaker 5: green energy economy. This is a new industrial policy from
Speaker 5: the Biden administration that could continue or it could stop
Speaker 5: short if it's Trump. How are you thinking about twenty
Speaker 5: twenty five.
Speaker 3: Well, I mean, look, I think the industrial policy will
Speaker 3: remain strong. I mean that's our reshoring thing, which is
Speaker 3: which was part of the Trumpet iministration. So half of
Speaker 3: the industrial policy is potentially green energy and half of it,
Speaker 3: I would say, is reshoring in the de globalization trend.
Speaker 4: So there's going to be spending either way.
Speaker 3: It may be redirected, like I could see maybe the
Speaker 3: energy policy shifting back towards traditional energy, but I would
Speaker 3: be surprised as spending is curtailed in a meaningful way.
Speaker 3: From that standpoint, I think we will see changes or
Speaker 3: differences is in maybe in the tariffs sol though recently
Speaker 3: that seemed to be more aligned. And then, of course
Speaker 3: immigration is a big one, and that was a huge
Speaker 3: surprise this year that really nobody saw coming around the
Speaker 3: label to positive labor shock from immigration. So to me,
Speaker 3: that's a while. That's probably the single biggest wildcard depending on.
Speaker 4: Who wins the election.
Speaker 2: Bigger not tighter is if you coming from men and
Speaker 2: Zenner and the team more and Stanley, this economy can
Speaker 2: grow without it getting tighter and generating inflation pressure. Are
Speaker 2: you saying that could flip the other way pretty quickly
Speaker 2: based on the outcome the election.
Speaker 3: I think that well, depending on how things behave if
Speaker 3: policy really changes.
Speaker 4: But yeah, sure, if you if you all of a sudden.
Speaker 3: Sh borders down and you know, Trump's talking about deporting people,
Speaker 3: that would be a negative labor shock, and then we'd
Speaker 3: be in a reverse situation. So look, right now, I
Speaker 3: think the election is literally a fifty to fifty I mean,
Speaker 3: I mean the polls are right there forty eight, forty
Speaker 3: nine to fifty percent for both sides.
Speaker 4: So this is this is not an issue yet. We've
Speaker 4: talked about this in the.
Speaker 3: Note two, which is that volatility and election years typically
Speaker 3: doesn't start picking up until August September, so I think
Speaker 3: it'll be okay for the next month.
Speaker 4: Or this is not going to be a topic, but
Speaker 4: it can
Speaker 3: Come at us quickly, probably post the conventions.