WEBVTT - Bloomberg Surveillance TV: December 10, 2024

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news.

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<v Speaker 2>This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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<v Speaker 2>with Lisa Bromwitz and Amrie Hordern. Join us each day

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<v Speaker 2>for insight from the best in markets, economics, and geopolitics

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<v Speaker 2>from our global headquarters in New York City. We are

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<v Speaker 3>Bob Dole of cross Mark is cautious heading into the

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<v Speaker 3>new year, saying Risk Act returns are likely to be

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<v Speaker 3>lower in twenty twenty five after very strong returns in

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<v Speaker 3>twenty twenty four. US equities are increasingly vulnerable to corrections

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<v Speaker 3>given elevated valuations and earnings expectations. Bob, I am so

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<v Speaker 3>pleased to say joins us now. Bob, do you think

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<v Speaker 3>that yesterday was indicative of some of the perilousness if

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<v Speaker 3>you can say that, of such high valuations at a

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<v Speaker 3>time of great uncertainty?

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<v Speaker 4>Absolutely, Lisa, these evaluations are up there. When I look

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<v Speaker 4>at my screen and I see, you know, twenty five

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<v Speaker 4>times trailing and twenty three forward. I say, I guess

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<v Speaker 4>the world's perfect, and it would have to be to

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<v Speaker 4>justify those valuations. And you've all just discussed the world

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<v Speaker 4>isn't exactly perfect. Expectations are high for the economy, expectations

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<v Speaker 4>are high for what the Trump administration can do, and

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<v Speaker 4>those good news items must come in to sustain these levels.

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<v Speaker 3>That said, you're not exactly a raging bear. I mean

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<v Speaker 3>I was looking, and you still expect sex to outperform bonds.

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<v Speaker 3>You still see gains incoming.

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<v Speaker 1>So how do you nuance a message.

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<v Speaker 3>Of caution without necessarily pulling back in any capacity to

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<v Speaker 3>time where other people are saying we're just beginning some

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<v Speaker 3>sort of AI revolution in US equity markets.

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<v Speaker 4>Yeah, so I wouldn't go to one hundred percent cash.

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<v Speaker 4>But if I've made a lot of money and I'm

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<v Speaker 4>fully invested and was tempted to take a little money

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<v Speaker 4>off the table, I think that's okay. I'm fully invested.

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<v Speaker 4>I've just been moving a little bit more toward neutral.

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<v Speaker 4>For example, my biggest overweight thankfully has been financials. I'm

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<v Speaker 4>trimming them. My biggest underweight, thankfully has been healthcare. I'm

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<v Speaker 4>doing some bottom fishing there, just moving a little more neutral.

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<v Speaker 4>Uncertain about where we head in the new year. Is

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<v Speaker 4>a Trump administration going to pound the table on cost

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<v Speaker 4>cutting and text cuts or is it going to be

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<v Speaker 4>more about deportation and tariffs. They're going to give very

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<v Speaker 4>different answers to the stop market.

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<v Speaker 5>Well, Bob, you know that politics are ordinarily a second

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<v Speaker 5>concern for markets, but they're likely to inject volatilely of

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<v Speaker 5>the course of the coming year. Do you actually move

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<v Speaker 5>politics to being the first order of business when it

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<v Speaker 5>comes to the concern for markets in twenty twenty five?

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<v Speaker 4>Well, only its effect on the economy. The economy and

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<v Speaker 4>earning has always come first in my view, but politics,

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<v Speaker 4>particularly in this environment, have a more than normal impact

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<v Speaker 4>on those profits.

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<v Speaker 5>So when it comes to things like pulling back you

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<v Speaker 5>say on financials, a lot of analysts that have been

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<v Speaker 5>coming on our program say that actually they are overweight

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<v Speaker 5>because they're looking at the potential M and A activity,

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<v Speaker 5>looking at the deregulation that Trump might usher in, given

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<v Speaker 5>the fact that he did so in Trump one point zero,

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<v Speaker 5>and he keeps talking about it. So why at this

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<v Speaker 5>moment would you pull back on something as specific as financials.

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<v Speaker 4>So it's still my largest overweight. So I still love

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<v Speaker 4>the stocks, but I don't want to be a pig.

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<v Speaker 4>So I'm taking some money off the table, recognizing the

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<v Speaker 4>valuations have moved up some and you trees don't necessarily

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<v Speaker 4>go to the sky or go there in a straight

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<v Speaker 4>line as it were, So just taking a little money

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<v Speaker 4>off the table. If I'm not overweight financials, I would

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<v Speaker 4>get there.

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<v Speaker 6>Giving your concern about the US economy and valuations, are

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<v Speaker 6>you finding opportunities either in stocks that focus more globally

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<v Speaker 6>or in global stocks or are you kind of very

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<v Speaker 6>focused just on the US here?

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<v Speaker 4>My mandate is all US, but there are some interesting

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<v Speaker 4>things overseas, notwithstanding difficult environment that we see for earning

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<v Speaker 4>over there. I would say back to core portfolio, you

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<v Speaker 4>want to focus on companies with high earnings predictability, Peter,

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<v Speaker 4>in my view, high earnings persistence, strong free cash flow,

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<v Speaker 4>dive it in stocks, dividend growth stocks. I think we'll

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<v Speaker 4>do even better next year.

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<v Speaker 6>Great, So you're going to focus on the dividend sector

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<v Speaker 6>for next year dived end growth.

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<v Speaker 4>Yes, that's awesome.

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<v Speaker 6>Any other kind of outliers that you have out there

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<v Speaker 6>that maybe aren't top of mind for everyone, that you

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<v Speaker 6>think could be a really interesting opportunity.

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<v Speaker 4>Yeah, so I come back to the I'll call it quality,

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<v Speaker 4>although it's not exactly quality. That earnings, persistence, and the

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<v Speaker 4>free cash flow. Those stocks have done just fine on

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<v Speaker 4>the way up in this market, and I think when

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<v Speaker 4>we get the inevitable pullback, I think those stocks will

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<v Speaker 4>go down less than the market, showing some relative outperformance.

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<v Speaker 3>I'm wondering if you see any signal from what we

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<v Speaker 3>got from Oracle yesterday. Oracle had really high expectations, shares

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<v Speaker 3>had been flying high. They came out basically in line.

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<v Speaker 3>I mean, I was looking through the numbers looking for

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<v Speaker 3>some kind of catastrophe to really justify the fact that

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<v Speaker 3>their shares were down more than eight percent. Couldn't really

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<v Speaker 3>find it, but it really highlighted those high valuations. How

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<v Speaker 3>vulnerable are some of these companies, particularly in the tech space,

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<v Speaker 3>to disappointments when it comes to earnings.

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<v Speaker 4>Great point, I think you read it well. That is

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<v Speaker 4>to say, the earnings were okay. They weren't great, but

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<v Speaker 4>they were okay. And then you see the stock doing

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<v Speaker 4>what it did. You say, what am I missing? It's

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<v Speaker 4>expectations are just very high in too many places. And

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<v Speaker 4>I repeat at a multiple in the low twenties, things

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<v Speaker 4>better nearly perfect, and the world's articles earnings were not perfect,

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<v Speaker 4>they were just okay.

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<v Speaker 1>I'm looking right now.

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<v Speaker 3>We just got at FIB small business optimism, and you know,

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<v Speaker 3>some of these peripheral reads shed some light on how

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<v Speaker 3>much the mood has changed, and you can make the

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<v Speaker 3>argument maybe this is just because of the election and

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<v Speaker 3>some sort of optimism in terms of regulatory pullback. Nonetheless,

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<v Speaker 3>you saw a surge to the highest level going back

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<v Speaker 3>to twenty twenty one. You see the biggest jump in

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<v Speaker 3>this optimism going back to nineteen eighty at a time

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<v Speaker 3>where you've seen surprise after surprise to the upside. I

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<v Speaker 3>just wonder how much of a risk there is that

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<v Speaker 3>we are underestimating how much strength there is in the

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<v Speaker 3>economy and what that means for inflation, on yields and

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<v Speaker 3>the Fed's path ahead.

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<v Speaker 4>Lisa, I think you nailed it there with that set

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<v Speaker 4>of questions. Look, stocks have moved up a lot to

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<v Speaker 4>discount that good news that supposedly is coming, and that's

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<v Speaker 4>why you see sentiment on the stock market and the

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<v Speaker 4>conference board percentage of Americans who think stocks are going

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<v Speaker 4>to be higher twelve months from now all time high.

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<v Speaker 4>That's generally not a time to pound the table. And

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<v Speaker 4>you may make another good point inflation. Inflation is not

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<v Speaker 4>going to two percent as the Fed wants in my judgment,

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<v Speaker 4>without a recession. In fact, it's stubborn. It's likely to

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<v Speaker 4>move up a little bit more. You talked there earlier

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<v Speaker 4>on about the three handle for the CPI. That's nowhere

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<v Speaker 4>close to too, if you will.

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<v Speaker 3>Yeah, and this is really a reason why maybe the

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<v Speaker 3>bond market holds the key keys to just how much

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<v Speaker 3>legroom this market has. Bob Doll of Crossmark, thank you

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<v Speaker 3>so much as always for being with us. Talking about

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<v Speaker 3>Saudi Arabia and turning to commodities, oil pairing back recent

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<v Speaker 3>gains following the fall of Syrian President Bashar al Assades

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<v Speaker 3>and ahead of OPEC's year end conference, Ellen Wald of

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<v Speaker 3>the Atlantic Council, also author of Saudi Inc, Writing the

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<v Speaker 3>oil market does not seem phased by these events. Prices

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<v Speaker 3>climbed one percent and trading on Monday, and the market

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<v Speaker 3>is still more concerned about the tepid economic growth outlook

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<v Speaker 3>and supply growth forecasts for twenty twenty five that could

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<v Speaker 3>put the market into oversupply. Ellen joins us Now and Ellen,

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<v Speaker 3>I want to start with your experience covering the royal

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<v Speaker 3>family in Saudi Arabia and your intensive knowledge of the

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<v Speaker 3>country that a lot of people are saying has to

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<v Speaker 3>be the main operator in this event. What do you

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<v Speaker 3>think their mindset is seeing the fall of Syria and

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<v Speaker 3>what their role is in trying to impose some sort

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<v Speaker 3>of new order in a key stronghold in the Middle East.

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<v Speaker 7>That's a great question, and I think that Saudi intervention

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<v Speaker 7>and Saudi involvement at this point could really play a

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<v Speaker 7>key role in the future of what Syria looks like

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<v Speaker 7>and also whether this instability spreads to other areas of

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<v Speaker 7>the region.

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<v Speaker 1>I think that the Saudis wants stability.

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<v Speaker 7>Ashar al Asad was a very stabilizing force until he

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<v Speaker 7>wasn't and now that he's gone, the potential for a

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<v Speaker 7>real failed state and potential for more insurgencies to take

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<v Speaker 7>root is very very high, and the Saudis want to

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<v Speaker 7>prevent that.

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<v Speaker 1>They want a stable rule over all.

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<v Speaker 7>Of Syria, and so they really have a potential right

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<v Speaker 7>now to both influence the development of whatever new government

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<v Speaker 7>or power comes in, but.

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<v Speaker 1>Also to influence.

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<v Speaker 7>How well that regime is able to hold on to power.

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<v Speaker 7>And I think that oil and fuel is very very

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<v Speaker 7>critical at this juncture, because even though Syria has the

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<v Speaker 7>oil and gas supplies that it needs to supply its

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<v Speaker 7>own demand, it's not going to be able to get

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<v Speaker 7>them up and running in time to stabilize.

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<v Speaker 1>Their their hold on power. And so essentially a Seria

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<v Speaker 1>has been dependent on Iranian.

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<v Speaker 7>Fuel, uh And and Russia and these other kind of

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<v Speaker 7>pariah nations for a very long time, and Iran is

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<v Speaker 7>clearly not interested in supplying that fuel. We saw this

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<v Speaker 7>very dramatic tanker turnaround right in the middle as soon

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<v Speaker 7>as the uh Asad regime fell.

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<v Speaker 1>And so if Saudi Arabia and other.

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<v Speaker 7>Gulf countries with kind of stable monarchies can step in

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<v Speaker 7>and help provide them with the electricity, the.

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<v Speaker 1>Fuel and aid uh you know, to start to rebuild

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<v Speaker 1>and start to consolidate their hold on power, then they

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<v Speaker 1>could prove to be.

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<v Speaker 7>A very stabilizing force in Syria and in the rebuilding

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<v Speaker 7>of whatever is to come. And so I I do

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<v Speaker 7>think there is an important opportunity for the Saudis along

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<v Speaker 7>with others in the Gulf to really influence the future

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<v Speaker 7>trajectory of Syria.

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<v Speaker 5>Well, who do you think is best position to really

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<v Speaker 5>fill that void? Saudi Arabia, Rack kowait Emroadis.

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<v Speaker 7>You know, it's difficult because the political and religious makeup

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<v Speaker 7>of Syria is very different from the Gulf. But I

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<v Speaker 7>think that at this point those sectarian differences matter a

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<v Speaker 7>bit less than really who comes through with the aid

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<v Speaker 7>and with the fuel and the money and the medical supplies.

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<v Speaker 1>And the food that they're going to need.

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<v Speaker 7>And I do think that the Saudis could take a

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<v Speaker 7>leadership role in kind of a coalition effort to supply

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<v Speaker 7>these things and really to do you know, to become

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<v Speaker 7>that stabilizing force.

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<v Speaker 6>Yeah, I'm pulling this back a little bit more domestically.

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<v Speaker 6>How successful do you think, you know, drill baby drill

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<v Speaker 6>will be? Is that something that's going to be effect

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<v Speaker 6>of really ramping up our production? And do you have

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<v Speaker 6>any thoughts on what we should be trying to do

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<v Speaker 6>with the refining industry, which is really kind of been

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<v Speaker 6>stagnant in this country I think for years.

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<v Speaker 7>Yeah, I think I kind of wish the refrain was

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<v Speaker 7>actually refine baby, refine instead of drill, baby drill, Because

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<v Speaker 7>at this point, you know, production in the US is

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<v Speaker 7>at its highest. I mean we're at at like thirteen

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<v Speaker 7>point five million barrels a day.

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<v Speaker 1>We're the largest producer in the world right now. How

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<v Speaker 1>much more do we really need to produce? How much

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<v Speaker 1>more do we really need to.

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<v Speaker 7>Throw into this uh, you know market that's kind of

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<v Speaker 7>verging on over supply. But what we really could do,

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<v Speaker 7>and what I think would really help both the American

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<v Speaker 7>people and you know, our trading partners abroad, would be

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<v Speaker 7>to really take a look at our refining industry.

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<v Speaker 1>To put in some new refineries.

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<v Speaker 7>We've seen refineries closing and shifting to BUYO fuels, which

0:11:44.960 --> 0:11:47.080
<v Speaker 7>aren't really all that profitable or useful.

0:11:47.520 --> 0:11:48.000
<v Speaker 1>We need to.

0:11:48.520 --> 0:11:53.280
<v Speaker 7>Really maybe have some new refineries, and we could really

0:11:53.320 --> 0:11:56.480
<v Speaker 7>I think, keep gasoline prices down and fuel costs down

0:11:56.520 --> 0:11:59.520
<v Speaker 7>that way, as opposed to just producing more oil and

0:12:00.120 --> 0:12:03.280
<v Speaker 7>shipping it abroad, because we can only utilize so much

0:12:03.280 --> 0:12:04.520
<v Speaker 7>of that in the US.

0:12:04.840 --> 0:12:06.040
<v Speaker 1>We can also if we have.

0:12:06.080 --> 0:12:08.839
<v Speaker 7>More gasoline and other fuels, then we can use ship

0:12:08.920 --> 0:12:12.440
<v Speaker 7>that and export that equally. So I do think that

0:12:12.520 --> 0:12:15.480
<v Speaker 7>the really we should change that refrain to refine baby refined.

0:12:15.520 --> 0:12:18.160
<v Speaker 1>It doesn't roll off the tong Quoitas. Well, we don't.

0:12:18.280 --> 0:12:20.439
<v Speaker 5>We don't have a state oil company the way these

0:12:20.720 --> 0:12:23.440
<v Speaker 5>Gulf countries do. And we just heard from Chevron, I

0:12:23.480 --> 0:12:25.679
<v Speaker 5>believe it was last week that said, actually, we care

0:12:25.760 --> 0:12:29.400
<v Speaker 5>more free cash flow more than we care about production growth.

0:12:29.400 --> 0:12:31.439
<v Speaker 5>And they're actually starting to pull back in the Permian.

0:12:31.760 --> 0:12:35.280
<v Speaker 5>So what is the US in total spare capacity?

0:12:36.480 --> 0:12:37.360
<v Speaker 1>That's a great question.

0:12:37.400 --> 0:12:39.280
<v Speaker 7>I don't think that we can really talk about the

0:12:39.360 --> 0:12:42.360
<v Speaker 7>US in terms of spare capacity, because, like you said,

0:12:42.360 --> 0:12:45.400
<v Speaker 7>there's no state run oil company. Every oil company decides

0:12:45.400 --> 0:12:48.200
<v Speaker 7>for themselves. It's in their best interest for a very

0:12:48.200 --> 0:12:50.560
<v Speaker 7>long time. For a long time, in kind of the

0:12:50.600 --> 0:12:55.840
<v Speaker 7>height of the fracking period, we had this kind of

0:12:55.840 --> 0:12:59.560
<v Speaker 7>ethos where everyone had to produced, produce even if they

0:12:59.679 --> 0:13:02.880
<v Speaker 7>weren't even you know, making up their costs simply because

0:13:02.920 --> 0:13:03.600
<v Speaker 7>they had to keep.

0:13:03.440 --> 0:13:04.240
<v Speaker 1>Ahead of payroll.

0:13:04.320 --> 0:13:07.280
<v Speaker 7>And so you could be sure that the push and

0:13:07.320 --> 0:13:08.920
<v Speaker 7>the drive was to increase production.

0:13:09.400 --> 0:13:10.480
<v Speaker 1>Now that's not the case.

0:13:10.520 --> 0:13:13.880
<v Speaker 7>Now that you've got big companies like Chevron, Exxon, uh

0:13:13.920 --> 0:13:16.480
<v Speaker 7>and you know, really consolidating, and there's a lot of

0:13:16.480 --> 0:13:19.760
<v Speaker 7>consolidation in the Permian, you're seeing less of this push

0:13:19.800 --> 0:13:22.280
<v Speaker 7>and more of a sense of Okay, what's a healthy

0:13:22.320 --> 0:13:25.080
<v Speaker 7>growth rate, you know, what's healthy for the company.

0:13:25.120 --> 0:13:26.400
<v Speaker 1>And so I don't think we're going to.

0:13:26.400 --> 0:13:29.959
<v Speaker 7>Necessarily see much more growth or a significant amount of

0:13:30.000 --> 0:13:33.400
<v Speaker 7>growth in terms of oil production. And I do think

0:13:33.400 --> 0:13:35.240
<v Speaker 7>the focus should really be on what do we do

0:13:35.280 --> 0:13:37.920
<v Speaker 7>with this oil and how are we best using it?

0:13:37.960 --> 0:13:41.679
<v Speaker 7>And how can companies maximize uh, you know, their profits

0:13:42.080 --> 0:13:44.160
<v Speaker 7>with the oil that they're already drilling.

0:13:44.480 --> 0:13:46.640
<v Speaker 3>Ellen Wald of the Atlantic Council, thank you so much

0:13:46.920 --> 0:13:57.640
<v Speaker 3>for your time and for your insights, particularly in Saudia Arabia.

0:14:00.080 --> 0:14:03.600
<v Speaker 3>Here's the latest small caps outperforming post election, but Bank

0:14:03.600 --> 0:14:07.760
<v Speaker 3>of America Securities looking for MidCap outperformance twenty twenty five.

0:14:08.080 --> 0:14:11.200
<v Speaker 3>Jill Carey Hall writing, we favor mid over small caps

0:14:11.200 --> 0:14:14.160
<v Speaker 3>for twenty twenty five or cost us on small relative

0:14:14.200 --> 0:14:17.400
<v Speaker 3>to large for now, given small caps have the most

0:14:17.520 --> 0:14:21.800
<v Speaker 3>post election policy risk, refinancing risk has emerged in small

0:14:21.840 --> 0:14:24.600
<v Speaker 3>caps have been stuck in earnings pre share recession.

0:14:24.720 --> 0:14:26.480
<v Speaker 1>Jill, I am very pleased to say joins us now.

0:14:26.600 --> 0:14:28.920
<v Speaker 3>Jill, welcome, Thank you so much for being here. I

0:14:28.960 --> 0:14:32.120
<v Speaker 3>want to start with NFIB small Business Optimism, which came

0:14:32.160 --> 0:14:34.840
<v Speaker 3>out this morning at the highest level going back about

0:14:34.880 --> 0:14:38.280
<v Speaker 3>three years at a time, everyone's convinced that the policy

0:14:38.320 --> 0:14:41.440
<v Speaker 3>mix is going to be auspicious. Why do you push.

0:14:41.360 --> 0:14:43.640
<v Speaker 8>Back, Well, I think, you know, maybe near term we

0:14:43.720 --> 0:14:49.720
<v Speaker 8>do see some further upside given small business optimism, consumer confidence, momentum,

0:14:49.760 --> 0:14:52.560
<v Speaker 8>good seasonality. Usually December is a good time for small caps.

0:14:52.560 --> 0:14:54.280
<v Speaker 8>But when you look ahead to twenty twenty five, I

0:14:54.320 --> 0:14:56.960
<v Speaker 8>think even though there is a lot of optimism on

0:14:57.120 --> 0:15:01.200
<v Speaker 8>deregulation and business friendly policy, I do think that will

0:15:01.200 --> 0:15:04.760
<v Speaker 8>certainly help some pockets of US small and mid caps.

0:15:04.800 --> 0:15:07.400
<v Speaker 8>And you know, financials as a sector we're bullish on.

0:15:07.520 --> 0:15:09.520
<v Speaker 8>I think there's a lot to be in there from

0:15:09.640 --> 0:15:13.000
<v Speaker 8>deregulation in terms of costs. But I think for small

0:15:13.040 --> 0:15:15.880
<v Speaker 8>caps overall, you know, you look at the backdrop and

0:15:16.200 --> 0:15:19.160
<v Speaker 8>if we do see some of the policies that could

0:15:19.200 --> 0:15:22.360
<v Speaker 8>be more negative to profits in terms of tariffs and

0:15:23.000 --> 0:15:26.480
<v Speaker 8>immigration policy, small caps are the most labor intensive size segment.

0:15:26.520 --> 0:15:29.800
<v Speaker 8>They would also be hurt the most by tariffs. That's

0:15:29.800 --> 0:15:32.720
<v Speaker 8>at a time when you know we've seen better economic data.

0:15:32.760 --> 0:15:35.640
<v Speaker 8>We've seen with the red sweet multiple rate cuts priced

0:15:35.640 --> 0:15:37.920
<v Speaker 8>out of the market, refinancing risk has come back and

0:15:38.000 --> 0:15:40.200
<v Speaker 8>small caps are still stuck in this earnings recession. They

0:15:40.200 --> 0:15:41.280
<v Speaker 8>haven't been able to get out of.

0:15:41.400 --> 0:15:43.840
<v Speaker 3>A real question here about how much the optimism around

0:15:43.880 --> 0:15:45.960
<v Speaker 3>small caps is tied to some of the policies that

0:15:46.040 --> 0:15:49.280
<v Speaker 3>are expected from the Trump administration, and how much is

0:15:49.600 --> 0:15:51.560
<v Speaker 3>the feat is going to be cutting rates even with

0:15:51.840 --> 0:15:54.360
<v Speaker 3>a growing economy at a time where there's a real

0:15:54.440 --> 0:15:58.480
<v Speaker 3>inward focus on the United States and US exceptionalism that

0:15:58.800 --> 0:16:01.280
<v Speaker 3>would benefit some of these companies disproportionately.

0:16:01.920 --> 0:16:03.520
<v Speaker 8>Well, Look, I think that's going to be a reason

0:16:03.560 --> 0:16:06.920
<v Speaker 8>why this year is going to be about picking stocks

0:16:06.920 --> 0:16:09.280
<v Speaker 8>and picking your spots within the market rather than just

0:16:09.360 --> 0:16:12.600
<v Speaker 8>buying into seas. So I think from an index perspective,

0:16:12.640 --> 0:16:15.400
<v Speaker 8>midcaps do look the best positioned. I mean, they've historically

0:16:15.440 --> 0:16:18.440
<v Speaker 8>actually outperformed in the year following when the Fed first

0:16:18.480 --> 0:16:21.200
<v Speaker 8>started cutting rates, and they have you know, less post

0:16:21.240 --> 0:16:24.800
<v Speaker 8>election policy risk around tariffs and immigration reform. They're the

0:16:24.880 --> 0:16:28.920
<v Speaker 8>least labor intensive size segment. You know, their profits trends

0:16:28.960 --> 0:16:31.440
<v Speaker 8>have been a bit better in terms of revisions next

0:16:31.440 --> 0:16:33.680
<v Speaker 8>twelve months, CPS trends have actually started trending up a

0:16:33.720 --> 0:16:36.040
<v Speaker 8>little bit. For midcaps, they're still coming down and small

0:16:36.400 --> 0:16:39.200
<v Speaker 8>so I think that's where I would focus. But from

0:16:39.240 --> 0:16:41.320
<v Speaker 8>a you know, stock perspective, I think if you can

0:16:41.360 --> 0:16:44.600
<v Speaker 8>focus on areas of small caps that are more economically

0:16:44.680 --> 0:16:47.320
<v Speaker 8>sensitive but don't have as much refinancing risk, you know,

0:16:47.360 --> 0:16:50.960
<v Speaker 8>screening on leverage and those factors, focusing on stocks that

0:16:51.000 --> 0:16:54.320
<v Speaker 8>have positive rather than negative revision since that's the scarce

0:16:54.400 --> 0:16:57.760
<v Speaker 8>resource right now, there's still opportunities in small caps. The

0:16:57.880 --> 0:17:00.600
<v Speaker 8>valuation dispersion is high, there's a lot of both cheap

0:17:00.600 --> 0:17:03.960
<v Speaker 8>and expensive stocks, so you know, still areas for active

0:17:04.000 --> 0:17:06.320
<v Speaker 8>stock selection. At b of ARN, let's cover about a

0:17:06.359 --> 0:17:08.239
<v Speaker 8>thousand small and mid cap stocks, so there's a lot

0:17:08.280 --> 0:17:09.440
<v Speaker 8>of opportunity out there.

0:17:10.200 --> 0:17:12.959
<v Speaker 9>Jill, I feel like the refine answering risk is a

0:17:13.000 --> 0:17:16.119
<v Speaker 9>reflection of a long term structural trend from the last

0:17:16.160 --> 0:17:19.360
<v Speaker 9>ten years where private markets have picked off so many

0:17:19.480 --> 0:17:22.159
<v Speaker 9>quality small assets. So what you're left with in the

0:17:22.200 --> 0:17:26.200
<v Speaker 9>public markets and small are these more levered, lower quality names.

0:17:26.240 --> 0:17:29.440
<v Speaker 9>I think looking forward over the next big structural trend

0:17:29.480 --> 0:17:32.720
<v Speaker 9>over this coming decade, obviously AI is going to impact

0:17:32.760 --> 0:17:35.919
<v Speaker 9>big companies, but it also feels like small caps or

0:17:35.920 --> 0:17:40.000
<v Speaker 9>small business models could get disintermediated. So it feels like

0:17:40.040 --> 0:17:42.160
<v Speaker 9>there's some left tail risks there that I don't think

0:17:42.160 --> 0:17:44.359
<v Speaker 9>a lot of people talk about. Is that something that

0:17:44.400 --> 0:17:45.440
<v Speaker 9>your team is thinking about.

0:17:45.680 --> 0:17:48.440
<v Speaker 8>Yeah, I mean, I think that's the barcase we hear

0:17:48.480 --> 0:17:51.760
<v Speaker 8>on small caps, the demise of small caps, that small

0:17:51.760 --> 0:17:55.600
<v Speaker 8>caps have just morphed into these low quality zombie companies.

0:17:55.640 --> 0:17:58.800
<v Speaker 8>There's no good companies left. I think there are obviously

0:17:58.840 --> 0:18:01.160
<v Speaker 8>some aspects to that that are true. I think we're

0:18:01.280 --> 0:18:03.720
<v Speaker 8>past peak low quality. Is the good news because when

0:18:03.720 --> 0:18:06.600
<v Speaker 8>we had the IPO boom in twenty twenty, twenty twenty one,

0:18:06.720 --> 0:18:09.439
<v Speaker 8>all these non profitable companies joined the index. Some of

0:18:09.480 --> 0:18:11.919
<v Speaker 8>the rebalances in the Russell have have taken some of

0:18:11.960 --> 0:18:16.880
<v Speaker 8>that out companies. Some companies have started to return to profitability.

0:18:16.600 --> 0:18:19.800
<v Speaker 8>So we're past maybe peak low quality. But I do

0:18:19.840 --> 0:18:22.360
<v Speaker 8>think that when you look at metrics like leverage has

0:18:22.359 --> 0:18:25.760
<v Speaker 8>increased over time, when you look at the quality the index,

0:18:25.800 --> 0:18:28.480
<v Speaker 8>the proportion of non earners there are, the long term

0:18:28.480 --> 0:18:30.560
<v Speaker 8>growth rate of small caps, there aren't as many high

0:18:30.560 --> 0:18:32.640
<v Speaker 8>growth stocks as there used to be, and then companies

0:18:32.640 --> 0:18:36.119
<v Speaker 8>are staying private longer, ipoing it at bigger market caps.

0:18:36.160 --> 0:18:38.080
<v Speaker 8>So there has been a shift in the index, and

0:18:38.080 --> 0:18:40.199
<v Speaker 8>that's one reason why we think the equity risk premium

0:18:40.240 --> 0:18:42.439
<v Speaker 8>for small caps, even though it's now gone below average,

0:18:42.440 --> 0:18:44.960
<v Speaker 8>may not go back to the averages that we saw

0:18:44.960 --> 0:18:47.719
<v Speaker 8>in the eighties and nineties. So, you know, I do

0:18:47.840 --> 0:18:50.439
<v Speaker 8>still think that there are positive longer term themes for

0:18:50.520 --> 0:18:53.200
<v Speaker 8>domestic smid caps, Like if we see a cap X cycle,

0:18:53.240 --> 0:18:56.080
<v Speaker 8>if we see restoring continue in the US, that should

0:18:56.080 --> 0:18:58.840
<v Speaker 8>definitely benefit pockets of the size segment. And just given

0:18:58.880 --> 0:19:02.119
<v Speaker 8>that it is so his historically cheap versus large caps,

0:19:02.200 --> 0:19:04.080
<v Speaker 8>you know, that should argue that you could potentially see

0:19:04.119 --> 0:19:07.200
<v Speaker 8>better price returns over the next decade. But ner term,

0:19:07.240 --> 0:19:09.960
<v Speaker 8>we'd still be cautious given the profits environment.

0:19:10.160 --> 0:19:13.120
<v Speaker 3>Jill Carey Hall really fascinating. Thank you so much, Jill

0:19:13.160 --> 0:19:15.000
<v Speaker 3>Kerry Hall of Bank for America's Securities.

0:19:15.840 --> 0:19:19.399
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0:19:19.400 --> 0:19:22.480
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