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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 3: Bob Dole of cross Mark is cautious heading into the
Speaker 3: new year, saying Risk Act returns are likely to be
Speaker 3: lower in twenty twenty five after very strong returns in
Speaker 3: twenty twenty four. US equities are increasingly vulnerable to corrections
Speaker 3: given elevated valuations and earnings expectations. Bob, I am so
Speaker 3: pleased to say joins us now. Bob, do you think
Speaker 3: that yesterday was indicative of some of the perilousness if
Speaker 3: you can say that, of such high valuations at a
Speaker 3: time of great uncertainty?
Speaker 4: Absolutely, Lisa, these evaluations are up there. When I look
Speaker 4: at my screen and I see, you know, twenty five
Speaker 4: times trailing and twenty three forward. I say, I guess
Speaker 4: the world's perfect, and it would have to be to
Speaker 4: justify those valuations. And you've all just discussed the world
Speaker 4: isn't exactly perfect. Expectations are high for the economy, expectations
Speaker 4: are high for what the Trump administration can do, and
Speaker 4: those good news items must come in to sustain these levels.
Speaker 3: That said, you're not exactly a raging bear. I mean
Speaker 3: I was looking, and you still expect sex to outperform bonds.
Speaker 3: You still see gains incoming.
Speaker 1: So how do you nuance a message.
Speaker 3: Of caution without necessarily pulling back in any capacity to
Speaker 3: time where other people are saying we're just beginning some
Speaker 3: sort of AI revolution in US equity markets.
Speaker 4: Yeah, so I wouldn't go to one hundred percent cash.
Speaker 4: But if I've made a lot of money and I'm
Speaker 4: fully invested and was tempted to take a little money
Speaker 4: off the table, I think that's okay. I'm fully invested.
Speaker 4: I've just been moving a little bit more toward neutral.
Speaker 4: For example, my biggest overweight thankfully has been financials. I'm
Speaker 4: trimming them. My biggest underweight, thankfully has been healthcare. I'm
Speaker 4: doing some bottom fishing there, just moving a little more neutral.
Speaker 4: Uncertain about where we head in the new year. Is
Speaker 4: a Trump administration going to pound the table on cost
Speaker 4: cutting and text cuts or is it going to be
Speaker 4: more about deportation and tariffs. They're going to give very
Speaker 4: different answers to the stop market.
Speaker 5: Well, Bob, you know that politics are ordinarily a second
Speaker 5: concern for markets, but they're likely to inject volatilely of
Speaker 5: the course of the coming year. Do you actually move
Speaker 5: politics to being the first order of business when it
Speaker 5: comes to the concern for markets in twenty twenty five?
Speaker 4: Well, only its effect on the economy. The economy and
Speaker 4: earning has always come first in my view, but politics,
Speaker 4: particularly in this environment, have a more than normal impact
Speaker 4: on those profits.
Speaker 5: So when it comes to things like pulling back you
Speaker 5: say on financials, a lot of analysts that have been
Speaker 5: coming on our program say that actually they are overweight
Speaker 5: because they're looking at the potential M and A activity,
Speaker 5: looking at the deregulation that Trump might usher in, given
Speaker 5: the fact that he did so in Trump one point zero,
Speaker 5: and he keeps talking about it. So why at this
Speaker 5: moment would you pull back on something as specific as financials.
Speaker 4: So it's still my largest overweight. So I still love
Speaker 4: the stocks, but I don't want to be a pig.
Speaker 4: So I'm taking some money off the table, recognizing the
Speaker 4: valuations have moved up some and you trees don't necessarily
Speaker 4: go to the sky or go there in a straight
Speaker 4: line as it were, So just taking a little money
Speaker 4: off the table. If I'm not overweight financials, I would
Speaker 4: get there.
Speaker 6: Giving your concern about the US economy and valuations, are
Speaker 6: you finding opportunities either in stocks that focus more globally
Speaker 6: or in global stocks or are you kind of very
Speaker 6: focused just on the US here?
Speaker 4: My mandate is all US, but there are some interesting
Speaker 4: things overseas, notwithstanding difficult environment that we see for earning
Speaker 4: over there. I would say back to core portfolio, you
Speaker 4: want to focus on companies with high earnings predictability, Peter,
Speaker 4: in my view, high earnings persistence, strong free cash flow,
Speaker 4: dive it in stocks, dividend growth stocks. I think we'll
Speaker 4: do even better next year.
Speaker 6: Great, So you're going to focus on the dividend sector
Speaker 6: for next year dived end growth.
Speaker 4: Yes, that's awesome.
Speaker 6: Any other kind of outliers that you have out there
Speaker 6: that maybe aren't top of mind for everyone, that you
Speaker 6: think could be a really interesting opportunity.
Speaker 4: Yeah, so I come back to the I'll call it quality,
Speaker 4: although it's not exactly quality. That earnings, persistence, and the
Speaker 4: free cash flow. Those stocks have done just fine on
Speaker 4: the way up in this market, and I think when
Speaker 4: we get the inevitable pullback, I think those stocks will
Speaker 4: go down less than the market, showing some relative outperformance.
Speaker 3: I'm wondering if you see any signal from what we
Speaker 3: got from Oracle yesterday. Oracle had really high expectations, shares
Speaker 3: had been flying high. They came out basically in line.
Speaker 3: I mean, I was looking through the numbers looking for
Speaker 3: some kind of catastrophe to really justify the fact that
Speaker 3: their shares were down more than eight percent. Couldn't really
Speaker 3: find it, but it really highlighted those high valuations. How
Speaker 3: vulnerable are some of these companies, particularly in the tech space,
Speaker 3: to disappointments when it comes to earnings.
Speaker 4: Great point, I think you read it well. That is
Speaker 4: to say, the earnings were okay. They weren't great, but
Speaker 4: they were okay. And then you see the stock doing
Speaker 4: what it did. You say, what am I missing? It's
Speaker 4: expectations are just very high in too many places. And
Speaker 4: I repeat at a multiple in the low twenties, things
Speaker 4: better nearly perfect, and the world's articles earnings were not perfect,
Speaker 4: they were just okay.
Speaker 1: I'm looking right now.
Speaker 3: We just got at FIB small business optimism, and you know,
Speaker 3: some of these peripheral reads shed some light on how
Speaker 3: much the mood has changed, and you can make the
Speaker 3: argument maybe this is just because of the election and
Speaker 3: some sort of optimism in terms of regulatory pullback. Nonetheless,
Speaker 3: you saw a surge to the highest level going back
Speaker 3: to twenty twenty one. You see the biggest jump in
Speaker 3: this optimism going back to nineteen eighty at a time
Speaker 3: where you've seen surprise after surprise to the upside. I
Speaker 3: just wonder how much of a risk there is that
Speaker 3: we are underestimating how much strength there is in the
Speaker 3: economy and what that means for inflation, on yields and
Speaker 3: the Fed's path ahead.
Speaker 4: Lisa, I think you nailed it there with that set
Speaker 4: of questions. Look, stocks have moved up a lot to
Speaker 4: discount that good news that supposedly is coming, and that's
Speaker 4: why you see sentiment on the stock market and the
Speaker 4: conference board percentage of Americans who think stocks are going
Speaker 4: to be higher twelve months from now all time high.
Speaker 4: That's generally not a time to pound the table. And
Speaker 4: you may make another good point inflation. Inflation is not
Speaker 4: going to two percent as the Fed wants in my judgment,
Speaker 4: without a recession. In fact, it's stubborn. It's likely to
Speaker 4: move up a little bit more. You talked there earlier
Speaker 4: on about the three handle for the CPI. That's nowhere
Speaker 4: close to too, if you will.
Speaker 3: Yeah, and this is really a reason why maybe the
Speaker 3: bond market holds the key keys to just how much
Speaker 3: legroom this market has. Bob Doll of Crossmark, thank you
Speaker 3: so much as always for being with us. Talking about
Speaker 3: Saudi Arabia and turning to commodities, oil pairing back recent
Speaker 3: gains following the fall of Syrian President Bashar al Assades
Speaker 3: and ahead of OPEC's year end conference, Ellen Wald of
Speaker 3: the Atlantic Council, also author of Saudi Inc, Writing the
Speaker 3: oil market does not seem phased by these events. Prices
Speaker 3: climbed one percent and trading on Monday, and the market
Speaker 3: is still more concerned about the tepid economic growth outlook
Speaker 3: and supply growth forecasts for twenty twenty five that could
Speaker 3: put the market into oversupply. Ellen joins us Now and Ellen,
Speaker 3: I want to start with your experience covering the royal
Speaker 3: family in Saudi Arabia and your intensive knowledge of the
Speaker 3: country that a lot of people are saying has to
Speaker 3: be the main operator in this event. What do you
Speaker 3: think their mindset is seeing the fall of Syria and
Speaker 3: what their role is in trying to impose some sort
Speaker 3: of new order in a key stronghold in the Middle East.
Speaker 7: That's a great question, and I think that Saudi intervention
Speaker 7: and Saudi involvement at this point could really play a
Speaker 7: key role in the future of what Syria looks like
Speaker 7: and also whether this instability spreads to other areas of
Speaker 7: the region.
Speaker 1: I think that the Saudis wants stability.
Speaker 7: Ashar al Asad was a very stabilizing force until he
Speaker 7: wasn't and now that he's gone, the potential for a
Speaker 7: real failed state and potential for more insurgencies to take
Speaker 7: root is very very high, and the Saudis want to
Speaker 7: prevent that.
Speaker 1: They want a stable rule over all.
Speaker 7: Of Syria, and so they really have a potential right
Speaker 7: now to both influence the development of whatever new government
Speaker 7: or power comes in, but.
Speaker 1: Also to influence.
Speaker 7: How well that regime is able to hold on to power.
Speaker 7: And I think that oil and fuel is very very
Speaker 7: critical at this juncture, because even though Syria has the
Speaker 7: oil and gas supplies that it needs to supply its
Speaker 7: own demand, it's not going to be able to get
Speaker 7: them up and running in time to stabilize.
Speaker 1: Their their hold on power. And so essentially a Seria
Speaker 1: has been dependent on Iranian.
Speaker 7: Fuel, uh And and Russia and these other kind of
Speaker 7: pariah nations for a very long time, and Iran is
Speaker 7: clearly not interested in supplying that fuel. We saw this
Speaker 7: very dramatic tanker turnaround right in the middle as soon
Speaker 7: as the uh Asad regime fell.
Speaker 1: And so if Saudi Arabia and other.
Speaker 7: Gulf countries with kind of stable monarchies can step in
Speaker 7: and help provide them with the electricity, the.
Speaker 1: Fuel and aid uh you know, to start to rebuild
Speaker 1: and start to consolidate their hold on power, then they
Speaker 1: could prove to be.
Speaker 7: A very stabilizing force in Syria and in the rebuilding
Speaker 7: of whatever is to come. And so I I do
Speaker 7: think there is an important opportunity for the Saudis along
Speaker 7: with others in the Gulf to really influence the future
Speaker 7: trajectory of Syria.
Speaker 5: Well, who do you think is best position to really
Speaker 5: fill that void? Saudi Arabia, Rack kowait Emroadis.
Speaker 7: You know, it's difficult because the political and religious makeup
Speaker 7: of Syria is very different from the Gulf. But I
Speaker 7: think that at this point those sectarian differences matter a
Speaker 7: bit less than really who comes through with the aid
Speaker 7: and with the fuel and the money and the medical supplies.
Speaker 1: And the food that they're going to need.
Speaker 7: And I do think that the Saudis could take a
Speaker 7: leadership role in kind of a coalition effort to supply
Speaker 7: these things and really to do you know, to become
Speaker 7: that stabilizing force.
Speaker 6: Yeah, I'm pulling this back a little bit more domestically.
Speaker 6: How successful do you think, you know, drill baby drill
Speaker 6: will be? Is that something that's going to be effect
Speaker 6: of really ramping up our production? And do you have
Speaker 6: any thoughts on what we should be trying to do
Speaker 6: with the refining industry, which is really kind of been
Speaker 6: stagnant in this country I think for years.
Speaker 7: Yeah, I think I kind of wish the refrain was
Speaker 7: actually refine baby, refine instead of drill, baby drill, Because
Speaker 7: at this point, you know, production in the US is
Speaker 7: at its highest. I mean we're at at like thirteen
Speaker 7: point five million barrels a day.
Speaker 1: We're the largest producer in the world right now. How
Speaker 1: much more do we really need to produce? How much
Speaker 1: more do we really need to.
Speaker 7: Throw into this uh, you know market that's kind of
Speaker 7: verging on over supply. But what we really could do,
Speaker 7: and what I think would really help both the American
Speaker 7: people and you know, our trading partners abroad, would be
Speaker 7: to really take a look at our refining industry.
Speaker 1: To put in some new refineries.
Speaker 7: We've seen refineries closing and shifting to BUYO fuels, which
Speaker 7: aren't really all that profitable or useful.
Speaker 1: We need to.
Speaker 7: Really maybe have some new refineries, and we could really
Speaker 7: I think, keep gasoline prices down and fuel costs down
Speaker 7: that way, as opposed to just producing more oil and
Speaker 7: shipping it abroad, because we can only utilize so much
Speaker 7: of that in the US.
Speaker 1: We can also if we have.
Speaker 7: More gasoline and other fuels, then we can use ship
Speaker 7: that and export that equally. So I do think that
Speaker 7: the really we should change that refrain to refine baby refined.
Speaker 1: It doesn't roll off the tong Quoitas. Well, we don't.
Speaker 5: We don't have a state oil company the way these
Speaker 5: Gulf countries do. And we just heard from Chevron, I
Speaker 5: believe it was last week that said, actually, we care
Speaker 5: more free cash flow more than we care about production growth.
Speaker 5: And they're actually starting to pull back in the Permian.
Speaker 5: So what is the US in total spare capacity?
Speaker 1: That's a great question.
Speaker 7: I don't think that we can really talk about the
Speaker 7: US in terms of spare capacity, because, like you said,
Speaker 7: there's no state run oil company. Every oil company decides
Speaker 7: for themselves. It's in their best interest for a very
Speaker 7: long time. For a long time, in kind of the
Speaker 7: height of the fracking period, we had this kind of
Speaker 7: ethos where everyone had to produced, produce even if they
Speaker 7: weren't even you know, making up their costs simply because
Speaker 7: they had to keep.
Speaker 1: Ahead of payroll.
Speaker 7: And so you could be sure that the push and
Speaker 7: the drive was to increase production.
Speaker 1: Now that's not the case.
Speaker 7: Now that you've got big companies like Chevron, Exxon, uh
Speaker 7: and you know, really consolidating, and there's a lot of
Speaker 7: consolidation in the Permian, you're seeing less of this push
Speaker 7: and more of a sense of Okay, what's a healthy
Speaker 7: growth rate, you know, what's healthy for the company.
Speaker 1: And so I don't think we're going to.
Speaker 7: Necessarily see much more growth or a significant amount of
Speaker 7: growth in terms of oil production. And I do think
Speaker 7: the focus should really be on what do we do
Speaker 7: with this oil and how are we best using it?
Speaker 7: And how can companies maximize uh, you know, their profits
Speaker 7: with the oil that they're already drilling.
Speaker 3: Ellen Wald of the Atlantic Council, thank you so much
Speaker 3: for your time and for your insights, particularly in Saudia Arabia.
Speaker 3: Here's the latest small caps outperforming post election, but Bank
Speaker 3: of America Securities looking for MidCap outperformance twenty twenty five.
Speaker 3: Jill Carey Hall writing, we favor mid over small caps
Speaker 3: for twenty twenty five or cost us on small relative
Speaker 3: to large for now, given small caps have the most
Speaker 3: post election policy risk, refinancing risk has emerged in small
Speaker 3: caps have been stuck in earnings pre share recession.
Speaker 1: Jill, I am very pleased to say joins us now.
Speaker 3: Jill, welcome, Thank you so much for being here. I
Speaker 3: want to start with NFIB small Business Optimism, which came
Speaker 3: out this morning at the highest level going back about
Speaker 3: three years at a time, everyone's convinced that the policy
Speaker 3: mix is going to be auspicious. Why do you push.
Speaker 8: Back, Well, I think, you know, maybe near term we
Speaker 8: do see some further upside given small business optimism, consumer confidence, momentum,
Speaker 8: good seasonality. Usually December is a good time for small caps.
Speaker 8: But when you look ahead to twenty twenty five, I
Speaker 8: think even though there is a lot of optimism on
Speaker 8: deregulation and business friendly policy, I do think that will
Speaker 8: certainly help some pockets of US small and mid caps.
Speaker 8: And you know, financials as a sector we're bullish on.
Speaker 8: I think there's a lot to be in there from
Speaker 8: deregulation in terms of costs. But I think for small
Speaker 8: caps overall, you know, you look at the backdrop and
Speaker 8: if we do see some of the policies that could
Speaker 8: be more negative to profits in terms of tariffs and
Speaker 8: immigration policy, small caps are the most labor intensive size segment.
Speaker 8: They would also be hurt the most by tariffs. That's
Speaker 8: at a time when you know we've seen better economic data.
Speaker 8: We've seen with the red sweet multiple rate cuts priced
Speaker 8: out of the market, refinancing risk has come back and
Speaker 8: small caps are still stuck in this earnings recession. They
Speaker 8: haven't been able to get out of.
Speaker 3: A real question here about how much the optimism around
Speaker 3: small caps is tied to some of the policies that
Speaker 3: are expected from the Trump administration, and how much is
Speaker 3: the feat is going to be cutting rates even with
Speaker 3: a growing economy at a time where there's a real
Speaker 3: inward focus on the United States and US exceptionalism that
Speaker 3: would benefit some of these companies disproportionately.
Speaker 8: Well, Look, I think that's going to be a reason
Speaker 8: why this year is going to be about picking stocks
Speaker 8: and picking your spots within the market rather than just
Speaker 8: buying into seas. So I think from an index perspective,
Speaker 8: midcaps do look the best positioned. I mean, they've historically
Speaker 8: actually outperformed in the year following when the Fed first
Speaker 8: started cutting rates, and they have you know, less post
Speaker 8: election policy risk around tariffs and immigration reform. They're the
Speaker 8: least labor intensive size segment. You know, their profits trends
Speaker 8: have been a bit better in terms of revisions next
Speaker 8: twelve months, CPS trends have actually started trending up a
Speaker 8: little bit. For midcaps, they're still coming down and small
Speaker 8: so I think that's where I would focus. But from
Speaker 8: a you know, stock perspective, I think if you can
Speaker 8: focus on areas of small caps that are more economically
Speaker 8: sensitive but don't have as much refinancing risk, you know,
Speaker 8: screening on leverage and those factors, focusing on stocks that
Speaker 8: have positive rather than negative revision since that's the scarce
Speaker 8: resource right now, there's still opportunities in small caps. The
Speaker 8: valuation dispersion is high, there's a lot of both cheap
Speaker 8: and expensive stocks, so you know, still areas for active
Speaker 8: stock selection. At b of ARN, let's cover about a
Speaker 8: thousand small and mid cap stocks, so there's a lot
Speaker 8: of opportunity out there.
Speaker 9: Jill, I feel like the refine answering risk is a
Speaker 9: reflection of a long term structural trend from the last
Speaker 9: ten years where private markets have picked off so many
Speaker 9: quality small assets. So what you're left with in the
Speaker 9: public markets and small are these more levered, lower quality names.
Speaker 9: I think looking forward over the next big structural trend
Speaker 9: over this coming decade, obviously AI is going to impact
Speaker 9: big companies, but it also feels like small caps or
Speaker 9: small business models could get disintermediated. So it feels like
Speaker 9: there's some left tail risks there that I don't think
Speaker 9: a lot of people talk about. Is that something that
Speaker 9: your team is thinking about.
Speaker 8: Yeah, I mean, I think that's the barcase we hear
Speaker 8: on small caps, the demise of small caps, that small
Speaker 8: caps have just morphed into these low quality zombie companies.
Speaker 8: There's no good companies left. I think there are obviously
Speaker 8: some aspects to that that are true. I think we're
Speaker 8: past peak low quality. Is the good news because when
Speaker 8: we had the IPO boom in twenty twenty, twenty twenty one,
Speaker 8: all these non profitable companies joined the index. Some of
Speaker 8: the rebalances in the Russell have have taken some of
Speaker 8: that out companies. Some companies have started to return to profitability.
Speaker 8: So we're past maybe peak low quality. But I do
Speaker 8: think that when you look at metrics like leverage has
Speaker 8: increased over time, when you look at the quality the index,
Speaker 8: the proportion of non earners there are, the long term
Speaker 8: growth rate of small caps, there aren't as many high
Speaker 8: growth stocks as there used to be, and then companies
Speaker 8: are staying private longer, ipoing it at bigger market caps.
Speaker 8: So there has been a shift in the index, and
Speaker 8: that's one reason why we think the equity risk premium
Speaker 8: for small caps, even though it's now gone below average,
Speaker 8: may not go back to the averages that we saw
Speaker 8: in the eighties and nineties. So, you know, I do
Speaker 8: still think that there are positive longer term themes for
Speaker 8: domestic smid caps, Like if we see a cap X cycle,
Speaker 8: if we see restoring continue in the US, that should
Speaker 8: definitely benefit pockets of the size segment. And just given
Speaker 8: that it is so his historically cheap versus large caps,
Speaker 8: you know, that should argue that you could potentially see
Speaker 8: better price returns over the next decade. But ner term,
Speaker 8: we'd still be cautious given the profits environment.
Speaker 3: Jill Carey Hall really fascinating. Thank you so much, Jill
Speaker 3: Kerry Hall of Bank for America's Securities.
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