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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: For most of this year, there was only one direction

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Speaker 2: major stock indicase like the SMP five hundred and NASDAC

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Speaker 2: were headed, and that direction was up.

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Speaker 1: And SMP five hundred at fifty three hundred a fresh

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Speaker 1: record high, a fresh record high for the Dow Jones

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Speaker 1: Industrial Average, a fresh record high for the NASAK Composite,

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Speaker 1: and the Nasdaq one hundred. So we have record highs

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Speaker 1: for the three major indexes and the second day of

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Speaker 1: record highs for both the SMP five hundred and the NASAK.

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Speaker 2: Yesterday the STALK six hundred cloths that a fresh record high.

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Speaker 1: That's eight days of gains.

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Speaker 2: Equity markets are on attack, but this week that euphoria

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Speaker 2: came crashing down.

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Speaker 1: The majority of the names are certainly down. Tesla shares

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Speaker 1: falling more than twelve percent today, the biggest drop since

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Speaker 1: September of twenty twenty. Down, down, down on the day,

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Speaker 1: so at least inequities it's to find a place to

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Speaker 1: hide today.

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Speaker 2: On Wednesday, the s and P five hundred fell by

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Speaker 2: two point three percent, ending its longest streak without dropping

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Speaker 2: by two percent or more in seventeen years. According to

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Speaker 2: Bloomberg Data and the tech heavy Nasdaq saw an even

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Speaker 2: more dramatic selloff.

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Speaker 1: Than NASAK, the worst of the bunch, losing more than

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Speaker 1: three and a half percent. Again, these are the biggest

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Speaker 1: declines since late twenty twenty two.

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Speaker 2: End of markets recovered a bit to end the week,

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Speaker 2: but for some, this week's selloff didn't seem like just

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Speaker 2: a blip. Instead, it could be the beginning of a

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Speaker 2: new era in markets. Today on the show, Welcome to

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Speaker 2: the Great Rotation is everything we thought we knew about

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Speaker 2: markets this year about to flip. I'm Sarah Holder, and

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Speaker 2: this is the Big Take from Bloomberg News. To understand

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Speaker 2: the week that was in markets, I spoke to isabel Lee.

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Speaker 2: She's a reporter on Bloomberg's Cross Asset team.

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Speaker 3: A lot of people wonder what that is, but we

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Speaker 3: cover more macro trends and the niche parts of the

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Speaker 3: markets that you wouldn't really think of in the beginning.

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Speaker 3: But our team is the best team.

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Speaker 2: The Big Take team might argue with that one, but anyway,

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Speaker 2: when it came to markets, I started by asking Isabelle

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Speaker 2: about the positive and asked her what it was that

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Speaker 2: was propelling markets up and up and up for the

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Speaker 2: majority of this year. So Isabelle, let's go back in

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Speaker 2: time to say, three weeks ago, the S and P

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Speaker 2: five hundred and the Nasdaq hit another record high. What

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Speaker 2: was behind that rally?

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Speaker 3: It's just really the euphoria surrounding artificial intelligence. It all

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Speaker 3: began when chat GBT was introduced to markets, or at

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Speaker 3: least when people were aware of chat GBT. Since then,

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Speaker 3: big tech just rallied and broke record after another. I

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Speaker 3: think this year markets broke records like more than thirty times.

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Speaker 2: And then when did you and the Bloomberg Markets team

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Speaker 2: have a sense that something might be shifting? What were

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Speaker 2: the first warning signs?

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Speaker 3: I think it's safe to say that it all began

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Speaker 3: around July eleven. That's when the CPI report came out,

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Speaker 3: and it came out softer than expected. So that's good

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Speaker 3: because it showed CPI was cooling to the fastest pace

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Speaker 3: since twenty twenty one, and many read this as a

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Speaker 3: sign that the Fed can cut rates. At this point,

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Speaker 3: it's really just a matter of when, not if. So

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Speaker 3: that was the day we saw a massive rotation.

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Speaker 2: A massive rotation. According to Isabelle, July eleventh was when

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Speaker 2: what some are calling the Great Rotation began, and it's

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Speaker 2: all because investors started to really think about what lower

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Speaker 2: interest rates might mean for companies, and in particular smaller companies.

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Speaker 2: I asked Isabelle to define this great rotation in a sentence.

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Speaker 3: I think, in a sentence, it means a shift in

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Speaker 3: dominance with whoever is outperforming in the market. So for

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Speaker 3: the longest time, it's megacap tech stocks at tech Behem's

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Speaker 3: the big companies, and now we're seeing potentially small caps,

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Speaker 3: which are basically smaller companies. Small caps means smaller capitalization,

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Speaker 3: they have smaller market values, and everyone's saying that they

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Speaker 3: will benefit from lower interest rates. So why generally small

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Speaker 3: caps are just more sensitive to interest rates than they're

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Speaker 3: large caps Because they're more levered and easier monetier policy,

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Speaker 3: which means if the FED cuts would means there are

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Speaker 3: less chances of a session, and if there are less

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Speaker 3: chances of for a session, it'll benefit smaller companies.

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Speaker 2: Small caps are more levered, which means they have more debt.

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Speaker 2: Their fates are also more closely tied to the health

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Speaker 2: of the typical consumer. And now it's looking like the

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Speaker 2: economic case for a rate cut has only gotten stronger,

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Speaker 2: which for those reasons, would benefit these mom and pop

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Speaker 2: companies more so. On July eleventh, the great rotation towards

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Speaker 2: small caps started.

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Speaker 3: That was the day where we saw they wrestled two thousand,

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Speaker 3: So that's a gauge of small cap stocks beating DNASTAK

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Speaker 3: one hundred, a gauge of big cap stocks, by five

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Speaker 3: point eight percentage points. So at that point that was

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Speaker 3: the most since of ever twenty twenty. So this was

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Speaker 3: I think the beginning of the shift, or the so

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Speaker 3: called rotation.

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Speaker 2: And that shift accelerated. On Wednesday of this week, the

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Speaker 2: S and P five hundred and Nasdaq fell by two

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Speaker 2: point three percent and three point seven percent, respectively, the

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Speaker 2: most since late twenty twenty two. I asked Isabelle what

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Speaker 2: was behind this selloff?

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Speaker 3: So it was really the lukewarm earnings we saw the

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Speaker 3: day prior after market close, Alphabet reported earnings. They reported

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Speaker 3: a bloated capital expenditure. Tessa also reported earnings and it

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Speaker 3: was a miss and they delayed again the ROBOTAXI. So

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Speaker 3: it really got investors thinking, when are we going to

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Speaker 3: see the return on investments on everything they're spending on

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Speaker 3: AI they're lavishing billions of dollars on that, But obviously

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Speaker 3: it's not going to happen overnight. It's a marathon, not

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Speaker 3: a sprint, so to speak.

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Speaker 2: Right, does it mean that they're getting disillusioned with AI

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Speaker 2: and what would have to change for them to get

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Speaker 2: excited again?

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Speaker 3: It really depends. In markets, there are always two camps.

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Speaker 3: And of course there's a camp that says it's a bubble,

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Speaker 3: it will burst soon and it's just a matter of when.

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Speaker 3: But then the other camp is like, no, we believe

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Speaker 3: in these companies, even their fundamentals, their balance sheets, Like

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Speaker 3: how can this be not the feature of tomorrow? And

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Speaker 3: I mean, if you look at the companies that are

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Speaker 3: powering their rilly, they're just really getting bigger and bigger.

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Speaker 2: Well what went through your head when you saw those

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Speaker 2: huge dips this week? Well, the first question was does

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Speaker 2: this rotation have legs? Like is this the beginning or

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Speaker 2: is this just a blip? Now it looks like it's

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Speaker 2: just a blip, But again it still depends on who

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Speaker 2: you ask. I think we're just in the early days.

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Speaker 2: The early days. Isabelle pointed out that of the so

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Speaker 2: called Magnificent seven, only alphabet and Tesla have reported. There's

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Speaker 2: still Microsoft, Meta, Amazon, and Apple to go, and then

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Speaker 2: this year's stock market Darling the chip maker.

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Speaker 3: And Vidia, which a lot of my friends are the

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Speaker 3: most excited about. There's so many memes online about in

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Speaker 3: Nvidia about how all their employees are just mega rich. Anyway,

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Speaker 3: they set to report in August twenty eighth, so it's

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Speaker 3: still a month from now.

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Speaker 2: Well, how is on video doing.

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Speaker 3: In Vidia is here today, It's up more than two

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Speaker 3: hundred percent. That's kind of crazy. Microsoft is up just

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Speaker 3: more than twenty percent, so it's not even a close call,

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Speaker 3: but it just really underscores how Invidia is the biggest

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Speaker 3: beneficiary by far of this AI trade. I mean, twenty

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Speaker 3: percent is good, but if you compare it to two hundred,

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Speaker 3: it's it's really a wow.

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Speaker 2: Yeah, why is it valued so high? Is it overvalued?

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Speaker 3: I Mean, there are many reasons why stocks go up,

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Speaker 3: but it's really just investor enthusiasm because they were early

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Speaker 3: in the game, and the demand for chips, especially in

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Speaker 3: this area is really it's still incredibly high, and Vida

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Speaker 3: is just poised to capture all of that. And they're

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Speaker 3: also one of the first movers and the biggest. I'll

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Speaker 3: never forget this again. I spent too much time on Twitter,

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Speaker 3: but I saw this like meme of how Intel used

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Speaker 3: to be way bigger than in Vidia in terms of

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Speaker 3: market cap and now in Video's just leaps and bounds.

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Speaker 2: Well, it's funny because you're saying that, you know, some

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Speaker 2: of what we're seeing in the market is potentially investors

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Speaker 2: getting disillusioned with AI or some of that excite cooling down.

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Speaker 2: And Video is kind of an exception to this. Still, yeah,

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Speaker 2: what are you looking out for when and Video reports?

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Speaker 3: The thing with these megacap companies is a lot of

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Speaker 3: them report good earnings, but it's just that expectations are

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Speaker 3: so lofty that even good earnings sometimes don't cut it.

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Speaker 3: Here's the thing. A lot of the Magnificent seven stocks,

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Speaker 3: their earnings are now macro events. They're not anymore just

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Speaker 3: like earnings, you know, Oh yeah, I'll just read it

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Speaker 3: the next day. It's like a macro event, and the

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Speaker 3: stock market moves, which can change everything. Yes, because their

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Speaker 3: concentration is just so huge. It's like some thirty percent

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Speaker 3: of the index. Can you imagine, So that's why, however

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Speaker 3: they move, the market kind of moves in Lockslip.

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Speaker 2: So the expectations for the Magnificent Seven were so high

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Speaker 2: that even good earnings might not be enough to appease investors.

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Speaker 2: And that fact, coupled with the reality that interest rate

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Speaker 2: cuts benefit smaller companies more than big tech firms, means

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Speaker 2: that we've been seeing a shift. I asked Isabelle, if

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Speaker 2: that means that the Russell two thousand, the index of

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Speaker 2: all these small cap stocks, was the place to be.

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Speaker 3: It depends on who you ask, but it's always good

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Speaker 3: to I'm gonna sound like a boring portfolio manager or

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Speaker 3: responsible portfolio never never, but you should always really diversify

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Speaker 3: because now you could see that. For instance, we're writing

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Speaker 3: about this mutual fund that was the best performer here, Todate,

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Speaker 3: and it really basically held a lot of the megacap

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Speaker 3: tech stocks. Its top six holdings are the Magnificent Seven

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Speaker 3: except Tesla basically and year Todaate they were the best

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Speaker 3: performer among all of the mutual funds that Bloomberg tracks,

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Speaker 3: but if you look at them months to date, they

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Speaker 3: sit among the worst performers. And that just shows what

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Speaker 3: an overly concentrated portfolio looks like, which speaks to again diversifying,

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Speaker 3: but also honestly, if you have that much conviction, then

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Speaker 3: good for you, because when you win, you win big.

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Speaker 3: Just depends on your risk tolerance.

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Speaker 2: Coming up after the break, how to tell if this

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Speaker 2: great rotation is just a blip and what to do

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Speaker 2: if it's not. Markets are having a bit of an

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Speaker 2: anxious moment. Is the euphoria of AI's potential to transform

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Speaker 2: the world wearing off? Or is this just a blip?

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Speaker 2: I asked Bloomberg Cross Asset reporter Isabelle Lee when we

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Speaker 2: might have an answer, and she said that we're still

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Speaker 2: early in earning season. Sixty percent or three fifths of

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Speaker 2: companies in the S and P five hundred are still

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Speaker 2: left to report. Analysts estimate that the index will see

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Speaker 2: second quarter profits rise around nine point three percent year

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Speaker 2: over year.

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Speaker 3: So that's a good thing because that's the biggest such

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Speaker 3: expansion since the last three months of twenty twenty one,

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Speaker 3: and that's according to data by Bloomberg Intelligence. So it's

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Speaker 3: still looking to be a good earning season. But again,

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Speaker 3: how good depends on investor expectation. It still remains to

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Speaker 3: be seen.

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Speaker 2: Well, let's get into some of those macro events that

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Speaker 2: might be impacting the markets. We've been seeing a lot

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Speaker 2: of releases that have bolstered the case for the FED

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Speaker 2: to cut rates at its meeting in September. How is

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Speaker 2: all of that Fed chatter impacting what we've been seeing

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Speaker 2: in markets?

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Speaker 3: So the consensus this markets is still expecting a rate

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Speaker 3: cut in September. But we have some like Bill Dudley,

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Speaker 3: who is a former ne York FED president and Bloomberg

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Speaker 3: opinion columnist who now calls for a rate cut in July.

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Speaker 1: One of the interesting sort of quandaries of the FED

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Speaker 1: is in it right now. They've telegraphed it pretty clearly

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Speaker 1: that they're going to move in September, and it sort

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Speaker 1: of bigs the question it was so obvious that you

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Speaker 1: need to move in September, then what are you waiting for?

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Speaker 1: Why not just move in July?

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Speaker 2: But Isabelle says that a cut in July versus a

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Speaker 2: cut in September isn't going to be that big of

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Speaker 2: a deal for markets.

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Speaker 3: It's just twenty five basis points in the grand scheme

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Speaker 3: of things. That doesn't matter a lot. We're going to

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Speaker 3: see a ton more and it's just three months. I mean,

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Speaker 3: we've had this elevated interest rates for like over two years.

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Speaker 3: So to some it doesn't really matter. They just want clarity.

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Speaker 2: Something else that's probably making everyone's job a little harder

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Speaker 2: is all of the political news that we've had in

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Speaker 2: the US over the past couple of weeks that I

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Speaker 2: assume have made some sort of impression on the market.

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Speaker 2: There was the attempted assassination of Trump. Biden stepped down

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Speaker 2: and endorsed Kamala Harris last weekend. How is this dramatic

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Speaker 2: news cycle and the US presidential election more broadly showing

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Speaker 2: up in these numbers?

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Speaker 3: That was a big question. Actually, now it's just becoming

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Speaker 3: a lot more noisy, and we don't know why markets

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Speaker 3: or why some asset classes move. So I was also

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Speaker 3: working that weekend, and the sense that I got from

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Speaker 3: the people I bugged and who were kind enough to

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Speaker 3: reply it to me was there was a sense of

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Speaker 3: calm because if she at that point, they were like, okay,

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Speaker 3: then if she ends up being the nominee, then we

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Speaker 3: can finally get clarity that it's going to be Harris

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Speaker 3: versus Trump. Because there have been so much chatter about

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Speaker 3: will Biden stepped down? So when blah blah, blah and

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Speaker 3: the next day. Actually after that, stocks rebounded after their

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Speaker 3: worst week in April. But I don't really think it

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Speaker 3: was because of Harris. It was really more investors positioning

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Speaker 3: ahead of the earning cycle, which, again purely from a

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Speaker 3: market's perspective, is really what's important. And some managers I

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Speaker 3: talked to were like, Okay, good for now, we can

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Speaker 3: pause with this political noise because we have Trump and

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Speaker 3: Harris and then we can focus on earnings.

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Speaker 2: Well, how does stocks tend to perform on election years?

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Speaker 3: So I have tidbit from about that. So since nineteen

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Speaker 3: twenty eight, data from Bloomberg Intelligence shows that the S

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Speaker 3: and P five hundred has gained roughly five percent on

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Speaker 3: average in the third quarter of election years. So in general,

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Speaker 3: this logs positive returns nearly two thirds of the time

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Speaker 3: from the June to September period.

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Speaker 2: Interesting. So as well, there's like this golden rule of

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Speaker 2: economics podcasting where if you try to make an episode

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Speaker 2: about markets going down, markets will inevitably go up on

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Speaker 2: the day you publish. That upswing is likely here already,

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Speaker 2: as you mentioned, So after all of this, is what

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Speaker 2: we're seeing just a normal market fluctuation, or is it

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Speaker 2: a sign of some deeper problems brewing.

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Speaker 3: You're going to be annoyed with me because I'm going

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Speaker 3: to play it safe, and I'm going to be every

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Speaker 3: podcast host nightmare because I'm going to say it's too early.

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Speaker 2: Okay, when will we tell why should.

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Speaker 3: We have you back? Honestly, I think towards the end

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Speaker 3: of the third quarter, because then the election season will

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Speaker 3: really be have picked up, and then earning season would

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Speaker 3: have been done. We would have seen whether the Fed

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Speaker 3: indeed cut in September. But then if you ask me

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Speaker 3: again at that time, I'm probably going to say fourth quarter,

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Speaker 3: and then fourth card, I'm going to say twenty twenty five.

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Speaker 3: But on a serious note, I think towards the end

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Speaker 3: of the third quarter we'll see more clarity.

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Speaker 2: Got it, Well, we'll be calling you back. So as well,

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Speaker 2: given all this, what's a regular person with some money

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Speaker 2: in the stock exchange supposed to do? How should we

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Speaker 2: be thinking about this?

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Speaker 3: I'm going to echo what everyone does and what I

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Speaker 3: personally do. Actually, I just dump everything index funds. I mean, yes,

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Speaker 3: you don't see spectacular gains like oh my gosh, if

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Speaker 3: I have Nvidia, I would probably have down payment for

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Speaker 3: a house right now, but for now, for now, yes,

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Speaker 3: but index is safe, and I mean the way I

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Speaker 3: look at it is it's for a retirement. It's for

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Speaker 3: when I'm old and hopefully just sit by the beach

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Speaker 3: and sip coconut juice. So I just dump everything in

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Speaker 3: the index.

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Speaker 2: Wise words boring, right, that's safe, boring, but safe. If

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Speaker 2: it gets you on a beach with some coconut water,

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Speaker 2: I guess that could be good enough to stay in

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Speaker 2: the loop with the latest market moves. You can find

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Speaker 2: all of our coverage at bloomberg dot com slash markets.

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Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.

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Speaker 2: This episode was produced by David Fox. It was fact

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Speaker 2: checked by Thomas lou and Adrianna Tapia. It was edited

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Speaker 2: by Sid Verma and mixed by Alex Zugia. Our senior

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Speaker 2: producers are Naomi Shaven and Kim Gittelson, who also edited

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Speaker 2: this episode. Our senior editor is Elizabeth Ponso. Nicole Beamster

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Speaker 2: bor is Our executive producer. Sage Bauman is Bloomberg's head

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Speaker 2: of podcasts. Thank you so much for listening. Please follow

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Speaker 2: and review The Big Take wherever you get your podcasts.

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Speaker 2: It helps new listeners find the show. We'll be back

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Speaker 2: on Monday, m hmm.