WEBVTT - Taking the Pulse of US Regional Banks 0:00:01.360 --> 0:00:05.720 This is Bloomberg Business Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:19.000 Podcast with Carol Messer and Tim Stenebek from Bloomberg Radio. 0:00:20.880 --> 0:00:23.360 Under an hour. Here, we're going to get First Republic earnings, 0:00:23.920 --> 0:00:26.479 and that's going to really put a spotlight on deposit flows, 0:00:26.520 --> 0:00:30.479 funding cost expectations. We're seeing that shares are rallying ahead 0:00:30.520 --> 0:00:33.159 of earnings, so here to discuss that. We've got a 0:00:33.200 --> 0:00:37.280 great guest, Anton Schultz. He's president and chief investment officer 0:00:37.320 --> 0:00:40.520 of Mending Capital Advisors, and he joins us on zoom 0:00:40.640 --> 0:00:43.320 from Florida. Thank you so much for making time to 0:00:43.440 --> 0:00:46.040 chat with us on all things First Republic ahead of 0:00:46.080 --> 0:00:48.520 these earnings. I know that you invest in both big 0:00:48.560 --> 0:00:51.839 and small banks. You've got a really great broader outlook 0:00:51.840 --> 0:00:55.560 for the entire industry. How would you categorize the health 0:00:55.600 --> 0:00:57.320 of regional banks specifically? 0:00:57.320 --> 0:00:59.639 Though right now the. 0:00:59.640 --> 0:01:03.000 Health is actually very strong. The stocks don't tell you that, 0:01:03.560 --> 0:01:07.240 but really even the statistics that we all get about 0:01:07.240 --> 0:01:10.040 deposit flows are kind of misleading in terms of where 0:01:10.080 --> 0:01:12.920 they've gone and how they've gone. All of us have 0:01:13.040 --> 0:01:16.360 expected deposits to shrink in the industry. It's really simple. 0:01:16.640 --> 0:01:19.040 I mean, twenty twenty comes around. You know, the US 0:01:19.120 --> 0:01:21.080 government prints a ton of money, sends it out to 0:01:21.160 --> 0:01:23.840 corporations and individuals, they put it in the bank and 0:01:23.880 --> 0:01:26.080 they've been whittling it down over the last you know, 0:01:26.200 --> 0:01:29.920 year plus, and that's fully expected. The run on the 0:01:29.959 --> 0:01:33.200 banks not expected, and it was very specific to a 0:01:33.200 --> 0:01:36.839 few institutions, and that money scattered right that money left, 0:01:37.000 --> 0:01:39.600 you know, some of the left First Republic clearly left 0:01:39.600 --> 0:01:44.600 Silicon Valley, you know, definitely Signature as well. So that money, 0:01:44.720 --> 0:01:46.440 you know, just first went to some of the bigger 0:01:46.480 --> 0:01:50.240 institutions spread around the industry. But you would still expect 0:01:50.240 --> 0:01:54.000 the industry to experience outflows as people take down their deposits. 0:01:54.160 --> 0:01:56.520 You know, one of the regional banks I talked to said, well, 0:01:56.520 --> 0:01:59.200 our average consumer deposit went from thirteen thousand a person 0:01:59.200 --> 0:02:02.560 in nine thousand. That's not a fearful thing. It's just 0:02:02.560 --> 0:02:04.680 people spending the money that they got from the government. 0:02:04.920 --> 0:02:08.040 So anton, of course, deposits in focus after the belt 0:02:08.040 --> 0:02:10.280 to day the First Republic. But look, something that's really 0:02:10.280 --> 0:02:12.440 sticking with me is what Jamie Diamond said of JP 0:02:12.560 --> 0:02:15.600 Morgan last week. I believe and you guys said, look, 0:02:15.639 --> 0:02:16.720 by the end of the year, a lot of these 0:02:16.760 --> 0:02:19.320 deposit flows they're going to shake out, they're going to normalize. 0:02:19.520 --> 0:02:21.960 For a company like First Republic that's really dealing with 0:02:22.040 --> 0:02:24.680 a confidence issue, what do we take away from. 0:02:24.520 --> 0:02:27.440 That, Well, I mean, at the end of the day, 0:02:27.520 --> 0:02:30.640 the confidence issue was certainly helped by the largest banks 0:02:30.639 --> 0:02:34.120 putting thirty billion dollars deposits in. Certainly, I would think 0:02:34.120 --> 0:02:37.120 the regulators and the large banks nobody wants to see 0:02:37.120 --> 0:02:39.640 First Public fail. I'm a customer, right, I love them. 0:02:39.639 --> 0:02:42.040 They're great service. But at the end of the day, 0:02:42.200 --> 0:02:46.240 deposits matter, and the deposits matter versus how you've built 0:02:46.280 --> 0:02:48.560 your asset book. Right, what are you have in your 0:02:48.600 --> 0:02:50.440 asset book? Do you have a lot of bonds well 0:02:50.440 --> 0:02:53.080 that you know, kind of undid Silicon Valley people looked 0:02:53.080 --> 0:02:56.040 at the mismatch and ran and in this case, they 0:02:56.080 --> 0:02:59.320 had a lot of fixed right long term mortgages. And 0:02:59.480 --> 0:03:02.359 when you match that against higher short term interest rates, 0:03:02.520 --> 0:03:06.119 that's a tough match. And when you undermine confidence, then 0:03:06.160 --> 0:03:08.440 that those deposits ran a lot of the venture capital 0:03:08.480 --> 0:03:12.079 mining ran really fast, and that's you know, what companies 0:03:12.120 --> 0:03:15.000 had in common, or you know, clearly Silicon Valley had 0:03:15.040 --> 0:03:18.440 the largest concentration. First Republic would have been would have 0:03:18.480 --> 0:03:21.000 been next in terms of dollar amounts, in terms of 0:03:21.080 --> 0:03:24.000 you know, the regionals, and then pack Western Western Alliance. 0:03:24.120 --> 0:03:26.800 Western Alliance really startings last week. I mean, you know 0:03:26.840 --> 0:03:29.720 that was that was quite a pleasant surprise to people 0:03:29.720 --> 0:03:32.240 who owned it. Still down a lot, but up substantially 0:03:32.240 --> 0:03:32.919 from its lows. 0:03:33.280 --> 0:03:36.480 Yeah, So do you anticipate getting another upside surprise heading 0:03:36.520 --> 0:03:38.440 into the clothes today with First Republic? 0:03:39.520 --> 0:03:41.760 I mean it's absolutely you know, binary the way the 0:03:41.800 --> 0:03:45.440 stock reacts, but I certainly think that confidence has been 0:03:45.480 --> 0:03:49.120 restored without thirty billion dollars of inflow, and clearly they've 0:03:49.160 --> 0:03:53.440 been reaching out to customers and finding ways to diversify deposits. 0:03:53.480 --> 0:03:56.160 There are all sorts of programs out there that help 0:03:56.200 --> 0:03:58.800 diversy deposits. So of course, what also is important is 0:03:58.920 --> 0:04:01.440 everybody talks about two undred fifty thousand. Well, if you 0:04:01.440 --> 0:04:03.000 have an account with your spouse, or if you have 0:04:03.040 --> 0:04:05.280 account with your spouse, your two children, but it's two 0:04:05.320 --> 0:04:07.600 fifty of persons, So that's a million dollars right there. 0:04:07.920 --> 0:04:10.360 So you know, clearly, I think some of that money 0:04:10.440 --> 0:04:11.600 is going to come back. I think some of the 0:04:11.600 --> 0:04:14.920 confidence will be back. We want to resolve that company, 0:04:15.000 --> 0:04:17.919 so it's a very good company. But yeah, the outcome 0:04:17.960 --> 0:04:20.159 is going to be binary. My thirty four percent short interest, 0:04:20.520 --> 0:04:22.520 So clearly you can have a very large move in 0:04:22.560 --> 0:04:22.960 that stock. 0:04:23.480 --> 0:04:25.800 Anton get a little nerdy with me here if you will. 0:04:26.240 --> 0:04:28.960 When we're looking at price to book ratios for some 0:04:29.000 --> 0:04:31.400 of these regional banks, what is so striking to me 0:04:32.000 --> 0:04:36.480 is that they have fallen far below that key one level. 0:04:36.640 --> 0:04:39.800 And for our non stock audience around the world, when 0:04:39.839 --> 0:04:42.320 it falls below one, it is kind of this glaring 0:04:42.600 --> 0:04:44.919 buy signal, and it has been for a lot of 0:04:44.920 --> 0:04:47.760 these companies. Why is it not it is a no 0:04:47.920 --> 0:04:51.920 brainer to share buybacks for a lot of these regional banks. 0:04:51.960 --> 0:04:54.640 You're worried about a confidence issue, you're worried about your 0:04:54.640 --> 0:04:56.080 stock losing all this kind of value. 0:04:56.120 --> 0:04:58.440 Why not deploy that cash? 0:04:58.560 --> 0:05:02.320 Well, I mean, that's a brilliant observation. You get high 0:05:02.360 --> 0:05:09.560 honor marks for me being nerdy. I might, but if 0:05:09.600 --> 0:05:13.880 you really think about it, you know what the swings 0:05:13.920 --> 0:05:16.400 of this business, if you really think about it. You're 0:05:16.440 --> 0:05:18.640 absolutely right, all right, you're supposed to be buying regional 0:05:18.680 --> 0:05:22.280 banks below book value, and why are they not buying stockback? 0:05:22.440 --> 0:05:24.880 Some are right, but I think at the end of 0:05:24.960 --> 0:05:28.560 the day, people want to have confidence of strong capital ratios, 0:05:28.680 --> 0:05:31.840 lots of liquidity, and I think the industry is going 0:05:31.880 --> 0:05:33.800 to be a second half of the year buyback story, 0:05:33.920 --> 0:05:37.400 right as capital bills, as some of those bond portfolios 0:05:37.480 --> 0:05:40.080 start to you know, a cree back into value of 0:05:40.080 --> 0:05:43.440 book value in capital, you know, as rates potentially fall again, 0:05:43.800 --> 0:05:46.480 as we had potentially of mild recession. And by the way, 0:05:47.279 --> 0:05:50.720 regional banks can really outperform in a mild recession. Everybody 0:05:50.800 --> 0:05:52.640 goes back to two thousand and seven and eight, which 0:05:52.680 --> 0:05:54.880 is a you know, once in a century kind of 0:05:55.240 --> 0:05:57.880 timing period. I don't think we have the bad products. 0:05:58.200 --> 0:06:01.160 I don't think we have the irresponsible lens. I don't 0:06:01.200 --> 0:06:05.360 think we have the same capital ratios for the industry, 0:06:05.440 --> 0:06:07.560 and so I think it's a really good time. I 0:06:07.560 --> 0:06:09.400 also think we have a lot of latent m and 0:06:09.480 --> 0:06:12.280 A that will happen. Right, if you're a bank CEO 0:06:12.440 --> 0:06:15.120 and you're in your late fifties early sixties, you've been 0:06:15.160 --> 0:06:18.520 through two thousand and eight, You've been through twenty fifteen, 0:06:18.680 --> 0:06:21.239 you know Stockston Act. Well, then you've been through twenty 0:06:21.320 --> 0:06:24.200 twenty and twenty two. Boy, when you have a chance 0:06:24.240 --> 0:06:27.080 to sell your bank, you're going to And by the way, 0:06:27.120 --> 0:06:29.360 the gap from a MidCat bank and small cat banks 0:06:29.920 --> 0:06:33.760 is about four you know, handles in terms of pe 0:06:33.960 --> 0:06:37.120 ratios getting nerdy here. So that means the larger bank 0:06:37.160 --> 0:06:39.400 can buy the smaller one in a very creative manner 0:06:39.400 --> 0:06:41.200 and pay a forty percent premium immediately. 0:06:41.400 --> 0:06:44.040 I mean, and that's exactly what we're potentially expecting from 0:06:44.080 --> 0:06:47.400 First Republic as we talk about just how much kind 0:06:47.400 --> 0:06:50.159 of liquidity and a lifeline that we've gotten from GP Morgan, 0:06:50.200 --> 0:06:52.880 from Bank of America and others, and how much further 0:06:52.920 --> 0:06:53.760 they're willing to go. 0:06:53.880 --> 0:06:55.279 So that's simply something that we're. 0:06:55.120 --> 0:06:58.280 Going to be watching after the bell Anton. From your perspective, though, 0:06:58.279 --> 0:07:00.840 when we talk about exposure for some of these community 0:07:00.839 --> 0:07:02.919 banks and regional banks, talk to us a little bit 0:07:02.920 --> 0:07:04.839 about crypto exposure. That was at the heart of the 0:07:04.880 --> 0:07:09.320 issue with signature with SBB as well. Your take on 0:07:09.360 --> 0:07:12.480 whether we were let's say, ten years too early on 0:07:12.560 --> 0:07:15.160 that exposure you know, I. 0:07:15.640 --> 0:07:18.520 Think I'm disappointed that we didn't have a chance to 0:07:18.560 --> 0:07:22.520 sort of regulate and make things like like crypto or 0:07:22.560 --> 0:07:25.400 stable coins sort of a safe part of the marketplace 0:07:25.800 --> 0:07:28.520 because those deposits. Again, if you combine that with you know, 0:07:28.520 --> 0:07:32.000 the crypto and the venture together, Signature's case really twenty 0:07:32.000 --> 0:07:37.200 five percent deposits of you know, crypto and certainly similar 0:07:37.280 --> 0:07:40.000 Mountain venture. You know that money can go really quickly, right, 0:07:40.040 --> 0:07:42.680 you lose that confidence, you know, click the mouse, and 0:07:42.720 --> 0:07:44.760 by the way, that's a risk with FED now, the 0:07:44.800 --> 0:07:48.000 money can move really quickly on FED. Now, if you 0:07:48.040 --> 0:07:50.800 really think about going back to the financial crisis, you know, 0:07:50.920 --> 0:07:55.960 first Union or Wacoba failed, you know, was handed basically 0:07:56.000 --> 0:07:59.680 to Wells Fargo. They had sixteen billion run out over 0:07:59.720 --> 0:08:03.520 a week. I believe Silicon Valley had one hundred billion 0:08:03.560 --> 0:08:06.680 of demands on that Friday it failed. So you know, 0:08:06.720 --> 0:08:08.960 that ability to click the my house and move that money. 0:08:09.040 --> 0:08:10.880 So yeah, I would have loved to see crypto reregulated. 0:08:10.880 --> 0:08:13.080 I would love to see it part of the banking 0:08:13.120 --> 0:08:16.880 system in a regulated way. And look, deposits are obviously key, 0:08:17.280 --> 0:08:18.800 and that's important. And then you add up, you know 0:08:18.800 --> 0:08:22.760 another another factor is cannabis banking, you know? Is that legal? 0:08:22.840 --> 0:08:23.000 Right? 0:08:23.040 --> 0:08:25.920 There's a lot of cash people have, you know, their 0:08:26.000 --> 0:08:28.000 money in safes and things like that. So if you 0:08:28.040 --> 0:08:30.840 think about where that money is and where it should be, 0:08:30.880 --> 0:08:32.920 it should be in the banking system, it should be regular. 0:08:33.160 --> 0:08:35.520 Sure. Hey, we've got about forty five seconds left, So 0:08:35.520 --> 0:08:37.480 I do want to get to some names because our 0:08:37.520 --> 0:08:40.319 audience loves to hear some investment advice from the smart 0:08:40.320 --> 0:08:42.400 folks like you that we bring on the air. Talk 0:08:42.400 --> 0:08:45.120 to me about some of your top holdings and maybe 0:08:45.320 --> 0:08:47.880 some of your more unique ones. You've got a New 0:08:47.960 --> 0:08:50.840 York community bank down the list here. Talk to me 0:08:50.880 --> 0:08:52.760 about what's looking good to you right now? 0:08:53.240 --> 0:08:55.640 Perfect, well, you just let it off with with my 0:08:56.200 --> 0:08:58.760 one of my near term favorites. And look, I've loved 0:08:58.800 --> 0:09:01.920 in your community for a long time, non management for decades. Literally. 0:09:02.720 --> 0:09:04.960 I like the fact they got those signature deposits right. 0:09:05.000 --> 0:09:07.839 It definitely selves some positiveshoes for him. They're one of 0:09:07.880 --> 0:09:10.000 the top mortgage lenders in the country. That's not a 0:09:10.040 --> 0:09:12.040 great place to be now, but when rates come down, 0:09:12.080 --> 0:09:13.640 that's going to be a really great place to be. 0:09:14.040 --> 0:09:17.800 And I really think they're concentrating on improving their branch system. 0:09:18.160 --> 0:09:20.200 You know, the CEO of Tom Kagemi was the CFO 0:09:20.280 --> 0:09:22.040 for a long time. He's only had a you know, 0:09:22.080 --> 0:09:24.080 a couple of years as CEO, and I think he's 0:09:24.120 --> 0:09:27.240 really remaking that big. So I love the big dividend yield. 0:09:27.280 --> 0:09:29.600 I think that's important. So I'll give you to others 0:09:29.640 --> 0:09:32.559 with big dividend yields. First, Interstate FIBK. It's one of 0:09:32.640 --> 0:09:35.440 my top top positions as well. And I'll give you 0:09:35.480 --> 0:09:37.080 another one that's in the middle of a merger of 0:09:37.200 --> 0:09:40.120 you know, PFS Providence Financial right across the river from youre, 0:09:40.120 --> 0:09:43.199 New Jersey, and again big dividend yield. They've got a 0:09:43.280 --> 0:09:46.200 pending merger to close. They have some very big index 0:09:46.400 --> 0:09:49.280 activity has to happen when that merger closes, which again 0:09:49.360 --> 0:09:51.520 is another sort of technical reason to own it. But 0:09:51.559 --> 0:09:53.760 I really like management, knowing them a long time as well, 0:09:53.840 --> 0:09:55.960 so I like getting a big dividend and waiting for 0:09:56.120 --> 0:09:57.400 you know, these prices to recover. 0:09:58.000 --> 0:10:00.679 Anton Shoo's president and chief and best an officer over 0:10:00.720 --> 0:10:04.200 at Mendon Capital Advisors joining us on the line from Florida. 0:10:04.280 --> 0:10:05.959 We thank you as always. 0:10:05.960 --> 0:10:09.520 You're listening to the Bloomberg Business Week podcast. Catch us 0:10:09.559 --> 0:10:12.920 live weekday afternoons from three to six Eastern Listen on 0:10:12.960 --> 0:10:17.000 Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, 0:10:17.280 --> 0:10:19.080 or watch us live on YouTube. 0:10:19.600 --> 0:10:22.680 The SMP's basically been in one hundred point range going 0:10:22.720 --> 0:10:24.680 back to March here. So the big question as we 0:10:24.679 --> 0:10:27.760 get earnings from the likes of First Republic again down 0:10:27.800 --> 0:10:29.760 by about seven percent in the close here off of 0:10:29.760 --> 0:10:33.280 those earnings, but will continued earnings We've got about one 0:10:33.360 --> 0:10:37.040 hundred and seventy companies reporting this week. Will that change 0:10:37.120 --> 0:10:39.920 the needle as we move forward here? We're only about 0:10:39.920 --> 0:10:42.440 a fifth of the way through this earnings season. So 0:10:42.679 --> 0:10:45.920 joining us to discuss is Bloomberg Intelligence is Gina Martin Adams. 0:10:46.000 --> 0:10:48.840 She joins us on zoom from New Jersey. Gina, thank 0:10:48.880 --> 0:10:52.359 you so much for being here. What are your expectations? 0:10:52.360 --> 0:10:55.600 Are we going to continue to see beating estimates, beating 0:10:55.679 --> 0:10:57.360 estimates headlines over and over again? 0:10:58.400 --> 0:11:00.559 Well, thank you for having me into delight to be here. 0:11:00.600 --> 0:11:02.720 And certainly this is a critical earning season on a 0:11:02.800 --> 0:11:05.960 number of fronts. We tend to see companies beat earnings, 0:11:06.000 --> 0:11:09.480 so it's important to keep that perspective. On average, even 0:11:09.520 --> 0:11:12.000 in the worst of earning seasons, at least sixty five 0:11:12.040 --> 0:11:14.439 percent of S and P five hundred companies beat estimates. 0:11:14.440 --> 0:11:16.839 We're looking at seventy five percent so far, so it's 0:11:17.000 --> 0:11:20.320 been an above average earning season so far. But really 0:11:20.320 --> 0:11:24.120 we've only gotten financials and a few companies from other 0:11:24.200 --> 0:11:28.679 sectors thus far. If the analyst consensus is correct, earnings 0:11:28.679 --> 0:11:31.680 are now on pace to fall about seven percent year 0:11:31.720 --> 0:11:34.240 over year. The expectation at the start of the season 0:11:34.360 --> 0:11:38.400 was eight percent. That includes all of the analysts downgrades 0:11:38.400 --> 0:11:42.360 that are continuing for the non financial sectors. So so far, 0:11:42.440 --> 0:11:46.000 so good for earning season. I do think tech in particular, 0:11:46.080 --> 0:11:49.160 the megacap stocks in the S and P five hundred 0:11:49.200 --> 0:11:52.240 that are tech or tech adjacent are going to be 0:11:52.360 --> 0:11:55.839 the most critical reporters, not just because of the biggest stocks, 0:11:55.840 --> 0:11:58.480 but also because generally they're training at the largest premium, 0:11:58.559 --> 0:12:02.400 so they have the biggest hurdles to overcome Gina. 0:12:02.440 --> 0:12:04.760 It's interesting when you look at kind of the historical 0:12:06.080 --> 0:12:09.120 pattern that tech has performed at because in some ways 0:12:09.880 --> 0:12:12.240 in this last tightening cycle, every time rates go higher, 0:12:12.360 --> 0:12:14.480 there's an expectation of rates going higher, tech are the 0:12:14.480 --> 0:12:15.120 first ones. 0:12:14.960 --> 0:12:15.480 That get hit. 0:12:15.720 --> 0:12:18.120 But then if you go back to the twenty sixteen 0:12:18.240 --> 0:12:22.400 tightening cycle, tech outperformed in line with those rate hikes. 0:12:22.640 --> 0:12:25.000 I could argue both ways for recessions too. 0:12:25.040 --> 0:12:27.000 You've seen recessions where tech has been the go to 0:12:27.160 --> 0:12:29.079 and recessions where tech is the first to get hit. 0:12:29.559 --> 0:12:30.959 What happens this time around? 0:12:32.120 --> 0:12:34.320 Yeah, I think this is an excellent point. One key 0:12:34.360 --> 0:12:38.520 difference between this cycle and twenty sixteen is in twenty 0:12:38.559 --> 0:12:40.520 sixteen tech stacks in the S and P five hundred, 0:12:40.559 --> 0:12:42.360 we're not trading at a premium to the rest of 0:12:42.400 --> 0:12:45.320 the SMP, so that would argue that there might be 0:12:45.360 --> 0:12:48.640 a bit more risk in tech STAPs. Another key difference 0:12:48.679 --> 0:12:51.520 between the current period of earnings recession and that of 0:12:51.520 --> 0:12:55.120 twenty twenty is in the twenty twenty recession, recall tech 0:12:55.160 --> 0:12:58.480 earnings we're growing at an exponentially stronger pace than the 0:12:58.480 --> 0:13:00.439 rest of the S and P five hundred. They were 0:13:00.480 --> 0:13:04.599 still in business, not shut down, and actually experiencing accelerated 0:13:04.640 --> 0:13:08.040 demand because of the uniqueness of the pandemic cycle. So 0:13:08.360 --> 0:13:10.640 I think that this is something of a mix. Right now, 0:13:10.720 --> 0:13:13.920 tech is trading at a very premium valuation to the 0:13:14.000 --> 0:13:15.960 rest of the S and P five hundred about fifty 0:13:16.000 --> 0:13:17.880 percent above the rest of the S and P five 0:13:17.960 --> 0:13:22.320 hundred in fact, but also experiencing an earnings downdraft about 0:13:22.360 --> 0:13:25.960 double the index, particularly when when you remove those key 0:13:26.000 --> 0:13:29.400 buybacks from the tech sector, net income is falling more 0:13:29.440 --> 0:13:32.079 than more like twenty percent for the tech space and 0:13:32.160 --> 0:13:34.880 the S and P five hundred. So right now you've 0:13:34.920 --> 0:13:38.920 got a really tough climate. Now, Naturally, historical precedence is 0:13:38.960 --> 0:13:43.160 not necessarily perfectly relevant for any given cycle. There are 0:13:43.240 --> 0:13:46.720 unique characteristics of this cycle. Investors are more and more 0:13:46.840 --> 0:13:49.760 beholden to the tech space as the results of sort 0:13:49.760 --> 0:13:53.440 of hiding there throughout the pandemic and really not releasing 0:13:53.480 --> 0:13:55.840 their grasp on those tech stocks over the last couple 0:13:55.880 --> 0:13:59.120 of years, despite the fundamental evidence that suggests that this 0:13:59.240 --> 0:14:02.719 space is ruggling somewhat. So I think that this is 0:14:02.760 --> 0:14:06.080 a really unique spit in unique time point in time 0:14:06.120 --> 0:14:10.160 for tech. We can get some historical evidence to suggest 0:14:10.240 --> 0:14:14.640 that the combination of valuations and really suppressed earnings should 0:14:14.720 --> 0:14:18.880 not be great for tech. That said, interest rates play 0:14:18.880 --> 0:14:21.120 a role too, and there are a lot of moving 0:14:21.160 --> 0:14:23.400 parts to consider. For investing in this segment. 0:14:23.680 --> 0:14:25.600 So, Gina, before we move away from tech, I want 0:14:25.600 --> 0:14:28.480 to ask one final question on this. Micron and Seagate 0:14:29.040 --> 0:14:32.600 not doing so great with their earnings, is that a 0:14:32.720 --> 0:14:35.720 key indicator of what we might continue to see throughout 0:14:35.720 --> 0:14:36.400 the rest of the week. 0:14:36.520 --> 0:14:37.520 Yeah. 0:14:37.560 --> 0:14:42.280 Well, typically semiconductors are a leading indicator for the technology sector, 0:14:42.440 --> 0:14:46.480 so anything happening in this semiconductor space is likely to 0:14:46.560 --> 0:14:50.240 feed through to technology over the future quarters. They're the 0:14:50.320 --> 0:14:53.480 leading edge of the cycle. So what happens in semiconductors 0:14:53.560 --> 0:14:58.480 now maybe a harbinger of conditions emerging for the rest 0:14:58.520 --> 0:15:02.080 of the tech space going for I actually think though 0:15:02.160 --> 0:15:06.160 in the end because Apple, I almost merged Apple and 0:15:06.240 --> 0:15:10.800 Microsoft there. But because Apple and Microsoft are such a 0:15:10.920 --> 0:15:13.920 huge market caab portion of the tech space, they also 0:15:14.120 --> 0:15:18.120 really dominate earnings trends and their priced at premium levels 0:15:18.160 --> 0:15:21.640 relative to the index. These two will matter most without 0:15:21.640 --> 0:15:25.200 a doubt or current sentiment toward tech because they're just 0:15:25.320 --> 0:15:28.960 so large and they have dominated price trends for the sector. 0:15:29.000 --> 0:15:32.280 They're also very important to driving price trends for the 0:15:32.360 --> 0:15:34.280 S and P five hundred as a whole. But I 0:15:34.280 --> 0:15:36.600 don't want to ignore the rest of the indicators. I 0:15:36.680 --> 0:15:40.640 definitely think semiconductors' prices have performed very well, hinting to 0:15:40.680 --> 0:15:44.320 an emerging improvement in earnings trends for that segment. We 0:15:44.440 --> 0:15:46.920 want to pay attention to that pretty closely as an 0:15:46.920 --> 0:15:50.280 indicator for the broader sector. But really what matters from 0:15:50.280 --> 0:15:54.120 a sentiment perspective right now is can Apple and Microsoft 0:15:54.200 --> 0:15:57.880 continue to hold up sentiment toward their stocks which are 0:15:57.880 --> 0:16:02.080 definitely premium priced, and earn a are not particularly strong 0:16:02.680 --> 0:16:04.280 to support those premium prices. 0:16:04.880 --> 0:16:07.840 Well, talk to us then a little bit about kind 0:16:07.880 --> 0:16:11.680 of the valuations here, because it just feels like if 0:16:11.720 --> 0:16:13.800 you are and we've heard this time and time again 0:16:13.840 --> 0:16:16.640 when it comes to growth stocks and not necessarily your alphabet's, 0:16:16.640 --> 0:16:19.960 your metas, but even going back to the fifties or 0:16:20.000 --> 0:16:23.320 the sixties, kind of these growth stocks that were Walmart, IBM, 0:16:23.400 --> 0:16:28.240 Disney at the time, that in a decelerating macro environment, 0:16:28.520 --> 0:16:32.800 you lean towards the growthiest parts of the market because 0:16:33.800 --> 0:16:36.280 value as the alternative is not the way to go. 0:16:36.520 --> 0:16:38.080 If a recession is coming down. 0:16:38.160 --> 0:16:41.320 And I'm just thinking aloud here, teach me gena as 0:16:41.360 --> 0:16:43.800 a recession is kind of coming down, that just means 0:16:43.840 --> 0:16:47.520 a direct drop in things like CAPEC spending or infrastructure 0:16:47.520 --> 0:16:49.360 and things like that. So naturally you go in the 0:16:49.360 --> 0:16:52.600 opposite direction to the growthy names. Why aren't we seeing 0:16:52.680 --> 0:16:57.120 a bigger push towards the growthy names if everyone's convinced 0:16:57.120 --> 0:16:58.720 a recession is just around the corner. 0:16:59.560 --> 0:17:02.000 Yeah, I think it's a matter of a couple of things. 0:17:02.080 --> 0:17:05.040 Critie I would say, first, it's a function of inflation. 0:17:05.480 --> 0:17:07.600 You know, this has been a really unique cycle over 0:17:07.640 --> 0:17:10.080 the last year. All of the earnings weakness has really 0:17:10.119 --> 0:17:15.240 been accounted for by price trends and inflationary conditions that 0:17:15.320 --> 0:17:19.439 really suppressed margin growth. We did see some volume sales 0:17:19.440 --> 0:17:24.760 deceleration certainly amplify those margin struggles for companies, but that 0:17:24.920 --> 0:17:28.080 margin struggle was found in the part of growth companies 0:17:28.160 --> 0:17:30.960 much more than that for value companies, And as a 0:17:31.000 --> 0:17:33.600 matter of fact, many value companies actually exhibit a degree 0:17:33.600 --> 0:17:37.400 of pricing power over the last year. The second thing 0:17:37.440 --> 0:17:40.639 I think it is about sequence. I mean, frankly, everybody's 0:17:40.680 --> 0:17:43.960 talking about and still debating economic recession, but earnings are 0:17:44.000 --> 0:17:46.960 in recession, and they've been in recession for a year now. 0:17:47.359 --> 0:17:50.000 So we are about to post our fourth consecutive quarter 0:17:50.080 --> 0:17:52.960 of x Entergy earnings declines on a year ago basis 0:17:52.960 --> 0:17:56.320 for the S and P five hundred. While everyone debates 0:17:56.359 --> 0:17:59.879 economic recession, earnings recession maybe hitting its worst of it, 0:18:00.000 --> 0:18:03.639 it's worst point already and is projected to the earning 0:18:03.680 --> 0:18:06.280 stream is projected by analysts to start to recover in 0:18:06.320 --> 0:18:08.480 the second half of twenty twenty three and into twenty 0:18:08.520 --> 0:18:12.560 twenty four. That sequence makes a really big difference. Where 0:18:12.720 --> 0:18:15.919 is the earnings recovery going to come from? While the 0:18:15.960 --> 0:18:19.560 analyst consensus actually thinks that the stronger earnings areas of 0:18:19.600 --> 0:18:23.760 the market are a bit more value centric this time around. 0:18:23.800 --> 0:18:25.680 A lot of it is the classification of who's a 0:18:25.760 --> 0:18:28.960 value stock versus who's a growth stock. But when much 0:18:29.000 --> 0:18:31.960 of your value segment is in financials as well as 0:18:31.960 --> 0:18:35.359 some industrials, some consumer discretionary stocks, and these are the 0:18:35.400 --> 0:18:38.960 stocks expected to lead that earnings recovery that can really 0:18:39.000 --> 0:18:40.679 matter to the sequencing. 0:18:40.200 --> 0:18:42.720 I'm investing, Gina thirty seconds. When to put you on 0:18:42.760 --> 0:18:45.440 the spot here you mentioned margins. What's more important in 0:18:45.480 --> 0:18:48.159 this earning season? Top line or bottom line growth? 0:18:49.119 --> 0:18:51.920 Oh? I think bottom line is almost always more important. Creaty, 0:18:51.960 --> 0:18:54.400 the only thing the top line really matters for are 0:18:54.440 --> 0:18:58.520 those growth stocks because they do have longer duration cash 0:18:58.520 --> 0:19:02.960 flows and investors want to see some persistence in that 0:19:03.080 --> 0:19:05.960 growth outlook emerge for those companies. But margins are always 0:19:06.040 --> 0:19:08.960 most meaningful, So I'll pick bottom line bottom line. 0:19:08.960 --> 0:19:11.000 It is the top line growth I think coming handy 0:19:11.040 --> 0:19:13.000 when we're trying to price in whether the consumer is 0:19:13.000 --> 0:19:15.879 still spending. Gina Martin Adams, the chief equity strategist over 0:19:15.920 --> 0:19:18.920 at Bloomberg Intelligence, answering every question that we're throwing at 0:19:18.920 --> 0:19:20.280 her and staying after hours for us. 0:19:20.280 --> 0:19:22.320 We thank you as always. 0:19:23.680 --> 0:19:27.239 You're listening to the Bloomberg Business Week podcast. Catch us 0:19:27.280 --> 0:19:31.280 live weekday afternoons from three to six Easter on Bloomberg Radio, 0:19:31.480 --> 0:19:34.760 the Bloomberg Business app and YouTube. You can also listen 0:19:34.880 --> 0:19:37.960 live on Amazon Alexa from our flagship New York station, 0:19:38.440 --> 0:19:43.440 Just say Alexa, play Bloomberg eleven thirty, Maddie. 0:19:43.440 --> 0:19:45.200 One of these stocks that we have not talked about 0:19:45.240 --> 0:19:48.520 in today's trading session is this company called C three. 0:19:48.560 --> 0:19:51.960 It is an AI company. The ticker is literally AI 0:19:52.600 --> 0:19:53.639 and we know AI. 0:19:53.480 --> 0:19:54.600 Is all the rage. 0:19:55.080 --> 0:19:58.240 Yeah. We actually we had the CEO of C three 0:19:58.280 --> 0:20:01.639 AI on the show while ago a couple of weeks ago, 0:20:02.640 --> 0:20:05.200 and it was a great conversation. It was right after 0:20:05.720 --> 0:20:07.639 some very big news for the company. He talked a 0:20:07.640 --> 0:20:10.639