Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's talk to David Costin from Golden Sachs.
Speaker 3: He's the chief of US equity strategy there and or
Speaker 3: the chief US equity strategist, I should say, David, and
Speaker 3: it's great to get you on to talk about your
Speaker 3: expectations with the market, and I'd love to just get
Speaker 3: your take on the FED. You know, how important is
Speaker 3: the FED cutting cycle right now?
Speaker 2: Is? I think everyone has reduced.
Speaker 3: His or her expectations for the terminal rate.
Speaker 2: What are you looking at? Well?
Speaker 4: I have the benefit of working with the Golden Sachs
Speaker 4: economics team, and their forecast right now is a FED
Speaker 4: will cut next week as well as the beginning of
Speaker 4: next year. That's mostly priced into the market. The expectation
Speaker 4: for most portfolio managers with whom I interact on a
Speaker 4: regular basis are expecting an easy cycle to continue, and
Speaker 4: the stock market is pricing as though the underlying economic
Speaker 4: growth is close with a five percent. The economy, of course,
Speaker 4: is not growing.
Speaker 2: As rapidly as that, but the.
Speaker 4: Performance of cyclical stocks relative to defensive stocks is more
Speaker 4: consistent with a pretty robust economic underlying activity. In fact,
Speaker 4: that is what most of the fund managers are anticipating.
Speaker 4: The animal spirits have really been out in force.
Speaker 2: In the last month.
Speaker 4: We've seen the market rally by roughly five percent since
Speaker 4: the election. You saw recently the NFIB Small Business Optimism
Speaker 4: Index jump sharply. That's pretty consistent what we saw in
Speaker 4: the first Trump administration, the expectation of more business friendly environment.
Speaker 4: Whether that's true or not, of course, that remains to
Speaker 4: be seen. CEO confidence is typically highest in a unified
Speaker 4: republican government, so that also is I think one of
Speaker 4: the reasons why you've seen it. We are expecting a
Speaker 4: twenty five percent increase in M and A activity next year.
Speaker 4: The CEO confidence is one of the key variables, along
Speaker 4: with financial conditions and economic activity. So those are some
Speaker 4: of the attributes around why business expectations are pretty strong.
Speaker 4: The economy is the stock market is pricing that, and
Speaker 4: we have expectations of roughly seven percent increase in the
Speaker 4: S and P five hundred during the next twelve months
Speaker 4: to around six thousand, five hundred. So that's sort of
Speaker 4: the play lay of land Matt as we see it now.
Speaker 1: David, what do you tell people who are following the
Speaker 1: animal spirits. Should they keep following the animal spirits or
Speaker 1: is there something more under the hood they should be
Speaker 1: looking at. Given that when we look at your analysis,
Speaker 1: you're taking a look at a very very specific set
Speaker 1: of stocks that should outperform, and not just the entire index.
Speaker 4: So we have a couple of strategies that we think
Speaker 4: about in this environment. One we'd be companies whose customer
Speaker 4: base or customer clients are small and mid sized businesses.
Speaker 4: The intuition behind that is that companies that are small
Speaker 4: businesses are looking to spend more money in the idea
Speaker 4: of a more optimistic outlook. So if you're a supplier
Speaker 4: of those to those businesses, that's usually a good source
Speaker 4: of potential positive earning revisions.
Speaker 2: More greater business.
Speaker 4: A group of stocks that my colleague economic or stock
Speaker 4: analysts at Goldman have identified as a greater than average
Speaker 4: probability of being.
Speaker 2: Acquired in a merger.
Speaker 4: That's a strategy we published the other day last week
Speaker 4: looking at companies with a high risk adjusted return. The
Speaker 4: idea of the expected risk adjuster return being quite high
Speaker 4: in the coming year would be an appropriate strategy in
Speaker 4: our view, because the stock market trades at a very
Speaker 4: high valuation level, and there's a slight value bias or
Speaker 4: value tilts to a group of stocks with the highest
Speaker 4: risk adjusted potential risk adjuster returns. And I think that's
Speaker 4: an important strategy to think about given the uncertainty scenario
Speaker 4: around and the tariffs, exactly what will happen with inflation,
Speaker 4: employment situation, So there's certain undercurrents of concern, and so
Speaker 4: the idea of choosing stocks with high risk adjuster return
Speaker 4: I think it's appropriate to set up a.
Speaker 2: Portfolio at this time.
Speaker 4: We think of it as terms of various delices of strategies.
Speaker 5: I want to go back to the strategy you mentioned
Speaker 5: about stocks with a higher M and a potential. Obviously
Speaker 5: we've been talking about the antitrust, the regulatory environment that's
Speaker 5: expected in twenty twenty five, especially with a.
Speaker 2: New FTC chair named.
Speaker 5: Clearly there's a lot of interest among Wall Street firms
Speaker 5: in that. What are your conversations with clients around that sound?
Speaker 5: Have you also seen an increase in interest from investors
Speaker 5: to pursue that type of strategy we have?
Speaker 4: In fact, the Goldman Sachs Financial Services Conference was held
Speaker 4: on Tuesday and Wednesday of this week, and there was
Speaker 4: quite a lot of the CEOs who were presenting, we're
Speaker 4: talking about the expectation they had for increased M and
Speaker 4: a activity incounter twenty twenty five. Investors as a consequence,
Speaker 4: are also quite focused in this area. And we have
Speaker 4: a group of stocks where typically if you look at
Speaker 4: the S and P one thousand, five hundred, fifteen hundred,
Speaker 4: there's about a two percent of those companies get acquired
Speaker 4: each year, and a group of stocks to which I
Speaker 4: referred earlier, which my colleague analysts have identified as a
Speaker 4: greater than average probability. We about a nine percent hit
Speaker 4: rate of acquisitions. Those stocks tend to outperform as you
Speaker 4: would anticipate receiving a usually a merger comes at a premium.
Speaker 4: That's been a driving force behind why we get lots
Speaker 4: of inquiries looking at this list of sixty two companies.
Speaker 2: How do you look out, David for black swans.
Speaker 3: I mean, we're in a situation where we really haven't
Speaker 3: had any for so long. The market's up almost thirty
Speaker 3: percent this year, the S and P at least, it
Speaker 3: was up twenty five percent last year, and it's had
Speaker 3: an incredible run since the bottom in two thousand and
Speaker 3: nine from six six six to over six thousand. What
Speaker 3: do you do to try and factor that into your models,
Speaker 3: the potential of an unknown unknown.
Speaker 4: Well, since you referenced Donald Rumsfeld's famous dictum no knowns
Speaker 4: and no non knowns and non unknowns, that's ax question
Speaker 4: kind of hard to forecast.
Speaker 2: A black swan will.
Speaker 4: One way Matt to combat that or to tackle that
Speaker 4: problem would be to look at companies with a high
Speaker 4: risk adjusted return because that's factored into a certain grade,
Speaker 4: not a specific black swan event, but rather the idea.
Speaker 2: Of overall risk.
Speaker 4: The idea of a potentially high return adjusted for that risk.
Speaker 4: And that's a goal. That's the holy grail of all
Speaker 4: portfolio managers to get the best risk adjusted return that
Speaker 4: he or she can.
Speaker 2: So what do we think about it? Well, we look
Speaker 2: at some of the big macro issues that are that
Speaker 2: are there and try.
Speaker 4: To understand valuation. To set up with the stock market
Speaker 4: of trading at such high pe multiple does create you know,
Speaker 4: asymmetries in terms of downside risk if there's real disappointments
Speaker 4: on the underlying fundamental, So there's value has a potential
Speaker 4: component in a portfolio. I think the way to think
Speaker 4: about is a a as a portfolio in a true
Speaker 4: portfolio sense, with multiple strategies in place, some that are
Speaker 4: maybe companies that are likely to have an M and activity,
Speaker 4: some that are forecast to have more customer based in
Speaker 4: small area that we talked about our risk adjusted returns.
Speaker 4: Those combinations, I think is the right way to approach
Speaker 4: a market that trades at a very high valuation historically speaking,
Speaker 4: and that's I think that's how we would advocate and
Speaker 4: recommend to our clients.
Speaker 1: David, we thank you so very much for joining us,
Speaker 1: of course, that is David Coston of Goldman Sachs. We
Speaker 1: thank you for your time