WEBVTT - Markets and a Possible September Rate Cut 0:00:02.520 --> 0:00:13.760 Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg 0:00:13.840 --> 0:00:17.880 Surveillance Podcast. Catch us live weekdays at seven am Eastern 0:00:18.200 --> 0:00:22.000 on Apple CarPlay or Android Auto with the Bloomberg Business App. 0:00:22.320 --> 0:00:25.680 Listen on demand wherever you get your podcasts, or watch 0:00:25.760 --> 0:00:27.040 us live on YouTube. 0:00:27.440 --> 0:00:28.440 Lorid Cavalcina Drench. 0:00:28.600 --> 0:00:32.360 She's said of US equity strategy for RBC Capital Markets, Larie, 0:00:32.400 --> 0:00:34.519 what have you seen so far in earnings that you 0:00:34.920 --> 0:00:35.680 like maybe. 0:00:35.479 --> 0:00:35.960 Don't like it? 0:00:36.120 --> 0:00:37.559 How's the guide in shaping up for you? 0:00:37.680 --> 0:00:39.159 It's a great question. I'm going to get over the 0:00:39.159 --> 0:00:40.960 fact that you said it's only been three hundred and 0:00:40.960 --> 0:00:43.599 thirty five companies, which means we still have ways to go. 0:00:44.280 --> 0:00:46.880 That's our depressing thought for the morning. But now look, 0:00:47.040 --> 0:00:49.080 I think the tagline we've been using is fine but 0:00:49.159 --> 0:00:51.519 not fabulous, and I might put a comma after that. 0:00:51.640 --> 0:00:53.640 Now after having gone through last week where I think 0:00:53.680 --> 0:00:57.080 we had one hundred and fifty five companies, and I 0:00:57.120 --> 0:01:00.960 would say, comma starting to look messy? Okay, And you know, 0:01:00.960 --> 0:01:03.600 I think the overall headline stats are fine. The rate 0:01:03.640 --> 0:01:06.080 of upward revisions to F y one and f y 0:01:06.120 --> 0:01:08.600 two is like sixty one sixty two percent. That's moved 0:01:08.680 --> 0:01:10.479 up from the mid fifties. That's all well and good. 0:01:11.080 --> 0:01:14.080 You know, we watch very closely the Bloomberg Intelligence data 0:01:14.120 --> 0:01:17.559 where they track the bottom up consensus estimates, and those 0:01:17.560 --> 0:01:19.720 have crept up for both twenty twenty five and twenty 0:01:19.760 --> 0:01:22.720 twenty six. If you think about guidance, we've also been 0:01:22.720 --> 0:01:24.520 looking at some Bloomberg data for this as well, and 0:01:24.560 --> 0:01:27.840 so the guidance stats look pretty good. The problem is, 0:01:27.880 --> 0:01:30.479 I think a lot of this was well anticipated, and 0:01:30.560 --> 0:01:33.560 so you know, coming into reporting season, I heard clients 0:01:33.600 --> 0:01:37.319 talking about FX tailwinds. Guess what stocks aren't reacting all 0:01:37.360 --> 0:01:39.560 that well to beats on FX. I've been hearing that 0:01:39.600 --> 0:01:42.360 from my analysts. And if you think about, you know, 0:01:42.400 --> 0:01:44.919 some of these adjustments to guidance, because hey, the tariff 0:01:44.959 --> 0:01:47.400 rate isn't as bad as we initially baked in. Clients 0:01:47.480 --> 0:01:49.920 knew that was coming as well. So you know, I 0:01:49.920 --> 0:01:52.160 think some of this is falling flat. And when we're 0:01:52.200 --> 0:01:56.600 looking at you know, the demand discussion, frankly, was their 0:01:56.640 --> 0:01:59.880 push in, was their you know pull forward? Were their delays? 0:02:00.000 --> 0:02:01.680 I mean, it still sort of seems to be all 0:02:01.720 --> 0:02:04.360 of the above. The tech companies sound pretty good. I 0:02:04.360 --> 0:02:06.880 don't think there's been too much interruption on the AI story. 0:02:07.320 --> 0:02:09.200 But outside of that, it seems like there's a lot 0:02:09.240 --> 0:02:10.919 of confusion as to how much you know, kind of 0:02:10.919 --> 0:02:14.200 pull in actually happened. You're seeing some companies say there's 0:02:14.240 --> 0:02:16.720 a little bit, you know, of improvement. You know, some 0:02:16.760 --> 0:02:20.200 of that paralysis is alleviating. But frankly, Paul, I mean, 0:02:20.400 --> 0:02:23.960 the level of uncertainty still seems very, very high, and 0:02:24.000 --> 0:02:25.600 that that is concerning me right now. 0:02:26.000 --> 0:02:28.200 Well, even though we've had roughly forty percent of the 0:02:28.200 --> 0:02:30.239 market cap by the S and P five hundred reporting, 0:02:30.280 --> 0:02:32.120 now that we're past most of the tech earnings, we 0:02:32.200 --> 0:02:34.680 still have Nvidia on August twenty seventh. But of course, 0:02:34.720 --> 0:02:36.760 I mean you've noted in your notes declinents. We still 0:02:36.760 --> 0:02:39.239 have a number of consumer names coming in the next 0:02:39.240 --> 0:02:41.040 few weeks. So obviously Paul and I were talking about 0:02:41.040 --> 0:02:43.720 earlier when it comes to McDonald's, Disney, but then you 0:02:43.840 --> 0:02:47.000 still have in a few weeks Walmart and Targets. So 0:02:47.160 --> 0:02:49.399 what are you expecting when it comes to the consumer front, 0:02:49.440 --> 0:02:51.959 and specifically what you might hear about tariffs from them? 0:02:52.040 --> 0:02:54.520 So look, I don't think it's going to be awful, 0:02:54.520 --> 0:02:56.160 but it might be a little bit of cold water. 0:02:56.240 --> 0:02:58.079 And the reason I say that is if you think 0:02:58.080 --> 0:03:00.880 about sort of how reporting sea and unfold. We always 0:03:00.880 --> 0:03:02.760 start out with the financials, and we even saw a 0:03:02.800 --> 0:03:04.799 couple of the credit card companies, you know, I think 0:03:04.880 --> 0:03:07.280 last week and the week before echoed this as well. 0:03:07.320 --> 0:03:10.360 The financial like, hey, everything's fine. Spending is still good, 0:03:10.480 --> 0:03:13.239 and you know, like the delinquencies are low, and people 0:03:13.280 --> 0:03:15.440 are still paying their credit card bills, and you know, 0:03:15.480 --> 0:03:17.400 we're just not seeing anything wrong. 0:03:17.960 --> 0:03:18.680 And then you go and. 0:03:18.600 --> 0:03:21.640 Actually listen to the consumer companies that watch what the 0:03:21.639 --> 0:03:24.680 consumer is actually doing, and you know, maybe the word 0:03:24.760 --> 0:03:27.760 cracks is too strong, but I would say the composition 0:03:27.919 --> 0:03:31.280 of the spend is reflecting a concerned behavior. You know, 0:03:31.320 --> 0:03:33.720 one of the food companies last week actually referred to 0:03:33.760 --> 0:03:37.600 the idea of people stress eating chocolate, right that, which 0:03:37.680 --> 0:03:39.960 was probably one of my favorite quotes from last week. 0:03:41.120 --> 0:03:44.160 But you know, we saw other companies say the consumer 0:03:44.200 --> 0:03:47.520 is under stress and that doesn't result in a collapse 0:03:47.560 --> 0:03:50.320 in consumer spending, but there are some concerning things going on, 0:03:50.480 --> 0:03:52.160 not just from the high end, but the low end 0:03:52.200 --> 0:03:55.240 as well. And the Michigan survey on Friday actually showed 0:03:55.240 --> 0:03:58.360 a downtick and consumer sentiment for low end and lowly 0:03:58.440 --> 0:04:02.240 educated consumers. So there is something amiss We're going to 0:04:02.320 --> 0:04:03.560 hear more about, that is my guess. 0:04:03.560 --> 0:04:06.960 And also promotions, because consumer package good companies, especially coming 0:04:06.960 --> 0:04:09.120 into this year, we're talking so much about those types 0:04:09.160 --> 0:04:11.320 of at the grocery store, buy one, get one fifty 0:04:11.320 --> 0:04:13.600 percent off. What are you hearing so far with any 0:04:13.600 --> 0:04:13.840 of that? 0:04:14.160 --> 0:04:16.520 So I haven't been paying quite as much attention to 0:04:16.560 --> 0:04:19.520 the promotion conversation. But this whole idea of the value 0:04:19.560 --> 0:04:22.120 seeking consumer ranging from like the high end to the 0:04:22.120 --> 0:04:25.440 low end is still very much, you know, present, and 0:04:25.760 --> 0:04:27.279 you know, I've noticed some of the food companies have 0:04:27.320 --> 0:04:30.000 been talking about things like smaller pack sizes. I mean, 0:04:30.000 --> 0:04:32.240 this is sort of going with my own lived experience 0:04:32.279 --> 0:04:34.880 as the model like two little boys to just eat 0:04:34.960 --> 0:04:39.200 and eat and eat. So I think that that value 0:04:39.240 --> 0:04:43.440 consciousness is still translating into behavior and you're seeing it, 0:04:43.560 --> 0:04:46.440 you know, especially for these food companies. There's another company 0:04:46.480 --> 0:04:48.360 I forget who it was, but they were talking about 0:04:48.400 --> 0:04:52.000 how food has just become so much more expensive that 0:04:52.200 --> 0:04:55.360 it's radiating in terms of other purchase decisions, and so 0:04:55.400 --> 0:04:58.320 they can really see where consumers are prioritizing their. 0:04:58.160 --> 0:05:01.880 Spend small bit stocks, what's the call these days? 0:05:02.160 --> 0:05:04.400 So, you know, it's interesting with all these developments in 0:05:04.440 --> 0:05:07.320 the last like forty eight trading hours. You know, I 0:05:07.320 --> 0:05:10.120 think the FED meeting last week through some cold water 0:05:10.600 --> 0:05:13.960 on the small cap trade and Friday was a little 0:05:13.960 --> 0:05:16.040 bit of a mix, right because on the one hand, 0:05:16.240 --> 0:05:18.719 you know, we got this jobs report that said, Okay, 0:05:18.720 --> 0:05:21.240 there may be some deterioration in the labor market that's 0:05:21.240 --> 0:05:24.359 beyond what people had assumed. That is bad for small caps. 0:05:24.360 --> 0:05:26.800 You needs, you need jobs growth to be ramping, to 0:05:26.839 --> 0:05:29.960 be getting better for small caps to outperform. Typically flat 0:05:29.960 --> 0:05:33.159 to decelerating jobs growth doesn't work for them. That being said, 0:05:33.480 --> 0:05:36.240 small caps have become the hedge fund communities one of 0:05:36.279 --> 0:05:40.520 their favorite ways to express FED bets. And so you know, 0:05:40.600 --> 0:05:43.400 when people sort of settled down, you know, and started 0:05:43.400 --> 0:05:45.480 to think about, you know, okay, maybe the cuts are 0:05:45.480 --> 0:05:48.640 coming sooner. That feels we'll see how they trade today, 0:05:48.640 --> 0:05:50.279 but that feels like it should breathe a little bit 0:05:50.320 --> 0:05:51.920 of life into markets and a little bit of life 0:05:51.960 --> 0:05:54.279 into small caps. So I would not be short small caps, 0:05:54.560 --> 0:05:56.400 but I'm not I don't have enough conviction to go 0:05:56.440 --> 0:05:57.800 a long yet either, I'd be neutral. 0:05:58.000 --> 0:05:59.520 If you go to the S and P five hundred 0:05:59.560 --> 0:06:01.320 and then the A our function in the terminal, you 0:06:01.360 --> 0:06:04.719 can see where those consensus estimates are for cell site targets. 0:06:04.720 --> 0:06:06.719 And I know, LORI yours is a sixty two to 0:06:06.720 --> 0:06:08.800 fifty for year end right now. That actually just in 0:06:08.880 --> 0:06:11.320 play about a two tenths of a percent increase from 0:06:11.320 --> 0:06:13.520 where the S and P five hundred closed on Friday. 0:06:13.760 --> 0:06:15.680 So what's your view for the second half of the 0:06:15.760 --> 0:06:18.760 year when we're in what's historically the most seasonally weak 0:06:18.839 --> 0:06:20.960 time period in August and September for equities. 0:06:21.040 --> 0:06:23.520 Yeah, so look, we you know, targets have been tough 0:06:23.560 --> 0:06:26.000 this year, right And I think for us it's designed 0:06:26.040 --> 0:06:28.600 to articulate the path that we think the market is on, 0:06:28.760 --> 0:06:30.719 and the path that we think the market is on. 0:06:30.760 --> 0:06:32.599 We feel like it's a fairly neutral one. We see 0:06:32.680 --> 0:06:35.359 risks on both sides. I do think the sentiment rally 0:06:35.360 --> 0:06:38.880 we've seen since April eighth, that's been consistently our most 0:06:38.880 --> 0:06:42.039 bullish modeling, and that feels like it's kind of done 0:06:42.120 --> 0:06:44.160 at the recent highs about what it's supposed to do. 0:06:44.240 --> 0:06:47.440 It feels like we're ahead of twenty twenty five fundamentals, 0:06:47.440 --> 0:06:49.160 and it feels like we've already priced in a lot 0:06:49.160 --> 0:06:51.279 of good news from twenty twenty six. And my concern 0:06:51.360 --> 0:06:54.080 is that maybe twenty twenty six, while not terrible, ends 0:06:54.160 --> 0:06:56.440 up not being crie as rosy as everybody thinks. So 0:06:56.440 --> 0:06:59.080 that could create some volatility. And as you mentioned, Jess, 0:06:59.120 --> 0:07:00.960 I mean, this is seasonal. If you even just look 0:07:01.000 --> 0:07:03.920 the last five years, August is kind of mixed, September 0:07:03.920 --> 0:07:05.720 and October tend to be bad. And if you went 0:07:05.760 --> 0:07:08.120 back and looked at the twenty eighteen trade war, that 0:07:08.320 --> 0:07:11.880 post Labor Day period was when investors really started to 0:07:11.880 --> 0:07:14.240 get concerned based on what they were hearing from companies 0:07:14.280 --> 0:07:16.920 about the ripple effects of that trade war. So I've 0:07:16.960 --> 0:07:18.480 got all that in the back of my head. I 0:07:18.480 --> 0:07:20.800 don't feel bearish. I know, when you're not as bullish 0:07:20.800 --> 0:07:23.120 as everybody else, that's the box people want to put 0:07:23.120 --> 0:07:26.280 you in. But I feel very neutral, and so that's 0:07:26.280 --> 0:07:27.840 really what the target's trying to express. 0:07:28.120 --> 0:07:28.720 Lloyd, thank you so. 0:07:28.760 --> 0:07:29.480 Much for joining us. 0:07:29.520 --> 0:07:30.760 Really appreciate you coming in to our studio. 0:07:30.800 --> 0:07:34.880 Lori Cavacina, head of US equity strategy at RBC Capital Markets. 0:07:40.080 --> 0:07:43.679 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:07:43.720 --> 0:07:46.880 weekday afternoons from seven to ten am Eastern Listen on 0:07:47.000 --> 0:07:50.640 Applecarplay and Android Otto with the Bloomberg Business app, or 0:07:50.800 --> 0:07:52.280 watch us live on YouTube. 0:07:52.600 --> 0:07:54.440 You know what he wanted to talk to, fixing come people, 0:07:54.480 --> 0:07:57.000 cockpit parties. I mean the one in the corner. Nobody 0:07:57.040 --> 0:08:01.320 would be talking to them, no yield, no return. Now 0:08:01.320 --> 0:08:02.240 there's some of the cool kids. 0:08:02.320 --> 0:08:03.640 Now everybody wants to talk to that. 0:08:03.760 --> 0:08:06.040 One of the cool kids is Kathy Jones, chief fixed 0:08:06.040 --> 0:08:12.040 income strategists at Charles Schwab. Kathy, what's the overall called 0:08:12.080 --> 0:08:15.360 here in fixed again? What's Charles Schwab saying these days 0:08:15.360 --> 0:08:18.760 about getting how we should have some exposure to fixed income? 0:08:20.960 --> 0:08:22.560 Good morning, Paul, And no I'm not one of the 0:08:22.560 --> 0:08:26.560 cool kids yet, but I'm trying. How's sad? You know? 0:08:26.600 --> 0:08:29.559 I think that we have been in the camp since 0:08:29.640 --> 0:08:33.920 late last year keeping an intermediate term duration on average, 0:08:33.920 --> 0:08:37.280 meaning somewhere in that five to seven year area for 0:08:37.320 --> 0:08:41.560 an average duration in higher credit quality bonds. We've now 0:08:41.600 --> 0:08:44.160 considered going a little bit longer term. We think that 0:08:44.200 --> 0:08:47.000 these jobs numbers, combined with some of the other numbers 0:08:47.000 --> 0:08:50.480 we've seen lately, do suggest to slow down and activity 0:08:50.600 --> 0:08:55.520 the greater likelihood of FED ray cuts coming, and that 0:08:55.679 --> 0:08:58.640 suggests us that it's not too risky now to extend 0:08:58.720 --> 0:09:02.640 duration a little bit. For I'm here a ten year yield, 0:09:02.840 --> 0:09:05.480 probably not going back to four and a half five 0:09:05.559 --> 0:09:08.320 percent area, probably staying under that four and a half 0:09:08.760 --> 0:09:11.240 And if the FED does end up cutting rates, which 0:09:11.240 --> 0:09:14.719 we think they will in September, then you'll see the 0:09:14.760 --> 0:09:17.040 whole curve shift down, but you probably do a little 0:09:17.040 --> 0:09:21.400 bit better in the intermediate to longer term duration because 0:09:21.679 --> 0:09:24.760 it will be a cut as a result of slower 0:09:24.800 --> 0:09:25.760 economic growth. 0:09:26.080 --> 0:09:28.720 When you're looking at the ten year treasury yield, are 0:09:28.720 --> 0:09:31.040 we in a world we're four and a half percent? 0:09:31.120 --> 0:09:32.920 Maybe the new normal for that? 0:09:34.600 --> 0:09:37.480 Well, I think it's probably at this moment in time, 0:09:37.559 --> 0:09:42.280 the upper end of normal. But yeah, I think you know, 0:09:42.559 --> 0:09:45.400 when we look at where rates were for that long 0:09:45.440 --> 0:09:48.040 period of time, when you know, we couldn't get a 0:09:48.080 --> 0:09:50.800 conversation at a cocktail party because there were so low. 0:09:51.760 --> 0:09:55.000 Now we're going back to you know, what is considered 0:09:55.000 --> 0:09:57.760 more normal. If our normal growth rate is between one 0:09:57.760 --> 0:10:00.199 and a half and two percent. Then a more and 0:10:00.240 --> 0:10:04.280 a half percent ten year yield given two percent inflation, say, 0:10:05.200 --> 0:10:09.280 is probably a more normal kind of standard really yield 0:10:09.320 --> 0:10:13.560 that you would get relative to history. So I think 0:10:13.559 --> 0:10:15.600 that four and a half probably the upper bound for 0:10:15.640 --> 0:10:18.760 the time being, but somewhere around four percent and a 0:10:18.840 --> 0:10:20.560 ten year is probably the new normal. 0:10:21.520 --> 0:10:22.760 Katy, I got credit risk here. 0:10:22.800 --> 0:10:26.080 I'm looking at then GO function on the Bloomberg terminal, 0:10:26.080 --> 0:10:28.320 and I see that the best performance in US fixed 0:10:28.320 --> 0:10:32.040 income has been US corporate high yield. So it looks 0:10:32.080 --> 0:10:34.120 like the market's okay taking some credit risk. 0:10:34.160 --> 0:10:34.959 How do you think about that? 0:10:36.720 --> 0:10:39.520 Yeah, you know, we're a little bit wary of going 0:10:39.600 --> 0:10:43.199 too far down the risk spectrum, the credit spectrum and 0:10:43.320 --> 0:10:45.840 fixing inkin just because you don't get paid for it. 0:10:45.840 --> 0:10:48.520 It doesn't you know, it doesn't give you much spread. 0:10:48.880 --> 0:10:54.720 And the economic fundamentals showing softness means that will probably 0:10:54.800 --> 0:10:57.560 see those default rates go up on the lowest credit 0:10:57.640 --> 0:11:00.720 quality bonds. They're a little bit careful of that. But 0:11:00.800 --> 0:11:05.240 look high yield. As long as there's no recession, you 0:11:05.360 --> 0:11:07.320 get a lot of yield in that yield is what 0:11:07.400 --> 0:11:12.280 gives you the total return. It's been a very calm market, 0:11:12.840 --> 0:11:15.200 and that's a lot of people to hang in there 0:11:15.360 --> 0:11:18.240 in high yield. So our perspective is it's okay to 0:11:18.280 --> 0:11:21.480 have some allocation to high yield. We wouldn't over allocate 0:11:21.559 --> 0:11:23.600 to it, but you have to be ready to ride 0:11:23.640 --> 0:11:26.040 the ups and downs in that. From a long term perspective, 0:11:26.080 --> 0:11:29.240 those yields are pretty attractive and you compound them over 0:11:29.320 --> 0:11:31.920 time and that that gives you a decent total return. 0:11:32.360 --> 0:11:34.600 But you're going to have a lot more volatility there 0:11:34.600 --> 0:11:39.360 and a lot more correlation with equities, So allocation matter, 0:11:39.520 --> 0:11:43.160 Sizing the position in high yield is really important. 0:11:43.640 --> 0:11:46.200 What's top of mind for you on the economic calendar 0:11:46.200 --> 0:11:48.160 this week? I know we have durable goods orders coming 0:11:48.160 --> 0:11:50.520 out at ten a m. New York time later this morning. 0:11:52.160 --> 0:11:55.880 Oh, jobless claims, you know, anything to do with the 0:11:55.960 --> 0:11:59.160 labor market right now is really top of mind for 0:11:59.280 --> 0:12:03.520 us because we've seen such big revisions. We've seen so 0:12:03.600 --> 0:12:06.600 much attention now to the job market. It is a 0:12:06.600 --> 0:12:09.000 bell weather for the FAD obviously because it's part of 0:12:09.000 --> 0:12:12.360 their mandate. So we'll really those weekly jobless claims take 0:12:12.400 --> 0:12:13.800 on a lot more importance now. 0:12:14.200 --> 0:12:18.400 Hey, Kathy, as a bond investor, what's this week dollar 0:12:18.480 --> 0:12:20.280 mean for you guys. I mean, we've seen the stocks 0:12:20.320 --> 0:12:23.080 bounce back, a lot of other risk assets that bounced 0:12:23.080 --> 0:12:27.280 back after the sell off earlier in the year from Liberation. 0:12:26.920 --> 0:12:28.760 Day, but the dollar really hasn't still down. 0:12:28.800 --> 0:12:30.600 The Bloomberg dollar in next is still down about eight 0:12:30.600 --> 0:12:32.000 and a half percent this year. 0:12:32.000 --> 0:12:34.080 What does that mean for bond investors? 0:12:35.240 --> 0:12:36.880 Well, I think it's a good I mean, it's a 0:12:36.880 --> 0:12:41.120 good indication that the market expects those interest rate differentials 0:12:41.120 --> 0:12:44.240 to narrow visa the say Europe and some of the 0:12:44.240 --> 0:12:49.000 other major countries. It makes international investing in bonds a 0:12:49.040 --> 0:12:52.520 bit more attractive. It's been a good ten fifteen years 0:12:52.559 --> 0:12:55.200 since that's really been an attractive option for a lot 0:12:55.200 --> 0:12:58.880 of investors, particularly in developed markets. But now if we're 0:12:58.920 --> 0:13:01.080 going to see the dollar go down, it's a big 0:13:01.120 --> 0:13:06.040 component of return when you invest in international developed market bonds, 0:13:06.080 --> 0:13:10.839 So it means diversification actually is an opportunity. Now you 0:13:10.320 --> 0:13:13.800 still still get somewhat lower yield, but the play on 0:13:13.840 --> 0:13:16.360 the currency side, if we're right that it continues to 0:13:16.400 --> 0:13:19.640 go down, can give you pretty good returns. And actually 0:13:19.800 --> 0:13:24.800 year to date, the strongest performing sub asset class in 0:13:24.880 --> 0:13:28.240 fixed income is international developed market bonds. Because of that 0:13:28.320 --> 0:13:28.800 dropping the. 0:13:28.840 --> 0:13:30.960 Dollar, where do you see the long end of the 0:13:30.960 --> 0:13:34.800 treasury yield curve headed and do you think that will 0:13:34.840 --> 0:13:38.240 remain more stable when you're thinking compared with the short 0:13:38.320 --> 0:13:40.439 end that could potentially rally the Fed does begin to 0:13:40.520 --> 0:13:41.880 lean more dubbish into year end. 0:13:43.440 --> 0:13:47.080 Yeah, we're still looking for a steeper yield curve with 0:13:47.240 --> 0:13:51.360 a short end kind of leaning leading rates down and 0:13:51.480 --> 0:13:54.200 the long end kind of hanging in there coming down. 0:13:54.360 --> 0:13:57.160 Seeing yields come down at the long end, But I 0:13:57.200 --> 0:14:01.240 think given that inflation is still elevated, we have components 0:14:01.240 --> 0:14:05.599 of policy that are bearish for long term bonds or 0:14:05.600 --> 0:14:09.520 at least limit the decline and yields in long term bonds. 0:14:09.520 --> 0:14:15.680 So between deficit financing that's coming up and the inflationary 0:14:16.640 --> 0:14:20.480 impact of tariffs, most likely what we'll see is that 0:14:20.640 --> 0:14:23.280 steeper yield curve, so the whole thing shifts down, but 0:14:23.400 --> 0:14:25.520 much more at the short end that at the longer end. 0:14:26.000 --> 0:14:28.000 Kathy, thank you so much for joining us. Appreciate it 0:14:28.040 --> 0:14:28.640 as always. 0:14:28.720 --> 0:14:33.160 Kathy Jones, chief fixed income strategist at Charles Schwab. 0:14:33.720 --> 0:14:37.640 This is the Bloomberg Surveillance podcast. Listen live each weekday 0:14:37.680 --> 0:14:40.720 starting at seven am Eastern on Apple Coarclay, and Android 0:14:40.720 --> 0:14:43.760 Auto with the Bloomberg Business app. You can also listen 0:14:43.840 --> 0:14:47.080 live on Amazon Alexa from our flagship New York station, 0:14:47.640 --> 0:14:50.320 Just say Alexa play Bloomberg eleven thirty. 0:14:50.600 --> 0:14:55.160 Kara Murphy joins is she's a CIO of Kestrip Investment Management. Caar, 0:14:55.320 --> 0:14:58.800 what's the call to your clients these days? Here we've 0:14:58.840 --> 0:15:01.320 got the earning coming in. We've got to fed that 0:15:01.400 --> 0:15:03.880 I guess is going to cut once or twice this year. 0:15:04.320 --> 0:15:07.840 Is that enough to be supportive of risk assets these days? 0:15:09.160 --> 0:15:11.520 I think that's the That's the important question. And what 0:15:11.560 --> 0:15:16.520 we've seen is this like battling narrative between policy uncertainty 0:15:16.560 --> 0:15:19.080 and big changes when it comes to things like tariffs. 0:15:19.640 --> 0:15:22.360 But then underlying, when you look at companies earning potential, 0:15:22.400 --> 0:15:25.680 it continues to come in quite strong. So obviously we've 0:15:25.720 --> 0:15:28.840 seen a lot of noise from tariffs coming into you know, 0:15:28.880 --> 0:15:31.320 you saw GDP much weaker in the second quarter. You've 0:15:31.320 --> 0:15:34.000 seen earnings take a slow down in the second quarter. 0:15:34.720 --> 0:15:37.520 Late last week we had their revised jobs numbers coming down. 0:15:37.560 --> 0:15:40.680 So it's definitely taking an impact. But then when you 0:15:40.760 --> 0:15:43.360 hear companies talk about their outlooks for the second half, 0:15:43.480 --> 0:15:46.080 those are still coming in pretty good, and so those 0:15:46.200 --> 0:15:48.120 will continue to support stock prices. 0:15:48.640 --> 0:15:48.840 Well. 0:15:48.920 --> 0:15:52.160 City Group was pointing out Stukeiser how they're crunching some 0:15:52.200 --> 0:15:54.080 of the numbers here. The S and P five hundred 0:15:54.480 --> 0:15:57.040 average stock has moved about five point two percent in 0:15:57.080 --> 0:15:59.760 either direction for the second quarter earning season, and that's 0:15:59.760 --> 0:16:02.640 the and their data history going back to twenty twelve 0:16:02.720 --> 0:16:06.320 at this point in the earning season cycle. So I'm 0:16:06.360 --> 0:16:09.400 actually curious when you're looking at these kind of names, Kara, 0:16:09.520 --> 0:16:11.960 as far as when you're having more volatility within some 0:16:12.000 --> 0:16:14.720 of these single stocks, where are you seeing those types 0:16:14.720 --> 0:16:16.120 of opportunities and what are you buying? 0:16:16.120 --> 0:16:16.760 What are you selling? 0:16:17.760 --> 0:16:20.160 Yeah, And I think it's very interesting to point to that, 0:16:20.280 --> 0:16:23.000 because when you look at, say, like the percentage of 0:16:23.040 --> 0:16:26.680 companies who are beating estimates relative to what you typically 0:16:26.720 --> 0:16:29.120 see in history, we're pretty much on the nose with 0:16:29.320 --> 0:16:33.040 long term averages. So in terms of like the overall 0:16:33.160 --> 0:16:36.760 earnings power of the S and P five hundred companies, 0:16:37.480 --> 0:16:39.680 they are about like where we had expected them to be. 0:16:39.840 --> 0:16:42.320 But you're right, and that what we've seen that's different 0:16:42.400 --> 0:16:46.800 this particular season is that investors are rewarding those who 0:16:46.880 --> 0:16:50.240 beat and punishing more those who miss. So I think 0:16:50.280 --> 0:16:52.080 part of this is that as you think about the 0:16:52.160 --> 0:16:54.000 rebound that we had off of the low in the 0:16:54.000 --> 0:16:56.320 market in late April, it was sort of a buy 0:16:56.520 --> 0:16:59.640 everything type of rally. Now, as we're seeing numbers or 0:16:59.720 --> 0:17:02.920 under standing a little bit more how individual companies are impacted, 0:17:03.200 --> 0:17:05.719 you're seeing the market really differentiate between those who can 0:17:05.760 --> 0:17:07.000 earn and those who are struggling. 0:17:07.400 --> 0:17:07.680 Parah. 0:17:08.080 --> 0:17:12.359 This is an equity market that increasingly is concentrated in 0:17:12.760 --> 0:17:16.159 you know, a handful a dozen names, big tech names, 0:17:16.200 --> 0:17:18.480 and I don't know, I learned in business school that's 0:17:18.480 --> 0:17:21.200 not necessarily a good thing. How do you think about 0:17:21.240 --> 0:17:23.840 that as a risk, maybe as an opportunity, I'm not sure. 0:17:25.080 --> 0:17:28.679 I think this is definitely a risk for broad market investors. 0:17:28.720 --> 0:17:30.399 And this is one of the main risks that we 0:17:30.480 --> 0:17:32.400 had pointed to at the beginning of the year. So 0:17:32.480 --> 0:17:36.680 this high valuations and policy uncertainty. So we saw policy 0:17:36.680 --> 0:17:39.320 on uncertainty rear its ugly head in the second quarter. 0:17:40.119 --> 0:17:42.000 But then with this rebound in the market, we are 0:17:42.119 --> 0:17:45.320 back to like a super concentrated market, and as long 0:17:45.359 --> 0:17:48.879 as those like Magnificent seven names or whatever's leading the market, 0:17:48.880 --> 0:17:50.960 as long as those names continue to be able to 0:17:51.000 --> 0:17:54.879 show earning's power, I think we're okay. That said, that 0:17:55.000 --> 0:17:59.359 concentration combined with really high valuations make a market more vulnerable. 0:17:59.440 --> 0:18:02.160 That doesn't mean it's going to turn down, but if 0:18:02.200 --> 0:18:05.040 that earnings picture starts to change, then the whole index 0:18:05.160 --> 0:18:08.040 is really at risk. So we've been, you know, big advocates. 0:18:08.119 --> 0:18:09.960 We think twenty twenty five is the year of the 0:18:10.040 --> 0:18:13.800 diversification trade, which hasn't been a very sort of sexy 0:18:13.840 --> 0:18:16.440 thing to talk about, but we've seen it actually work. 0:18:16.520 --> 0:18:20.119 So bonds suddenly matter, Owning things outside the US suddenly matters. 0:18:20.200 --> 0:18:22.560 We think it's important to own things outside of those 0:18:22.640 --> 0:18:25.479 big names, and that's going to provide you the cushion 0:18:25.480 --> 0:18:27.159 that you need over the next couple of years. 0:18:27.359 --> 0:18:29.959 Of course, we have Palenteer reporting after the Bell today, 0:18:30.000 --> 0:18:32.959 another big name that has moved markets and especially had 0:18:32.960 --> 0:18:35.440 been added to the S and P five hundred most 0:18:35.520 --> 0:18:38.160 recently too. When you're thinking about some of these names 0:18:38.200 --> 0:18:40.200 that are coming up, what's the most important company names 0:18:40.200 --> 0:18:41.600 to you that you're going to be keeping a close 0:18:41.600 --> 0:18:43.360 eye on as far as waitings and what could move 0:18:43.400 --> 0:18:45.480 markets more so so. 0:18:45.560 --> 0:18:47.199 I think, you know, we've talked a lot about the 0:18:47.240 --> 0:18:49.760 AI trade, and obviously that's been a really important mover 0:18:49.800 --> 0:18:52.560 of the markets over the last couple of years, and 0:18:52.600 --> 0:18:55.159 it's important not just for those individual companies, but what 0:18:55.200 --> 0:18:58.040 it means for things like productivity of the US economy, 0:18:58.240 --> 0:19:00.639 you know, for the foreseeable future. Think that's going to 0:19:00.680 --> 0:19:03.160 continue to be a trend. So being able to hear 0:19:03.280 --> 0:19:05.800 not just about the capital investments being made there that's 0:19:05.840 --> 0:19:08.399 almost easy to do, but what are the actual returns 0:19:08.400 --> 0:19:09.720 on those capital investments? 0:19:10.880 --> 0:19:13.560 Ker fixed income? What's the play here for you? Because 0:19:13.560 --> 0:19:15.760 I look at the returns on the Bloomberg Total Return 0:19:15.800 --> 0:19:17.720