1 00:00:02,720 --> 00:00:07,280 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:08,200 --> 00:00:10,400 Speaker 2: Let's talk about what's going on in stocks right now 3 00:00:10,480 --> 00:00:14,320 Speaker 2: with the chief US stock strategist over at Goldman Sachs. 4 00:00:14,400 --> 00:00:16,800 Speaker 2: David Costin joins us. I'm pleased to say it right 5 00:00:16,840 --> 00:00:20,240 Speaker 2: here on Open Interest. David, thanks so much for your time. 6 00:00:20,720 --> 00:00:24,520 Speaker 2: Last week. You were the first major strategists to lower 7 00:00:24,560 --> 00:00:26,920 Speaker 2: your S and P five hundred price target. You cut 8 00:00:26,920 --> 00:00:30,120 Speaker 2: your year end forecast to sixty two hundred from sixty 9 00:00:30,400 --> 00:00:34,280 Speaker 2: five hundred. Just tell me, first off, what's behind the 10 00:00:34,320 --> 00:00:37,680 Speaker 2: call and are you worried about a slowdown in earnings. 11 00:00:38,320 --> 00:00:41,879 Speaker 3: Well, the genesis for why we reduced our year end 12 00:00:41,920 --> 00:00:46,680 Speaker 3: target is really a function of greater uncertainty and slow down. 13 00:00:46,440 --> 00:00:47,599 Speaker 1: In economic activity. 14 00:00:47,960 --> 00:00:51,360 Speaker 3: Those are two key inputs into our earnings model, and 15 00:00:51,400 --> 00:00:53,880 Speaker 3: that's also a component of our evaluation model. So the 16 00:00:53,880 --> 00:00:57,640 Speaker 3: bottom line is we're looking for earnings growth in counter 17 00:00:57,720 --> 00:01:01,520 Speaker 3: twenty twenty five of plus seven percent and seven percent 18 00:01:01,560 --> 00:01:04,319 Speaker 3: growth in twenty twenty six, so two years about seven 19 00:01:04,319 --> 00:01:07,760 Speaker 3: percent growth. Previously, we had anticipated around nine percent growth 20 00:01:07,760 --> 00:01:10,560 Speaker 3: this year, and the key driver behind that is a 21 00:01:10,560 --> 00:01:16,920 Speaker 3: slower economic forecast for the US economic output, and as 22 00:01:16,920 --> 00:01:20,319 Speaker 3: a result, we have a lower year in target around 23 00:01:20,319 --> 00:01:22,600 Speaker 3: six thousand, two hundred, So it's a similar kind of 24 00:01:22,600 --> 00:01:24,440 Speaker 3: return as we anticipated before, but just. 25 00:01:24,360 --> 00:01:25,440 Speaker 1: From a lower level. 26 00:01:25,480 --> 00:01:31,520 Speaker 3: And obviously recognize that that's a challenging situation because the tariff. 27 00:01:32,280 --> 00:01:33,360 Speaker 1: Assumptions we're making. 28 00:01:33,880 --> 00:01:36,680 Speaker 3: We're now assuming that the tariff rate is going to 29 00:01:36,760 --> 00:01:40,400 Speaker 3: increase by around ten percentage points. It's consistent with our 30 00:01:40,480 --> 00:01:43,080 Speaker 3: UH colleagues in US economics research, and so the tariff 31 00:01:43,160 --> 00:01:45,920 Speaker 3: rate MATT in the coming year will be around thirteen 32 00:01:45,959 --> 00:01:48,800 Speaker 3: percent model Previously we had assumed around three percent. 33 00:01:49,000 --> 00:01:50,880 Speaker 1: So those are the really the three building blocks. The 34 00:01:50,880 --> 00:01:52,680 Speaker 1: slower in his growth largely. 35 00:01:52,440 --> 00:01:55,440 Speaker 3: Driven by slower economic activity and a higher tariff rate, 36 00:01:55,640 --> 00:01:58,840 Speaker 3: and then a slightly lower PE multiple ascribed to the 37 00:01:59,160 --> 00:02:00,160 Speaker 3: year end growth. 38 00:02:00,360 --> 00:02:01,040 Speaker 1: For next year. 39 00:02:01,160 --> 00:02:04,480 Speaker 4: You know, David, the sentiment sentiment out there is brutal, 40 00:02:04,720 --> 00:02:07,120 Speaker 4: and you see it in some of the big tech stocks. 41 00:02:07,120 --> 00:02:10,119 Speaker 4: The Magnificent seven today is down getting close to three 42 00:02:10,160 --> 00:02:13,680 Speaker 4: percent just today alone. You have started calling this the 43 00:02:13,760 --> 00:02:17,480 Speaker 4: maleficent seven. Is that how you say magnificently malficent? That's right, 44 00:02:17,560 --> 00:02:21,880 Speaker 4: I think delicent maleficent seven. And you know what can 45 00:02:22,400 --> 00:02:25,120 Speaker 4: happen to turn that around? Of anything? What are the 46 00:02:25,160 --> 00:02:29,320 Speaker 4: broader market, implications for sentiment, and what has been the 47 00:02:29,400 --> 00:02:32,400 Speaker 4: darling sector in the market to turn so low. 48 00:02:34,120 --> 00:02:36,639 Speaker 3: Well, I think the proper way to think about this 49 00:02:36,960 --> 00:02:40,520 Speaker 3: is that the extraordinary returns for the US equity market 50 00:02:40,560 --> 00:02:43,120 Speaker 3: over the last two years has really been driven to 51 00:02:43,200 --> 00:02:46,760 Speaker 3: a meaningful amount by the seven large companies that are 52 00:02:47,320 --> 00:02:49,000 Speaker 3: sober k the Magnificent seven. 53 00:02:49,480 --> 00:02:51,160 Speaker 1: Unfortunately, from a portfolio. 54 00:02:50,680 --> 00:02:54,240 Speaker 3: Management perspective, it's been maleficent seven. It's been the real 55 00:02:54,360 --> 00:02:58,080 Speaker 3: source of pain in the market this year. And without 56 00:02:58,520 --> 00:03:01,799 Speaker 3: those companies, which are down roughly twelve percent year to date, 57 00:03:03,040 --> 00:03:05,440 Speaker 3: the rest of the market is actually up. The four 58 00:03:05,480 --> 00:03:07,480 Speaker 3: hundred and ninety three remaining stocks are up around one 59 00:03:07,480 --> 00:03:10,160 Speaker 3: percent year to date. So it gives you some context 60 00:03:10,240 --> 00:03:13,600 Speaker 3: around the importance the influence that these companies have had 61 00:03:13,600 --> 00:03:18,320 Speaker 3: on the broader market, the idea of these companies, the 62 00:03:18,400 --> 00:03:23,160 Speaker 3: uncertainty around some of the regulatory environment, the source of 63 00:03:23,200 --> 00:03:27,400 Speaker 3: when the hedge fund community in particular, which is largely invested, 64 00:03:27,639 --> 00:03:30,720 Speaker 3: tilting their portfolios towards these companies, that's been a source 65 00:03:30,760 --> 00:03:34,280 Speaker 3: of selling. On the other hand, about sixty percent of 66 00:03:34,520 --> 00:03:37,640 Speaker 3: large cap mutual funds are actually outperforming their benchmarks because 67 00:03:37,640 --> 00:03:41,120 Speaker 3: they've historically or traditionally been underweight these stocks. So it 68 00:03:41,160 --> 00:03:45,720 Speaker 3: has had differing implications for different groups of the clients 69 00:03:45,720 --> 00:03:48,120 Speaker 3: of Golden Sachs, and it's an important way to think 70 00:03:48,160 --> 00:03:49,680 Speaker 3: about our outlook for this year. 71 00:03:49,800 --> 00:03:51,840 Speaker 1: Is the idea of a broadening of the market. 72 00:03:51,840 --> 00:03:55,240 Speaker 3: That's been central to our forecast and outlook for investment 73 00:03:55,280 --> 00:03:58,320 Speaker 3: strategy for twenty twenty five. The idea that a broadening 74 00:03:58,360 --> 00:03:59,960 Speaker 3: of the market is likely to a place in that 75 00:04:00,040 --> 00:04:03,200 Speaker 3: has been a little bit consistent with what we were anticipating, 76 00:04:03,680 --> 00:04:05,280 Speaker 3: the idea of if people. 77 00:04:05,080 --> 00:04:07,160 Speaker 2: I met, well, I was just gonna say, you know, broadening, 78 00:04:07,280 --> 00:04:10,120 Speaker 2: that sounds great, and I hope you're right about it, 79 00:04:10,160 --> 00:04:13,440 Speaker 2: but there's still got to be some leadership, right and 80 00:04:13,840 --> 00:04:18,160 Speaker 2: if it's not the magnificent or maleficent seven you know 81 00:04:18,360 --> 00:04:21,919 Speaker 2: Nvidia right now leading declines as the Nasdaq one hundred 82 00:04:22,000 --> 00:04:26,159 Speaker 2: falls almost two percent, who takes over who does the 83 00:04:26,200 --> 00:04:28,800 Speaker 2: heavy heavy lifting here in a rebound? 84 00:04:30,120 --> 00:04:33,359 Speaker 3: Well, the point you identified correctly is that about a 85 00:04:33,400 --> 00:04:35,599 Speaker 3: third of the market cap of the S and P 86 00:04:35,640 --> 00:04:38,360 Speaker 3: five hundred of these seven companies, so clearly they have 87 00:04:38,400 --> 00:04:41,120 Speaker 3: a just apportioned impact seven companies, you know, more than 88 00:04:41,160 --> 00:04:42,480 Speaker 3: thirty percent of the index. 89 00:04:42,640 --> 00:04:43,760 Speaker 1: You can get it broaden of the. 90 00:04:43,720 --> 00:04:48,760 Speaker 3: Market in other ways, which is a greater uplift in 91 00:04:49,000 --> 00:04:51,400 Speaker 3: the typical stock. You can see that in healthcare companies 92 00:04:51,440 --> 00:04:55,000 Speaker 3: they actually done pretty well. You've had some defensives, generally 93 00:04:55,040 --> 00:04:57,800 Speaker 3: done well. This is an area we've been focusing on 94 00:04:57,880 --> 00:05:01,240 Speaker 3: with respect to, you know, discussion with fund managers of 95 00:05:01,279 --> 00:05:04,080 Speaker 3: how to position their portfolios. 96 00:05:03,640 --> 00:05:06,480 Speaker 1: In this market. Specifically, what we're looking for is what are. 97 00:05:06,400 --> 00:05:10,440 Speaker 3: The three drivers of the market that have been afflicting 98 00:05:10,600 --> 00:05:13,200 Speaker 3: the companies. This year has been a question about where 99 00:05:13,240 --> 00:05:18,360 Speaker 3: we are in the AI transition, and we've gone obviously, Navidia. 100 00:05:18,120 --> 00:05:20,000 Speaker 1: Terrific story, terrific company from. 101 00:05:19,800 --> 00:05:23,400 Speaker 3: A stock point of view, was really an extraordinary driver 102 00:05:23,480 --> 00:05:25,640 Speaker 3: of performance in the last couple of years. Obviously that's 103 00:05:25,640 --> 00:05:27,640 Speaker 3: moved a little bit in the other direction. Well, that 104 00:05:27,800 --> 00:05:29,560 Speaker 3: is sort of phase one of what we think of 105 00:05:29,600 --> 00:05:32,920 Speaker 3: as the AI transition. Phase two, which is the infrastructure 106 00:05:33,320 --> 00:05:35,359 Speaker 3: where a lot of the hyperscalers are located in that 107 00:05:35,440 --> 00:05:39,720 Speaker 3: sort of category utility companies. Really companies are involved in 108 00:05:39,760 --> 00:05:43,000 Speaker 3: the build out of the infrastructure for AI, and really 109 00:05:43,040 --> 00:05:45,719 Speaker 3: the focus of fund managers now has shifted to the 110 00:05:45,760 --> 00:05:46,800 Speaker 3: third phase, which. 111 00:05:46,600 --> 00:05:47,800 Speaker 1: Is the applications. 112 00:05:47,839 --> 00:05:50,800 Speaker 3: A lot of the software companies stocks down dramatically last year. 113 00:05:50,839 --> 00:05:53,960 Speaker 3: They've actually been an area of focus for portfolio managers. 114 00:05:54,680 --> 00:05:55,360 Speaker 1: That's where we're. 115 00:05:55,200 --> 00:05:57,840 Speaker 4: Focused one issue I think for portfolio managers and what 116 00:05:57,839 --> 00:06:00,640 Speaker 4: you're saying, actually there's a silver lining and that if 117 00:06:00,640 --> 00:06:04,800 Speaker 4: you have mutual funds finally outperforming because you have a 118 00:06:04,839 --> 00:06:07,200 Speaker 4: broadening of the market, that's actually great for your retirement 119 00:06:07,200 --> 00:06:11,440 Speaker 4: account because of the diversification many fas financial advisors have on. 120 00:06:11,880 --> 00:06:13,919 Speaker 4: But a lot of the trades this year that have 121 00:06:14,000 --> 00:06:17,800 Speaker 4: done well are really really defensive, and even then at 122 00:06:17,800 --> 00:06:21,040 Speaker 4: this moment, people are having a really hard time buying 123 00:06:21,360 --> 00:06:24,800 Speaker 4: the dip. So what is your advice? 124 00:06:24,880 --> 00:06:25,400 Speaker 1: What are you. 125 00:06:25,520 --> 00:06:28,880 Speaker 4: Telling clients who are looking to take advantage of the 126 00:06:28,880 --> 00:06:31,800 Speaker 4: fact that the market has fallen so much when they 127 00:06:31,839 --> 00:06:33,120 Speaker 4: don't know what the low is. 128 00:06:34,520 --> 00:06:36,640 Speaker 1: First of all, Sonalo, we have to put this in context. 129 00:06:37,000 --> 00:06:41,560 Speaker 3: In any year, the typical drawdown is ten percent. In 130 00:06:41,600 --> 00:06:43,760 Speaker 3: any year, you typically get to peak the truck drawdown 131 00:06:43,760 --> 00:06:45,920 Speaker 3: at some point of ten percent. Well, that's what we've got, 132 00:06:46,200 --> 00:06:49,560 Speaker 3: So it's not so extraordinary, and it's largely driven by 133 00:06:49,600 --> 00:06:51,839 Speaker 3: some of these biggest companies we just been speaking about 134 00:06:52,040 --> 00:06:54,800 Speaker 3: absent that the typical stock is down maybe five percent. 135 00:06:54,920 --> 00:06:56,920 Speaker 1: So where are we focused. We're focused on a couple 136 00:06:56,960 --> 00:06:57,200 Speaker 1: of things. 137 00:06:57,279 --> 00:07:02,080 Speaker 3: Number one, what are some stocks that are insensitive to 138 00:07:02,520 --> 00:07:04,440 Speaker 3: some of the drivers of the market, some of the 139 00:07:04,440 --> 00:07:08,120 Speaker 3: idea of economic activity, the idea of it potentially slowing down, 140 00:07:08,279 --> 00:07:12,280 Speaker 3: the idea of concerns about the return on capital that 141 00:07:12,640 --> 00:07:15,560 Speaker 3: so much of the AI story has made based upon. Well, 142 00:07:15,600 --> 00:07:18,520 Speaker 3: there are companies where they're trading in the last six 143 00:07:18,560 --> 00:07:22,360 Speaker 3: months have really been less sensitive to regulatory environment uncertainty 144 00:07:22,360 --> 00:07:26,240 Speaker 3: around the economy, amdocs, MSCI, you can think of a 145 00:07:26,320 --> 00:07:28,880 Speaker 3: companies in different a lot of healthcare companies there they 146 00:07:28,920 --> 00:07:32,680 Speaker 3: have traded in a pattern that has been unrelated to 147 00:07:32,800 --> 00:07:35,320 Speaker 3: some of the key drawdown sources, which has been a 148 00:07:35,680 --> 00:07:38,760 Speaker 3: reassessment of how fast the economy will grow focus on 149 00:07:38,800 --> 00:07:40,920 Speaker 3: the AI. So there's a bunch of companies, we call 150 00:07:40,920 --> 00:07:44,600 Speaker 3: it our insensitive portfolio, stocks that have not disprayed price 151 00:07:44,720 --> 00:07:46,880 Speaker 3: sensitivity to some of these bigger themes that have been 152 00:07:47,680 --> 00:07:50,920 Speaker 3: buffeting the market in the last several months. So that's 153 00:07:50,960 --> 00:07:54,120 Speaker 3: a strategy to be thinking about for this environment. For 154 00:07:54,120 --> 00:07:56,760 Speaker 3: those football managers who are consistent with our view, which 155 00:07:56,800 --> 00:07:59,240 Speaker 3: is the economy is still growing. The market is going 156 00:07:59,240 --> 00:08:01,120 Speaker 3: to end the market like to end the market, you know, 157 00:08:01,160 --> 00:08:03,840 Speaker 3: the year higher than it is today, six two hundred. 158 00:08:04,360 --> 00:08:07,280 Speaker 3: There are some stocks that are really not so sensitive 159 00:08:07,280 --> 00:08:09,720 Speaker 3: to what's been happening in the day to day news flow. 160 00:08:09,760 --> 00:08:13,360 Speaker 2: We'll look to the insensitive portfolio in the meanwhile, when 161 00:08:13,400 --> 00:08:16,200 Speaker 2: you cut your S and P target, you raised your 162 00:08:16,600 --> 00:08:18,960 Speaker 2: target on Europe's stock six hundred or the outlook. At 163 00:08:19,040 --> 00:08:22,320 Speaker 2: least there are you saying this is like the go 164 00:08:22,400 --> 00:08:24,560 Speaker 2: to trade because it certainly has been working. 165 00:08:26,440 --> 00:08:27,640 Speaker 1: It certainly has been working. 166 00:08:27,800 --> 00:08:32,000 Speaker 3: That question really relates to what's the longer term investment strategy. 167 00:08:32,040 --> 00:08:34,360 Speaker 3: And we've been focusing for a while on the US 168 00:08:34,480 --> 00:08:38,240 Speaker 3: exceptionalism story and the idea that US companies have a 169 00:08:38,480 --> 00:08:43,120 Speaker 3: dramatically higher reinvestment rate of their cash flow. I give 170 00:08:43,120 --> 00:08:45,640 Speaker 3: you a example of the last decade. On average, US 171 00:08:45,720 --> 00:08:49,520 Speaker 3: companies reinvest around forty percent of their cash flow back 172 00:08:49,520 --> 00:08:51,600 Speaker 3: into their business to grow the business, whereas the rest 173 00:08:51,600 --> 00:08:54,000 Speaker 3: of the world stock markets it's around twenty five percent. 174 00:08:54,200 --> 00:08:58,960 Speaker 3: That's a pretty meaningful gap, and that gap can persist. 175 00:08:58,679 --> 00:08:59,679 Speaker 1: A year after year after year. 176 00:08:59,720 --> 00:09:02,640 Speaker 3: So the idea of companies US companies investing for the 177 00:09:02,679 --> 00:09:05,599 Speaker 3: longer term is something that's unique. 178 00:09:05,480 --> 00:09:09,000 Speaker 1: Characteristic of US companies. That's one area why from a 179 00:09:09,040 --> 00:09:09,560 Speaker 1: longer term. 180 00:09:09,520 --> 00:09:12,720 Speaker 3: Perspective, US socks likely they continued to do better. They've 181 00:09:12,720 --> 00:09:16,160 Speaker 3: obviously been a source of awesome performance for the last 182 00:09:16,160 --> 00:09:17,040 Speaker 3: fifteen years. 183 00:09:17,720 --> 00:09:20,600 Speaker 1: The valuation has come down slightly, but the. 184 00:09:20,559 --> 00:09:23,240 Speaker 3: Earnest growth still in the United States of seven percent 185 00:09:23,320 --> 00:09:25,640 Speaker 3: MATT is going to be much greater than you're getting 186 00:09:25,679 --> 00:09:29,640 Speaker 3: in Europe. Europe's really had a valuation recovery off of below, 187 00:09:29,880 --> 00:09:33,400 Speaker 3: but it's still US companies will have faster growth, and 188 00:09:33,440 --> 00:09:36,120 Speaker 3: admittedly they trade at a higher multiple, and they're also 189 00:09:36,160 --> 00:09:38,360 Speaker 3: investing more to have that growth persist. 190 00:09:38,720 --> 00:09:41,720 Speaker 4: David, We thank you so very much to joining for 191 00:09:41,760 --> 00:09:43,439 Speaker 4: joining us today. Of course, it has been a tough 192 00:09:43,679 --> 00:09:46,319 Speaker 4: trade out there. That is, David Costin of Golden Sacks 193 00:09:46,400 --> 00:09:49,360 Speaker 4: early to make that call that things this year might 194 00:09:49,360 --> 00:09:51,920 Speaker 4: not be as rosy as we came in the year 195 00:09:51,960 --> 00:09:52,720 Speaker 4: believing they would be.