Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's talk about what's going on in stocks right now
Speaker 2: with the chief US stock strategist over at Goldman Sachs.
Speaker 2: David Costin joins us. I'm pleased to say it right
Speaker 2: here on Open Interest. David, thanks so much for your time.
Speaker 2: Last week. You were the first major strategists to lower
Speaker 2: your S and P five hundred price target. You cut
Speaker 2: your year end forecast to sixty two hundred from sixty
Speaker 2: five hundred. Just tell me, first off, what's behind the
Speaker 2: call and are you worried about a slowdown in earnings.
Speaker 3: Well, the genesis for why we reduced our year end
Speaker 3: target is really a function of greater uncertainty and slow down.
Speaker 1: In economic activity.
Speaker 3: Those are two key inputs into our earnings model, and
Speaker 3: that's also a component of our evaluation model. So the
Speaker 3: bottom line is we're looking for earnings growth in counter
Speaker 3: twenty twenty five of plus seven percent and seven percent
Speaker 3: growth in twenty twenty six, so two years about seven
Speaker 3: percent growth. Previously, we had anticipated around nine percent growth
Speaker 3: this year, and the key driver behind that is a
Speaker 3: slower economic forecast for the US economic output, and as
Speaker 3: a result, we have a lower year in target around
Speaker 3: six thousand, two hundred, So it's a similar kind of
Speaker 3: return as we anticipated before, but just.
Speaker 1: From a lower level.
Speaker 3: And obviously recognize that that's a challenging situation because the tariff.
Speaker 1: Assumptions we're making.
Speaker 3: We're now assuming that the tariff rate is going to
Speaker 3: increase by around ten percentage points. It's consistent with our
Speaker 3: UH colleagues in US economics research, and so the tariff
Speaker 3: rate MATT in the coming year will be around thirteen
Speaker 3: percent model Previously we had assumed around three percent.
Speaker 1: So those are the really the three building blocks. The
Speaker 1: slower in his growth largely.
Speaker 3: Driven by slower economic activity and a higher tariff rate,
Speaker 3: and then a slightly lower PE multiple ascribed to the
Speaker 3: year end growth.
Speaker 1: For next year.
Speaker 4: You know, David, the sentiment sentiment out there is brutal,
Speaker 4: and you see it in some of the big tech stocks.
Speaker 4: The Magnificent seven today is down getting close to three
Speaker 4: percent just today alone. You have started calling this the
Speaker 4: maleficent seven. Is that how you say magnificently malficent? That's right,
Speaker 4: I think delicent maleficent seven. And you know what can
Speaker 4: happen to turn that around? Of anything? What are the
Speaker 4: broader market, implications for sentiment, and what has been the
Speaker 4: darling sector in the market to turn so low.
Speaker 3: Well, I think the proper way to think about this
Speaker 3: is that the extraordinary returns for the US equity market
Speaker 3: over the last two years has really been driven to
Speaker 3: a meaningful amount by the seven large companies that are
Speaker 3: sober k the Magnificent seven.
Speaker 1: Unfortunately, from a portfolio.
Speaker 3: Management perspective, it's been maleficent seven. It's been the real
Speaker 3: source of pain in the market this year. And without
Speaker 3: those companies, which are down roughly twelve percent year to date,
Speaker 3: the rest of the market is actually up. The four
Speaker 3: hundred and ninety three remaining stocks are up around one
Speaker 3: percent year to date. So it gives you some context
Speaker 3: around the importance the influence that these companies have had
Speaker 3: on the broader market, the idea of these companies, the
Speaker 3: uncertainty around some of the regulatory environment, the source of
Speaker 3: when the hedge fund community in particular, which is largely invested,
Speaker 3: tilting their portfolios towards these companies, that's been a source
Speaker 3: of selling. On the other hand, about sixty percent of
Speaker 3: large cap mutual funds are actually outperforming their benchmarks because
Speaker 3: they've historically or traditionally been underweight these stocks. So it
Speaker 3: has had differing implications for different groups of the clients
Speaker 3: of Golden Sachs, and it's an important way to think
Speaker 3: about our outlook for this year.
Speaker 1: Is the idea of a broadening of the market.
Speaker 3: That's been central to our forecast and outlook for investment
Speaker 3: strategy for twenty twenty five. The idea that a broadening
Speaker 3: of the market is likely to a place in that
Speaker 3: has been a little bit consistent with what we were anticipating,
Speaker 3: the idea of if people.
Speaker 2: I met, well, I was just gonna say, you know, broadening,
Speaker 2: that sounds great, and I hope you're right about it,
Speaker 2: but there's still got to be some leadership, right and
Speaker 2: if it's not the magnificent or maleficent seven you know
Speaker 2: Nvidia right now leading declines as the Nasdaq one hundred
Speaker 2: falls almost two percent, who takes over who does the
Speaker 2: heavy heavy lifting here in a rebound?
Speaker 3: Well, the point you identified correctly is that about a
Speaker 3: third of the market cap of the S and P
Speaker 3: five hundred of these seven companies, so clearly they have
Speaker 3: a just apportioned impact seven companies, you know, more than
Speaker 3: thirty percent of the index.
Speaker 1: You can get it broaden of the.
Speaker 3: Market in other ways, which is a greater uplift in
Speaker 3: the typical stock. You can see that in healthcare companies
Speaker 3: they actually done pretty well. You've had some defensives, generally
Speaker 3: done well. This is an area we've been focusing on
Speaker 3: with respect to, you know, discussion with fund managers of
Speaker 3: how to position their portfolios.
Speaker 1: In this market. Specifically, what we're looking for is what are.
Speaker 3: The three drivers of the market that have been afflicting
Speaker 3: the companies. This year has been a question about where
Speaker 3: we are in the AI transition, and we've gone obviously, Navidia.
Speaker 1: Terrific story, terrific company from.
Speaker 3: A stock point of view, was really an extraordinary driver
Speaker 3: of performance in the last couple of years. Obviously that's
Speaker 3: moved a little bit in the other direction. Well, that
Speaker 3: is sort of phase one of what we think of
Speaker 3: as the AI transition. Phase two, which is the infrastructure
Speaker 3: where a lot of the hyperscalers are located in that
Speaker 3: sort of category utility companies. Really companies are involved in
Speaker 3: the build out of the infrastructure for AI, and really
Speaker 3: the focus of fund managers now has shifted to the
Speaker 3: third phase, which.
Speaker 1: Is the applications.
Speaker 3: A lot of the software companies stocks down dramatically last year.
Speaker 3: They've actually been an area of focus for portfolio managers.
Speaker 1: That's where we're.
Speaker 4: Focused one issue I think for portfolio managers and what
Speaker 4: you're saying, actually there's a silver lining and that if
Speaker 4: you have mutual funds finally outperforming because you have a
Speaker 4: broadening of the market, that's actually great for your retirement
Speaker 4: account because of the diversification many fas financial advisors have on.
Speaker 4: But a lot of the trades this year that have
Speaker 4: done well are really really defensive, and even then at
Speaker 4: this moment, people are having a really hard time buying
Speaker 4: the dip. So what is your advice?
Speaker 1: What are you.
Speaker 4: Telling clients who are looking to take advantage of the
Speaker 4: fact that the market has fallen so much when they
Speaker 4: don't know what the low is.
Speaker 1: First of all, Sonalo, we have to put this in context.
Speaker 3: In any year, the typical drawdown is ten percent. In
Speaker 3: any year, you typically get to peak the truck drawdown
Speaker 3: at some point of ten percent. Well, that's what we've got,
Speaker 3: So it's not so extraordinary, and it's largely driven by
Speaker 3: some of these biggest companies we just been speaking about
Speaker 3: absent that the typical stock is down maybe five percent.
Speaker 1: So where are we focused. We're focused on a couple
Speaker 1: of things.
Speaker 3: Number one, what are some stocks that are insensitive to
Speaker 3: some of the drivers of the market, some of the
Speaker 3: idea of economic activity, the idea of it potentially slowing down,
Speaker 3: the idea of concerns about the return on capital that
Speaker 3: so much of the AI story has made based upon. Well,
Speaker 3: there are companies where they're trading in the last six
Speaker 3: months have really been less sensitive to regulatory environment uncertainty
Speaker 3: around the economy, amdocs, MSCI, you can think of a
Speaker 3: companies in different a lot of healthcare companies there they
Speaker 3: have traded in a pattern that has been unrelated to
Speaker 3: some of the key drawdown sources, which has been a
Speaker 3: reassessment of how fast the economy will grow focus on
Speaker 3: the AI. So there's a bunch of companies, we call
Speaker 3: it our insensitive portfolio, stocks that have not disprayed price
Speaker 3: sensitivity to some of these bigger themes that have been
Speaker 3: buffeting the market in the last several months. So that's
Speaker 3: a strategy to be thinking about for this environment. For
Speaker 3: those football managers who are consistent with our view, which
Speaker 3: is the economy is still growing. The market is going
Speaker 3: to end the market like to end the market, you know,
Speaker 3: the year higher than it is today, six two hundred.
Speaker 3: There are some stocks that are really not so sensitive
Speaker 3: to what's been happening in the day to day news flow.
Speaker 2: We'll look to the insensitive portfolio in the meanwhile, when
Speaker 2: you cut your S and P target, you raised your
Speaker 2: target on Europe's stock six hundred or the outlook. At
Speaker 2: least there are you saying this is like the go
Speaker 2: to trade because it certainly has been working.
Speaker 1: It certainly has been working.
Speaker 3: That question really relates to what's the longer term investment strategy.
Speaker 3: And we've been focusing for a while on the US
Speaker 3: exceptionalism story and the idea that US companies have a
Speaker 3: dramatically higher reinvestment rate of their cash flow. I give
Speaker 3: you a example of the last decade. On average, US
Speaker 3: companies reinvest around forty percent of their cash flow back
Speaker 3: into their business to grow the business, whereas the rest
Speaker 3: of the world stock markets it's around twenty five percent.
Speaker 3: That's a pretty meaningful gap, and that gap can persist.
Speaker 1: A year after year after year.
Speaker 3: So the idea of companies US companies investing for the
Speaker 3: longer term is something that's unique.
Speaker 1: Characteristic of US companies. That's one area why from a
Speaker 1: longer term.
Speaker 3: Perspective, US socks likely they continued to do better. They've
Speaker 3: obviously been a source of awesome performance for the last
Speaker 3: fifteen years.
Speaker 1: The valuation has come down slightly, but the.
Speaker 3: Earnest growth still in the United States of seven percent
Speaker 3: MATT is going to be much greater than you're getting
Speaker 3: in Europe. Europe's really had a valuation recovery off of below,
Speaker 3: but it's still US companies will have faster growth, and
Speaker 3: admittedly they trade at a higher multiple, and they're also
Speaker 3: investing more to have that growth persist.
Speaker 4: David, We thank you so very much to joining for
Speaker 4: joining us today. Of course, it has been a tough
Speaker 4: trade out there. That is, David Costin of Golden Sacks
Speaker 4: early to make that call that things this year might
Speaker 4: not be as rosy as we came in the year
Speaker 4: believing they would be.