00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with Stock's attempting to rally following the biggest one day drop in a month. Keith Leerner of Truest writing, the encouraging development is that this is still looking more like rotation than broad based liquidation. Keith joins us now for more. Keith, I don't know when you wrote that, but does it apply to the price sanction of the last twenty four hours too? 00:00:55 Speaker 3: Oh? 00:00:55 Speaker 4: Yes, certainly, and I he good fryad. 00:01:02 Speaker 3: Listen. 00:01:02 Speaker 4: Even yesterday, you know we had that, you know, some big cap tech names down a lot, and then you looked at the board yesterday you had energy up you had industrials up, you had financials up, you had healthcare up. 00:01:11 Speaker 3: So I think we're still seeing this big move up. 00:01:13 Speaker 4: But I also like, if you zoom out a bit here, Jonathan, back when we had that rally off the lows in March for the SMP, there was only one sector that I performed one and that was tech, and Tech was up forty seven percent. The closest sector behind it was that was lagged it by almost by sorry, by more than twenty percent. So you know, you had expectations we set higher. It was one sector that's very dominated, and now that money is rotating to other areas, and to the point that you just discussed, it's not leaving the market, it's just rotating to other areas. And you're also having some pretty good numbers yesterday. If I looked at the board yesterday, you had a lot of these industrials, you know, up three, four, five. 00:01:51 Speaker 3: Percent, okaith. 00:01:52 Speaker 2: I think in some ways that speaks to what we're talking about in the bond market too. I mentioned these rolling shocks that we're experiencing right now through energy, through interest rates and market, and I think it's important to points now we've had the energy shot we've had the bond market Jitters, we haven't had the growth scare in case. Does that speak to maybe your enthusiasm for this rotation in equities, which is a risk anset that should be sensitive to the growth back drop. You believe that can continue? 00:02:15 Speaker 3: Yeah, I do. 00:02:16 Speaker 4: I will also say at the same time, Jonathan, you know we're still positive on tech longer term. I just think as I mentioned that it got too far, you know, it went too far too fast, and now you're resetting, and as we've been discussing this morning, you know, the economy continues to prove resilient. 00:02:30 Speaker 3: In fact, I think you know, most on Wall. 00:02:32 Speaker 4: Street, if you thought, you know, maybe a month ago, if you said, hey, yielder at four to seventy, where's the stock market? You probably would think it would be, you know, hit a bit more. And you are seeing some of those tin those higher financial conditions hit in more of the growth areas of the market. But all in all, you know, I would trade a stronger economy within a week or one with a little bit higher rates, and I think that's what the market's doing because ultimately that should still feed into stronger earnings, which continues to be the north star of this bull market, which. 00:02:59 Speaker 5: Is the reason, like Keith, we're seeing a lot of people say their rotation is intact. 00:03:02 Speaker 1: But maybe the Magnificent seven or. 00:03:04 Speaker 5: More specifically, the hyperscalers are no longer the same kind of bet that they were, say six months ago. Yesterday the biggest one day decline going back to Liberation Day and some of the turmoil there. In twenty twenty five, almost eight hundred billion dollars in value raised from this particular index. 00:03:20 Speaker 1: Is it a buying opportunity or is it a warning shot? 00:03:24 Speaker 3: Maybe somewhere in the middle. 00:03:26 Speaker 4: I mean, with one of the economies we wrote about, you know, coming out of last month was that, you know, the tech sector was up eighteen percent at the time. At the same time, the Mag seven was actually down for the year, and that's a lot of because of semiconductors. So, you know, I would say more broadly, not just the MAG seven. I mean, the one thing that kind of stood out to me is, you know, late last year, the technology sector was training for about a thirty two multiple. 00:03:48 Speaker 3: Now that's down to about twenty three. 00:03:50 Speaker 4: The premium for tech to the overall market early in this pool market was about forty five percent. 00:03:54 Speaker 3: That was the peak and now we're down to about ten. 00:03:57 Speaker 4: So at least at least the good news to me is you're setting expectations. 00:04:01 Speaker 3: And even though, as you know, not. 00:04:03 Speaker 4: Saying something specific about a recommendation for stocks, but like you know, Google and revenue and Intel's revenue numbers with twenty five percent, it's hard pressed to find that. So oh, I still think ultimately that tech will be a buying opportunity. 00:04:15 Speaker 3: Is it right here right now? 00:04:16 Speaker 4: I'm not sure about that yet, But ultimately I think money will go take back into tech. And the last thing I also say is we continue to have this love hate relationship with tech. This is the fifth pullback of at least ten percent. 00:04:28 Speaker 3: During this bull market. 00:04:29 Speaker 4: During the entire bull market, tech has doubled the S and P five hundred. So it's just, you know, like I said, the love hate relationship that we're seeing, it. 00:04:35 Speaker 1: Does feel a little bit different this time. 00:04:37 Speaker 5: And I know I'm going to get pillar aid for saying that because those are the most hated words in financial markets. There is a new cost to borrow money for some of these hyper scalers in particular, and I wanted to buifurcate the tech universe into the hyper scaler suspenders and then the receivers. As John does a good job of talking about the wealth transfer. 00:04:53 Speaker 1: At this point, it. 00:04:54 Speaker 5: Does seem like the charge is getting bigger for a lot of these hyper scalers. Their desires are continuing to grow at paces that we cannot track, and there has been a sense of concern in markets at a time of already elevated bond yields around the world. 00:05:08 Speaker 1: Doesn't this change the calculus. 00:05:09 Speaker 5: On some level, on a multiple level, or even just on a growth prospect level. 00:05:13 Speaker 4: Yeah, certainly, And I would say at least, you know, one thing we've been released on the track, even more closely, is breaking out all the technology big cat tech stocks and look at credit spreads and then moving up and even like Oracle being the poster child, you're seeing when CDXIT makes a new high, the stock is moving lower. So now I think it is very important. I think it is one of the main the key risks that we're looking at. But I guess as I think about things is you know, we were training at a thirty two multiple, now we're down to a twenty three. That premium that I mentioned has really evaporated. So at least in my mind, the market has has has re rated down because of those very risks that you're talking about. 00:05:52 Speaker 3: So I guess the question, the open question is is it we rated enough? 00:05:55 Speaker 4: And again, you know, on a very short term, I think it's a difficult call. But I think at this point at least we really reset expectations. Again, not that recommendations on individuals because that's not my area of focus. But even like you look at you after what happened with Alphabet, you're treating out a sub pe relative to the overall market as far as a discount now, and at the same time you've seeing these companies with really strong revenue growths. So I think all that's in the mixed Lisa, But I think again I would still think I'm giving tech longer term the benefit of the doubt. 00:06:24 Speaker 2: Yesterday was different, and Bromo, I'm pleased to went there. Yesterday was different because this equity market punished the spending of Alphabet and Tesla and didn't reward the chip makers, which is where the money would go. Same as we're down on the session yesterday, which I think would be surprising for a lot of people. If they looked at the numbers of the spend coming out of the likes of Alphabet and the likes of Tesla. So you have to question the effectiveness of the spend, return on investment, and the durability the sustainability of the spend as well, and the cost of capital is going to become increasingly important. I think you can see that in bonds and increasingly just on the margin just a little bit more. You can see it in credit too. 00:06:59 Speaker 5: Right now you're starting to see this spreads widen, as Keith was just talking about, and yesterday we saw some real pushback. But you're right, normally the wealth transfer would be alive and well you'd see that inverse relationship. 00:07:08 Speaker 1: The idea that it's not indicates. 00:07:10 Speaker 5: That maybe people don't believe that spend project can really continue at the pace that it is, or that there's going to be enough competitive pressure to lower prices, lower margins and potentially get some new competitors into the field. 00:07:21 Speaker 2: I'm not going to draw firm conclusions from twenty four hounds of price sanction. Lisa won't either, but Keith is notable that yesterday Chips didn't rally that had a nice little run going into warnings Monday, Tuesday, decent few days of gains, three days, I believe on the sami's keith. Then things started to change just yesterday. What was your reaction to that, Well, I mean, I think it. 00:07:40 Speaker 4: Is important, as you mentioned right now, there's so much uncertainty about how all the AI spending turns into a cash flow like and when. But I also remindful it was like, you know, semiconductor just came off an eighty percent plush quarters, so in some ways I think that was anticipating these good numbers and you. 00:08:00 Speaker 3: Know it's priced in. 00:08:01 Speaker 4: So it does tell you at this point that this kind of cooling or this reset in tech and semiconductors likely has a bit further to go because it was so overheat. In fact, the move that we have seen in semi conductors over the last year is the strongest we have seen since the late nineties. 00:08:18 Speaker 3: But ultimately, I think one. 00:08:18 Speaker 4: Of thing that's different so far, and we can you know, debate this is evaluations are half of what they were in the semi conductors back in the late nineties, and earning trends are much stronger. Obviously, we are still asking the question of what's normalized earnings as well. But I think the main point, going back to where I started is, you know, you just you had a lot of good news priced into this quarter, So I'm not surprised you're not seeing the reaction because you were up eighty percent for the overall. 00:08:41 Speaker 2: In depth stay with US, multiple Imberg surveillance coming up after this. 00:08:55 Speaker 1: So here's the lisis. 00:08:56 Speaker 2: This morning, the White House taunting efforts to find inflation. The President announced an expansion of the rate payer Protection Pledge. The President now scheduled to deliver an economic message in the key mautaground state of Michigan on Monday. Monica Guarre and the team over at Morgan Stanley writing in their midterm election preview the following, even when growth is resilient, voters often discount healthy macro data when their lived experience is defined by higher cost for gas, groceries, rent, and utilities. Monica joins US now for more Monica Conmonic Warner. It's good to see this is going to be a major issue into the midterms. What can you do between now and then if you're a policymaker. 00:09:32 Speaker 6: If you're a policy maker, you're looking for every Avenue. I think that the Trump announcement around corporations contributing to power generation and trying to reduce those costs as one of those measures. But you have to balance that with what's happening geopolitically and globally. When we see what's happening with US and Iran pressures on gas prices, right and that elevation as well as you know, concerns at the local level or just around housing, and that's more of a local issue, not and that the federal government can just come in and cut. 00:10:02 Speaker 7: It's the last week of Congress in terms of before their summer holiday that you have both the House and the Senate in session. Gas prices are going up, Americans are pushing back in polls about this war. Are they going to do something when it comes to at least some of the immediate effects of the pump. 00:10:17 Speaker 6: So what's really interesting about this is that you see, you know, like you said. 00:10:21 Speaker 1: It's really unpopular war. 00:10:22 Speaker 6: About fifty nine percent of the population is not in favor. And Congress has actually moved, you know, to rebuke the president. A Republican held House has rebuked the president with this gop you know, War Act saying that they are not in favor of continuation. However, Senate's not going to move on that, So it's mainly symbolic. And in the same hand, right one hand. 00:10:45 Speaker 1: You're saying, you know, we're not in favor. 00:10:47 Speaker 6: There are moneying ninety five billion right for more spending on the Iran war. So what are they going to do? There's limited tools that they can actually pull on. Maybe you look to releasing more from the Strategic Petroleum Reserve in the US, but even that is very limited. We already have dwindling levels of the SPR to historic lows, and any sort of shift there would maybe alter pricing for a week or two ahead of the midterms, so you would have to really time it strategically. 00:11:14 Speaker 7: The other risk this morning, of course, is the reintroduction of new tariffs. The market seem to be brushing this off, but some analysts I'm talking to are saying their clients corporations really care they're going through these lists. Is this going to be an issue for this White House with some of these C suite executives. 00:11:30 Speaker 6: Well, what we've seen is that the broader and our view, we think that the broader costs passed through to the individual related to tariffs has peaked and is starting to come down. You know, we have seen a lower inflation print. However, all this macro you know activity could turn that tide right. It's just was a small disinflationary you know, moment in June. So for us, we're still you know, very much watching that number and seeing you know, what the what Congress and you know the Trump is going to do to actually move on it. Now, what's important here for us when we're thinking about tariffs in the future is the full package for the consumer and how they're going to respond in the midterms. And so from the political science lens, we're looking at gas prices, which in years where there is an increase from the prior January you get a loss about thirty two seats. 00:12:23 Speaker 1: So it really puts the. 00:12:24 Speaker 6: GOP already on the back foot, not just because historically you get a turnover in midterms, but then you also have the gas price component also dragging on the. 00:12:34 Speaker 1: Likelihood of re election. 00:12:35 Speaker 5: So that's the election picture and sort of the lead up to it. From a market perspective, I understand that I've got a very skewed kind of view on a lot of things. But yesterday I saw the data on the news about the tariffs and I thought, oh, they're looking for new revenue to plug some of the gaps because the deficits. 00:12:52 Speaker 1: Going up so much. Maybe this could help bond yields. 00:12:55 Speaker 5: Is that even in their calculus, because at this point you're seeing bond yields really get carried away and affecting some of the area is that they've been talking about the most, like housing. 00:13:02 Speaker 6: Well, you have to remember that the tariffs that have been recently announced are largely symbolic. Right you're saying, you know, Trump came out and said one hundred percent tariffs on pharma, but that starts in twenty twenty eight, again post elections. So it's not necessarily a mid term factor. Nor do I think that it's really a revenue plug, because it's giving a long runway in order to get you know, these generics back to the US. In addition, when you think about the USMCA renegotiations, we've said long for a long time now over and over again that this was going to be a pressure point for the summer, and we're starting to see that comes ahead on the fifty percent on Canada that we think could have the biggest impacts. But again that's still an opening bid. And when you're working with Trump, you have to remember this administration we always land somewhere in the middle. 00:13:44 Speaker 1: So as far as the tear of. 00:13:45 Speaker 6: Component, I think it's a little less risky than say the gas and US are on. 00:13:50 Speaker 1: Piece of the equation. 00:13:51 Speaker 2: I sherely suspinse I was looking at the bumb market too, Stay with us Mulblomberg surveillance. Coming up off to this, the Republican Senator Dave mccorhomick, coming fresh off last week's Pennsylvania Defense and Innovation summits, securing ten billion dollars in new investments for his state. The US Senator Dave McCormick joins us now for more. Good morning, sir, it's going to say yeat morning. Let's talk about the nature of this challenge, and the character of the challenge defensively has changed as well, and the Middle East a fantastic example of that this morning. What do we need to change when we think about the kind of investments that needs to be made in this country. 00:14:31 Speaker 8: Well, there's three big changes that have happened. The World's getting more dangerous to the nature of warfare is changing dramatically with drone's autonomy AI. And Third, we've had apathy within our defense ecosystem, so we need to introduce new players into our defense ecosystem, drone manufacturers and all sorts of other unique capabilities. And we need to change the way we procure defense systems. So it needs to be much faster, it needs to be much more competitive. We need to constantly be innovating. So the focus of the summit was to bring together the traditional industrial base. 00:15:04 Speaker 3: We've gone. 00:15:06 Speaker 8: To one percent of global shipbuilding, so we need to go back to the core industrial base, but introduce all these new technologies into the mix. So the goal of that was to bring those players together. Have the President have his cabinet there, have all the major primes, all the emergent technologies, all the big investors, because you need the capital, and talk about ways to move forward in accelerating our ability to man the battlefield with this next generation of weapons. 00:15:31 Speaker 7: It's an important conversation to have now because we are relying on inventories. 00:15:34 Speaker 1: When it comes to the war in the Middle East. 00:15:36 Speaker 7: All that has been given in terms of Russia's invasion of Ukraine. Where are we on defense inventories. 00:15:42 Speaker 8: Well, I think where we were adequate in terms of being able to continue to conduct military operations, but there's no doubt that we need to ramp up our production capacity. Let me just give me an example. In Ukraine, they make ten thousand drones a day a day. We have nowhere near that manufacturing capacity here at home. So we need to ramp up that manufacturing capacity. In shipbuilding as another example, we in Philadelphia build a shipyard. We build one ship a year. We need to go to twenty, which we're doing over the next five years. So we've let ourselves become more dependent on others, and we've let ourselves locked into looking backwards at last year's for thirty year old platforms as opposed to embracing this next generation of technolog. 00:16:25 Speaker 1: When it comes to the next generation of technology. 00:16:26 Speaker 7: When it comes to the Iran War, we've been heard from Palentier executives this is going to be the first war that really was conducted by AI. Are you concerned that China is building a model like Kimmy K three off of our technology? 00:16:38 Speaker 1: Yeah, no, absolutely. 00:16:39 Speaker 8: I mean China has a tradition of stealing our elouctual property and using that to their advantage. That's why we need to continue to do all the things necessary to lead in the AI race. I always like to say that we can. I'd rather have our hand than China's hand, but it depends on what we do. So we need to embrace the compute capacity and the energy capacity needed to be in the lead. We need to make sure we don't overly constrain our innovators because this is really the most important technology race of our lifetimes. 00:17:12 Speaker 2: And we are throwing tons of capital. 00:17:14 Speaker 1: That's it. We're throwing tons, and that's what's. 00:17:15 Speaker 2: Different about this moment. I think for Treasury and I want to make that pivot. I think it's important. The ministry costs a lot of money. We know that, and the deficit wasn't a problem because we didn't see the biggest companies on the planet raising the capital to the extent they are now. And you start to see these moves and you're in a fantastic scene. I mentioned this earlier on the program. You're in many ways the perfect scene because you bring to the Senate experience on both the geopolitics, the cost of war, and Wall Street how you finance it. Are you starting to get concerned about what's happening with the bond market here at these levels, and if not, when well this we. 00:17:45 Speaker 8: Are in uncharted territory. I think last time I was here we talked about this. We've got a couple things going on. We're in the middle of this geopolitical shock with what's happening in the Middle East, and we're also in the biggest capital boom and productivity wave that we've ever seen. So I think we're dieting both things at the same time. And we talked about my friend Kevin worsh now in this unique position because he has these inflationary pressures coming, but we also have this huge productivity boom coming. And I think he's wisely said, we're going to launch these committees, We're going to figure out how we're going to think about the models for the future. And he's also talked in I think very convincing ways about the need to guard against inflation. And so I think for the foreseeable future, we've got all these factors and we need to just keep our powder drive. 00:18:34 Speaker 2: I think he should hut next week. 00:18:35 Speaker 3: I think we should keep our powder drive. 00:18:37 Speaker 8: That means helped well listen Unfortunately not in that position, because. 00:18:42 Speaker 2: Senator Warren, your colleague from Massachusetts, has another problem calling out the Federate zet. You're in a position where you can sign what you think. 00:18:49 Speaker 8: Yeah, listen, I think given all those factors and uncertainty, I would like to see interest rates stay where they are. 00:18:56 Speaker 2: This is the Bloomberg's Events podcast, bringing youst in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.