WEBVTT - S&P 500 Earnings Outlook 0:00:02.480 --> 0:00:09.160 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:09.160 --> 0:00:13.360 Bloomberg Intelligence podcast. Catch us live weekdays at ten am 0:00:13.400 --> 0:00:14.000 Eastern on. 0:00:14.000 --> 0:00:17.080 Apple card playing and Broid Auto with the Bloomberg Business App. 0:00:17.120 --> 0:00:20.279 Listen on demand wherever you get your podcasts, or watch 0:00:20.400 --> 0:00:22.840 us live on YouTube. 0:00:23.480 --> 0:00:24.919 So I don't know if you know this, guys, but 0:00:25.040 --> 0:00:27.800 four point six trillion dollars worth of market cap is 0:00:27.800 --> 0:00:28.639 reporting this week. 0:00:28.680 --> 0:00:29.640 It was the third I. 0:00:29.600 --> 0:00:32.040 Think busiest week for the S and P in terms 0:00:32.080 --> 0:00:34.920 of earnings. John Tucker super pumped. So I was reading, 0:00:34.960 --> 0:00:38.360 I'm Gina marn Adams Bloomberg Intelligence. He's a senior, a 0:00:38.440 --> 0:00:40.559 chief equity strategist, I should say, and they were kind 0:00:40.600 --> 0:00:43.120 of taking that broader look on the earning season, and 0:00:43.159 --> 0:00:45.080 she'd a really interesting point, And Gina, this is why 0:00:45.080 --> 0:00:46.760 I wanted to get you on to talk about it. 0:00:46.920 --> 0:00:48.920 You guys say that if you look at guidance by 0:00:48.960 --> 0:00:53.320 the firms looking at about sixteen percent earnings growth, but 0:00:53.479 --> 0:00:56.840 earning's growth by analysts sees significantly less. 0:00:57.200 --> 0:00:58.480 Is that kind of gap weird? 0:01:00.200 --> 0:01:04.360 It is unusually large what we do find. Alex, First, 0:01:04.360 --> 0:01:06.479 thank you for having me on. Thank you for reading 0:01:06.520 --> 0:01:12.360 the work oh always. What we usually find is that 0:01:12.600 --> 0:01:16.360 company's guidance is a pretty good proxy for what to 0:01:16.400 --> 0:01:20.320 expect during the earning season. Analysts over the last several 0:01:20.400 --> 0:01:27.160 quarters have underestimated earnings have also undershot guidance, not just 0:01:27.400 --> 0:01:31.320 by this huge amount though. For instance, coming into the 0:01:31.360 --> 0:01:34.440 second quarter earning season, analysts we're expecting about eight percent 0:01:34.520 --> 0:01:38.280 earnings growth, our guidance model was saying twelve. We ended 0:01:38.360 --> 0:01:42.639 up getting fourteen. This time around, analysts are expecting merely 0:01:42.760 --> 0:01:46.520 four percent earnings growth and our guidance model is saying 0:01:46.560 --> 0:01:50.440 fifteen sixteen, So it's a very big gap. I think 0:01:50.480 --> 0:01:53.640 a couple of things really explain the gap this time around. 0:01:53.680 --> 0:01:57.120 The first is when you look at the sector concentration 0:01:57.280 --> 0:01:59.680 of guidance, only about a fifth of S and P 0:01:59.720 --> 0:02:03.840 five hundred companies tend to guide earnings. That tend that 0:02:03.920 --> 0:02:06.200 surprises a lot of people. It's not every company gives 0:02:06.320 --> 0:02:08.760 us guidance. We have to rely on a small subset 0:02:08.800 --> 0:02:12.640 of companies for this analysis. But nonetheless, of those about 0:02:12.639 --> 0:02:15.320 one hundred companies that give us guidance, most of them 0:02:15.440 --> 0:02:19.720 are tech, communications and consumer discretionary companies, so they also 0:02:19.800 --> 0:02:23.959 are concentrated in certain sectors. Now, Tech and communications in particular, 0:02:24.040 --> 0:02:26.480 we know are the strongest segments of the S and 0:02:26.520 --> 0:02:28.359 P five hundred. We've seen that play out over the 0:02:28.440 --> 0:02:31.480 last year and a half. The weakest players in the 0:02:31.560 --> 0:02:34.079 S and P five hundred are energy companies. They're still 0:02:34.120 --> 0:02:37.600 producing double digit declines and earnings. Analyst consensus thinks they're 0:02:37.600 --> 0:02:40.919 going to give us another twenty percent drop in earnings 0:02:40.960 --> 0:02:43.839 year over year. They don't give us guidance at all. 0:02:43.960 --> 0:02:46.400 For the most part, they're just absent in the guidance trends, 0:02:46.400 --> 0:02:50.480 so that we could have a sector skew happening. Nonetheless, 0:02:50.520 --> 0:02:52.760 that sector skew existed last quarter, and it gave us 0:02:52.760 --> 0:02:55.120 pretty good indication that analysts were too bearish. 0:02:55.720 --> 0:02:59.200 Maybe it's just I want to underpromise and over deliver 0:02:59.440 --> 0:03:02.560 from my bi rated stocks. That's been known to happen, 0:03:02.720 --> 0:03:05.040 you know, once or twice. Yeah, once or twice. I 0:03:05.200 --> 0:03:06.959 never did it, of course, But no, no, no, of course. 0:03:07.160 --> 0:03:07.359 Yeah. 0:03:07.760 --> 0:03:10.560 Talk to us about the Magnificent seven and their presence 0:03:10.639 --> 0:03:13.680 in the marketplace in terms of taking this market higher. 0:03:13.720 --> 0:03:16.840 How important are they still and maybe from an earning's 0:03:16.840 --> 0:03:17.480 perspective to. 0:03:18.400 --> 0:03:21.280 Yeah, well, clearly the market moves higher faster when the 0:03:21.280 --> 0:03:24.320 MAG seven are rising. Right when the Mag seven are leading, 0:03:25.680 --> 0:03:27.880 as we saw for the last majority of the last 0:03:27.960 --> 0:03:30.000 year or so, the market moves up at a faster 0:03:30.120 --> 0:03:32.400 pace because they're the bigger stocks. They're the biggest market 0:03:32.400 --> 0:03:37.040 cap latings they do matter. You can, however, have periods 0:03:37.080 --> 0:03:40.840 of time in which the Magnificent seven are not leading 0:03:40.840 --> 0:03:42.880 the market and you still have games. The third quarter 0:03:42.960 --> 0:03:45.360 was a good example of that. The Mag seven really 0:03:45.360 --> 0:03:47.440 sputtered a bit in the third quarter sort of. We 0:03:47.440 --> 0:03:50.880 saw rotation move into other stocks. All other sectors started 0:03:50.880 --> 0:03:53.160 to break out in the month of August, reaching new 0:03:53.240 --> 0:03:56.400 highs when the Mag seven was still struggling beneath its 0:03:56.440 --> 0:03:59.920 former peak, and stocks still rose, but the rate of 0:04:00.120 --> 0:04:03.080 appreciation in the S and P five hundred does shift 0:04:03.160 --> 0:04:06.360 when your smaller players are rising faster than your bigger players. 0:04:07.360 --> 0:04:10.280 The worst case scenario is the MAG seven falls. It's 0:04:10.360 --> 0:04:13.880 really difficult for the index to make gains when the 0:04:13.920 --> 0:04:18.480 Mag seven is selling off because they're so big. In particular, 0:04:18.680 --> 0:04:22.360 Tech and communications as whole sectors are gigantic. They're forty 0:04:22.360 --> 0:04:25.240 percent of the market cap of the index. So when 0:04:25.320 --> 0:04:28.640 those stocks are struggling it's very difficult for the rest 0:04:28.640 --> 0:04:31.960 of the S and P to recover, particularly at this 0:04:32.120 --> 0:04:35.200 stage of the cycle when you still have commodity prices 0:04:35.240 --> 0:04:38.279 and commodity length sectors as operating as a drag on 0:04:38.360 --> 0:04:42.279 index and a drag on index earnings. You do need 0:04:42.320 --> 0:04:44.960 some stability in the rest of the index to overcome 0:04:45.120 --> 0:04:48.560 that earnings drag and that price drag. But they are 0:04:48.640 --> 0:04:52.480 still important. It's a matter of degree of importance, and 0:04:52.839 --> 0:04:55.479 you know, they're very important to the rate of appreciation 0:04:55.640 --> 0:04:59.360 in the market. They're very important to the overall trend 0:04:59.400 --> 0:05:02.280 in the market, and increasingly important also as a driver 0:05:02.400 --> 0:05:04.680 of earnings growth on the S and P five hundred. 0:05:04.640 --> 0:05:07.440 Right, because of the hyperscaler situation, Like the more capex 0:05:07.480 --> 0:05:09.880 they spend, the more it trickles down into other sectors 0:05:09.880 --> 0:05:13.840 and other companies as well. What kind of capac spend 0:05:13.920 --> 0:05:15.919 from the hyperscaler is you think we're going to see 0:05:16.040 --> 0:05:19.120 for next year, and has that compare, say to this year, 0:05:19.160 --> 0:05:22.080 and is that like a disappointment, like what is good 0:05:22.080 --> 0:05:23.640 and bad? I'm using air quotes. 0:05:24.320 --> 0:05:27.400 Yeah, I don't have any specific numbers on the hyperscalers. 0:05:27.400 --> 0:05:29.880 In particular, I would lean on our analysts in order 0:05:29.920 --> 0:05:33.760 to sort of derive those type of nuanced expectations or 0:05:33.800 --> 0:05:37.240 micro expectations. In terms of macro, what we're seeing is 0:05:37.760 --> 0:05:41.240 companies have realigned their capital spending in line with their sales, 0:05:41.240 --> 0:05:44.320 So capex ratios capex to sales ratios across the s 0:05:44.400 --> 0:05:48.080 and P five hundred are very close to normalized. Now 0:05:49.120 --> 0:05:51.919 we're looking at still double digit capital spending growth, but 0:05:51.960 --> 0:05:56.240 that's down from extreme rapid capital spending growth coming out 0:05:56.320 --> 0:05:58.640 of the recession that we had in twenty twenty two. 0:05:59.240 --> 0:06:02.080 The vast majority of that improvement has come from tech 0:06:02.120 --> 0:06:05.680 and communication stocks, but you're seeing across the board more 0:06:05.720 --> 0:06:10.839 normalized capital spending, with the exception again of energy, where 0:06:10.960 --> 0:06:13.440 this is just a big drag on the index. The 0:06:13.480 --> 0:06:18.040 commodity sensitive segments of the index are still experiencing low 0:06:18.080 --> 0:06:21.600 capex relative to sales. I do think that tech is 0:06:21.640 --> 0:06:25.920 a big portion of the overall optimism with respect to capex, 0:06:25.920 --> 0:06:29.800 but it's not the only thing happening. Healthcare is another 0:06:29.920 --> 0:06:33.880 area where we should see improvement in capital spending. Financials 0:06:34.400 --> 0:06:37.800 have been somewhat reticent to improve their capital spending pace, 0:06:37.920 --> 0:06:41.400 as we've been quite cautious or many financials managers have 0:06:41.440 --> 0:06:44.599 been quite cautious with respect to the outlook. That group 0:06:44.640 --> 0:06:48.960 is starting to talk about spending on AI, for example, 0:06:49.120 --> 0:06:51.840 so that's something to watch going into twenty twenty five. 0:06:52.279 --> 0:06:56.360 The long story short is CAPEX will still likely contribute 0:06:56.360 --> 0:07:00.840 to growth and likely contribute to overall optimist The only 0:07:00.920 --> 0:07:03.400 area where we may be spending a little too much 0:07:04.120 --> 0:07:07.920 is in tech and communications is among these companies where 0:07:08.400 --> 0:07:12.120 they've ramped up spending so fast, sales now need to 0:07:12.120 --> 0:07:14.760 spend a little bit of time catching up to accommodate 0:07:14.760 --> 0:07:15.559 that spending pace. 0:07:16.480 --> 0:07:22.000 So what sectors are screening well for you guys these days, Gina. 0:07:21.360 --> 0:07:24.880 Sure, it's a combination, a strange combination of cyclicals and 0:07:25.000 --> 0:07:29.840 defensive sectors. We actually still have both tech and communications 0:07:29.880 --> 0:07:33.120 the giants in the middle of our sectors scorecard. That 0:07:33.240 --> 0:07:36.400 happened for the first time in several quarters back in June. 0:07:36.960 --> 0:07:39.280 They dropped out of the leadership position on our sector 0:07:39.360 --> 0:07:41.360 rotation model and have been kind of sitting in the 0:07:41.400 --> 0:07:46.680 middle instead. It's more segments like healthcare, which was a 0:07:46.680 --> 0:07:49.720 big laggard last year, still a growth industry, but a 0:07:49.720 --> 0:07:53.360 little bit of defensive quality. Real estate is toward the 0:07:53.360 --> 0:07:56.880 top of our sector's scorecard. Even some of the consumer 0:07:56.920 --> 0:08:00.920 stocks and the consumer staples group with screen as relatively 0:08:01.040 --> 0:08:05.120 well positioned given the dynamics of sectors right now, and 0:08:05.600 --> 0:08:07.960 interest rates seem to be driving a lot of choices 0:08:08.000 --> 0:08:11.040 because financials and utilities are toward the top of the 0:08:11.080 --> 0:08:14.320 scorecard as well, So fat that the Fed is reversing policy, 0:08:14.480 --> 0:08:19.680 creating a potential improvement and lending conditions. Also, that rally 0:08:19.720 --> 0:08:22.800 in the long end of the curve, reducing pressure on 0:08:22.840 --> 0:08:26.240 some of the high borrowers in the index does seem 0:08:26.240 --> 0:08:29.560 to be characterizing the sector scorecard to some degree. At 0:08:29.560 --> 0:08:33.199 the same time, recovery and laggarts, So recovery and earnings 0:08:33.280 --> 0:08:37.439 laggards such as healthcare, real estate is starting to show. 0:08:37.320 --> 0:08:39.800 Up, all right, you know, super appreciate it. It was a 0:08:39.800 --> 0:08:42.160 really great piece. I love digging into all your research, 0:08:42.240 --> 0:08:45.319 you know, Martin Adams, she heads up our equity strategist 0:08:45.320 --> 0:08:48.560 coverage for Bloomberg Intelligence. Only the best for you guys 0:08:48.559 --> 0:08:50.360 here at Bloomberg Intelligence. 0:08:51.880 --> 0:08:55.760 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:08:55.840 --> 0:08:58.959 weekdays at ten am Eastern on applecard. 0:08:58.360 --> 0:09:00.920 Play and rout Outo with the Bloomberg Business. 0:09:01.240 --> 0:09:04.120 You can also listen live on Amazon Alexa from our 0:09:04.120 --> 0:09:09.240 flagship New York station Just Say Alexa playing Bloomberg eleven thirty. 0:09:10.160 --> 0:09:12.880 Crazy story out there Southwest Airlines one of my favorite 0:09:12.880 --> 0:09:16.320 stock symbols love LUV for love Field. Out there in 0:09:16.640 --> 0:09:21.720 the Dallas area, they have Elliott Management Investment Management calling 0:09:21.760 --> 0:09:25.320 for a special shareholder meeting, which is kicking off their 0:09:25.320 --> 0:09:29.080 firm's first US proxy fight since twenty seventeen. Let's get 0:09:29.080 --> 0:09:33.320 the latest reporting all that, Crystal see Bloomberg US Deals Reporter. 0:09:33.400 --> 0:09:38.160 So Elliott Management, Southwest, Southwest Airlines, what's the history there? 0:09:38.360 --> 0:09:41.120 Yeah, So Elliott actually unveild does Steak in June saying 0:09:41.160 --> 0:09:45.120 that they have a significant position in Southwest and at 0:09:45.120 --> 0:09:48.079 this point they have eleven percent steak in Southwest, which 0:09:48.120 --> 0:09:52.440 is very very sizable in percentage and in a dollar 0:09:52.480 --> 0:09:55.320 amount it works about two billion dollars. What we know 0:09:55.400 --> 0:09:58.000 here is that Elliott's calling a special share owder meeting, 0:09:58.000 --> 0:10:01.440 which is an out of cycle investment meeting, and they're 0:10:01.480 --> 0:10:03.680 trying to elect eight members into the board. 0:10:05.000 --> 0:10:08.640 Does love aka that's Luv is the ticket for Southwest? 0:10:08.720 --> 0:10:10.520 Does Southwest have a leg to stand on? 0:10:11.400 --> 0:10:15.040 So Southwest actually just put out a statement. They're saying 0:10:15.040 --> 0:10:18.000 that they have made every effort to reach a constructive 0:10:18.040 --> 0:10:22.760 resolution with Elliott. We all know that proxy fights are 0:10:22.840 --> 0:10:25.880 very expensive, They're very time consuming. So I think what 0:10:27.080 --> 0:10:29.720 Southwest here is saying that they've heard investors' feedback that 0:10:29.840 --> 0:10:32.280 nobody wants to fight. And it's actually something that's very 0:10:32.280 --> 0:10:34.320 common in the activism world that the investor would tell 0:10:34.360 --> 0:10:35.640 you they don't want to fight, company tell you they 0:10:35.640 --> 0:10:37.600 don't want to fight. Activists doesn't want to fight either, 0:10:37.880 --> 0:10:40.400 but somehow they can't come to resolution, and here we are. 0:10:41.120 --> 0:10:46.600 So the contention, the tension here is really that Southwest 0:10:46.640 --> 0:10:48.800 has said that they are backing the management at backing 0:10:49.160 --> 0:10:52.719 the CEO, Bob Jordan, and they will already they have 0:10:52.760 --> 0:10:55.839 already done enough board refreshment, whereas Elliott thinks they need 0:10:55.880 --> 0:10:58.680 a control in the board to bank further changes. 0:10:58.840 --> 0:11:00.800 Well, as you point out, I mean you're reporting here 0:11:01.760 --> 0:11:04.439 Elliott's they do this a lot in terms of activism, 0:11:04.520 --> 0:11:06.360 but what they don't typically do is take it to 0:11:06.400 --> 0:11:08.360 a shareholder vote. They usually get what they want. I 0:11:08.360 --> 0:11:10.840 guess before then, what's different here, do you think? 0:11:10.960 --> 0:11:14.679 Yeah, so they have never done the US proxy fight 0:11:14.800 --> 0:11:18.240 since twenty seventeen. But this is quite significant in the 0:11:18.440 --> 0:11:22.320 activism world. They are usually very effective. The second they 0:11:22.320 --> 0:11:25.520 show up in any stock immediately the company take them, 0:11:25.880 --> 0:11:27.679 you know, very seriously. They try to come to a 0:11:27.720 --> 0:11:30.840 resolution because, like I said, proxy fights lengthy and costly. 0:11:31.679 --> 0:11:34.760 But southrest here somehow it is like evolved into this 0:11:35.440 --> 0:11:37.840 and that at many points, like people thought they could 0:11:37.880 --> 0:11:42.840 have resolved. But I guess, like, yeah, there's some differences here. 0:11:43.120 --> 0:11:46.120 What does Elliott want Southwest to do that Southwest is 0:11:46.160 --> 0:11:47.960 not doing because you'd think at this point it'd be 0:11:48.040 --> 0:11:51.440 like all options, all hands on Southwest deck here. 0:11:51.760 --> 0:11:55.199 Yes, So Elliott has asked for three main things, which 0:11:55.240 --> 0:11:58.760 is leadership change, management change, board change, as well as 0:11:58.840 --> 0:12:03.240 operational improvement. And they've they've kind of pinned this on 0:12:03.320 --> 0:12:06.040 the CEO, Bob Jordan this whole time, saying that he's 0:12:06.080 --> 0:12:08.640 not the right person to execute whatever strategy that the 0:12:08.679 --> 0:12:11.040 company has put out. The company has said they would 0:12:11.040 --> 0:12:12.760 add revenue, they would cut cost. 0:12:13.200 --> 0:12:13.320 Uh. 0:12:13.400 --> 0:12:15.840 They even like kind an investor day in late September, 0:12:16.400 --> 0:12:20.520 and none of that kind of I guess like fulfilled 0:12:20.559 --> 0:12:24.040 like Elliott Stamon, which is a majority in the boardroom. 0:12:24.160 --> 0:12:27.320 So this is where we are, and they're calling it 0:12:27.440 --> 0:12:29.800 requested a meeting for December tenth, which is one of 0:12:29.800 --> 0:12:33.960 the busiest traveling season in the US in the world, 0:12:34.040 --> 0:12:36.840 and so it's an interesting timing. And this is also 0:12:36.840 --> 0:12:39.040 one thing that Southwest is pointing at is like it's 0:12:39.280 --> 0:12:42.880 they call this a selfish request in their statements, saying 0:12:42.920 --> 0:12:45.360 that it is a time where Southwest should be executing. 0:12:45.840 --> 0:12:50.240 Southwest they in July adopted a poison pill, so they're 0:12:50.240 --> 0:12:52.000 taking this seriously for sure. 0:12:52.440 --> 0:12:54.680 Yeah, so a poison till is you know, as you know, 0:12:54.760 --> 0:12:58.800 something that stopped someone from the hostel takeover. And Elliott 0:12:58.840 --> 0:13:01.360 at that point had like close to ten percent, and 0:13:01.400 --> 0:13:03.480 ten percent is a threshold to call a special meeting, 0:13:04.040 --> 0:13:07.800 and the poison pillars for twelve and a half percent, 0:13:07.840 --> 0:13:10.160 so it stops Elliott from getting more shares than that, 0:13:10.240 --> 0:13:13.679 and once they do, acquiring more show would become really costly. 0:13:14.000 --> 0:13:18.000 So it's also a kind of rare occurrence these days. 0:13:18.000 --> 0:13:19.720 Not a lot of the company put in poison pills. 0:13:19.760 --> 0:13:22.400 But again, Southwest is life full of surprises. 0:13:23.040 --> 0:13:27.080 Yeah, tell me about it just before you go. How 0:13:27.440 --> 0:13:31.520 when these things unfold, is like Elliott Managements what they 0:13:31.559 --> 0:13:34.000 want now like here's the best bid, but like I'll 0:13:34.000 --> 0:13:36.839 take a little bit less, or do they really want 0:13:36.880 --> 0:13:39.080 to replace all these board seats, et cetera, et cetera. 0:13:39.120 --> 0:13:41.400 So from our reporting, actually both sides have like spent 0:13:41.480 --> 0:13:43.440 a lot of time trying to figure out like how 0:13:43.440 --> 0:13:46.560 to not go to a fight, like whether we can 0:13:46.600 --> 0:13:49.440 do like Elliott had asked for majority seats. So at 0:13:49.440 --> 0:13:52.920 one point they nominated ten directors, and then Southwest Change 0:13:52.960 --> 0:13:54.839 came back and said, well, six of our directors left, 0:13:54.880 --> 0:13:57.080 were three seats open, which you pick three instead? You know, 0:13:57.080 --> 0:13:59.760 it's always a constant negotiation, is it? Three is a ten? 0:14:00.280 --> 0:14:03.600 And I'm sure everything has been discussed. Everything you know 0:14:03.679 --> 0:14:06.520 on the table has been has been talked about, and 0:14:07.480 --> 0:14:09.760 but this is this is this is it? Like this 0:14:09.800 --> 0:14:14.040 will be up to shareholders to vote on who actually 0:14:14.080 --> 0:14:16.400 gets the majority in the boardroom. 0:14:16.480 --> 0:14:18.840 All right, Crystal, thanks a lot, really appreciate it. Crystal 0:14:18.840 --> 0:14:21.200 see joining us Bloomberg US Deals reporter. 0:14:21.280 --> 0:14:23.240 That's kind of fuss fun something to talk about. 0:14:23.400 --> 0:14:24.120 I know, I like it. 0:14:25.600 --> 0:14:29.480 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:14:29.560 --> 0:14:32.240 weekdays at ten am Eastern on Affo card Playing and 0:14:32.360 --> 0:14:35.280 broyd Otto with the Bloomberg Christmas App. Listen on demand 0:14:35.320 --> 0:14:39.640 wherever you get your podcasts, or watch us live on YouTube. 0:14:40.600 --> 0:14:42.680 Ale steal here alongside John Tuger and pauls we need. 0:14:42.720 --> 0:14:45.360 This is Bloomberg Intelligence Radio. We are broadcasting to live 0:14:45.400 --> 0:14:48.520 from Interactive Broker Studio right here in midtown Manhattan. Those 0:14:48.560 --> 0:14:51.160 bond guys are still sleeping, but we're here and we're 0:14:51.160 --> 0:14:51.960 definitely working. 0:14:52.040 --> 0:14:52.560 Also working. 0:14:52.600 --> 0:14:56.280 Christina Hooper, chief Global market strategist over at Invesco. She 0:14:56.360 --> 0:15:00.800 joins us now in studio. Christina, I keep but yeah, okay, 0:15:00.800 --> 0:15:03.080 it's forty six record highs potentially if we close at. 0:15:03.000 --> 0:15:05.560 These levels for the SMP. Do you buy it? 0:15:05.600 --> 0:15:07.920 As in, are we climbing a walla warry? Or is 0:15:07.920 --> 0:15:10.240 this like a fundamentally lead driven rally and do you 0:15:10.240 --> 0:15:10.600 buy it? 0:15:10.920 --> 0:15:13.600 I do buy it, so for a few reasons. First 0:15:13.680 --> 0:15:17.400 of all, we have central banks at our back. And 0:15:17.480 --> 0:15:20.280 it's not just the FED easing. We have a number 0:15:20.440 --> 0:15:24.800 of central banks easing. It's an environment of accommodation and 0:15:24.840 --> 0:15:27.840 that is supportive of risk assets, including equities, and I 0:15:27.880 --> 0:15:32.000 would argue that is the single largest driver of markets 0:15:32.080 --> 0:15:34.680 right now. But we also have an economy that is 0:15:34.720 --> 0:15:38.840 on pretty solid footing in the United States, and actually 0:15:38.880 --> 0:15:42.520 elsewhere not so bad either. We're getting stimulus from China, 0:15:42.600 --> 0:15:45.240 so I think the global picture is quite good, but 0:15:45.400 --> 0:15:48.520 in particular in the US, I think that this is 0:15:48.520 --> 0:15:51.360 an economy that is going to slow only modestly, and 0:15:51.400 --> 0:15:54.440 then is going to quickly reaccelerate, probably by the end 0:15:54.480 --> 0:15:55.640 of this year early next year. 0:15:56.200 --> 0:15:59.680 All right, Given that background stocks versus bonds, let's start there. 0:16:00.600 --> 0:16:03.360 So I think there's a place for both in one's portfolio. 0:16:03.880 --> 0:16:06.880 It's important to be well diversified. I would err on 0:16:06.920 --> 0:16:10.200 the side of an overweighting of stocks relative to bonds, 0:16:10.240 --> 0:16:13.000 but I still see an attractive picture, especially now that 0:16:13.080 --> 0:16:16.560 yields have backed up. As an entry point for fixed income. 0:16:17.360 --> 0:16:21.200 This is an economy. I mean, in a normal environment, 0:16:21.240 --> 0:16:24.560 what we would see is the FED cutting as an 0:16:24.640 --> 0:16:28.640 economy is in bad shape. This is a very different scenario. 0:16:28.840 --> 0:16:31.400 So we can go out on the risk spectrum when 0:16:31.400 --> 0:16:32.760 it comes to fixed income as well. 0:16:33.080 --> 0:16:36.000 Isn't the reacceleration though, a risk because if you get 0:16:36.000 --> 0:16:38.720 really reacceleration of growth and inflation, that means actually the 0:16:38.720 --> 0:16:40.840 Fed's going to have to revert and start hiking again. 0:16:40.880 --> 0:16:42.160 Is that a scenario for you. 0:16:42.720 --> 0:16:44.960 Well, that's certainly a risk, but I think it's an 0:16:45.040 --> 0:16:48.760 unlikely risk right now. And I'm looking at six months 0:16:48.760 --> 0:16:51.760 out and what I see as an attractive picture for equities, 0:16:51.960 --> 0:16:54.320 And let's face it, if we get to an environment, 0:16:54.320 --> 0:16:56.600 I think what's much more likely is that we have 0:16:56.720 --> 0:16:59.640 a FED that slows down is easy, and I'm very 0:16:59.680 --> 0:17:02.080 comfort with that because it's slowing down, it's easing for 0:17:02.200 --> 0:17:02.760 good reasons. 0:17:02.800 --> 0:17:04.000 So what do you think the FED will do for 0:17:04.040 --> 0:17:06.080 the remainder on the next three four meetings? 0:17:06.080 --> 0:17:06.560 Maybe? 0:17:06.920 --> 0:17:08.280 So I think that for. 0:17:08.320 --> 0:17:10.720 This year we're probably only going to get twenty five 0:17:10.760 --> 0:17:14.120 basis points more and I'm very comfortable with that through 0:17:14.160 --> 0:17:16.080 the end of twenty four, Okay, and then I think 0:17:16.119 --> 0:17:20.240 we will see continued easing next year and we'll probably 0:17:20.320 --> 0:17:22.920 get maybe one hundred, one hundred and twenty five basis 0:17:22.920 --> 0:17:26.760 points if all goes well with this economy, which knock 0:17:26.800 --> 0:17:29.080 on wood, will happen. 0:17:29.040 --> 0:17:31.360 If we do Tucker, did you have something? 0:17:32.320 --> 0:17:32.480 Oh? 0:17:32.520 --> 0:17:35.119 Oh if I'm just talking to myself, Ohky, it's. 0:17:34.960 --> 0:17:37.960 A distinction we need to make here over So, but 0:17:38.000 --> 0:17:39.320 if we only get twenty five to the rest of 0:17:39.359 --> 0:17:41.280 the year, and we have to price that out. Does 0:17:41.280 --> 0:17:43.640 that cause turbulence in the market or do you think 0:17:43.680 --> 0:17:46.440 then earnings will be strong enough to show guys we're good? 0:17:47.560 --> 0:17:50.439 I think so what we So we have gotten only 0:17:50.480 --> 0:17:53.359 a little bit of earning season thus far, but my 0:17:53.480 --> 0:17:58.600 takeaways are that the consumer is quite strong. Yes, there 0:17:58.640 --> 0:18:02.200 are there's weakness in lower income consumers, but the overall 0:18:02.240 --> 0:18:06.000 picture is a positive one. Companies are in pretty good shape, 0:18:06.600 --> 0:18:11.520 their plans to do more business travel next year. We're 0:18:11.560 --> 0:18:14.280 seeing a lot of different areas of real strength with 0:18:14.320 --> 0:18:17.560 a few pockets of weakness. So I think that absolutely 0:18:17.600 --> 0:18:23.280 can be the picture and can I think encourage investors 0:18:23.760 --> 0:18:26.120 to continue to move stocks higher this year. 0:18:26.840 --> 0:18:29.239 So are there sectors here that you want to play here? 0:18:29.280 --> 0:18:31.399 Because I'm I'm just looking at just at today's action. 0:18:31.480 --> 0:18:33.240 You know, the best performance has been some of the 0:18:33.240 --> 0:18:36.280 tried and true mag seven, the Invidios, the Metas, the 0:18:36.320 --> 0:18:39.360 Googles of the world. Are you comfortable still making that 0:18:39.440 --> 0:18:42.000 play or are you looking for value or in other 0:18:42.160 --> 0:18:42.879 parts of the market. 0:18:43.400 --> 0:18:46.280 So this is an environment that will support a big 0:18:46.359 --> 0:18:50.040 tent under which many asset classes can exist, Although I 0:18:50.119 --> 0:18:53.520 do think the greatest potential from here are the smaller 0:18:53.560 --> 0:18:57.320 caps and the cyclicals because they are so closely correlated 0:18:57.320 --> 0:19:00.280 with the economy, and if you believe there's going to 0:19:00.280 --> 0:19:03.720 be an economic reacceleration, then and I do, I would 0:19:03.840 --> 0:19:08.000 argue for at least a modest overweighting of the cyclicals 0:19:08.040 --> 0:19:08.840 and the small caps. 0:19:08.880 --> 0:19:10.480 It's interesting you say that because we had an article 0:19:10.520 --> 0:19:12.159 out today on the Boombrag that talked about how the 0:19:12.240 --> 0:19:15.080 russell is still ten percent below its record highs, but 0:19:15.119 --> 0:19:18.439 the small cap six hundred, which has more exposure to 0:19:18.480 --> 0:19:21.800 say quality, is almost near that twenty twenty one record. 0:19:22.240 --> 0:19:25.119 So is there a distinction within that small cap space. 0:19:25.560 --> 0:19:28.160 Well, I certainly think there is a distinction right now, 0:19:28.240 --> 0:19:30.160 but that could change. Again. 0:19:30.280 --> 0:19:31.200 We are just at. 0:19:31.080 --> 0:19:35.439 The start of what could be a significant economic reacceleration, 0:19:35.760 --> 0:19:38.920 so I won't dismiss parts of the small cap universe. 0:19:39.560 --> 0:19:43.000 What I would say though, is that right now, as 0:19:43.080 --> 0:19:46.200 there is still some hesitancy and apprehension, there's a fair 0:19:46.240 --> 0:19:48.880 amount of uncertainty about a lot of different things, including 0:19:49.080 --> 0:19:51.679 what the Fed's going to do and who's going to 0:19:51.680 --> 0:19:54.720 win the presidential election, we're likely to see more of 0:19:54.800 --> 0:19:58.120 a focus and a desire to be in quality. 0:19:59.680 --> 0:20:03.040 End the Bloomberg Index browser shows me kind of how 0:20:03.080 --> 0:20:06.000 the fixed income market is behaving, even though they're not 0:20:06.040 --> 0:20:10.320 working today. By far, the best performance has been US 0:20:10.359 --> 0:20:14.520 corporate high yield. Is that played out or is there 0:20:14.520 --> 0:20:15.760 still opportunity there? And I yield. 0:20:16.000 --> 0:20:18.320 I think there's opportunity there. It's not a surprise to me. 0:20:18.440 --> 0:20:21.879 In fact, I go back to the last time the 0:20:21.880 --> 0:20:25.000 FED was able to successfully tighten and avoid a recession, 0:20:25.200 --> 0:20:27.960 so that was ninety four ninety five. They began to 0:20:28.240 --> 0:20:32.359 cut in ninety five ninety six, and if you look 0:20:32.520 --> 0:20:35.480 at the first six months of performance for a variety 0:20:35.480 --> 0:20:38.760 of different asset classes, as the FED started to cut, 0:20:39.280 --> 0:20:43.360 high yield bonds did very well in that period. And 0:20:43.640 --> 0:20:48.120 I'm not surprised because they were cutting into a good environment, 0:20:48.320 --> 0:20:49.879 not dissimilar to where we are today. 0:20:50.640 --> 0:20:53.760 Do you think that the post election makeup will be 0:20:53.840 --> 0:20:55.480 a headwind or a tailwind? 0:20:55.520 --> 0:20:56.560 I can see a case for both. 0:20:56.600 --> 0:21:00.560