WEBVTT - Goldman Sachs Chief US Equity Strategist David Kostin Talks Seeing Fed Cutting Rates Three Times

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>We're not going to bring in David Cosson. He's Goldmen

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<v Speaker 2>Sacks's chief US equity strategist on the latest price target

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<v Speaker 2>increase for the S and P five hundred, because of course, David,

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<v Speaker 2>really interesting here. This is by far and not the

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<v Speaker 2>first time you've done this this year. At what point

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<v Speaker 2>do tariffs become problematic for you?

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<v Speaker 1>Well, the idea of tariffs are baked into our forecast

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<v Speaker 1>right now. We're looking for earnings growth this year of

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<v Speaker 1>around seven percent, and earn his growth in twenty twenty

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<v Speaker 1>six also around seven percent, and investors are now starting

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<v Speaker 1>to turn their attention into next year's earnings. I know

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<v Speaker 1>we're only early part of July of twenty twenty five,

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<v Speaker 1>but the investment analysis looks into next year and discounts

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<v Speaker 1>that back. So the idea of tariffs, we're assuming somewhere

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<v Speaker 1>in the mid teens likely to be the final level.

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<v Speaker 1>The effective rate for tariffs last year, as you know,

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<v Speaker 1>is around three percent. It's already up in the low

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<v Speaker 1>double digits right now, but the real insight will probably

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<v Speaker 1>be late this year when we'll have sort of a

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<v Speaker 1>run rate level of tariffs. But from our perspective, the

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<v Speaker 1>market investers are soorth thinking about the mid level of

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<v Speaker 1>teens mid teens, and that's probably what's going to support

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<v Speaker 1>an earnest growth of seven percent.

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<v Speaker 3>That's why the market was higher.

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<v Speaker 4>Companies seem to have near cas aar wrote for us

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<v Speaker 4>at Bloomberg Opinion, really fat margins right now, so they

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<v Speaker 4>can absorb to some extent these tariffs.

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<v Speaker 3>One thing about the falling way.

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<v Speaker 1>In the last thirty years, margins have gone from five

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<v Speaker 1>percent to twelve percent, that's net margins, the S and

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<v Speaker 1>P five hundred and five to twelve. What are the

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<v Speaker 1>driving factors of that? What are the building blocks? Lower

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<v Speaker 1>cost of good souls, lower cogs. About half of the

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<v Speaker 1>five percentage points of that improvement in margins comes from there.

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<v Speaker 1>Lower tax rates another reason, lower interest expense. Those are

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<v Speaker 1>the reasons why margins have moved higher. And so we

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<v Speaker 1>look out in the next couple of years. Tariffs are

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<v Speaker 1>a way of increasing the cost of good soul. That's

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<v Speaker 1>a downward pressure likely to be a downward pressure on margins.

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<v Speaker 1>Some of the debt that's rolling over for some companies

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<v Speaker 1>actually rolling over to higher level, and so Matt what

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<v Speaker 1>you want to think about this is the tariffs are

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<v Speaker 1>a downward pressure, and then who is going to pay

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<v Speaker 1>for those tariffs? Is that going to be the supplier?

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<v Speaker 1>Is that going to be the consumer? Who's going to

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<v Speaker 1>pay for that?

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<v Speaker 4>What do you think about the effects of one big,

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<v Speaker 4>beautiful bill now that we have it, and Stephen was

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<v Speaker 4>obviously a huge part of creating that legislation. Now that

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<v Speaker 4>we have that certainty and now that you can investors

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<v Speaker 4>can calculate put it into their.

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<v Speaker 3>Models, is it a good thing? Well?

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<v Speaker 1>I think the clarity, as you just referenced, is really

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<v Speaker 1>the important thing for portfolio managers and for corporations. Corporate

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<v Speaker 1>executives thinking about capital spending decisions given in policies, things

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<v Speaker 1>like that all are enhanced when they have some clarity

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<v Speaker 1>on what the policy is likely to be.

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<v Speaker 3>So in that regard, the fact that it was passed.

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<v Speaker 1>Means you can look forward and see what are some

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<v Speaker 1>of the fundamentals, and the idea of the economy is

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<v Speaker 1>decelerating but still growing is an important backdrop. And the

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<v Speaker 1>idea that the Fed is likely to be cutting interest

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<v Speaker 1>rates three times to the Golden Zachs economics forecasts three

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<v Speaker 1>times starting in September twice next year. That is an

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<v Speaker 1>environment where bond yields are likely to also be lower.

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<v Speaker 1>Tenure treasure yields probably around the four point two percent,

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<v Speaker 1>and that supports our forecast of around twenty two times

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<v Speaker 1>multiple for the SNP five hundred. So that valuation which

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<v Speaker 1>is current today. If we think forward Ernie's growth seven percent,

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<v Speaker 1>that lifts the s and P five hundred and our

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<v Speaker 1>view to six thousand, six hundred by the end of

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<v Speaker 1>this year, sixty nine hundred, six nine hundred by middle

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<v Speaker 1>of twenty twenty six for next twelve months. That's the

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<v Speaker 1>general backdrop. Again, the clarity on policy is important, and

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<v Speaker 1>now investors have moved beyond sort of this year, really

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<v Speaker 1>beyond the tariff discussions. The view is it will be

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<v Speaker 1>eventually resolved, and what's the general thrust of a business.

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<v Speaker 2>You can make an argument that some of the market

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<v Speaker 2>has already been looking beyond some of the current policies,

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<v Speaker 2>trying to feel the impact of deregulation, lighter regulation. KBW

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<v Speaker 2>bank indets now ought more than twelve percent. It's almost

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<v Speaker 2>Super Bowl aka bank earnings next week, and so that'll

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<v Speaker 2>kick off this earning season will be really interesting to

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<v Speaker 2>watch every single bank except one in the KBW Bank

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<v Speaker 2>indexes up on the year. Have we seen the best.

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<v Speaker 3>It's going to get? I think important aspect to think about.

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<v Speaker 1>We've had an incredible twenty five percent rally in the

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<v Speaker 1>last ninety days, a twenty five percent rally in the

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<v Speaker 1>S and P five hundred. It is a really really

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<v Speaker 1>narrow breath market. It's really led by some of the

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<v Speaker 1>largest companies in the market. That's fine, but the idea

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<v Speaker 1>of the median stock, the typical company is down eleven percent,

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<v Speaker 1>eleven percent lower than it's fifty.

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<v Speaker 3>Two week high.

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<v Speaker 1>If you look at the MidCap stocks, look to the

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<v Speaker 1>Rustle two thousand, these stocks are down basically you're ten

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<v Speaker 1>percent or they are trading ten percent lower than their

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<v Speaker 1>then fifty two week high. As a consequence to that,

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<v Speaker 1>the idea of some opportunities in these other sectors are

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<v Speaker 1>where we are focusing our discussions with portfolio managers. The

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<v Speaker 1>alternative within the financial sector, banks have had a terrific rallies.

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<v Speaker 1>You just referenced a lot of dividend increases once the

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<v Speaker 1>CCAR results came out, and so what are some of

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<v Speaker 1>the areas within the financial community that have that have

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<v Speaker 1>lagged on a relative to our model and the alternative

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<v Speaker 1>asset managers, there's certainly one one category that we focus on.

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<v Speaker 4>What do you think about the.

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<v Speaker 3>FED path?

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<v Speaker 4>As you've pointed out, people are already looking to twenty

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<v Speaker 4>twenty six, right, and at that point President Trump is

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<v Speaker 4>going to be able to put very likely a yes man, right,

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<v Speaker 4>someone who wants to cut rates dramatically.

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<v Speaker 3>In the chair.

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<v Speaker 4>Do you expect that to that person to be able

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<v Speaker 4>to push those cuts through? I mean, are you looking

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<v Speaker 4>at three percentage points cut in twenty twenty six?

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<v Speaker 1>Well, what matters more for the stock market is real

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<v Speaker 1>interest rates, real tenured bond yields, So you think amnominal yields,

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<v Speaker 1>we're looking at something in the vicinity of a four

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<v Speaker 1>four quarter percent, which is supportive of a valuation as

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<v Speaker 1>they indicate around twenty two times forward multiple. And that

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<v Speaker 1>is the area that investors in the equity market are

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<v Speaker 1>probably more focused on than specifically the path of the

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<v Speaker 1>FED policy. Now are baseline forecast is you're going to

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<v Speaker 1>get because inflation is going to come lower, the economy

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<v Speaker 1>is gonna still grow, and the FED has that capacity

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<v Speaker 1>to be lower and lowering rates. So that's the general

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<v Speaker 1>path who we're anticipating and that supports the market is

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<v Speaker 1>generally moving in a positive direction at this juncture.

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<v Speaker 2>So I'm going to ask our producers to pull up

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<v Speaker 2>a chart g hashtag.

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<v Speaker 3>BTV four four zero zero.

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<v Speaker 2>This is a Bloomberg Intelligence analysis of the top twenty

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<v Speaker 2>or so firms that have benefited most from tariffs in

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<v Speaker 2>the top or the bottom most impacted, like the worst performers,

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<v Speaker 2>the ones that are most impacted by tariffs. The divergence

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<v Speaker 2>is real.

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<v Speaker 3>There has been a.

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<v Speaker 2>Bounce back from the bottom of April. However, the best

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<v Speaker 2>performers have been up almost twenty percent. The worst formers

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<v Speaker 2>are performers are still down almost five percent. How does

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<v Speaker 2>Goldman think about this? In baskets? What does well? And

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<v Speaker 2>do the ones that have not performed well do they

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<v Speaker 2>continue to lag into next year?

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<v Speaker 1>Well, the idea of margins is at the core of

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<v Speaker 1>investor discussions right now that we have, which is who

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<v Speaker 1>is going to pay for those margins? Is that going

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<v Speaker 1>to be the supplier, Is that going to be the

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<v Speaker 1>corporation absorbing them? Is that going to be the consumer

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<v Speaker 1>at the end of the day of paying for that?

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<v Speaker 1>And in historically speaking, it's the consumer that ends up

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<v Speaker 1>absorbing much of that cost.

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<v Speaker 3>And now a lot of companies.

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<v Speaker 1>Advanced their inventory at the beginning, so they that makes

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<v Speaker 1>the analysis a little bit more complicated. We look at

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<v Speaker 1>the share prices that you just showed in your graph,

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<v Speaker 1>that could be complicated by the idea of this is

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<v Speaker 1>how the share prices are performing, what about the fundamentals?

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<v Speaker 1>And we're going to kick off next week on the

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<v Speaker 1>fifteenth of July with all the bank earnings, and the

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<v Speaker 1>next six six weeks or so, we'll have much more

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<v Speaker 1>clarity in the question of how is it that companies

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<v Speaker 1>are dealing.

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<v Speaker 3>With these tariffs? Who remember the tariffs only.

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<v Speaker 1>Partially were implied were applied during the second quarter, so

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<v Speaker 1>this second quarter still is uncertain. Now it's been pushed

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<v Speaker 1>out in many cases really until maybe perhaps August first,

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<v Speaker 1>so there's still a transition process here. But in terms

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<v Speaker 1>of those stocks, there's only a lot of questions as

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<v Speaker 1>to who's going to pay for the tariffs and our

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<v Speaker 1>view generally as the consumer, it's going to be ultimately

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<v Speaker 1>fast on the consumer.

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<v Speaker 3>You were you were here for an historic event.

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<v Speaker 4>David Nvidia passed four trillion dollars in market cap. We've

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<v Speaker 4>fallen back a little bit below that, but we're there,

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<v Speaker 4>and we've seen this company and this industry power the

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<v Speaker 4>US stock market for three years now in a row.

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<v Speaker 4>How much more room is left for this gold rush

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<v Speaker 4>to continue? I mean, where do you think we are

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<v Speaker 4>if you were to compare AI opportunity to a baseball game,

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<v Speaker 4>and what inning are we right now?

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<v Speaker 1>Well, let's think about that in baseball getting there's sort

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<v Speaker 1>of phases of that. If we think about phase one, two, three,

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<v Speaker 1>and four, in Vidia is absolutely in phase one.

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<v Speaker 3>We'll call that the early innings that.

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<v Speaker 1>Are necessary in order to build out the infrastructure. That's

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<v Speaker 1>the leading edge of the infrastructure. That then you have

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<v Speaker 1>the utility companies, you have other semi conductor companies, you

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<v Speaker 1>have some of the hardware companies. That's sort of the

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<v Speaker 1>second phase and the infrastructure. Now where we are, I

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<v Speaker 1>would say, is where two and a half years November

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<v Speaker 1>of twenty twenty two is when chat GPT was introduced.

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<v Speaker 1>We're two and a half years in. We'll say perhaps

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<v Speaker 1>that whole transition process is maybe five years, so we're

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<v Speaker 1>sort of halfway to first answer your question, maybe we're

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<v Speaker 1>halfway through one scenario and so you've gone from the

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<v Speaker 1>leading edge in the video, you've had the infrastructure, now

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<v Speaker 1>you have the applications. And most companies. When we talk

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<v Speaker 1>to most companies and ask how is it that they're

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<v Speaker 1>using AI, they're still looking for getting their data codified

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<v Speaker 1>in a way that can allow the AI generator of

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<v Speaker 1>AI perhaps to make them more efficient.

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<v Speaker 3>So that's the third phase.

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<v Speaker 1>The fourth phase is what's the long term implications for corporates?

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<v Speaker 1>And so another way of sort of summarizing this is,

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<v Speaker 1>is the transmission mechanism for AI through the margin channel

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<v Speaker 1>better margins, more efficiency, or is it through the revenue channel?

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<v Speaker 1>Is that companies can boost their output and get better sales.

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<v Speaker 1>Those there are different companies that are that are that

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<v Speaker 1>are going to benefit or be different ways in which

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<v Speaker 1>they can benefit in So this is one of the

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<v Speaker 1>things I find most surprising is that only half the

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<v Speaker 1>companies in the S and P five boundary chose to

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<v Speaker 1>discuss AI on their quarterly conference calls. Only half the

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<v Speaker 1>other half chose we're mute on the subject.

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<v Speaker 2>David, we got to leave it there. We're hitting a

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<v Speaker 2>hard break. That is, David Cosson of Goldman Sachs know

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<v Speaker 2>you're on the road a lot, so appreciate you joining

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<v Speaker 2>us here in studio.