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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. 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 hour stops pushing KaiA heading into earnings from Morgan Stanley and bn Y Steve shefferoner Federated writing. Despite all of the headline risk and volatility, the relentless march of earnings growth continues to drive the market higher. Steve joined us now for more. Steve can want a good see it. How high is that earning spar going into earning season?

00:00:53
Speaker 3: Uh, it's the highest in a while.

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Speaker 4: I mean, expectations are that earnings are going to grow twenty two percent on a year of a year basis. That would be the strongest quarter since Q four of twenty twenty one coming right out of COVID.

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Speaker 3: We generally beat five to eight percent.

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Speaker 4: And so you know, is it impossible to see a thirty percent over your earnings growth number?

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Speaker 3: I think it is. I know it's likely, but it's possible, and it's broad based.

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Speaker 4: I mean, certainly tech and energy you're playing a big part here, but ten of the eleven sectors are likely to see positive growth. Healthcare is the only one it's not joining the party. What we're seeing is margin expansion at a rate equal to or better than any other period we've seen in our careers. And I can say that safely for all of us around the table. That's the big story. That's what's driving markets hire.

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Speaker 2: The story's great. It just depends how well priced that is right now. I know it's really really early dates, but it was touching gug just yesterday morning where it found like the beats weren't really being rewarded, but the message with being absolutely obliterates. If that stuff's got punished, i'd be am. A great example of that is that at a lesson or is it a premature.

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Speaker 4: I don't think it's just about beats and misses. I think one of the things that's happening is that the nature of risk is changing. It used to be that it was a growth or a value story or a factor story. It's who are AI winners and losers right now? And you're funding your AI capex by not spending on mainframes. And I think as the market looks at that, they're asking, well, is this something that's going to continue for an extended period of time because you can't really start to ask if AI capex is going to peak until the hyperscalers stop raising capital to increase even more on the capex site. So when you look at things like the chip trade, I think they have room to go because the demand continues to outstrip. I also think that it's going to get more volatile because the first leg of this was earnings moving higher. You could see these chip stocks and you can see their earnings jumping.

00:02:43
Speaker 3: Now.

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Speaker 4: The question the market's wrestling with is via long term contracts and the.

00:02:47
Speaker 3: Sustainability of this play.

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Speaker 4: Should the multiple revalue and anytime you're in a multiple revaluation story, it tends to be a little bit more volatible.

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Speaker 5: This has been incredibly complicated year because it's both a micro story and a macro story On the micro level. Yesterday, when we got the earnings reports, we did see pretty tremendous beats, and then we saw some of them with pretty paltry gains. Goldmanzacs is a perfect example. As the session grew older, those shares gained more and more. Yes, it was the commentary, but also it was this idea that disinflationary print on CPI would give the Fed more room not to hike rates. How much is this a rate hiking story as much as it is a micro story and a story of AI.

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Speaker 4: So if I were to rank them in priority order, I think the big story is earnings. That's really the underpinning of what's going on here. I think as it relates to the FED, I agree with that survey. I think what you can misread from Chairman Warsh is I don't think he's actually being hawkish or pivoting in a hawkish direction. I think what we're doing is we're going back to a different kind of FED guidance, and that is I'm going to be staunch in my defense of price stability in my comments, and I'm not going to tell you what I'm going to do.

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Speaker 3: I remember being a young analyst on.

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Speaker 4: Wall Street once here in Greenspan speak and he's about doing an interview, and he said, please don't ask me about monetary policy. I might be forced to launch a thirty minute answer where I tell you nothing. And I think that that's what you're going to see from Forest today in front of the Senate. I think he's trying to break the market's dependency on being spoon fed fed guidance. And I think that that can be misinterpreted by some as hawkish. I think what Wall Street is looking at is just as it would have been ridiculous to cut rates in the face of rising oil prices earlier this year, it's equally ridiculous to really be considering hiking rates until we see how all this plays out.

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Speaker 5: Putting aside Kevin O. Worsham, what is the actual decision of what he's going to do? Is it seems like the longer they remain on a hold, the more the punch bowl is available to all the investors on Wall Street, the more you can get these earnings that continue to outperform in a massive way from the big banks.

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Speaker 3: Why is that not how you see it? Essentially, Yeah, because I think when you.

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Speaker 4: Look at the bulk of this earnings growth, it's not coming from rate sensitive companies, right, It's not coming from smaller cap company. It's even the banks. While their numbers are good, and they were terrific and very good for the banks, they're not really driving the kind of thirty percent year of year growth that's really coming from tech, that's really coming from places like material that's really coming from places like industrials. The companies that are spending on chips have more money than the Lord himself. They don't need to borrow at the federal funds rate, and so I think that that earnings growth is in a lot of ways at this point, really independent of rates. What you see though, is that there's large swats of the economy middle income Americans, lower income Americans, smaller businesses that do care about rates, and they've been under pressure for three or four years. And look, we can quibble about this, but inflation rates two point six percent and the federal funds rate is three point seventy five percent.

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Speaker 3: That is that those.

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Speaker 4: Are real rates that are high relative to history, and I think they probably don't need to be there.

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Speaker 3: We just need to get through some of this noise for that to become a parent.

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Speaker 6: Do you think it's that cohort that being affected by those higher rates it's going to hold the FED back from having a potential hike.

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Speaker 4: Look, yeah, I think that's right, because I think what you would do by hiking rates is punish those that are already being punished. You're not going to slow down AI capex spend, which is pushing up memory prices. You're not going to slow down the high end consumer where higher rates mean more money from their you know, their kind of money market account or their savings, and they all have fixed rate thirty or three percent mortgages. So I think it would be counterproductive quite frankly.

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Speaker 2: Stay theyre related to it? Do you think the multiple is going to go up?

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Speaker 4: So that's been the thing that I think we've gotten right over the last couple of years is that if you're in an environment where margins are growing and the SMP is getting more profitable because of mixshift, because of more subscription based models, then it's unreasonable to think that the multiple doesn't follow.

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Speaker 3: And that's really been correct.

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Speaker 4: If you look at where margins have gone, so too has the multiple followed, and until that stop ups, I think that's right. So what used to be a kind of sixteen times you know, fair value we think is somewhere right now between twenty and twenty two. That doesn't mean that that lasts forever, but until these margins stop going higher, there's really no reason to think that the market would pay less.

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Speaker 3: For a higher market.

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Speaker 2: Stice right now obsess with potential downside. What I'm hearing from you is potential upside. What kind of upside are you thinking about?

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Speaker 4: So we're at nine thousand by the end of the next year on the SMP. We think that that's if you look at what that really represents.

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Speaker 3: Sounds like a big.

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Speaker 2: Number, sounds like a massive number.

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Speaker 4: It does, but it's a year and a half of average equity returns, you know, kind of high single digit, low double digit returns. That's on average what the SMP does. But we think that that's the direction to travel. The cappex continues to be there, the bottlenecks continue to be there, the pricing power continues to be there. This is the largest infrastructure build since the railroads, and the capacity that can come online that would derailed us.

00:08:02
Speaker 3: These are hard assets. This isn't like a software upgrade.

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Speaker 4: It's three to five years to build that chip capacity that then makes these prices go the other way.

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Speaker 3: So we think that this has legs stay with us.

00:08:13
Speaker 2: More Bloomberg surveillance coming up after this. The big banks in focus, First Morgan Stanley raising its price target on JP Morgan citing better than expected guidance for that interest income whose second call from Barclay's raising its price target on Goldman, highlighting better than expecting trading and investment banking fees. And finally, Wells Fargo raising its price target on b of A, citing strong underlying financial trends. That stock is up again this morning. We're higher y point five percent. Let's stick with our top story. Wall Street delivering a blowout earning season, America's oldest bank BNY adding to those results, posting back to back quarters of record revenue and sales. Joining us now to this us is the BNYCFO Dermott mcdonoughot. Welcome to the program, buddy. It's good to see you record performance in Q one again in Q two. What's behind the activity, Dermot? And the question I think that applies to your bank and so many others this morning is can this continue?

00:09:15
Speaker 7: Thanks for having me, Jonathan, and great to be with you. When I was getting ready for the show this morning, I wasn't too sure whether to put the tie on or put the England shirt on. So I put the tie on. But hopefully you'll bring it home today and enjoy the match this afternoon. Listen be and why today great results. We're really pleased with the performance. We feel like the firm is humming at the moment. We've built the company for durability and to take advantage of opportunities like this that the market has presented over the last quarter. The US economy is strong. We continue to be positive on the US economy. There's a lot to be optimistic about in terms of what's happening. Full employment, the yield curve is behaving well. Flows are strong. And when you have a company like ours who has built a broad set of durable businesses and has been in this for a long time, with twenty percent of the world's investable assets flowing through your pipes every day, this shows up in kind of record net revenues, which we're just posting this morning of five point seven billion dollars. So as a company, we're very believed. Please, but we feel like we have more white space to go and more opportunity, and we're going to keep pushing on into the second half of the.

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Speaker 2: Year and dem record assets and the castady as well, north of sixty trillion. That's a record for the firm as well. You talked about it, you just alluded to it. There help us straw distinction between the bank drop and execution the environment and have a bank actually performed what's happening there.

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Speaker 7: So look, we started on this journey four years ago, and I can say confidently under Robin's leadership that Being White today is a materially different company than it was a few short years ago. And a couple of ill give you a couple of examples of that. We will talk this morning about this being our fourteenth quarter of consecutives year on year sales growth. This year alone, first half we've had two record sales quarters. Our mandates are growing in size. Ten percent of our sales this year have been with new logos. So that points to the fact that clients are seeing what we're doing, They see the reimagination.

00:11:26
Speaker 3: Of the firm.

00:11:27
Speaker 7: They want to partner with us more in many different ways, and that's showing up in the numbers.

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Speaker 3: One thing that we saw.

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Speaker 5: It was a sense of a real upgrade in terms of full year revenue guidance that you put up about ten to eleven percent year over year versus the five percent previously.

00:11:44
Speaker 1: What gives you confidence.

00:11:45
Speaker 5: Heading into the second half that the momentum can continue to the degree that we saw earlier this year.

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Speaker 7: So look, I live and breathe be and why I see the forty seven thousand people around the world working together as one delivering for clients, and that results in a strong pipeline, strong backlog. We're a better firm than today than we were a year ago. And so look, I think four years ago, if we had this backdrop that we're experiencing over the last quarter, we wouldn't have performed as well as we have this quarter. So we're making that one percent better at the firm every day, and that compounded over a long period of time is going to give us like the confidence that we can deliver for our shareholders, for our clients, and for our employees over a long period of time. So we're very bullish at the US economy. We're very bullish being why and our strategy we feel like it's working, and we kind of feel like that we have a lot of opportunity ahead of us. There's no shortage of work to do to make this company better debt.

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Speaker 5: One thing that we've seen pretty much across all the banks is that expenses came in heavier than a lot of people had expected. I wonder how much of this is structural, that there is a set and everything is getting more expensive, whether it's the personnel that potentially can drive the change and the performance, as well as some of the technological advancements that you need to be investing in.

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Speaker 7: So the way, look, I obsess about expenses every day, as you would imagine me to do. The expense growth that we've seen this quarter, and we updated our guide for the full year to six to seven percent, it's largely revenue related plus investments. Over the last three years, we've roughly invested about half a billion dollars in the firm and strategic growth initiatives, and that's largely been offset by our efficiency and transition to the platform operating model. So you can see that the investments that we've made over the last three years. You see that proof in today's results, and we're going to continue to invest in a thoughtful improveent manner and that will deliver durable results over the long term. I'll say this on the call today. We've developed new products, whether it's byside, trading for one borrow, plus products that weren't that meaningful to the overall revenue pie a couple of years ago are now delivering meaningful contributions to the revenue mix. So B and Y is innovating as well and partnering with clients and stitching the firm together to deliver integrated solutions that we believe will allow us to grow revenue in the future.

00:14:21
Speaker 2: I think to be fatty to them at ten consecutive corners of positive operating leverage speaks to some of the things you just said there that balance between cost discipline and investment. When it comes to investment, the focus right now is firmly on AI. Some companies seem to be rationing spending right now. Dermott. What comes out and the release from you and the team this morning is that your spending, the investment you've made on AI is translating into real business impact. Can you share with us were specifically and how this is trending.

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Speaker 7: So, look, we talked a lot about and we had a slide in our disclosure in Q one about what we're doing in AI. Like in the context of B and Y and a four billion dollar engineering budget, our investment in AI is modest in the context of the overall budget. We've got a good strategy at B and Y. We're very proud of it. We've been at it right since the start, since the launch of CHATYBT, and we're very proud of the platform that we've built Eliza. It's lm agnostic and so we feel like we have the right structure in place. We've had broad adoption with our people around the firm. We've upskilled people pretty much. One hundred percent of people at B and Y now know how to use AI and are doing it in their daily work. And we think about enterprise productivity and individual productivity, and Robin says, there's lots of times AI for everyone, for everywhere, for everything, and it's all about creating capacity and productivity so that we can allow the firm to grow and use AI to enable that. So we're AI optimists at B and Y. We believe it can upscale our people, allow them to do more interesting work and at the same time partner with clients Girl affirm.

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Speaker 2: Stay with us More Bloomberg surveillance coming up after this. The AI build out growing as a political flashpoint. New York State leading the pushback, becoming the first in the nation to issue a moratorium on new Hyperscandid Data Centres PGM, the largest grid operator in the country, saying data centers have increased supply costs by more than sixty percent. The former US COMMAS Secretary Gener Ramondo is leading Raised US, a non partisan organization designed to help the American labor force adapt to AI. The secretary joins us now for more. Madam Secretary, welcome to the program. Let's just start the conversation with the kind of work you're doing and what we need to know this morning.

00:16:46
Speaker 1: Good morning, good morning.

00:16:47
Speaker 8: So Raise US is the new organization that I am leading, and our mission.

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Speaker 1: Is very simple.

00:16:55
Speaker 8: You know, we want the US to lead the global AI competition, but to have a strategy so that every American worker gets brought along. And right now we're not headed down that path. And it's something I'm deeply worried about. We have extremely outdated infrastructure, social insurments, support for workers, incentives for companies to retrain and redeploy instead of just laying people off. And so I think it's time that we get to work. We're working with governors of both parties. This is a non partisan, non political effort with companies and just trying to find some creative, innovative solutions. Because I will tell you one of my greatest worries is even if America has the best chips, the best models, the most data centers, but doesn't have an intentional plan to manage this transition and falls into a period of very high unemployment, we will lose the AI race because that will be too destabilizing.

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Speaker 3: What's your reaction.

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Speaker 6: Though to what New York Governor Kathy Holkl is doing in terms of the moratorium, because this potentially can slow down how quickly the US can advance in the AI space.

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Speaker 8: Right, So I think this is a perfect example of what we're trying to do, which is to say Americans are worried. Right, They're worried about When the average American hears AI.

00:18:20
Speaker 1: What they hear is I'm going to lose my job, my.

00:18:23
Speaker 8: Electricity prices are going up, my kids won't have a job.

00:18:27
Speaker 1: I've just spent money for college.

00:18:29
Speaker 8: Those are real legitimate, valid anxieties.

00:18:34
Speaker 1: And we have to find solutions to address them.

00:18:38
Speaker 8: So while I don't think like no one is happier than the President of China that we are slowing down data center construction, that being said, it's not okay if people's electricity bills are going up, or people's water bills are going up, or people's economic security is going down because of you know, AI companies. So we must find a way to do both. Steam ahead with data centers and technology and make sure you know, these companies pay their fair share so other folks electricity bills don't go up and people have frankly a job, a meaningful job in an AI economy.

00:19:21
Speaker 6: You've recently were an opinion piece where you said, what we need is a new grand bargain between the public and private sectors when it comes to AI.

00:19:28
Speaker 3: What do you make of.

00:19:29
Speaker 6: The Trump administration looking at taking equity stakes another version of industrial policy that some of which started under the Biden administration.

00:19:40
Speaker 8: Yes, so listen, I do think it is a good idea for the American people and the American government to share in the extreme.

00:19:52
Speaker 1: Profit and commercial benefit of AI.

00:19:57
Speaker 8: That being said, I personally have always been a bit of a critic on the government taking big equity shares with companies. You know, I'm still a believer in capitalism, however many flaws it has right now in the way it's playing out in America. And I just you know, of the government owning the means of production is you know, the definition of socialism. I think it's creates a lot of problem potential for corruption. So I think the intention is a good intention. Personally, I just get very nervous if we're stepping down a path of like a state owned enterprise, et cetera.

00:20:37
Speaker 1: So I I'd like to find another way.

00:20:40
Speaker 5: How do you balance the idea of trying to create some sort of pact with the US worker, with the US average citizen, while also maintaining a US edge versus China?

00:20:51
Speaker 3: Right, I mean, do you want to sort.

00:20:53
Speaker 5: Of create this sense that there is isolation between the two stacks that I just wonder what the ultimate goal is, what the which you're hearing from some of the folks you're speaking with.

00:21:04
Speaker 8: You know, I think if you talk to the tech companies in AI, many of whom are partners with US and raise US, they feel that they're in a global arms race to get ahead of each other and also get ahead of China and other technologies.

00:21:20
Speaker 1: And I understand that.

00:21:23
Speaker 8: But I will say this, if we as a nation put our blinders on, and if every company just moves forward at pace to implement AI to increase profits without a people strategy, and if we wake up in a couple of years with millions or tens of millions of Americans put out of work because of AI, we will lose the global AI race because there will be massive regulatory backlash. It will be massively destabilizing to our economy, It'll be recessionary, it'll be massively destabilizing for our politics. So what I'm trying to say to business leaders, to governors, to Congress, to everyone in America is let's get together and find solutions.

00:22:15
Speaker 1: Let us be intentional.

00:22:17
Speaker 8: About how we transition to an AI economy, because quite frankly, every American deserves to see themselves productive and having a good job in that economy. And until we convince the people of America that there's a good future for them in.

00:22:32
Speaker 1: An AA economy, you're going to continue to.

00:22:34
Speaker 8: See what you just asked me about, moratoriums on data centers, other kinds of uprising, and that's bad for America.

00:22:42
Speaker 1: That's bad for everyone in America.

00:22:45
Speaker 2: This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, antient politics. 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 bused this out. Mm hmm