Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. Ohmar Aguilar, Schwabasse and
Speaker 2: Management writing, we are getting some corrections within the frothy
Speaker 2: areas of the market. It is time to use volatility
Speaker 2: to rebalance exposures to reduce concentration. I'm joined us now
Speaker 2: for more. I'm always good to get your thoughts on things, sir.
Speaker 2: Let's get into it. What would you be reducing right now?
Speaker 2: What would you be taking advantage of?
Speaker 3: Well, we have been experiencing one of the biggest and
Speaker 3: largest momentum markets that we have had since the late nineties,
Speaker 3: and think, you know, the exposures that people may have
Speaker 3: had to the traditional that momentum you know type trades
Speaker 3: are very high, and I think we have been encouraging
Speaker 3: clients over the last you know, two months to try
Speaker 3: to use this periods of volatility to try to reduce
Speaker 3: exposure to that momentum trade. We have seen these, you know,
Speaker 3: that can actually go very quickly as you know, the
Speaker 3: AI trade expending on capex and increasing capex. Continue to
Speaker 3: just emphasize that sort of megacap you know, dominance that
Speaker 3: we have seen. You know, one of the statistics that
Speaker 3: we keep on showing is that you know, only seventeen
Speaker 3: percent of stocks within the S and P five hundred
Speaker 3: have been able to outperform the market this year.
Speaker 4: So that tells you a lot of that level.
Speaker 5: Of concentration that you know, if we go back in history,
Speaker 5: you know, when it comes down to momentum trades, they
Speaker 5: tend to be online very very quickly, and we have
Speaker 5: seen some of these headwachs already over the last.
Speaker 4: Couple of months.
Speaker 2: I've heard this sycrament repeatedly throughout the whole year, and
Speaker 2: if I listen to people as they offer that encouragement
Speaker 2: to move out of these names, I would have missed
Speaker 2: out on the rally because that's what supported the index.
Speaker 2: What are you suggesting paper should buy instead?
Speaker 5: Well, I think if you look at the fundamentals of
Speaker 5: the economy and you look at where what is happening.
Speaker 5: You know, we have been encouraging clients to just take
Speaker 5: this Barbelle approach and take a look at the fundamentals
Speaker 5: of what is the corporate.
Speaker 4: Earnings growth that you see on these areas.
Speaker 5: You know, normally what you see in this you know,
Speaker 5: probably not very clear economic picture because of the lack
Speaker 5: of data. You know, we have seen the softness in
Speaker 5: the labor market, We have seen softness in the house
Speaker 5: and market. We clearly see this deceleration of economic growth
Speaker 5: with inflation stays you know high, and what that would
Speaker 5: recommend is for people to start moving into the cyclical
Speaker 5: part of the market and being more defensive. We're not
Speaker 5: necessarily thinking that the economy is going to crush or
Speaker 5: is going to go into very hard landing.
Speaker 4: But clearly we see you know, the potential.
Speaker 5: For these to go to US law down and only
Speaker 5: companies with a strong balance will do. We actually saw
Speaker 5: on the performance of dividend payer stocks you know, this year.
Speaker 5: This is the this is the opportunity to take a
Speaker 5: look at those companies that can.
Speaker 4: Actually do well.
Speaker 5: So starting to go into that part of the market
Speaker 5: is started, well, interest rates were probably coming down if
Speaker 5: they already started the FED, you know, reducing rates.
Speaker 4: That also provides a little bit of ability.
Speaker 5: For cyclicals and sort of mid sized companies to start
Speaker 5: doing well. And I think I will emphasize the fact that,
Speaker 5: you know, earnings potentially is sort of the biggest part
Speaker 5: of what the market might look at.
Speaker 6: OMAR does Defensive means something different today than it meant,
Speaker 6: say five years ago.
Speaker 5: Stability, Lisa, stability is what we actually think about. Defensive
Speaker 5: is not the traditional consumer staples utilities trade and in fact,
Speaker 5: utilities tends to be more driven by AI these days
Speaker 5: than what is the traditional AI.
Speaker 4: But it's really more.
Speaker 5: Stability in earnings what we actually think about being defensive.
Speaker 5: You know, higher quality names in terms of profitability and
Speaker 5: profit margins. You know, stability is a big part of it.
Speaker 5: Do you think about it companies that did very well
Speaker 5: through all this period of uncertainty around targets and around
Speaker 5: you know, labor market costs increasing, et cetera. Where those
Speaker 5: companies that had very good profit margins, So the are
Speaker 5: the ones that are able to steal not necessarily pass
Speaker 5: through the increased prices to the consumers. You know, those
Speaker 5: companies that are squeezing their profit margins will have no
Speaker 5: choice to actually pass.
Speaker 4: Through those prices to the consumers.
Speaker 5: So we clearly emphasize that ability of continue to have
Speaker 5: sustainability of earnings, quality of earnings, and healthy profit margins.
Speaker 6: A number of people have come on the show this morning,
Speaker 6: and I've talked about how there still is quite a
Speaker 6: bit of dynamism under the surface, and you talked about
Speaker 6: the cyclical sides of the market that could potentially do better,
Speaker 6: especially if the Fed cuts rates.
Speaker 7: Again next month.
Speaker 6: At the same time, people are seeing more inflationary pressures
Speaker 6: come in, whether it's from stimulus efforts, whether it is
Speaker 6: from the energy costs. And I'm just wondering whether increasingly
Speaker 6: the idea of diversification is starting to look very different
Speaker 6: for you, with the bond market maybe not having the
Speaker 6: same kind of profiles it has in the past.
Speaker 5: Well, the versification is clearly the name of the game,
Speaker 5: and that has not going to change. I think the
Speaker 5: main concern that we continue to have is the fact that, yes,
Speaker 5: as we see in the bond market, you know, a
Speaker 5: steeper yield curve when we see inflation expectations continue to rise,
Speaker 5: and that is a big component of what I think,
Speaker 5: you know, we may see we were starting to see
Speaker 5: a little bit of movement on the credit market.
Speaker 4: Clearly this is the time where you.
Speaker 5: Know, diversification and maintain the levels of quality in the
Speaker 5: bond selection is actually a key part of it. I
Speaker 5: don't necessarily think that duration is sort of a play
Speaker 5: in the mode market at the moment, but I guess
Speaker 5: the expectations have been said. But I think the shape
Speaker 5: of the yield curve and the movements that you have
Speaker 5: as you see you know, sticky inflations and you see
Speaker 5: a continuation of that expectations that we're going to have
Speaker 5: a more steeper year cleve is sort of a big
Speaker 5: part of what we are encouraging clients to look at.
Speaker 5: On the equity side, again, you know earnings, you know potential,
Speaker 5: and diversification suggests reducing the concentration. And I cannot emphasize
Speaker 5: that even more because you know the level of concentration
Speaker 5: that there is in terms of the majority of portfolios,
Speaker 5: it is you know, pretty high, and I think diversifying
Speaker 5: away from it even if the means that having to
Speaker 5: buy some of the companies that have been underperforming this
Speaker 5: year is actually a healthy thing to do it for investors.
Speaker 2: And I can I just follow up because we get
Speaker 2: this argument so many times on this program. We can't
Speaker 2: just buy something counts for the sake of buying something,
Speaker 2: haunts for the sake of reducing concentration.
Speaker 1: Risk.
Speaker 2: Concentration has been a theme because that's where the earnings
Speaker 2: power has been. And I'm trying to understand why you
Speaker 2: want to go somewhere else. What is it about being
Speaker 2: somewhere else If it's just for the sake of being
Speaker 2: somewhere else.
Speaker 5: Well, I think the fundamentals or the corporations you know,
Speaker 5: tend to basically look at, you know, where the market
Speaker 5: and the price tends to be driven is about that
Speaker 5: earnings potential and the free type flow generation. And as
Speaker 5: you're right, you know, the companies that have done very
Speaker 5: well so far, you know, tend to be driven a
Speaker 5: lot by that earnings potential free cash flow generation, and
Speaker 5: in many cases that have provided a good performance. Now
Speaker 5: when you look at what that means in terms of
Speaker 5: sustaining that rate of earnings potential, that's where the risk
Speaker 5: you know stays and therefore you know the size of
Speaker 5: that you know, concentration.
Speaker 4: When you have companies that could be.
Speaker 5: Between three and four percent of the active risk that
Speaker 5: goes into your portfolios, that tends to be fairly risky. Now,
Speaker 5: there are areas that are still also generating significant amount
Speaker 5: of earnings that are significantly potential for free cas folow
Speaker 5: generation that are not you know, that high levels of valuation.
Speaker 5: So looking at those undervaluation companies that still have the
Speaker 5: same characteristics, the same factors with some of the others,
Speaker 5: but you don't necessarily have to go into these very
Speaker 5: high multiples is actually a very healthy thing to do.
Speaker 7: Where do I sign the moment? Where aren't they well,
Speaker 7: you know they.
Speaker 5: Are you know significant in areas in infrastructure, there are
Speaker 5: significant areas you know, within even technology.
Speaker 4: If you actually look just a technology excluding you.
Speaker 5: Know the max seven, you know there are components within
Speaker 5: you know, technology that are still pretty good that their
Speaker 5: capitals expenditure is still to increase their roes and the
Speaker 5: ros continue to use very healthy there are still being
Speaker 5: a very this is the time where stock selection matters
Speaker 5: and looking at factors that drive performance, you know matter
Speaker 5: you actually see areas within you know, the cyclical markets,
Speaker 5: whether it's in materials, whether it's in energy, in those
Speaker 5: you know, or is there's very very good opportunities that
Speaker 5: you can have.
Speaker 4: You know, again, we have been.
Speaker 5: Talking about it, you know, I've been talking into your
Speaker 5: program about you know, going into small caps. You know,
Speaker 5: we still think that it's early to go into small cap.
Speaker 5: There still need to be some structural pieces that could
Speaker 5: benefit those small cap companies. You don't necessarily have to
Speaker 5: go all the way and try to overweight small cap.
Speaker 4: But then looking at those you know that.
Speaker 5: Tend to be you know, multiples that are decent with
Speaker 5: earnings potential at Flickastion generation is the way to go.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: An increasing number of Democratic lawmakers calling for Senate Minority
Speaker 2: Leader Chuck Schumer to step aside after famous to stall
Speaker 2: members of his party from a Green to a Republican
Speaker 2: deal to reopen the government. Joining US now Henrida, Trace
Speaker 2: a Vader Partners Henrietta a reality check for politicians in Washington.
Speaker 2: They've had two already, they had one twelve months ago.
Speaker 2: In the general, the general public weren't happy with affordability,
Speaker 2: the cost of living in this country, and look to
Speaker 2: Republicans to try and fix it. And they're wanting to
Speaker 2: vote for whoever is going to come out with a
Speaker 2: good idea, and their ideology is not cemented, it's not fixed.
Speaker 2: They'll shift from one party to another with ease. You
Speaker 2: and I have talked about that. How do you think
Speaker 2: that sets us up for the midterms next year?
Speaker 1: Yeah, I mean, that's exactly what last Tuesday's election showed.
Speaker 1: It wasn't just that Democrats came out. The exit polling
Speaker 1: shows that it was Trump voters who went for him
Speaker 1: in twenty twenty four who swung right back to the
Speaker 1: Democratic Party this cycle. And that's a combination of the
Speaker 1: president's economic policies more than anything else. So what Democrats
Speaker 1: have done here with this shutdown is not keep an
Speaker 1: eye on affordability, which was of course the talking point
Speaker 1: of the Tuesday elections, but the inflation, grocery prices, healthcare prices.
Speaker 8: I mean, I'll be honest.
Speaker 1: You guys know I don't like healthcare even I know
Speaker 1: now that the insurance premiums for people over the age
Speaker 1: of sixty are going to increase nine hundred and nineteen
Speaker 1: dollars as a result of not extending these ACA subsidies.
Speaker 1: And we just spent forty one days saying that back
Speaker 1: to back. We're going to have a vote on it
Speaker 1: in December. We'll do it again in January. So I
Speaker 1: think that for the Democrats, just keeping this message alive
Speaker 1: is outside of the Beltway, sending the message that has
Speaker 1: just won an election and looks like it'll be a
Speaker 1: repeat of twenty eighteen based off what we're seeing in
Speaker 1: the polling.
Speaker 6: To build on that, Henrietta, do you think that this
Speaker 6: shutdown was futile for the Democrats or do you think
Speaker 6: that it actually yielded some political benefits.
Speaker 1: They get yielded a lot of political benefits. I'll cover
Speaker 1: a couple. Number one I think is setting up Schumer
Speaker 1: to step down and pave the way for the senator
Speaker 1: from Hawaii to come in and be the next Democratic
Speaker 1: leader in the Senate side. That's pretty plainly something that's
Speaker 1: building within the Democratic conference on the Senate side. I
Speaker 1: think that's something that Schumer is ushering in himself. And
Speaker 1: he took a lot of arrows by voting against this bill,
Speaker 1: by agreeing to let the eight moderates cross the line.
Speaker 1: It's exactly however many you needed. I think that's what
Speaker 1: leadership does, especially on the Democratic side. You've seen it
Speaker 1: in the past. Joe Biden just did it last year.
Speaker 1: On the messaging side, think about where the numbers are.
Speaker 1: President Trump's approval rating has cut again in half. You
Speaker 1: went from negative seven to negative thirteen in the polling
Speaker 1: averages just since October. And on the congressional ballot in
Speaker 1: generic polling, the Democrats went from plus one in the
Speaker 1: generic ballot.
Speaker 8: On October first to plus four.
Speaker 1: Now that's enough to get you the midterm House election,
Speaker 1: and that's the goal of leadership.
Speaker 9: There's a lot of.
Speaker 6: Time between now and the midterms, and it really includes
Speaker 6: the beginning part of next year when we could potentially
Speaker 6: get tax rebates. You can call them the tariff dividend,
Speaker 6: you can call them whatever you want.
Speaker 9: But a lot of people are.
Speaker 6: Expecting more money in people's pockets come January and February.
Speaker 6: How much do you expect that to really skew things
Speaker 6: the other direction back toward the Republicans heading into the midterms.
Speaker 1: Why do you need a two thousand dollars rebate? What's
Speaker 1: the problem is the inflation still rising? Is affordability still
Speaker 1: a problem? Didn't we just pass a one big, beautiful
Speaker 1: bill with three and a half trillion dollars of deficit increases.
Speaker 8: Why do we need a two thousand dollars dividend check.
Speaker 1: That, by the way, will not be paid for by
Speaker 1: tariffs because the tariffs don't bring in that kind of revenue.
Speaker 1: In the two thousand Cares Act, we passed the exact
Speaker 1: same kind of rebate check Trump is talking about right now.
Speaker 1: It costs two hundred and ninety two billion dollars. The
Speaker 1: tariffs have brought in eighty nine billion dollars. If we
Speaker 1: give two thousand dollars to every eligible American, that's off
Speaker 1: four hundred billion dollars spending provision. So you're going to
Speaker 1: increase the deficit to provide tax cuts to Americans who
Speaker 1: are suffering from inflation because of taris. I don't think
Speaker 1: that's a winning message.
Speaker 2: At a time when it's a question mark of the
Speaker 2: policy itself and whether it which stands. They screwtiny at
Speaker 2: the Supreme Court in the coming month as well, Henriette said,
Speaker 2: where do they have space to offer some kind of
Speaker 2: giveaways and change policy?
Speaker 1: You know, it's It's amazing because when I speak with Republicans,
Speaker 1: they plainly don't want to go through the very difficult
Speaker 1: activity of passing a fiscal year twenty six budget and
Speaker 1: a fiscal year twenty six reconciliation bill. Democrats wouldn't want
Speaker 1: to either. It's extremely difficult. Voters opens up all your
Speaker 1: members to vote e rama. But what you could do
Speaker 1: is you could get sixty votes to extend the ACA
Speaker 1: subsidies and then think about what we just talked about.
Speaker 1: You get every family with two sixty year olds in
Speaker 1: the House on Medicare and Medicaid, you can get nine
Speaker 1: hundred nineteen dollars for each of them back in their pockets.
Speaker 8: If you are a household with kids with twenty.
Speaker 1: Thirty forty year olds, the ACA subsidies get extended, you
Speaker 1: get two hundred up.
Speaker 8: So there's a pretty easy path to.
Speaker 1: Sixty votes if you want it, and we'll have those
Speaker 1: votes in December and then again in late January. And
Speaker 1: if you want ustimate the economy quickly get money back
Speaker 1: into consumers pockets, the AC s is a really fast
Speaker 1: way to do it, and a lot of Republicans would
Speaker 1: like to see that too. Look at Alabama, Boozyana, Mississippi.
Speaker 8: That's where those voters are.
Speaker 7: Stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. Dan Skelley of
Speaker 2: Mork and Stanley writing, while the fundamental backdrop for the
Speaker 2: market has improved from the panic stricken spring, our current valuations,
Speaker 2: investors are not being compensated for a high degree of
Speaker 2: policy and earnings risk.
Speaker 7: Dan joins a snap for more dank and monic.
Speaker 9: Morning, John.
Speaker 2: Do you think that catches the pushback we're seeing across
Speaker 2: several single names out of the past few weeks.
Speaker 9: Definitely.
Speaker 10: And by the way, I think the volatility in the
Speaker 10: rotation that we're seeing among single names is healthy. I mean,
Speaker 10: the idea is if everything was going up euphorically, then
Speaker 10: maybe we could talk more about a bubble. But you
Speaker 10: are seeing the market reward winners and penalized losers, and
Speaker 10: so I think that's a healthy trend. I think, frankly,
Speaker 10: there's seemingly a bubble and everyone guessing whether or not
Speaker 10: we're in a bubble or not.
Speaker 2: A bubble in bubbles correct, not in the credit market,
Speaker 2: credit markets wide open.
Speaker 7: Suppose somebody is spending. Do you think that reminds the case?
Speaker 10: I think that remains the case and is likely to
Speaker 10: be so for the foreseeable future. You've seen some of
Speaker 10: these bond deals way over subscribed, as you know, in
Speaker 10: the last couple of months, and so we're just not
Speaker 10: yet at that point where things are starting to look
Speaker 10: more concerning.
Speaker 6: Bubble of a bubble, bubble in bubble and bubble took. Okay, honestly,
Speaker 6: this is so derivative.
Speaker 9: I'm having a hard time increase.
Speaker 6: Of the bubble in bubble talk, I know, but it's true.
Speaker 6: There is this feeling that right now there is a
Speaker 6: lot of fear out there. I just want to go
Speaker 6: back to the point that you made that it's healthy
Speaker 6: to see swings like this. It's healthy to see swings
Speaker 6: in one stock name evaluations mark evaluations of two hundred
Speaker 6: and sixty four billion dollars.
Speaker 11: In one day.
Speaker 6: The idea that we saw that kind of gain just
Speaker 6: on Monday alone in the likes of Nvidia, after seeing
Speaker 6: two hundred million dollars lost in one day, how is
Speaker 6: this healthy? Doesn't it really point to concentration risk in
Speaker 6: another kind of way in the index?
Speaker 10: Sure, it's an excellent point, Lisace. I'll say a couple
Speaker 10: of things. So first is what I'm describing is among
Speaker 10: the mag seven themselves, you saw a handful half of
Speaker 10: them up on earnings and half of them down on earnings,
Speaker 10: And so I think that's really what we're looking at.
Speaker 10: But I think to your point, in terms of absolute
Speaker 10: market values, it certainly speaks to the crowding that's happened
Speaker 10: not only this year, but going back fifteen years.
Speaker 9: Really since eight. We've seen this winner.
Speaker 10: Take all phenomena for almost two decades now, and it
Speaker 10: speaks to just again just how much the market share
Speaker 10: winners have differentiated themselves versus everyone else. Last point, you
Speaker 10: reference ninety eight ninety nine, which we're starting to hear
Speaker 10: more and more of. Obviously, let's not forget that in
Speaker 10: the stretch from kind of the fall of ninety nine
Speaker 10: to the spring of two thousand and NASTAC doubled over
Speaker 10: a seven or eight month period.
Speaker 9: That is truly what a blowoff top looks like. We
Speaker 9: haven't seen that of yet.
Speaker 11: There's also this.
Speaker 6: Question of how far the AI trend is diverging from
Speaker 6: the underlying economy, and we keep going back to this
Speaker 6: how difficult it is to get a gauge on what's
Speaker 6: happening with people feeling pretty negative on the economy, pretty
Speaker 6: negative about their spending power. At the same time that
Speaker 6: you're seeing these runaway gains and these expectations for all
Speaker 6: this profitability and efficiency.
Speaker 11: How do you scare that?
Speaker 10: So it's a case shaped market economy, it's a case
Speaker 10: shaped socioeconomic recovery. Post COVID, everything is diverging. We wrote
Speaker 10: about this recently in our letter, talking about the market
Speaker 10: is not the economy. The economy is not the market.
Speaker 10: And when you look at the changing nature of this
Speaker 10: economy really since COVID, but going back I'll say a
Speaker 10: decade plus, it's a services led economy. All we've done
Speaker 10: is wring our hands around tariffs and trade. This year
Speaker 10: trade is eleven percent of GDP. This is a service's economy.
Speaker 10: AI spending is being funded largely by cash flow, so
Speaker 10: we're seeing that as being somewhat more insulated from ebbs
Speaker 10: and flows in the economy. And increasingly it's a high
Speaker 10: end consumption market. I mean, one of the things we
Speaker 10: haven't talked about enough, we think is that ten percent
Speaker 10: of the population controls forty.
Speaker 9: To fifty percent of the spending.
Speaker 10: And that's a cohort that's been reflated in terms of
Speaker 10: wealth effect exposure to acid prices, houses and stock markets,
Speaker 10: and so we're seeing that bifurcation across not just the market,
Speaker 10: but every component of the changing nature of our economy.
Speaker 6: Does that make you want to expand out to some
Speaker 6: of the areas that are more susceptible to spending, whether
Speaker 6: it's on the high income, which seems like an AI
Speaker 6: trade at this point, or whether it's on the lower income.
Speaker 6: The sort of bet on some sort of cyclical improvement.
Speaker 10: Very selectively where there's also a fundamental catalyst. So we
Speaker 10: don't want to just make macro and factor bets. We
Speaker 10: want to also marry that with some type of idiosyncratic
Speaker 10: catalysts in whatever stock call or sector call you're making.
Speaker 10: For example, financials, Obviously there's a lot of macro inputs
Speaker 10: rates the economy lending, but at the moment idiosyncratically there's
Speaker 10: a capital market's recovery, there's the regulation coming from the administration,
Speaker 10: So you always want to have some type of fundamental catalyst. Lastly,
Speaker 10: as we've seen expectations around the FED dial down for December,
Speaker 10: we were almost one hundred percent priced a month or
Speaker 10: two ago. Now we're sixty percent price. We've seen all
Speaker 10: of those small cap and higher cyclical stocks trade off
Speaker 10: as well. So tell me what the Fed's going to
Speaker 10: do in December. I'll tell you if I want to
Speaker 10: make that trade.
Speaker 2: Well, there's some excitement that maybe we'll get some economic data.
Speaker 2: How relevant is that data to this market?
Speaker 9: It's super relevant.
Speaker 10: And all of your guests and you all have been
Speaker 10: talking about this concept of flying through the fog, which
Speaker 10: we've been doing with the government data. We think basically
Speaker 10: trying to triangulate all the different inputs in terms of
Speaker 10: private market surveys and providers. We actually might see a
Speaker 10: slight tick up in the unemployment rate when we come
Speaker 10: out of that fog in the following weeks.
Speaker 2: Is not enough to hold back the index because we've
Speaker 2: had the lust each ob numbers a year at a stop.
Speaker 7: Market's been just fined.
Speaker 9: Probably not, So it's a great point. Probably not.
Speaker 10: And the index is going to continue to follow the
Speaker 10: AI sentiment and the earnings trend, which continues to be
Speaker 10: really strong.
Speaker 6: So what's your highest conviction trade heading into your end?
Speaker 10: So heading into year end, I have to say that
Speaker 10: the AI power and the AI infrastructure basket, which has
Speaker 10: sold off more recently, still looks really really compelling. We
Speaker 10: came into this year expecting capital spend to be three
Speaker 10: hundred billion. It's tracking towards five hundred billion. But in
Speaker 10: terms of what we heard from the tech players over
Speaker 10: the last month, we're going to look at maybe seven
Speaker 10: hundred billion going into next year. So if you think
Speaker 10: downstream in terms of all the industrial power in different
Speaker 10: utility components, we think that trade still looks really compelling,
Speaker 10: and it's sold.
Speaker 9: Let's come off a little bit off the highs.
Speaker 2: Stay with us multiple impax Savannan's coming up after this.
Speaker 9: Venue.
Speaker 2: Christianer mcmarkley's maintaining his bearish s and P five hundred
Speaker 2: year end target of sixty four point fifty as earning
Speaker 2: season continue news when it joins us now for more
Speaker 2: Good morning, sir, good morning, sixty four to fifty, justify
Speaker 2: yourself my front.
Speaker 12: So that is a base case, and we have an
Speaker 12: upside case of seven thousands. Figue that you look at
Speaker 12: it more as as range at this point in time.
Speaker 12: But listen, we have been it's just that the market
Speaker 12: has been moving ahead. So we moved our price target
Speaker 12: in early September, right, and so already the markets moved ahead,
Speaker 12: so you know, we remain cautiously optimistic. Actually, looking into
Speaker 12: next year, we are more optimistic. We expect earnings to increase,
Speaker 12: you know, double digits, ten to eleven percent, so I think,
Speaker 12: and the earning season right now is extremely robust.
Speaker 11: I mean, this is surprised.
Speaker 12: Even as to the upside, we were more optimistic, but
Speaker 12: this is building momentum from the second quarter.
Speaker 2: Yeah, what's happening in corporate America that's generating double digit
Speaker 2: earning growth?
Speaker 7: What are these companies doing?
Speaker 12: So?
Speaker 11: I think one is.
Speaker 12: If you look at the tech companies specifically, they're already
Speaker 12: monetizing AI to a decent extent, and that is showing
Speaker 12: up in their overall profitability. So they're laying off people
Speaker 12: and yet they're highly profitable and they're still spending. So
Speaker 12: that's one part of it. Af of course, is being
Speaker 12: tested and adopted to varying extents. Still, enterprises sage is
Speaker 12: quite low. But one of the interesting things we are
Speaker 12: noticing right now is operating leverage is improving to a
Speaker 12: broader cross section of industries. In other words, companies are
Speaker 12: doing a better job at cost control relative to their
Speaker 12: sales growth. Now that has been our fundamental concern outside
Speaker 12: of tech, especially that there's been a problem pressure on margins.
Speaker 11: So it doesn't mean it's good across the board.
Speaker 12: Some sectors are still having a tough time, for example, stables, discretionary,
Speaker 12: but overall we've seen an improvement in cost control relative.
Speaker 11: To sales class, so more positive operating leverage in the system.
Speaker 6: It sounds like you're kind of leading into the ballcase.
Speaker 6: At what point do you just reject the base case
Speaker 6: and go with the ballcase heading into your end?
Speaker 11: Good question, So if you wait for two weeks you'll
Speaker 11: know the answer.
Speaker 7: Here you might come the base case, so you know,
Speaker 7: the the point is, you know.
Speaker 12: We normally come up with that outlooks, you know, sometime
Speaker 12: towards the second half of November, where we you know,
Speaker 12: up data numbers, so this year, next year. So directionally,
Speaker 12: it's very evident that the US is turning out to
Speaker 12: be strong. So especially when you compare US to the
Speaker 12: rest of the world, which means Europe and Airbag, the
Speaker 12: divisions are running better, the profitability is running better, the
Speaker 12: expectation of margins are better, and that's the reason why
Speaker 12: we created a higher multiple than the rest of the world.
Speaker 7: You've been traveling around a lot.
Speaker 11: I don't know how you made it back.
Speaker 6: Congratulations, But there is a sense that the dialogue is
Speaker 6: completely shifted from earlier this year, where it was so
Speaker 6: America go into Europe for the promise of growth, the
Speaker 6: actual spending of Germany. That's flipped was what was the environment, like,
Speaker 6: what was the sentiment.
Speaker 12: Like, yeah, since I just came back from Europe, and
Speaker 12: so there's a certain layer of frustration over there because
Speaker 12: my trip earlier, I would say, in early March, there's
Speaker 12: a lot of skepticism about us, about tech, about what
Speaker 12: multiples you pay for it, about AI more broadly speaking,
Speaker 12: and underlying that was the enthusiasm of what the fiscal
Speaker 12: sort of spending expectation out of Germany for example. So
Speaker 12: I think what many of them will realize is that
Speaker 12: they were wrong. So they were right for about two months.
Speaker 12: So there's a level of frustration on that. There's also
Speaker 12: this fear of missing out, so the question of do
Speaker 12: we jump in or not. So that's an overall question.
Speaker 12: But if you look at a scale, like somebody was
Speaker 12: pointing out to me, you know, germal fiscal spending in
Speaker 12: Germany over the next ten years is going to be
Speaker 12: in a few hundred billion dollars. We're talking about wanted
Speaker 12: to have trillion in AI capex in the next few years.
Speaker 12: So the scale of what's happening over here is simply astounding.
Speaker 12: But I think some level of skepticism I sense in
Speaker 12: terms of the return on investment in AI that is
Speaker 12: I think reasonable because nobody knows, which is a fact,
Speaker 12: as to what the true profitability will be. And that
Speaker 12: is important not in itself, because the the scale of
Speaker 12: spending is so massive that the market is effectively putting
Speaker 12: one hundred percent probability that this is going to be
Speaker 12: truly transformational, more so than the four other big tech
Speaker 12: cycles we've had since the mid eighties, from the PCs
Speaker 12: to internet to mobile in the middle of cloud, and
Speaker 12: we have AI now that better play out because that's
Speaker 12: what the market is telling you is going to happen.
Speaker 2: That's why people are so skeptical. I just heard from
Speaker 2: my Bloomberg subscribe it directly. I can share the message
Speaker 2: with you. We know the enormous aion capital spend numbers,
Speaker 2: but what we don't know is the return on that capital.
Speaker 2: The market is discounting that the returns on the Aion
Speaker 2: campex will be significantly superior to the tech company's legacy returns.
Speaker 2: Is this really going to be the case? Is it durable?
Speaker 2: Feels like a stretch? Do you hear a lot of
Speaker 2: that kind of sentiment on the road.
Speaker 12: Yeah, so I think I hear a lot of that,
Speaker 12: And I think the frustration the difficulty is literally nobody,
Speaker 12: even if you talk to tech experts, have an idea
Speaker 12: about how to quantify the scale of productive improvement. The
Speaker 12: other thing is, you know, still a lot of it
Speaker 12: is coming from having a better cost pace right, in
Speaker 12: other words, being able to do more with less. But
Speaker 12: the real use case will also come in the top
Speaker 12: line itself, which is where in the early stages. And
Speaker 12: like I said, enterprise usage is still in the early stages.
Speaker 12: So I think that skepticism is reasonably warranted. But what
Speaker 12: I do point out, and I think we've discussed it
Speaker 12: in the past, the big tech as a group who
Speaker 12: are doing most of the spending, their multiples have generally
Speaker 12: been easing over the last two to three years, so
Speaker 12: they are earning into the multiples they're spending. But I
Speaker 12: think the big question now is also shifted into the
Speaker 12: funding landscape. So far, all the funding has come from
Speaker 12: organic cash flows, and in fact the big tech companies
Speaker 12: are spending fifty to fifty on buybacks and on capital spending.
Speaker 12: But going forward, given the scale of spending increasing, their
Speaker 12: credit markets are going to be tapped in varying to
Speaker 12: varying extent public private asset back and things like that.
Speaker 11: That's a question.
Speaker 7: It's that goodnews toy stocks.
Speaker 11: Well, you know, some.
Speaker 12: Amount of bladdagh being used by companies is actually optimal, right,
Speaker 12: so you're using a balance sheet efficient sly. But it
Speaker 12: also means that the equity markets now have another source
Speaker 12: to take a queue from in terms of how risk
Speaker 12: is being priced right and where is risk clearing and
Speaker 12: how does it compare to what we see the equity markets.
Speaker 12: But if you look at the scale as of now,
Speaker 12: we broadly estimate that in the tech area AI related
Speaker 12: there's been about call it one hundred and sixty odd
Speaker 12: billion which has been raised in public and private markets.
Speaker 12: If you look at the marketcap of big tech companies,
Speaker 12: I'm not even to include Oraclelendus it's touching twenty one trillion.
Speaker 12: So I think the scale is very modest and many
Speaker 12: of these spenders are highly profitable, but as.
Speaker 11: The scale of spending.
Speaker 12: So if you tell me that a trillion is going
Speaker 12: to be funded in credit markets, that's slightly a different story, right,
Speaker 12: And I think that's what people are asking.
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