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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 with our top story met US outlook dranking futures lower with more big tech earnings on der Chris Harvey of Wails Fargo with the most bullish year end SMP five hundred target on the street. Right in this we expect near term chopping US related to outlooks and rising rates. Our s and P five hundred target is fifty five thirty five, but we're more focused on the return profile. Stay in the game, but you need some portfolio headges. Chris is
with us now for more. Chris, good morning, to see you.
Good morning, fifty.
Five thirty five, up from forty six twenty five.
That's a big change. Can we start there? What changed?
That is a big change. So we knew we were going to move numbers higher. We just didn't know how much higher because I didn't know. You know, we looked at things last year and.
We were up.
We were expecting mark be up ten percent, maybe fifteen, and we couldn't figure out. You know, that was pretty good at the time, but we missed the market by ten percent. What we figured out is the market's just being a lot more aggressive on how it's discounting. It's discounting a lot, a lot further into to the future, and it's using a much more.
Aggressive forward multiple.
And so when we took that into consideration, we realized, hey, we can get to two seventy on twenty twenty five. We can use a twenty twenty one multiple and that gets us over fifty five hundred and so that's really how we got there. And what we think is going to happen is not the economy is going to be really strong. It's a mix shift. The winners are going
to keep winning. The more profitable companies are going to make up a bigger percentage of the S and P five hundred and that's how you're going.
To get there. So within this is a big coll bet on megacap.
Tech, megacap tech, but really more profitable companies. Most of a lot of the megacap tech are those, but it's not every single megacap tech is a profitable company. But yes, along those lines, is.
There anything in the earnings that you've seen or the spending by said companies that makes you concerned?
Now, what makes me concerned is we really haven't learned anything new at this point in time. Consumer still value oriented, still selective, high ends doing better than low end. Kind of knew that people like to travel services over goods and things. We knew that as well. Economy is a little bit stronger than expected. Not new news. What we're waiting for and what we're looking for and what we think is this AI spend. It's not a discretionary spend
and we'll see that going forward. Maybe that's part of what we saw last night. And what we think is again you're going to have a separation. You've already had that separation between the winners and losers. That separation is just going to get bigger and bigger and bigger.
The separation has been in earnings returns, but it's all bit in earnings, just BLUs straight out. We saw Southwest, for example, coming out earlier this morning under performing wider loss. You say people like to travel, there are signs that that's actually being challenged on the margins. We just got results from American Air similar type of disappointment. How much does this make you shift some of the companies that
you like? Is this basically a bit that the cash winners and the AI darlangs can keep going, but the broadening out isn't going to happen.
Yes, So, Lisa, there's a lot there.
Right.
If we look at Delta, Delta is a lot different than Southwest, and Delta had a lot more positive things. It's a high end consumer. It's also more business oriented. Right, what do we like? What's going to change? Well, the bigger question is we see two trades in the marketplace. It's the momentum trade as the rein inflation trade. And I think that momentum trade will continue because again the
winners will keep winning. As far as our positioning, what we want to do and what we've been doing for the last year and a half is we want to barbel communications with something more defensive. Now, what we want to do is barbell community with health care or utilities. We want some ballots, We want some protection in that portfolio, but we do want to participate to the upside.
If the FED doesn't cut this year or only cuts once, how do you change your target again?
Don't change it at all? Really, yeah, because the reason is if you go back to twenty one when the FED was way too aggressive, and then you roll into twenty two, you ran into a bus.
Saw why was that?
Well you were too accommodative twenty one and then you turned everything on its head in twenty two. Well, you're not going to see that going forward. You're going to see a FED that's going to cut. It's going to be a multi year cut, multi year easing cycle, and that continuity is going to help. What else is backing that up? This secular AI trade is not going anywhere. It's actually broadening out to power to electrification, and then the M and A story keeps getting better and better
and better. So whether it's one cut, two cuts, three cuts, we don't care because it's the start of a bigger cycle.
I know it's no one's really base case, but what if there was a hike. How would that change your outlook?
Yeah, that would be good. And what we tell people is today, if today's the risk of increased US exceptionalism.
Well I don't know about that.
But what I do tell people is, if today's your first day on the job, you would not be coming to the conclusion the FED needs to cut right. The economies stronger than expected. We're in a ball market with equities credit spuarres or less than ninety basis points. The consumer's fine. And while the FED says things are tight, I see parts where it's tight. But when it's really tight, people don't have to tell you. You feel it, you
know it. I'm surprised that the FED is telegraphing easing as much as it has and why they pivoted in December so hard. That's to me is very surprising.
My favorite line of yours over the last few years race yourself. I think you might know you might have guessed coming out of the pandemic. I remember in the twenty twenty you said it's going to be spring break for adults. Did you expect it to last this long?
I did not.
I love Yeah, it's toward the word in the cyclew to tell how long a spring break heav out. It is a long spring break that's been bad though good.
I'm going to work out what to do with discretionary based on that, and that was ultimately cool coming out of the pandemic. It was spring bright for adults. Discretionary, discretionary, go, go go.
What is it now?
I think it's more producers over consumers.
Right.
The consumer again is they've spent what they needed to spend. They've done their revenge spending. Right, They're being a lot more selective. They're saying, I'm not going to spend a lot for that. If I can jump on a plane and go and travel, I will do that. But goods and day to day things, I've got enough stuff, right, And so now that AI trade, right, that's the secular trade. The discretionary spending is not AI. It's a non discretionary spend. And it's beginning to build out.
Right.
You have the secondary and tertiary trades, the data centers, the power issues surrounding that, the electrification, and so I think if you're looking for a narrative, consumers probably produces over consumer. But really it's that AI trade. It's that momentum trade. It's still a garb growthy market in our opinion.
You mentioned M and A and I have to go there because it's something we've been talking about a lot. How much M and A can happen given some of the recent FTC action.
Well, that's a great question and one of the things we keep saying one of the things that we think will happen. Right, People ask us how do you handicap elections? What do you do? And the thing that we look at is who's going to control the Senate? Who controls the Senate is very important. If the GOP takes control
of the Senate, that's much better for equity markets. And I think this time around it's going to be much better for M and A because the regulatory environment is very difficult for M and A and M and A activity. And so if you see that change in the Senate, I think that helps accelerate longer term M and A in the M and A cycle.
So, aside from a rate hike by the Federal Reserve, what could crack your confidence in this hype of return as we pass through which data matters most?
How long do you have time?
We've got time?
So, right, now it's rates. I'm really worried about rates because rate equity and rates, there is this momentum component where I buy strength, I sell weakness. So you can see rates gap up pretty quickly. Right we're above I think we're four sixty four to sixty and change. You could see four four and three quarters five percent very very quickly. The other thing is expectations. Are we seeing people just managing expectations or are they telling us something different?
And then the last thing in the equity market, it's the same thing. Right, I buy strength, I sell weakness. Well, a downturn of three four five percent can turn into a seventy eight, nine, ten percent. I'll sell them very very quickly. So those are some of the things that we're worried about right now.
Chris, this was great. It's going to catch up. It's been so long.
Yeah, it's been to Thank you Chris Safide of Welsh Sanga. Especially this economic data with Plurina Yurriucci of t Rowe Price.
She joins us.
Now, Plerina, this is an interesting mix of data with the emphasis on interesting. You've got a big downsize surprise on GDP. You've got a COPYC price Index quarter on quarter, coming in a bit hotter than expected, job has claims a little bit lower than expected. Why would you place the emphasis this morning?
So I think it's very important to unpack the components of GDP and what led to this slowing in growth in Q one. So overall, I would say this is not a worrying report for the FED. It's a report that says the economy continues to expand at a solid pace. Look at consumption growth at about two and a half percent. This is a healthy consumer that is backed up by the claims data where unemployment claims are low and job growth remains strong when you look at the payroll data.
So overall, it's a report that says to the FED, the economy is not reaccelerating, it's slowing from the pace of growth in the second half of last year. That is telling the fact that those interest rate increases maybe having some affection slowing demand, particularly for goods, but it's not alarming by any means. And then what I like to do with this GDP report is to sort of look at the final domestic sales and final sales to
domestic private actors in the economy. And that's again that's showing two and a half to three and a half percent growth in Q one, it's not telling us the economy is that week after all. And I think a big drag here is also coming from net inventory contribution, which Michael already alluded to.
So we want to talk about the sustainability of this economic growth that we're seeing, because so many people are planning gone to the story of US exceptionalism away from the top line number, which is a clear and obvious downside surprise, the sources of growth in the first Quarterlurinic blurinic, we talk that. Do you see that continuing through twenty twenty four.
Yeah, So there are.
A couple of interesting things here. Let's start with business investment. This has been driven by structures investment in the past and intellectual property investment as the housing market was really retrenching throughout twenty two and twenty three and res investment collapsed. Now we're seeing a rebound in res investment, and I think this is going to be sustained this year because there is really a dearth of housing in the housing market.
We don't have inventory, and home builders will start building again and we're seeing that in Q one. So I think this will remain supportive of growth. Also, the point that we've made in the past together in this show is that I think the consumer, the US consumer will continue to keep its wallet open so long as we don't have layoffs, and layoff data are not screaming weak scigence now, and so long as we continue to add jobs.
And then, Michael McKey, we already discuss this problem of historical residual seasonality with Q on GDP growth, which means that oftentimes Q one also Q two tends to be weaker than the second half of the year, So we need to be concious of this as well. Now, the question, the bigger question that I think you're also trying to allude to, is where is potential growth for the economy.
How fast can we grow beyond potential this year? And this is the big question mark this year because we don't know the effect of this shock to the labor supply from migrant workers that we received last year.
Blorina. The market seems to emphasize, as John is pointing out, the inflation figures as well as the job as claims coming in lighter than expected. Is this what the FED would focus on as well? They focus more on inflationary pressures than they would say on slowing growth.
What the Fed has told us is that they're not concerned about the strong growth numbers and the strong employment numbers, and their focus remains inflation. So in that sense, it makes sense. I think they'll look at the GDP numbers through this lens too. But at the same time, there is no new information really in the PC deflator for Q one because we've already received January and February data
for PC. We knew that that meat expectations. We largely have the components of March PC because of the CPI reports and the PPI reports that we've received in recent weeks, and so I'm surprised that the market should focus so much on the QE GDP deflator because there's no new information there. As far as I'm concerned.
If Loreina great to catch up with you, I just want to get a final question that if we can, looking ahead to the Federal Reserve next week, what is going to be the big topic of focus for you and then FMC meeting. Do you expect any big changes to the statement at all?
So I would say that they want to be a little bit cautious about how sanguine they are on the number of case that they will be able to deliver this year, given the strength of economic data, the labor market, and the upsides prizes to inflation. So I do think they will emphasize that they have a dubbish bias, but it's uncertain whether they'll be able to deliver on that March sep and the dot plot, so I'm watching for signs that they want to back off from three cuts this year.
Got it, Loreina, Thank you, Michaelhersha and at twenty TV Research joins to surround the table. Michael Comornitier. Let's get into this. So I heard it from Yellen, We're going to hear it from blinked. When do we start to see the policy?
Well, I think a sanctions push is something that the US is not going to take lately, especially on a major Chinese bank, and I think, frankly, the Chinese are taking this pretty Chinese banks are taking this pretty seriously as well, So I would guess that this move is not imminent, but you have to take the thread seriously.
Is the warning enough for the Chinese banks to change course?
I think for the large banks Beijing will let them manage their own sanctions risk. I think it's more likely that we would see something that would be one of the smaller banks. Now that could be still a large bank in absolute terms, but what we've seen with Iran, with North Korea is it's typically the sanctions risk is really embedded in the smaller Chinese financial institutions.
There's a plethora of issues Tony blinkn is going to want to bring up today, whether it's China bring you more Iranian crude, whether it's China supporting Russia. If not outright, but through these things like helping them with the materials they need TikTok South China. See what is the main request they need to ask over capacity?
What do you go in there and say you need to sort this immediately.
I think it is a long list. As you said, I don't think that Blincoln is going to carry the water, so to speak.
On trade.
I think that's really discussion left to trade officials. I mean, clearly he's going to make that point. But I think higher on Blinken's agenda will be China support for Russia, Iran, and then nexus to the Israel and Goaza conflict, and then South China. See, you have you a flashpoint that people sometimes sleep on, but is really serious with the tensions between China and the Philippines, that could bring the US in potentially quite easily, in the sense that the
US is a treaty ally with the Philippines. So if we see an accidental collision, some kind of miscalculation between China and the Philippines, that issue moves right to the front burner.
How much do you think that the conversation is going to sound something like this, Tony Blankin to the ambassador or even Jijinpang, we're so much better than the other guy, will be so work with us.
I don't think that will be an explicit part of the conversation, but the election certainly is on something that is on the minds of the Chinese. I think they don't want to see China become any more of the center of the US election than they already are with an issue like TikTok, So it's an incentive for Beijing
not to let these issues flare up too much. At the same time, it somewhat limits President Biden's negotiating leverage because the Chinese don't know who is going to be president a year from now, so the election is going to be something that's in the certainly on everyone's mind, but not explicitly raised. In this conversation.
You said that trade is not going to be really the main issue. They're going to be talking about support to Russia and trade with Russia and some of the other sort of global interference with geopolitics on the part of TEDDA, how do you divorce the idea of trade from some of those issues at a time work economics increasingly is really determining the geopolitics.
They can't be divorced, and especially if you think about the excess capacity issue, it's one that's really tied to the strategic competition over clean energy. If you look at the export controls, which are a trade issue, right, limiting export of semi connectors to China a direct link back to national security. So it is definitely going to be part of the conversation. The Chinese, i think, are going to push back quite forcefully on US tech restrictions.
They see this.
They've been characterizing this as an obstacle to China's development. So it's getting closer to being sort of a core redline issue for China's so it absolutely is going to be part of the conversation.
They can't be divorced, but Japan is going to be watching very carefully.
Can we just build on this conversation that Lisa starts in, how do you think countries like the United States will maintain national security cooperation with countries like Japan at a time where maybe economics cooperation is tested, And I will use that word tested. I can think of Nippon steel looking at what's happening at the FX market. How do you maintain cooperation in one when cooperation in the other is a little bit French yud Right now?
I think for US Japan this relationship is really very solid. I think there's a mutual interest there and enough time, you know, spent on the relationship to be able to see through issues like Nupon steel. The exchange rate, you know, is an issue. I think it's the same issue on the Chinese side, right dollar yen has got the same issues as dollar yen, and there you have the prospect
of these geopolitics seeping in there as well. So it's a complicated balancing act also on the Chinese side as we think about these exchange rate development.
What did you make of what happened last week in Washington, d C.
What was your impression of the mating that Japan and South Korea had with the Treasury secretary.
Clearly it's showing, you know, interest on both sides and managing these exchange rate movements. You know, it's it's a complicated task. I think, as you're saying, one of the questions is.
When do they intervene? How do they intervene?
We've just seen verbal intervention so far. I think frankly, they're fighting against some pretty strong fundamentals in terms of the strength of the US economy and the prospect that the FED is going to be higher for longer. So there's limits, you know, to how much FX intervention can do when the fundamental the mismatch between the fundamentals are that strong.
When you're talking about allies like Japan, I also think of the European Union. How much is Secretary blink In today going to rely on those allies And the fact that the Biden administration, as opposed to really the Trump administration has taken a multilateral approach, saying it's not just us, it's a group of us that you're going to have to contend with.
It's a big part of the conversation, and I think the Biden administration really wants and needs the Europeans to step up more on this issue of China, support for Russia, and a number of these other flashpoints you know, on excess capacity. This is even more of an issue for European countries like Germany than it is necessarily for the US economy. On Russia, Ukraine, it's even more of an existential threat to European security than it is to the US.
So the US is counting on the Europeans to do more. Whether they will do more remains to be seen. President She will be visiting France next month. That's going to be really interesting tests to see how forcefully the Europeans are going to push back.
How nervous do you think Tim Cook is in terms of its business Apple's business right now in China?
How at risk are some of.
The US and frankly even European companies that rely on China for their business.
If I'm Tim Cook, I'd probably be more nervous about the macro situation in China, the fact that the consumer remains weak and that there's rising competition than it would necessary early from the political risk, He's definitely got to manage that. But if we're thinking about an Apple or a Tesla, those are such bellweather companies in China's market that I think Beijing has to be careful about overt retaliation.
This is, you know, at the time when China's trying to revive confidence in the economy, A strike against an Apple or Tesla would really chill the business environment. I think the US firms that are more at risk of retaliation are you know, less of the brand name, marquee names, more closely tied to technology competition. Those are the areas that I think, you know, those companies are more risk.
But frankly, Beijing does not have great options for retaliation at a time they're trying to revive the economy.
Michael enjoyed this. Thanks for mness. Thank you very much.
Michael hosting that of twenty two the research. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, angiot 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 or anywhere else you listen and as always on the bloom Blog, Terminal, and the Bloomberg Business out
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