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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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.
Stephen Arthur federated Hermes, writing this, we remain optimistic.
This season has been.
Exceptionally positive, with earnings running eight percent year over year and upward revisions running higher than usual. Stephen joins us. Now, Stephen, wonderful to see you. Thank you so much for coming back. You're right, earnings have been surprising to the upside. Why are stock traders not necessarily impressed?
Lisa? Could you repeat that again? Your right? I loved that?
All right, all right, you're right, ste This sounds like a home squabble, Evehn.
You're right, so carry on.
At least that these stocks have had big run like, look at Disney, it's almost doubled over the last year. A lot of these stocks have run into earnings, and so you know, traders are taking profit. That's pretty normal, actually, and we tend not obviously we're too big to trade the day, we don't really do that. But we look at the longer term picture, the next twelve months, we see a broad rotation out into everything else.
Just starting to see it already.
Disney's not like on our by list per se, but it's one of those stocks that probably is going to participate in that rotation.
Right.
It's relatively inexpensive. It's really been in a doghouse for a long time. It's starting to come to life. It's got a long way to go to get back to where it used to be three four years ago.
So the numbers allow people who like to spend narratives to spend them in any which way they want to, and so it's kind of a field day for people who have lots of creativity and some time to do so. I'm curious if you look at the earnings, it does look like any mention of uncertainty is punished at a time where there's a lot of uncertainty, and some of the economic data has pointed to a potential stagflationary type of mix that definitely surprised markets.
So which is it.
Are people responding to that and penalizing that. Have people recognized those risks in valuations?
Well?
Yeah, I mean, the overall market's really not that expensive once you take out the MAC seven, which are kind of special exceptional companies globally, right, you take them out, the rest of the market's trading around nineteen twenty times. We don't think that's an unreasonable level, and we think it's the rest of the market where there's value right now in the market. So you know, I would call it it's an environment where there's short term certainty and
long term less uncertainty. I mean, if you look at the pattern of what's happening right now as an example, when I was on a few months ago, we were talking about this, the soft soft data is signaling a slow down.
The hard data is still good. When is it going to catch up?
The hard data by virtue of the fact that it's hard is rear view mirror stuff. It's what the FED uses as an example.
I call it the cracked rear view mirror.
We're in a news cycle here that's twenty four to seven now more than ever. Trying to make forecasts bake based on hard data is you're fighting yesterday's war. So the FED is now coming around because the hard data is finally softening up. We've been screaming that they should be cutting way back in the spring. They're now going to do that. We're entering a cutting cycle. But the soft data is starting to turn. Look at things like
air travel boom, it's spiking. The Dallas Fed's real time economic indicators, it's up one hundred basis points in the last month. You look at consumer sentiment surveys up ten points in the last couple of months. You got small business confidence indicators up ten percent last couple of months. You look at the market and the industrials, the cyclicals are starting to lead. You know, we do a lot of bipos and federate hermes. Right, I got I'm teasing
the guys in the office. I've become the office receptionist after five PM. I mean, like, I get these companies all showing up, right, I mean that market is really picked up. That's not a sign that confidence is falling over amongst the people that actually make decisions in the economy. So we see all the soft indicators picking here most of them, and uh, you know, we're pretty optimistic, as you know.
But we're all our good news though. What's been pricing in is the uncertainty of tariffs. They're actually going to bite and we're going to have an average terif rate about fifteen to twenty percent this time last year was two point five percent.
Yeah, I think you got to check the math on that, because the actual remember that a lot of the goods that come in that come into the US come through Canada and Mexico. The goods that come in there through USMCA are zero percent. So when Trump talks about these massive tarifs on canemas are he's talking about trade that they've brought across the border that doesn't conform with USMCA, which in the case of Europe, if they were doing that,
they'd throw them out of the union. So you've got to make you've got to account for that zero part of the thing. The actual tariff rate on average right now as we know it is about thirteen percent. We figure about half of that's going to be paid by the foreign importers. So you're looking at fifteen percent of the economy's imports. Half of that is not going to be you work out the math, it's about an eighty or ninety basis point price increase, probably spread over six months.
There's all these other things that are decreasing in price, commodities, steel, oil, regulatory costs, taxes. Another way to think about what Trump is doing here is he's increasing a consumption tax, a prely efficient one, by the way, because it's partly paid by foreigners, and he's using it to fund an investment tax reduction. With all these accelerated, the multiplier on investment spending is multiples of what it is on consumption spending. So there's a kind of shift going on in the economy.
I get the tariff thing is not that positive, but it's not as big of a deal. It's the one thing everyone can hang on to. So it's a good discussion point.
You mentioned the president a few times.
He thinks you have great analysis, by way, because I follow his truth social and he has treated about you right now. He has what some would say, undermined market credibility when it comes to hard data releases by firing the commissioner at the BLS continually going after the FED, and some are saying maybe it's going to be very overtly political individual he'll put at the FED.
Do you think he's undermining market confidence a little bit?
I'm my advice to him, not that he takes my advice, but I don't think it's necessary to pound the FED chair as an example. On that case, I would just say, look, the FED chair is a rear view mirror looking guy. He simply is going stop listening to what he says he's going to do, and just think about what he's likely to do. And we think we've been saying for a while he's going to start cutting in September. Now that the rearview mirror is looking like it should, he
will on the labor secretary. One reason that storm is passed, and I don't necessarily agree with the pressure there either, but one reason that storm is passed is because the reality is, let's face it, I've heard you complain on the air about the labor numbers.
They've been terrible.
Yeah, there needs to be an overhaul of that department.
The physician did.
From that perspective, it probably would have not even been a news story. But the end of the day, people are saying, yeah, the labor numbers aren't really good. Yeah, the Fed, No, they've been in a lot of bad calls here, So he's not completely off base with the pressure in these areas.
How concerned are you about inflation given the fact that right now you look at backward looking numbers that might constrain the economy, but the forward look is pretty rosy at a time where you do have some input pressures with prices.
Yeah, but the Fed's not looking forward so bad.
That's fine.
And the other thing is that, you know, I look at the actual ongoing inflation rate here, it's kind of stabilizing around two point five to two point well, it's right, two point six, two point seven, but it's going to stabilize by next year two point five. That's really the feds informal target. I think they figured out a long time ago two is too close to zero for government work.
So assuming that, right, shouldn't the FED funds rate, if you look at history, should be about fifty basis points above that.
That's three.
So we have FED funds going to three over the next eighteen months. I think that's where we're heading. Here, and so I would just say I got six cuts coming against a backdrop.
That's pretty good.
We have the FED cutting not because they need to, but because they can. And now that they think they need to, they'll start doing it. And once they realize they can, they will.
Stephen as he is the receptionist at Federated Armies where he offers lots of pigs in a blanket. Do you have your your your different facts?
Ye? Yeah, exactly.
Stephen off Cio of Equity is a Federated Armies.
Thank you.
Turning back to markets, we are seeing stocks looking through all of this looking to rebound after the S and P five hundred posted its fifth down day in the last six Anastasia and Moroso Partners Group writing this, this is a long awaited quarter of adjustment and the market may need to act accordingly.
Expect expecting less.
Upside and more choppiness in Q three and the Stasia joins us, now, great to see it morning. All right, So this is the adjustment that everyone is expecting, that everyone's looking to buy into.
How do you get an adjustment?
And I asked this question yesterday, how do you get a sell off if everyone's looking to.
Buy the dip.
Well, I think the newsflow is going to dictate that, and we need to have more Caterpillar like reports that talk about the tariff hit that some of these companies are going to have to absorb, and some of them may be in line with consensus expectations and some of it may not. You know, I think that could be one trigger for a potential pullback as we really do
realize the tariff hit. The other trigger, of course, is inflation, and inflation and expectations for next week are somewhat subdued, but could we see some potential surprises there, so you know, maybe, Lisa, the move here in the market is not necessarily tremendous downside, because I think some level of expectations already baked in.
But that's why I really kind of call it the quarter of choppiness, because on the one hand, we need to mark to market some of these tariffs, and at the same time, we also know that if the label market weakness weakens as a result of that, then that sets us up for a September cut. And I think that's what the markets are caught in between, and that's why we sort of get the back to back days of selling and buying and selling and buying, and I think that could continue.
That's the reason why you're seeing some selling even on the heels of earning supports that are really positive, which we've seen increases to forecasts that beat expectations, and then the likes of AMD selling off.
I'm just wondering, what do you do with the job?
Well, I think for public market investors, if you have any sort of pullback, of course, you step in and you sort of buy your favorite names, and I would say, you know, for us, it's really about long term investing at Partners Group and focusing on thematic investing and really aligning yourself with some.
Of the key secular growth themes.
You know, as much as we worry about the next inflation report or the next you know, rate cut or not, what truly determines whether the company is going to outperform or not is whether it's aligned with the lawng term trend of let's say, artificial intelligence or perhaps healthcare innovation or new way of living, and whether you align with.
That and benefiting from that.
So, you know, if there is an opportunity to buy into that in public markets, that's great for us. I think there's a lot of delectivity that we're looking at, and given the clarity of tariffs that is emerging, I think for the private equity industry in general, the deal activity is likely to pick up.
Is it the clarity because the rates are set, or is it the clarity that they're not as bad as some would expect.
Both both.
I mean, Emory, you know, we put this chart together, you know, looking at the percent of world GDP that had a deal in place. Back in April, it was zero, you know, nobody had a trade deal done with the United States. And today, fast forward to today, in about thirty percent, about twenty eight percent of the world GDP has some sort of a deal in place, and there's still a big chunk of global GDP that's in negotiation.
So that's the.
First point is that you have predictability, you have some clarity for a growing share of GDP. The second point is the one you made, which is, you know, for most countries that are able to negotiate a deal, they're doing so at a lower ter afraid that could have been under the Liberation Day announcement. So I think it's both of those things. And then the third point is now that we have the numbers, Now that we have
the certainty, we actually know how to price things. And this is why I say some of the delactivity can also move from being contemplated to actually being materialized because we know exactly what we have to pencil into the models.
But what happens when the higher rates, which is a much higher average rate than we had last year, actually starts to get digested in this economy two point five percent versus fifteen percent, twenty percent depending on righty right.
Well, that's why I call this a quarter of adjustment, and is going to happen this quarter. If you think about, for example, the tariffs that were back back in April about three percent. Now the tariffs have ratched up closer to ten percent, and I think most of that is being collected now, and in the next month or two we're going to see fifteen or sixteen percent that's collected. But one thing that I will refer back to the Caterpillar report that I found interesting.
They very much talk about profit.
Margins including the tariff hit, but also profit margins excluding the tariff hit, and that really suggests to me that companies as well as the FED are treating this as a one off adjustment that they need to take, they need to process, and I think it happens in Q.
Three as you see the pipeline of opportunities in the private markets really build steam. You're buying it to open AI at five hundred billion dollars.
I will defer to our investment teams on that, but you know, I think valuation is something we take very seriously. And look, I will say Lisa broadly speaking, and private markets, you know, it's where can we find the most robust margins and where can we find the fastest growth rate and EPs and how can we actually build that.
That's where we're focused on building, rather than maybe buying into after the fact. You give one hundred million dollar bonuses to all the people to have them stay in place, although that might be the benefit for some of these strategies. ANC Gamors a partners group. Thank you, wonderful, Thanks to
you as always. Frankly of HSBC has a buy rating on the stock and a price target of two hundred dollars from the current one hundred and sixty three, Noting a bullish AI own a need for higher conviction to drive earnings upside.
Frank joins us now for more. Frank, thank you so much for being with us.
How frustrating is it to get the fundamental story right and the price action wrong.
Yeah, that's a good question, I think when you think about this, though, it was just really about the conviction that the management needed to give people. We had a really strong enough into results. So I think going into these results, people were looking not only for a good number, but something tangible for analysts to be able to raise their numbers significantly after these results. I don't think we got that, so I think that was why the shares
didn't react so well. And I think the other point was China as well. There was a lot of expectations built into that d I threeh eight would come back, But it also shows you the complexities of the China US relationship. So I think now people are going to have to take a step back and look at whether or not how quickly these licenses can come and how
quickly these revenues can come. But again, I think the market is over focusing a bit on it, because if you look at the fundamentals, there's a lot of growth still in the hyperscalers that's more than enough to go around to drive their growth, So.
Our investors just sort of looking for certainty where there is none. Are the outperformers right now just giving false promises of hope or are you saying that essentially there are some companies that are more fortified against some of these uncertainties and are getting.
Rewarded for that, and these others are sort of in.
A weight and see mode from a stock performance standpoint.
Yeah.
So, I think you know that the China element certainly has become a big part of the narrative this year, not only for AMD but also for Ennvidia, So I think that has complicated the AI story a bit in a way. I think you know that the expectations are probably a bit more bullish on that. But we also believe though that you don't quite need the China story for this to play out. I mean, we still see
very strong demand. They highlight on the call that the Mi I three five five is doing very well, better than expected, and the pricing OUTLOAK is better, So we do think that it can continue to work. I think the narrative has been a little bit too narrowly focused on on the China part, and we've come to realization that is not going to be as easy for China revenues to come back in as people previously expected.
If we get sit on China for a second, why is it so much harder for AMD than in Video.
Well, we haven't seen the Nvidia numbers yet, so I guess, you know, in the next or the next month, we'll see how much Nvidia ad back comes back from China. I think AMD did disappoint the fact that they haven't started their revenues. We do expect. I think Nvidia had more inventory on hand that they could probably ship out. You also saw that AMD had a lot of work
in progress inventory, so that has to be resumed. So that's going to take a bit longer versus what we saw for potentially for Nvidia, which had already built up you know, finished good inventory.
But in Vidia has been, at least when it comes to the rhetoric, very bullish on getting back into China. Actually we learned of the Trump administrations you turn on these export controls because Jensen Wang was in Beijing and in video released this statement that they're going to put the age twenties back in the Chinese market.
So would you say they are months ahead of where am D is.
I think they you know, I guess said earlier. I think the way their product has been built out, they've already shipped out a lot more chips, so I think they are in that sense ahead, Whereas you know, AMD has admitted that they have a lot of these products are still in the building phase, so that's why it's going to take longer, as well as waiting for the licenses. So I think that's probably the one of the reasons why you see a stronger recovery for EN video from the China.
Part, Frank, we hear a lot of noise about tariffs and ongoing discussions that are happening right now. The President of the United States has talked about semiconductor tariffs that could go on as soon as this week. How much has that already factored into a lot of the earnings. How much noise is there and how much signal?
Yeah, so I think, you know, the the semiconductor tariff is definitely something that has been on people's minds. I think for the most part, if you see a tariff that's less than twenty percent, I think the market will be we'll take that quite well. But it could be a lot higher than that. I think it's going to hit the actual chip makers like TSMC a lot harder.
I think the actual the companies that are leveraged to the hyperscllic growth then can pass on some of these crises increases more effectively as the hyperscillars have a lot bigger CAPEX budgets and continue to raise them. So I think it's going to hit the consumer part of this semiconductor pile a lot, a lot harder than it's going to be on the AI side.
Frank, what about some of these proposals to put tracking devices in certain high caliber chips as well as some of the constraints without constraining the supply chips. I'm really trying to wrap my head around what the administration is trying to do to keep the flow of commerce while clamping down on some of the more sensitive chips. Do you have a sense of how this is coming together, of what this proposal looks like.
I think it's still very difficult to have an idea of how it's going to end up. But remember this also isn't entirely one sided. We've had some chatter last week of China having some concerns about the video chips as well, you know, in terms of whether there's kind of a kill switch. So I think there's going to be a lot of back and forth when it comes to this. So I think for most people that look at the AI story, we should continue to look at outside China as an area of growth.
Right.
I know there's the narrative continues to be on China, but if you look at you know what's really doing well. Basically, you know, the AI companies, these chips are doing fine without the China market. I know people would like the China market, but if you take out the China market, these guys are still growing and I think the most part still beating expectations.
Frankly of HSBC, thank you so much as always for your insights. Joining us now is Rich Greenfield of Lightshed Partners Rich. Before we get into the nitty gritty, why are shares lower after what Githa just described was a pretty blowout report.
I mean, I think you got to sort of step back. First of all, I think blowout might be a strong word. I think the reality is Disney Stock has obviously had a nice little run over the course of the last six months. I think the company definitely I don't want to say with sandbagging, but you know, if you listen to Hugh Johnson Disney CFO, he certainly was keeping you know, he didn't raise expectations after last quarter is pretty meaningful, you know, upside in the first you know, several quarters
of the year. So I think there was sort of an expectation that this was going to be good, that they were going to exceed expectations and raise the guidance, and so I think it was sort of in the stock. So I again, I think this has been a very widely owned stock. People were sort of knew that the outperformance was coming. And I think the reality is I think the thing that surprises me is that there isn't more excitement around the WWE deal this morning or the
NFL deal. But I think just sort of the you know, sort of hitting what people have thought and you're sort of seeing sell on the news more than anything else.
Well, the market initially really did like that deal.
When it comes to ESPN and the NFL media, what does this say to you about the direction of travel for Disney and the company r at large?
Is that going to be a spinofferage?
Well, look, I think that you got to step back, and so you know, the stock is trading. You know, you've got it up on the screen right now, one hundred and fifteen dollars. If you go back ten years ago, Disney reported their fiscal you know, Q three earnings the same week. Ten years ago, the stock was trading at this exact same level. So this has been sort of a lost decade for Disney in terms of the stock. Yes, it's been up and down in between, but you know,
ten years it hasn't performed. I think it's really setting the stage for a strategic transformation. And you know, iigers last year is twenty twenty six, and I think when you look at how they're positioning ESPN, you know, if you think about sort of launching the direct to consumer service, having its stand on its own, adding in the NFL content, doing the big NBA deal this morning, doing the WWE
WrestleMania deal. They are putting all of the pieces together to separate ESPN and probably ESPN and ABC from the rest of the Walt Disney Company at some point over the next twelve to eighteen months. And I think that is going to be the next strategic catalyst for Disney. I don't know, I don't think they'll talk about it this morning, but it feels like they're setting the stage for that.
Does Bob Iger want that before he exits the company? And by the way, we should we should not. It's expectations he's going to exit.
Some think maybe he's going to stay on.
Look, I have no insight into whether Bob actually leaves. He certainly has been telling everyone that is close to him that when he's that he's really leaving this time. You know, the chairman of the board, Gorman, is certainly tasked with finding a replacement. I think you're going to see that replacement. And you know, look, I think Disney
has two core challenges figuring out the future. You know, if you think about youth culture, my partner Brandon row Us has been writing about sort of the incredible surge of engagement around roadblocks, Like if you look at where youth culture is and where kids are spending their time, it's hard not to look at something like roadblocks and go,
how is Disney not in this world? Like, sure, they're building something on Fortnite, but if you look at sort of the UGC growth that's happening so organically on roadblocks, like that seems more like where Disney should be than trying to figure out the future of sports streaming with ESPN and ABC, And so I think, sort of whoever is Disney's CEO? I think the big task is figuring
out what is the future mix of this company? What is the ideal mix of assets to be positioned so that the next decade looks a lot better than the last decade.
There's also a question of the geographic footprint rich.
I mean, we're seeing AMD shares fall because of a lack of certainty with China, but we understand that Disney has its footprints in China as well as around the world, even though some people might see it as sort of brand Americana. How much does that throw button or how much do you want to hear about that on today's call?
And look, you know, I think a topic that people don't really like to talk about, right is how are US movies performing overseas? And I think if you look at a lot of the international performance, you're seeing it be relatively underwhelming. And you know, I do scratch my head and wonder whether there is sort of a greater sort of anti American sentiment. Certainly China has boxed almost even if they let us movies in, they don't do
any box office anymore. And so I do think that there is this growing fear I have around Hollywood and the movie exhibition business that international which used to be sort of the huge upside for these films, like you did a good number in the US and then you blew it out overseas. We're seeing a lot of underperformance overseas that is increasingly concerning.
Which I'm just wanting looking forward.
The other thing that we've heard in terms of a theme from companies has been artificial intelligence. And I know that Disney and other content creators have really not wanted to talk about this because of the strikes in Hollywood and some of the other concerns around what this will do to jobs.
But is that going to be something that you expect.
To hear about given that it's kind of a tool that they will need to be using.
I think everyone in Hollywood is going to initially look to how do they use this to speed up creation and reduce cost. You know, the challenge is going to be not so much how a company like Disney or Warner Brothers, Discovery or Paramount uses these tools but how the kid in their basement, you know, who never could have created a feature film before now can like will somebody come up with Bluey in their basement?
Right?
Like?
Just using all of these powerful tools. If you're a good storyteller, you don't have to be a good animator anymore. AI can do that for you. And so I think what's going to be really interesting as you look forward is is the how the competition or the competitive landscape, not just for Disney, but for all these media companies changes over the course of probably the next three to five years. I mean, the pace of AI innovation is astounding, and I think what you can do is only getting
cheaper and faster and easier. And so the competitive dynamic that currently exists there aren't many companies that do feature linked animation. I wonder in five years how we're going to think about the competitive set for animation.
Rich Greenfield of Lightshed Partners, thank you so much for being with us today.
This is the Bloomberg Savnants podcast, bringing you the best in markets, economics, anchient politics. You can watch the show live on bloombag 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 bloom Blog terminal and the Bloomberg Business apps.