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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'll begin this hour with SMP five hundred set for a weekly gain. Savita Supermanian, a Bank of America writing sentiment is far from uphork. The consensus Wall Street broker is recommending an average at location of just fifty six percent. To US docs, this is not euphoria, Siviita joins us. Now, thank you so much, good morning, Thanks thanks for joining us. So it's not euphoria. What are we in right now?
What is this world? Yeah, the world.
Feels weird, but I think we're in that sort of wall of worry stage where there are certain themes that are getting a lot of credence and credibility like AI. Other themes are kind of falling out of bed like GLP one, and then you've got this potential broadening of the market that we've all been waiting for with baited breath, that I think is at a moment where it's it's
actually in the work. So if you read the transcripts, and I love Lori's quote, but I think that when you read the transcripts, companies are worried, but they're also talking about the fact that they've delayed a lot of projects. They haven't canceled them, they've delayed them. That means there's a lot of pent up activity, business activity in the pipes that is likely to be unfurled over the next
couple of quarters. And I think what really stemied that pickup in broadening and you know kind of other companies actually moving from you know they're very low low multiples and low low levels, is the idea that we're past a lot of the tariff uncertainty. I mean, granted, there are curveballs that are thrown at us every day, but we do know what's going on with Europe. You know, we've got a better handle on how companies can actually
plan and do business. We're also starting to see I think the beginnings of this m and A cycle, even cross border MNA, so I think those are other animal spirits. I could on LESHA a broader pickup in economic activity. And then when we look at things like you know, companies reporting, I think what's really noteworthy is that at this point about eighty percent of companies have beat on revenue.
That's new.
We haven't seen this revenue surprise in a while.
So what that means is that.
Analysts mark down expectations very low for sales and demand, and they're beating those lowered expectations. So I think this all bodes well for a broader market.
I would stick with.
Large cap value stocks, companies that are you know, really in the penalty box but could actually start to work in an environment where you know, we do see earnings broaden in a bigger pickup.
What happens if you add in rate cuts to all of that, is that just jet fuel for the broadening out and even maybe for some of the smaller companies.
I think it's jet fuel for small caps. I don't know if large caps need a rate cut. I mean, the thing that I like about the S and P five hundred is it's kind of immune to the FED because a lot of these stocks really move more on long rates rather than short rates. So I think that, you know, the refinancing risk is really firmly in the Rustle two thousand rather than the S and P five hundred.
But I do think that a FED cutting.
Rates from these levels would be sort of a driver for more positive sentiment on stocks, a shift out of cash into stocks if inflation remains high.
I think there's one.
Pocket that the bulk of individual investors have to go to. So think about individual investors that are mostly retirees. They're sitting in big tech stocks and cash. If cash shields are coming down but inflation is still relatively.
High, what are you going to do for real yield?
This is where I think that dividends, cash return, etc.
Come in. What worries me a little bit.
About the big ballast of the S and P five hundred the AI spenders is that these guys are becoming more capital intensive and that might not be great for multiples for.
Cash return, et cetera.
In fact, we wrote a note this morning highlighting that the magnificent six if you take out Tesla is growing much more capital intensive and less R and D focused, and I think that's something to watch because we're sort of in the middle innings. I think of an AI spend cycle, and if that continues, the asset lightness of these megacap tech stocks is potentially compromised.
Your note you have.
We are moving from quote everyone spending on tech to tech spending on everything data.
This has been a story of the entire quarter.
Yeah, it has been the story, and it's been a lot of the reason why it's hard to be bearished. But I do think this idea of the business model changing is so interesting Cevita, because part of the thing that people bought tech for was because they were capital lights and you could get those really high valuations.
And great growth and yeah, great growth and free cash level.
So is there now a ceiling or will there start to be a ceiling on multiples on valuations if it's a different business model and.
All of a sudden they're capital intensive.
Well, I think you need to see the revenue beats for these companies, because if you don't see top line really accelerate along with capex, you're cutting into that earnings.
You're cutting into that free cash flow.
We've already seen the total shareholder return for the Magnificent six drop since twenty fifteen. We've seen capex to sales pick up, We've seen R and D to sales decline. It's all happening. The question is when will it get priced in? Because these stocks are trading near their all
time highs in terms of multiples. I think what we start to see is a tradeoff where old economy stocks are getting all these new tools to get more efficient asset light, labor light, et cetera, whereas tech companies are starting to get more asset intensive. It's a very sort of slow burn shift or handing off of you know, multiple expansion to multiple contraction.
But I think it's something to keep an eye on.
When it comes to policy. We have the one big, beautiful bill. There is a little bit more of an understanding. What's going on with terras? Yeah, what are you waiting for out of Washington? What's the next shoot to drop?
You know, I think right now there's there are not a lot of catalysts, and maybe you know the FED obviously, but I think that you know, we're in an environment where our near turn out look.
On equities isn't great.
I mean, we think a lot of the good news is priced into the market. If you look at reactions to beats, they were pretty good, but reactions to missues were terrible. In fact, the worst downdraft to earnings missues and sales missus in the history of our data since reg FD back in two thousand and one. So this means the good news is probably more than priced in
in the near term. I do think if we see this broadening of earnings growth and we see a pickup in some of the economic indicators, maybe the FED cut is compromised or a continued cutting cycle is compromised, but I think that's the driver for better earnings.
And you still think we're going to be at sixty three hundred year end.
So sixty three one hundred is our year end forecast. I think it's tricky because we've also got the mid term elections coming up, So our twelve month forecast, which is probably more important or relevant, is really for more like five percent gains from here. I think what's interesting, though, is that the years where you've seen the biggest earnings recoveries haven't necessarily seen the strongest market returns. So that's kind of what we're operating on, is the idea.
That earnings are coming back.
We're exiting a manufacturing recession, but market returns aren't necessariarily going to be blockbuster.
Tavita, thank you so much for your time this morning. Thank you, fantastics.
Vita Supermanian of a Bank of America. We're joined by former Chief International Trade Counsel for the Senate Finance Committee, Bruce Hirsch, and he writes, our trading partners have had to adjust to the idea that these deals need to include offers to purchase specific US goods or commit to invest in the United States. The bigger the number, the better. Bruce, thank you so much for joining us. This is exactly
what Danny and Oliver were just getting at. The issue I have with this premise for Switzerland is that they are top five foreign direct investor already into the United States.
Well, they certainly are, and we have a close trading relationship with them, but we also have a trade deficit with them, and a large part of that deficit is on pharmaceuticals, and pharmaceuticals is one of the areas of great concern that President Trump he wants to onshore that manufacturing. So he's going to look at that deal perhaps a little bit differently, and he looks at some of the
others also. He's really been counting on our trading partners to reduce their terrorists the close to zero and that's difficult politically for a country like Switzerland are doing agricultural products.
So what do you think Switzerland can offer at this point, given the fact that Oliver just outlined how difficult these negotiations have become.
Well, I mean, there's the possibility that they'll make some very tough decisions on agricultural terriffs. Beyond that, you know, if there have any other investments in the bank to put on the table here, that probably is going to be critical. I mean, I suspect that President Trump is looking for some sort of investments in domestic manufacturing here of pharmaceuticals, because that, again is what he cares about. But it's hard to say, and they really are between a rock and hard place.
Bruce Amory's have done really great reporting on this that it did look like the Swiss and the US had a deal before all of this unraveled. It's a less traditional type of negotiation that you need to satisfy the President himself rather than a coalition of stakeholders or the Senate itself. You've been in the room under more traditional trade frameworks. How does it change the negotiation when you're really trying to favor a party of one instead of more stakeholders.
Well, it's going to lead to a bit of confusion on both sides at the table because I mean, as you mentioned at one point, the question was, how do you satisfy Congress? They're the ones who have to approve the deal. With the end of the day, the groundwork will have been done with Congress, with stakeholders to develop a US position. Consultations will continue, your good sense of what you need to do. Now you're trying to satisfy
a party of one. And because President Trump has a number of objectives and they can shift whether it's revenue or industrial policy, or leverage for trade or non trade objectives, you just don't know. So both sides are at the table and they're trying to figure out what will satisfy President Trump, and they're not really quite sure.
Well to that point, we're in this environment where it has been figured out the top line of the deal first and then the details later bruce to what grief, does that actually give the US more leverage as things progress. The fact that we don't have these details, and it is something that Washington can push back on because you don't have the details in the fine print yet, well.
Well, you know, it certainly gives the opportunity for leverage. It also gives the opportunity to disrupt the deals that you've just cut. We've already seen in some of the deals both with the EU and Japan. You know, they're concerned about when certain parts of the deal with regard to Section two thirty two National Security Secral tariffs, when they're going to be implemented. They were expecting them to
be implemented right away and that hasn't happened. So, yes, it gives leverage, but you know, the question is at what cost and will it blow up the deal? So it's a great challenge. It also sort of undermines a lot of what these countries are looking for and what the markets you're looking for, which is stability, because to the extent that there are things like that, there are these opportunities to disrupt the deals by continuing to push
after the top line has been agreed to. You know, that can undermine that sense of stability that everybody's seeking.
Mody is looking for stability right now, Bruce. What's going on with India and that trade negotiation.
Well, again, this really highlights the fact that the deals are made at the top. And you know, we had a situation in which the negotiators are right up to the cabinet level thought they had a deal with India. It was presented to President Trump and he looked at it eventually and decided not enough. Again, a lot of countries are going to zero. India wasn't willing to go to zero on their agricultural goods, and so he just said no. And this is going to create a real
challenge for a number of reasons. You know, we have to India is going to have to make some tough choices. Potentially they may have themselves kind of check of some sort. But politically it's very difficult for Prime Minister Moti because he presents himself as a strong leader and having to appear to cave to pressure is really going to be very difficult for him, either on these tariffs or on the relationship with Russia. So it's going to be a challenge.
On that one, and he's even go out with the rhetoric saying this is going to be challenging, but I'm going to have to do it. He doesn't want to cave at this moment. We're gonna be watching those trade negotiations very carefully. Former Chief International Trade Council for the Senate Finance.
Committee, Bruce Hirsh, thank you so much for joining us.
Don Vin of Key Bank has a sector weight rating on Intel's shares.
John joins us now.
John Mandeep is really outlining here that it's not just the President of the United States. He might be the final nail in the coffin, but actually there is the board that's pushing back on the CEO strategy right now when it comes to Intel.
Do you think he can stay in the top position?
I think he can, right. I think if you kind of take a step back, there's only a handful of executive is out there that are capable of leading Intel. And clearly during the search he was their top pick, right he was on the board of Intel's deeply familiar with the challenges that they had. He's had a lot of success historically, He's been successfully run Cadence. So I think he's you know, I think there's a lot of
noise going on right now. But you know, taking a step back, he's the right person to kind of run Intel at this point.
He's the right person John.
But what happens if it's a White House that is unsatisfied if he stays on as CEO, Just how painful could they make things for Intel?
Yeah, I think he's got to learn to kind of manage up, if you will, to the White House. Obviously, this is an uncharted territory for public company CEOs if you are singled out by the President of the United States. But yes, this would be extremely difficult if he doesn't figure out how to kind of manage up to the White House. You know, a big beneficiary Intel is of the of the Chips Act, Right, They're going to get a significant amount of funding from the US government to
support their manufacturing initiatives. And if he's not willing to play nice and manage manage up, you know, a lot of that funding could be at the at risk.
Well, he wrote a note made it public as well, basically saying that they're trying to work with the White House to alleviate any concerns John, what would it look like to manage up how would Intel get out of the situation in the ire of the president that they have right now.
Yeah, I think at this point, I think the tension between the administration and Lipu right now is how much they're willing to commit to manufacturing the US. I think if you look at Lipwui's predecessor, Pat he kind of maybe was a little bit too aggressive in terms of building out capacity to manufacture in the US is of the mindset of if we build out this capacity, they will come. Lippoo, as we've seen, has taken a much
more discipline approach at spending. He's come out and he said, you know, we are very excited about our next process Note fourteen A, but we are going to be much more disciplined about it. Right if fourteen A doesn't pan out as we'd like, I'm not ready at this point to fully commit to fourteen A, which is leading manufacturing
in the US. So I think he's got to carefully choose his words and commit communicate to the White House that he's fully committed to US manufacturing, but he's got to be very careful about committing the full amount there and just be very careful about how he selects his words.
John, How can he be explicit to the President of the United States when the Wall Street Journal this morning is saying that he and some Intel directors have disagreed about simple questions as whether or not the company should stay in the manufacturing business or exit entirely.
Doesn't he need to shore.
Up his own company, the directors the board before he starts making matter of fact statements to the President of the United States.
Yes, I do agree that he's got to kind of figure out also how to manage the board. But it's not a surprise that they're having differences. But I think this is why they needed to bring them in, you know, I'll pat the previous YEO had the full support of the board, and obviously that strategy wasn't working, so they had to bring somebody in to kind of change up the strategy. And I think that's that's what the board
and Laboo are going through it now. They're going through some of those growing pains.
John, I would love to get your read on the wider chip sector now that we've had some of their earnings under our belt.
It was an.
AMD that was punished for voicing uncertainty when it comes to whether or not they'll be able to sell some of their key technology in China. You had the lights of NXP for exams Semple saying they were uncertain of how much of a pull forward they had in terms of orders. Just how much clarity do you have on the sector as a whole for where we move from here with some of these tensions still very front and center.
Yeah, there are clearly a lot of cross currents right now. I think the trend that we are seeing Last night we had Marketship, which was a great print. Stocks down eight percent pre market today. I think what we're seeing right now is it doesn't matter how good your print is and how good your results and guidance is, everything's getting sold in this market. I think people are very nervous that a lot of the strong results that we're getting in this environment is a function of pull forward
demand related to tariffs. I think there's a lot of concerns that this could result in a weaker second half. There's a lot of concerns that this could undermine kind of the cyclical recovery that we're seeing in the broader chip sector. And then on top of that, right, you've
got these geopolitical uncertainty that is layering on top of that. Right, just the other day in the middle of the earning period, you know, you have the Trumpet administration levy one hundred percent check tariff on companies that aren't willing to commit to building in the US.
Right, and then potentially export controls.
And do they actually mean that they're going to be licenses that are going to be taken back or will they just be you turned like we saw at the age twenty, John, thank you so much for your time this morning, John Vin of key Bank Capital Markets, Colin Marker, Charles Schwab writing the need for new FED chair to cut rates.
Could be a point.
By the time FED chair pals term is up next year, the FED may have cut three or four times.
Colin joins us now for more. Is this the irony of all this?
The President is really job boning the FED and wants to talk about maybe regime change at the FED by time to get some of these appointments.
They were dumb what he wants.
I think Sid, I don't think it's going to matter because what we saw with obviously the headline about the weakening labor market. Now, there was already some support for RAID cuts. It seems like there's even more support for RAID cuts based on comments from various FED officials, and the data basically says that if we do get that weakening labor market, and if we look forward to say April, May June of next year, the markets are pricing in
three or four RAID cuts. So even without the headlines of a new FED chair, who's it going to be, how dubbish are they going to be, we might see a FED funds rate one hundred basis points lower than where.
We are right now.
That doesn't mean that the jaw boning might end. It doesn't mean that we might not get a new FED chair who is as dubbish as the administration wants. But we have to remember that it's a committee, and I think most committee members, whether it's a governor or a district bank president, they look at their dual mandate and they I think they're more methodical about how they're going.
To go about it.
So even the headlines might not stop, but I think cooler heads will prevail.
Some people have made the point, though, and Paul Donovan at UBS included that Waller's actually the most dubbish pick you could have for a FED chair because he has credibility with the rest of the committee and could sway them to more dubbish.
Outlook is that, right would a Waller be.
The most dubbish pick over the Kevins, over anyone else based.
On what we've seen.
I don't know if he'd be the most dubbish pick, but he's clearly dubbish. We could argue he's the most dubbish member of the committee right now governors and district bank presidents. But he's not out there talking about the need for a three percentage point raidcut or something like that. If the data were to change, maybe his tune or tone would change, but right now we're not seeing that. So it seems like he could be in line to be the next FED chair. There's a lot going on,
you know. We have the temporary announcement for Myron because we don't really know what Powell's going to do. So if Powell stays on and Waller's already in there, he could be a logical choice without making too many headlines, without having to worry about the confirmation process.
Well, so, when Stephen I was announced, the market reaction was slight, but there was one there, a little bit of curve steepening. If you get someone like a Myron or again one of the Kevins, a less traditional sort of appointment to the FED chair, would.
You put on steepeners? Does that trade make sense?
We think steepeners make sense regardless, because we think short term rates are likely coming down based on the data we're seeing. But at the same time, we have fiscal concerns that likely aren't going away anytime soon, and the idea that inflation might stay elevated. We're not expecting a reacceleration, but the idea that with the tariffs in place right now at relatively high levels, we can see it stay higher than we would have expected if we talked.
About this, say six months ago.
So we think maybe long term rates stay where they are, maybe come down a little bit, but likely not as much as short term rates. So I think whoever is in charge of the Fed over the next six to twelve months, we think the curve should continue to.
Steep In talking to Neil Dudda yesterday and he joined the program this morning. He was talking with the fact that Powell basically holds the cards if it is someone that seems overtly political that the top administry wants to put as a FED chair.
Do you think he stays on.
I don't know, and I say that because because it's anybody's guess right now, and I think he's in a really difficult position. On the one hand, he doesn't want to or I think he does a really good job of not politicizing it because he basically doesn't say much. Anytime someone asks him a question or someone brings it up at the press conference, he just defers and says,
we're looking at the data now. If there's a push for someone who is, you know, very partisan, very political, and is very loud about the need to cut rates sharply, which the data right now doesn't support, maybe he stays on because his term as governor doesn't end for another few years.
But I think he's in a.
Really difficult position because that makes it seem like he's politicizing it, when at the end of the day, I think he's just trying to uphold the integrity of the committee, because I really think he's trying to do the best he can.
So you think he's trying to protect the institution, But he in the end, if he were to do that, he would end up become almost a shadow fed chair. How can the market deal with that?
That's a great question. I think we just have to understand that. Again, there's a lot of committee members, so whether he's I wouldn't say he'd be a shadow fed chair. He would just be one other voting member. I think he has the respect of a lot of his colleagues out there.
We're a senator saying that they're going to run for Congress, for the House.
I think if he was there to do that, you know, he'd.
Be a voter, and he would vote based on what the mandate suggests and what the data suggests. We have a lot of time before next May. I think it's going to be a really exciting couple of months.
Well, we have a lot of time, but we have so much information to digest before that time. And this week we had both a ten and a thirty year auction, and both of them were pretty weak, or at least just lackluster. Let's say, do you look at that and say, Okay, this is real concerns about a bloting deficit and fed independence or is it just yields have been lower.
Since the payrolls data, there was less demand.
I'd say all he above, you know, when we look at the fifth concerns which are clearly there, and there doesn't seem to be anyone on either side that wants to fix this right now from in the grand scheme of things. And if we have this you know, rising deficits, rising debt, you know, we need to find more buyers there. So I think that's one of the reasons why we
think yields could stay elevated for a little bit. We're not worried that they're going to shoot significantly higher to say six percent levels, seven percent levels, But if there are concerns and weak auctions like we got this week week at the margin, nothing crazy, but it shows that maybe there is a slight pullback in demand. That's another reason why yields can stay elevated and we see a sleeper yield curve.
Okay, So to that point, bringing the whole conversation around, if you have an appointment to the Fed, that in practice doesn't matter because it's already going dubvish, but gives that appearance, especially to foreigners, to seem to be one that kind of chips away at the FED independence. Does that then matter because it makes foreigners less willing to fund the twin deficits of the US.
I think it would matter, and this is something we talk about a lot about the idea of FED independence. We're not worried right now now that they're going to lose that. I mean, there's a lot of headlines about it, but we've talked to d Nausey in this morning about it. It's a committee, but that would be a concern for us. You know, if there was a lack of independence, we think we'd likely see a week er dollar. We think we'd likely see long term meals rise because of that
loss of confidence in the markets. And when we look at what we've seen in the TICK data, basically from Liberation Day, initially the first month, we actually saw foreign private investors sell a lot of a lot of their treasury holdings that then reversed in May. So we kind of have a cloudy picture right now. We're not really sure what the long term trend will be. But what that shows us is maybe more volatility, and that in and of itself would result in kind of that higher term premium colin.
As we close out the week, what are you looking for next week. Is everything just gonna be dominated by CPI?
I think so. I think we'll have to look under the surface. I mean, the headline gets a lot of or gets a lot of headlines, but we'll have to see what the difference is between goods and services. And we'll have to see how much passed through we're seeing in terms of goods, the imported goods, but are we seeing a slowdown in services? Because I think that's the big dichotomy right now.
Colin, thanks so much for your time this morning, Colin Martin of Charles Schwabe.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, an gio 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 Business app.