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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.
Bob Dole of cross Mark is cautious heading into the new year, saying Risk Act returns are likely to be lower in twenty twenty five after very strong returns in twenty twenty four. US equities are increasingly vulnerable to corrections given elevated valuations and earnings expectations. Bob, I am so pleased to say joins us now. Bob, do you think that yesterday was indicative of some of the perilousness if you can say that, of such high valuations at a time of great uncertainty?
Absolutely, Lisa, these evaluations are up there. When I look at my screen and I see, you know, twenty five times trailing and twenty three forward. I say, I guess the world's perfect, and it would have to be to justify those valuations. And you've all just discussed the world isn't exactly perfect. Expectations are high for the economy, expectations are high for what the Trump administration can do, and those good news items must come in to sustain these levels.
That said, you're not exactly a raging bear. I mean I was looking, and you still expect sex to outperform bonds. You still see gains incoming.
So how do you nuance a message.
Of caution without necessarily pulling back in any capacity to time where other people are saying we're just beginning some sort of AI revolution in US equity markets.
Yeah, so I wouldn't go to one hundred percent cash. But if I've made a lot of money and I'm fully invested and was tempted to take a little money off the table, I think that's okay. I'm fully invested. I've just been moving a little bit more toward neutral. For example, my biggest overweight thankfully has been financials. I'm trimming them. My biggest underweight, thankfully has been healthcare. I'm doing some bottom fishing there, just moving a little more neutral.
Uncertain about where we head in the new year. Is a Trump administration going to pound the table on cost cutting and text cuts or is it going to be more about deportation and tariffs. They're going to give very different answers to the stop market.
Well, Bob, you know that politics are ordinarily a second concern for markets, but they're likely to inject volatilely of the course of the coming year. Do you actually move politics to being the first order of business when it comes to the concern for markets in twenty twenty five?
Well, only its effect on the economy. The economy and earning has always come first in my view, but politics, particularly in this environment, have a more than normal impact on those profits.
So when it comes to things like pulling back you say on financials, a lot of analysts that have been coming on our program say that actually they are overweight because they're looking at the potential M and A activity, looking at the deregulation that Trump might usher in, given the fact that he did so in Trump one point zero, and he keeps talking about it. So why at this moment would you pull back on something as specific as financials.
So it's still my largest overweight. So I still love the stocks, but I don't want to be a pig. So I'm taking some money off the table, recognizing the valuations have moved up some and you trees don't necessarily go to the sky or go there in a straight line as it were, So just taking a little money off the table. If I'm not overweight financials, I would get there.
Giving your concern about the US economy and valuations, are you finding opportunities either in stocks that focus more globally or in global stocks or are you kind of very focused just on the US here?
My mandate is all US, but there are some interesting things overseas, notwithstanding difficult environment that we see for earning over there. I would say back to core portfolio, you want to focus on companies with high earnings predictability, Peter, in my view, high earnings persistence, strong free cash flow, dive it in stocks, dividend growth stocks. I think we'll do even better next year.
Great, So you're going to focus on the dividend sector for next year dived end growth.
Yes, that's awesome.
Any other kind of outliers that you have out there that maybe aren't top of mind for everyone, that you think could be a really interesting opportunity.
Yeah, so I come back to the I'll call it quality, although it's not exactly quality. That earnings, persistence, and the free cash flow. Those stocks have done just fine on the way up in this market, and I think when we get the inevitable pullback, I think those stocks will go down less than the market, showing some relative outperformance.
I'm wondering if you see any signal from what we got from Oracle yesterday. Oracle had really high expectations, shares had been flying high. They came out basically in line. I mean, I was looking through the numbers looking for some kind of catastrophe to really justify the fact that their shares were down more than eight percent. Couldn't really
find it, but it really highlighted those high valuations. How vulnerable are some of these companies, particularly in the tech space, to disappointments when it comes to earnings.
Great point, I think you read it well. That is to say, the earnings were okay. They weren't great, but they were okay. And then you see the stock doing what it did. You say, what am I missing? It's expectations are just very high in too many places. And I repeat at a multiple in the low twenties, things better nearly perfect, and the world's articles earnings were not perfect, they were just okay.
I'm looking right now.
We just got at FIB small business optimism, and you know, some of these peripheral reads shed some light on how much the mood has changed, and you can make the argument maybe this is just because of the election and some sort of optimism in terms of regulatory pullback. Nonetheless, you saw a surge to the highest level going back to twenty twenty one. You see the biggest jump in this optimism going back to nineteen eighty at a time
where you've seen surprise after surprise to the upside. I just wonder how much of a risk there is that we are underestimating how much strength there is in the economy and what that means for inflation, on yields and the Fed's path ahead.
Lisa, I think you nailed it there with that set of questions. Look, stocks have moved up a lot to discount that good news that supposedly is coming, and that's why you see sentiment on the stock market and the conference board percentage of Americans who think stocks are going to be higher twelve months from now all time high. That's generally not a time to pound the table. And you may make another good point inflation. Inflation is not going to two percent as the Fed wants in my judgment,
without a recession. In fact, it's stubborn. It's likely to move up a little bit more. You talked there earlier on about the three handle for the CPI. That's nowhere close to too, if you will.
Yeah, and this is really a reason why maybe the bond market holds the key keys to just how much legroom this market has. Bob Doll of Crossmark, thank you so much as always for being with us. Talking about Saudi Arabia and turning to commodities, oil pairing back recent gains following the fall of Syrian President Bashar al Assades and ahead of OPEC's year end conference, Ellen Wald of the Atlantic Council, also author of Saudi Inc, Writing the
oil market does not seem phased by these events. Prices climbed one percent and trading on Monday, and the market is still more concerned about the tepid economic growth outlook and supply growth forecasts for twenty twenty five that could put the market into oversupply. Ellen joins us Now and Ellen, I want to start with your experience covering the royal family in Saudi Arabia and your intensive knowledge of the country that a lot of people are saying has to
be the main operator in this event. What do you think their mindset is seeing the fall of Syria and what their role is in trying to impose some sort of new order in a key stronghold in the Middle East.
That's a great question, and I think that Saudi intervention and Saudi involvement at this point could really play a key role in the future of what Syria looks like and also whether this instability spreads to other areas of the region.
I think that the Saudis wants stability.
Ashar al Asad was a very stabilizing force until he wasn't and now that he's gone, the potential for a real failed state and potential for more insurgencies to take root is very very high, and the Saudis want to prevent that.
They want a stable rule over all.
Of Syria, and so they really have a potential right now to both influence the development of whatever new government or power comes in, but.
Also to influence.
How well that regime is able to hold on to power. And I think that oil and fuel is very very critical at this juncture, because even though Syria has the oil and gas supplies that it needs to supply its own demand, it's not going to be able to get them up and running in time to stabilize.
Their their hold on power. And so essentially a Seria has been dependent on Iranian.
Fuel, uh And and Russia and these other kind of pariah nations for a very long time, and Iran is clearly not interested in supplying that fuel. We saw this very dramatic tanker turnaround right in the middle as soon as the uh Asad regime fell.
And so if Saudi Arabia and other.
Gulf countries with kind of stable monarchies can step in and help provide them with the electricity, the.
Fuel and aid uh you know, to start to rebuild and start to consolidate their hold on power, then they could prove to be.
A very stabilizing force in Syria and in the rebuilding of whatever is to come. And so I I do think there is an important opportunity for the Saudis along with others in the Gulf to really influence the future trajectory of Syria.
Well, who do you think is best position to really fill that void? Saudi Arabia, Rack kowait Emroadis.
You know, it's difficult because the political and religious makeup of Syria is very different from the Gulf. But I think that at this point those sectarian differences matter a bit less than really who comes through with the aid and with the fuel and the money and the medical supplies.
And the food that they're going to need.
And I do think that the Saudis could take a leadership role in kind of a coalition effort to supply these things and really to do you know, to become that stabilizing force.
Yeah, I'm pulling this back a little bit more domestically. How successful do you think, you know, drill baby drill will be? Is that something that's going to be effect of really ramping up our production? And do you have any thoughts on what we should be trying to do with the refining industry, which is really kind of been stagnant in this country I think for years.
Yeah, I think I kind of wish the refrain was actually refine baby, refine instead of drill, baby drill, Because at this point, you know, production in the US is at its highest. I mean we're at at like thirteen point five million barrels a day.
We're the largest producer in the world right now. How much more do we really need to produce? How much more do we really need to.
Throw into this uh, you know market that's kind of verging on over supply. But what we really could do, and what I think would really help both the American people and you know, our trading partners abroad, would be to really take a look at our refining industry.
To put in some new refineries.
We've seen refineries closing and shifting to BUYO fuels, which aren't really all that profitable or useful.
We need to.
Really maybe have some new refineries, and we could really I think, keep gasoline prices down and fuel costs down that way, as opposed to just producing more oil and shipping it abroad, because we can only utilize so much of that in the US.
We can also if we have.
More gasoline and other fuels, then we can use ship that and export that equally. So I do think that the really we should change that refrain to refine baby refined.
It doesn't roll off the tong Quoitas. Well, we don't.
We don't have a state oil company the way these Gulf countries do. And we just heard from Chevron, I believe it was last week that said, actually, we care more free cash flow more than we care about production growth. And they're actually starting to pull back in the Permian. So what is the US in total spare capacity?
That's a great question.
I don't think that we can really talk about the US in terms of spare capacity, because, like you said, there's no state run oil company. Every oil company decides for themselves. It's in their best interest for a very long time. For a long time, in kind of the height of the fracking period, we had this kind of ethos where everyone had to produced, produce even if they weren't even you know, making up their costs simply because they had to keep.
Ahead of payroll.
And so you could be sure that the push and the drive was to increase production.
Now that's not the case.
Now that you've got big companies like Chevron, Exxon, uh and you know, really consolidating, and there's a lot of consolidation in the Permian, you're seeing less of this push and more of a sense of Okay, what's a healthy growth rate, you know, what's healthy for the company.
And so I don't think we're going to.
Necessarily see much more growth or a significant amount of growth in terms of oil production. And I do think the focus should really be on what do we do with this oil and how are we best using it? And how can companies maximize uh, you know, their profits with the oil that they're already drilling.
Ellen Wald of the Atlantic Council, thank you so much for your time and for your insights, particularly in Saudia Arabia. Here's the latest small caps outperforming post election, but Bank of America Securities looking for MidCap outperformance twenty twenty five.
Jill Carey Hall writing, we favor mid over small caps for twenty twenty five or cost us on small relative to large for now, given small caps have the most post election policy risk, refinancing risk has emerged in small caps have been stuck in earnings pre share recession.
Jill, I am very pleased to say joins us now.
Jill, welcome, Thank you so much for being here. I want to start with NFIB small Business Optimism, which came out this morning at the highest level going back about three years at a time, everyone's convinced that the policy mix is going to be auspicious. Why do you push.
Back, Well, I think, you know, maybe near term we do see some further upside given small business optimism, consumer confidence, momentum, good seasonality. Usually December is a good time for small caps. But when you look ahead to twenty twenty five, I think even though there is a lot of optimism on deregulation and business friendly policy, I do think that will certainly help some pockets of US small and mid caps. And you know, financials as a sector we're bullish on.
I think there's a lot to be in there from deregulation in terms of costs. But I think for small caps overall, you know, you look at the backdrop and if we do see some of the policies that could be more negative to profits in terms of tariffs and immigration policy, small caps are the most labor intensive size segment. They would also be hurt the most by tariffs. That's at a time when you know we've seen better economic data.
We've seen with the red sweet multiple rate cuts priced out of the market, refinancing risk has come back and small caps are still stuck in this earnings recession. They haven't been able to get out of.
A real question here about how much the optimism around small caps is tied to some of the policies that are expected from the Trump administration, and how much is the feat is going to be cutting rates even with a growing economy at a time where there's a real inward focus on the United States and US exceptionalism that would benefit some of these companies disproportionately.
Well, Look, I think that's going to be a reason why this year is going to be about picking stocks and picking your spots within the market rather than just buying into seas. So I think from an index perspective, midcaps do look the best positioned. I mean, they've historically actually outperformed in the year following when the Fed first started cutting rates, and they have you know, less post election policy risk around tariffs and immigration reform. They're the
least labor intensive size segment. You know, their profits trends have been a bit better in terms of revisions next twelve months, CPS trends have actually started trending up a little bit. For midcaps, they're still coming down and small
so I think that's where I would focus. But from a you know, stock perspective, I think if you can focus on areas of small caps that are more economically sensitive but don't have as much refinancing risk, you know, screening on leverage and those factors, focusing on stocks that have positive rather than negative revision since that's the scarce
resource right now, there's still opportunities in small caps. The valuation dispersion is high, there's a lot of both cheap and expensive stocks, so you know, still areas for active stock selection. At b of ARN, let's cover about a thousand small and mid cap stocks, so there's a lot of opportunity out there.
Jill, I feel like the refine answering risk is a reflection of a long term structural trend from the last ten years where private markets have picked off so many quality small assets. So what you're left with in the public markets and small are these more levered, lower quality names. I think looking forward over the next big structural trend over this coming decade, obviously AI is going to impact big companies, but it also feels like small caps or
small business models could get disintermediated. So it feels like there's some left tail risks there that I don't think a lot of people talk about. Is that something that your team is thinking about.
Yeah, I mean, I think that's the barcase we hear on small caps, the demise of small caps, that small caps have just morphed into these low quality zombie companies. There's no good companies left. I think there are obviously some aspects to that that are true. I think we're past peak low quality. Is the good news because when we had the IPO boom in twenty twenty, twenty twenty one, all these non profitable companies joined the index. Some of the rebalances in the Russell have have taken some of
that out companies. Some companies have started to return to profitability. So we're past maybe peak low quality. But I do think that when you look at metrics like leverage has increased over time, when you look at the quality the index, the proportion of non earners there are, the long term growth rate of small caps, there aren't as many high growth stocks as there used to be, and then companies are staying private longer, ipoing it at bigger market caps.
So there has been a shift in the index, and that's one reason why we think the equity risk premium for small caps, even though it's now gone below average, may not go back to the averages that we saw in the eighties and nineties. So, you know, I do still think that there are positive longer term themes for domestic smid caps, Like if we see a cap X cycle, if we see restoring continue in the US, that should
definitely benefit pockets of the size segment. And just given that it is so his historically cheap versus large caps, you know, that should argue that you could potentially see better price returns over the next decade. But ner term, we'd still be cautious given the profits environment.
Jill Carey Hall really fascinating. Thank you so much, Jill Kerry Hall of Bank for America's Securities.
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.