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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.
Cameron Dawson of New Edge Wealth writing, the biggest question for twenty twenty six is whether or not everything else can strike back and deliver the earnings growth that is necessary to unseat the narrow mag seven leadership next year. Cameron, I am so pleased to say joins us now. Cameron, thank you so much for being with us, and happy holidays.
Great to see you. This broadening out trade and the real question behind it, when will we get the data and the information to understand stand whether it really is valid?
It really is a show me story in twenty twenty six as to whether or not the equal weight s and P five hundred can deliver on what are some pretty high expectations for earnings growth next year.
If you look over the last three years.
You've been in an environment where the largest parts of the market have driven the vast majority of the earnings growth, which is why you've had the vast majority of returns come from these MAG seven names. But that's expected to narrow, not quite flip, but narrow in twenty twenty six. So you can see it in something like the equal Weight sm P five hundred having expectations for revenue growth to accelerate from one and a half percent and twenty five
up to five percent in twenty twenty six. So a lot is writing on this idea of EPs delivering, and of course that will be a show me story as we move through the year to see if there is upside to those numbers or if yet again we'll be in an environment where MAG seven gets revised higher and equal Weight gets revised lower.
So you add to this story something that happened last week. There actually was a big piece of news last week and Nvidia had this agreement with Grock, which is a chip designer. Some twenty billion dollar valuation of this company doubling it over the past couple of months and raising questions about the dominance of Nvidia, but also whether there is a shift in narrative around the AI story to one that is more efficient, more useful, and cheaper for some of the end users.
I think no better way encapsulates this idea of potentially a narrative shift is looking at some of the non profitable AI related names. They of course, were leaders coming out of the April lows and saw an absolute frenzy as we moved into the fall, with September and October rallies that were truly eyewatering. But what's been fascinating is that they have not participated in this latest move higher.
If you look at something like the Golden Sachs Nonprofitable Tech Index, or look at something like ARC, those indices have not made new highs, which just suggests that maybe, just maybe there's some rationality entering into this market, which we would welcome and see is a good thing, because that kind of rally in unsustainable, unprofitable names is not something that we would see as healthy for the market.
What do you expect from M and A in I mean not just the mag seven, but in AI. I was pretty stunned after seeing that Grock deal when I looked on the FA function on the Bloomberg terminal to see free cash flow at Nvidia is just gone parabolic. Right last year it was twenty seven billion. This year it's sixty billion. Next year it's expected to be ninety five billion. I mean, they are just raking in cash and are able to deploy twenty thirty forty billion dollars without even thinking about it.
Yeah.
I think it's a really good question, and it raises the question of where we sit in the semiconductor cycle, because we do know that the end of the day, semiconductors are a cyclical business, and if you go back to prior siteles, you typically do see earnings grow by one hundred, one hundred and twenty percent plus in up cycles.
Then of course you do hit an inevitable down cycle, and we're now in an environment if you look at the overall Socks index that earnings are up about one hundred and fifty percent off of the late twenty twenty two lows, which just suggests that possibly we are closer to the end of the semi cycle than we are to the beginning. But I think it's also very arguable that this semicycle will go further and last longer than fire ones, simply because of the secular tailwinds of something
like AI. But it's important to remember that it's always this time. It's different with cyclical areas. If you remember last time, it was the Internet of Things and we were putting chips in everything, and that's why we weren't going to have semicycles anymore. I think the real question will be is how much further can this go? And is that free cashualw that Nvidia's generating today something that we can extrapolate into perpetuity. Possibly not?
Well, what happened Cameron to the the terror of Liberation Day? I mean the economic uncertainty that we're all wringing our hands about, right these tariffs that admittedly have been muted a bit by the drop and the dollar almost ten percent year to date. Is that is any of that a concern next year? Or have we realized that it's actually no big deal.
I think that if we were to see the tariffs as a concern, it's really captured in this conflicting kind of headline. We got a headline over the weekend saying that bankruptcies are at their highest level since twenty ten. And then you pull up corporate profits in overall you in the US and they're at new highs. And so this suggests that tariffs are hitting things like smaller businesses harder.
They're also hitting smaller consumers harder, who have a higher propensity to spend of their overall incomes.
So when you put that.
Together, it really encapsulates this idea that tariffs exacerbate the K shaped economy. They hurt lower income consumers, they hurt smaller businesses, is much more than they larger businesses and higher income consumers.
I just wonder, Cameron, how well you can see this rally continue unless you get participation that does broaden out this idea that you can see an economy that's growing at the fastest pace in two years. On headline GDP, Yes, it's noisy, but a lot of its data centers. It's not actually the mom and pop stores that are declaring bankruptcy.
The one thing that does give us a little bit of solace in thinking about this broadening out is contrasting where we are today in breadth measures versus where we were last year. Last year at this time, you only had about twenty percent of names trading above their fifty day moving average. It was an incredibly narrow market, which we thought made it more fragile. If you look today,
that status at sixty four percent. So it doesn't necessarily mean that we are immune to everything, but it is encouraging that we are seeing broader participation in the rally, that it's not resting on just a small handful of names. So, using the banks as example, if the economy was really falling off a cliff, we don't think that we would be seeing bank earnings revised higher nearly as much as
they are and banks hitting new all time highs. Some of that rally might be a little bit extended, but I think it's important to note that there are still some signs that cyclicality is being well bid in the equity market, which just give us a little bit more comfort that things aren't his extend or maybe broadening out in a better way.
Stay with us more Bloomberg Savannah's coming.
Up after this, Debbie Cuttingham, a federated Hermey, is writing, although Trump administration attacks in the Committee have intensified worry in the financial markets, we believe the FED will prevail. This does seem to be the preeminent belief right now
in markets. Debbie joins us now from more Debbie, why do you think that the idea of FED independence is kind of behind us and that people have sort of closed that story out in twenty twenty five and looked to a sort of more normal said in twenty twenty six.
Well, I think what we saw in twenty twenty five was a surprise and then ultimately a divided said, you know, we still don't know the full ending to the Lisa Cook story. We do know the ending to what the Supreme Court has thought about has FED independence and a different type of body compared to some of the other ones.
We saw President Trump go from you know, supporting Chair Poal to trying to fire Chair Poal, to being told he can't fire Chair Poal, to submitting, to trying to find other replacements for him, interviewing replacement candidates for him, for you know, his exploration of his share term in twenty twenty six. So I just feel like what we've seen so far has been a bit of a you know, upheaval and turmoil within the FED that now that the independence has been you know, solidified. I think that will
not be the case going into twenty twenty six. However, what I do think will be the case is that we see.
Less voting that.
Is all in alignment. I think we will see more descents. We've already started to see them in the last three meetings, and I think that will probably continue. And you know what we've seen historically as hawks, Centrists and doves will become even a little bit more pronounced in their voting.
So do you think, Debbie, that people are overpricing with chance of ray cuts next year?
I think they are, at least from what the Fed is telling us with their you know, their plot, their syrians of economic projections. You know they are looking for one.
Our official call right.
Now as we as we you know, transport into twenty twenty six is for two one in the first half, one in the second half. But I think ultimately, although the pace of lowering rates has modified from where it was when we started twenty twenty five, the ultimate terminal rate leases seems to be the same. I mean, it's not going below three percent, and that's where I think the bond market is settling in. That's why you see
you know, the ten year rallying at various points. That's why you see a range trade that is really more indicative of actual technicals and market conditions. You know, as we head into year end, supply and demand, reco market, you know, issues all seem to have more of a influence on rates on a day to day basis for this, you know, last trading week of the year. But ultimately, when you look at the terminal rate for the FED over time still at three percent, it's just three percent a year earlier.
I wonder how you view liquidity right now, given your position, and given that we're now have eclipped eight trillion dollars in money markets, it seems like there's a lot of cash slashing around the system, and we have pretty decent growth, right even though even though it's hard to look at these economic data points three point eight percent GDP, maybe only two point six percent inflation.
What's your view on a sort of the macro picture, you know, I.
Think the macro picture at this point is that the worst is behind us. We really when we went into twenty twenty five word toying with the potential for some sort of a you know, substantial growth slowdown into a potential recession. That's behind us now though at this point we think the worst quarter you know, obviously was the first quarter of twenty twenty five. And the consumer continues to be employed, so the consumer continues to spend. The consumer is the one driving the economy in this in
this you know, recovery that we have been experiencing. So I think slow growth will be the case. I nobody, I know, not a lot of people like that. From an equity market standpoint, it doesn't get the same you know, sort of splashy results that faster growth economy do does. But but I but I believe that when you look at liquidity markets, when you look at broader term fixed income, slow growth is not a bad not a bad place
to be. And we've seen that certainly in the gathering of assets in the in the liquidity market, as you said, you know, recently passing the eight trillion dollar market.
Stay with us, multilanbag Savannah's coming up off to this.
Bronical sark of City writing.
We continue to expect another slight increase the unemployment rate to four point seven percent in December.
Veronica joins us. Now, Veronica, thank.
You so much, for being here, thanks for having me holiday holiday.
Wondering from your perspective how much the data that we got earlier this month was actually valid and that people are discounting it too much.
Yeah, I think there's a lot of that going on. And if we saw the unemployment rate next Friday, the first week back back to work, if we saw that at something like four point seven, I think people will believe it a lot more. Because, yeah, there's a lot
of issues with the November October data. We don't know how much the government shut down affected new measurement of those months, but December should be relatively clean, and if it stays pretty high, I think that's a more concerning sign for people.
How come this labor market is weak?
I don't get it, because you've got incredible earnings growth, right, so corporate America is doing very well, and there are no new people coming into this country, right, there's no immigration the demographics trend like everyone old, there are no people like it should be.
Companies are fighting for employees.
Yeah, yeah, I mean there's been this issue of you know, is it labor supply, is it labor demand. We've been dealing with us for a couple of years now. You know, back in twenty twenty four, when we saw the unemployment rate increase, the excuse was also it's more immigration. I don't think we can use immigration to explain the bad data. You know, different sides of immigration to explain bad data.
But I think what's happened is that labor demand has just weakened more than labor supply, and that's why you've seen the unemployment rate rising. It's this low hiring still low firing dynamic. But I would be worried that low hiring can only last for so long before maybe you do see some layoffs.
Is that because technology and AI have made the few employees that companies hold on to more productive.
I'm a little hesitant to conclude that that's what's happening now. That might be part of the story, absolutely, and we could see larger productivity gains from.
AI longer run.
But this really started a couple of years ago. This really started maybe summer of twenty twenty three when we saw this pullback and hiring, and I do worry that it started in more rate sensitive sectors like manufacturing, small businesses. The pullback has really been there, and so yeah, it doesn't necessarily matter if you know equities are doing well in earnings or find small businesses are going to be more rate sensitively bringing.
Manufacturers I thought we're bringing manufacturing back, right.
We have been losing manufacturing jobs I think every month this year, but that predates this year also, and it is a rate sensitive sector.
Well, this sort of speaks to the question of is the FED restrictive and this is the big debate restrictive for who? Because on on one hand, you do see companies filing for bankruptcy at the fastest clip going back to twenty twenty. On the flip side, you see AI companies screaming ahead, digital Bridge being purchased for four.
Billion dollars out of fifteen percent Bingham.
So can you square that?
Yeah, I mean there's this fifurcation across all parts of the economy, and I think there's a lot you know that has already been said about the k shape economy for consumers. You know, higher income consumers are spending, but we definitely see that in sectors also, and you know, the smaller businesses who are more sensitive. I think rates are restrictive here, so you expect.
A significant number of rate cuts.
Let's just postulate that we do see an increase further in the unemployment rate to four point seven percent as you expect.
What does that mean for January twenty eighth.
Yeah, I think they're going to be cutting really Yeah, So we are penciling in another cut in January, another one in March. And it's just this kind of idea that you've clearly gotten more concerned on the labor market side of your mandate. If the unemployment rate is something like four to seven that we think we'll see in December, we will have hopefully more inflation data by March that we trust again, you know, early twenty twenty six data.
If you're seeing inflation slowing and data that you believe again, and you're less concerned on the inflation side of the mandate, you're more concerned on employment, why wouldn't you be at the midpoint of neutral, which would be cuts in January and March to get you there.
The counter argument is, if you get rate cuts potentially two by the end of March, at the same time that you have the one big beautiful bill, the tax refunds, and potentially an additional two dollars stimulus or whatever else might be coming down the pike.
Don't you risk reigniting inflation that never died.
Yeah, I'm not so concerned about that right now. You know, the inflation driven by lower rates, more stimulative monetary policy, you'd expect to see it first in a sector like housing, and you definitely don't see that yet. You don't see those signs yet. Home prices have been slowing, new rents have been slowing a lot. We already know that in the inflation data. There is this lag issue of shelter inflation that's going to I think, be slowing all of
next year. All of the potential fiscal stimulus, you know, maybe larger tax refunds of the business tax incentives that were part of the bill from the summer. Those can help support growth, But I would worry that the main determinant of if people are spending or not is if they have a job and what their labor income is, and that we have seen slowing already, and you would think consumption would slow them too.
Stay with us multile impag Savannah's coming up after this.
Let's stick with the consumer as focus shifts toward the new year data. Telseia with Telsey Advisory Group, writing heading into twenty twenty six. We expect events hire, REEF tax refunds, and more accommodative interest rates to drive a continued recovery and discretionary spending, especially among younger consumers.
Data joins us now in person, thank you so much for being here. Thank you for having me. It's wonderful to get your insights.
As we all look at our gifts from the holidays, decide which ones we need to return. What's to read on how well this season really did perform for retailers broadly across the sphere.
I think holiday season was solid.
I think those increases three point nine four point two percent very much in line with expectations. These ten days after Christmas are very important too, whether for returns, for gift card redemptions, all very important to see what it looks like. But the product newness drove demand. With the case shaped economy that we have, you're definitely seeing it higher end and the lower end looking for value. And that's where you saw some of the traffic. Whether it's
the Walmart's, whether it's the tjx's. They were there the last ten days before Christmas, as always, is where you got the real bump up in terms of top line.
I'm fascinated by the bifurcation between Walmart and Target because I had seen them previously in kind of the same box. But Walmart has done so well this year and Target has disappointed.
Why.
I think overall what you've seen from Walmart and Target store standards have fallen. You haven't seen the same innovation and product newness. You haven't seen the same forward momentum of movement, particularly with technology, where Walmart is anticipating what the customer needs and they really have modernized their whole store format. The Walmart of today is not the Walmart of five or even ten years ago.
If we see a K shaped economy, do we get Dollar Tree? You know, these family dollar kind of discount stores doing well, because if I look at the stock performance, I don't see Dollar Tree taking off.
I think overall you will see those dollar stores perform. Keep in mind that in twenty twenty five, the focus on tariffs who imports goods from China was impactful certainly to the dollar stores, and now lapping tariffs should be a benefit to them. Over time, who you saw as share gainers, it was all the off pricers. I mean, whether it was Burlington Ross Stores or TJ Max. With the diversification of the assortment that they have, they captured customers.
What's fascinating to me is you're talking about how this was a solid holiday season, and yet we're talking about a bankruptcy potentially at the end of this month of one of the biggest retailers, of saxophth Avenue, which faces more than one hundred million dollars of a debt payment.
A lot of people are wondering whether that will actually happen.
Can you square this story the idea that we're talking about robust sales, a steady consumer i'llbeit picky or choosy or whatever you want to say, at the same time that we could see a bankruptcy of one of the biggest retailers out there.
Well, when you think of who's gaining share from that, you look at the new brands that both Bloomingdale's and Nordstrom are putting on their shelves stocking in their stores, they're gaining share. Just across the street on fifty ninth Street, Bloomingdale's just opened a new extension to their fourth floor with newer brands. Whether it's Victoria Beckham, whether it's Valentino to tem They have a whole new assortment of goods out there that frankly, perhaps if not for this change,
you would not see those brands in Bloomingdale's. And you're seeing it in Bloomingdale's and in Nordstrom.
How much is this a pattern that you expect to be repeated, that we're going to see wholesale bankruptcies of some retailers that are not keeping up with a new product, while others I'm thinking of Walmart or I'm thinking of Bloomingdale's continue to gain share. Sort of the big get bigger, can invest in technology, and you see wholesale bankruptcies.
On the other side, financial leverage is very important in order to keep the operations of a retailer running smoothly. You get into trouble with financial leverage, that's an issue. It always takes a lot to kill a retailer. They don't just die overnight. Take a look, for example at Blockbuster from many years ago, and certainly we'll have to see what happens with that debt payment of Sacks that's
coming to very shortly. But certainly, when one is weak, others can gain strength, and that's what you're seeing in Bloomingdale's and Nordstrom.
We talk about Bloomingdale's.
Obviously it's a great store, it's an iconic department store across the street here, but it's owned by Macy's and that stock is down thirty percent this year. What's Macy's doing wrong that it's Bloomingdale's is doing right.
I think overall, the bold news chapter strategy that the CEO of Macy's, Tony Spring, is put in place, they're making advancements and you're seeing some change in Macy's.
Also.
You look this year at Macy's and what they've done, whether it's backstage with the off price in their assortment, whether it's what they're doing with luxury, whether it's what they're doing with their own brands, and frankly, the store experience.
The investments that they've made into the top one hundred and twenty five one hundred and fifty stores is outperforming the core and I think you're going to continue to see the assessment of the footprint of Macy's continue to be architected towards their best performing stores over time.
So you like Macy's, I mean, is this a buying opportunity than this dip.
I think Macy's is an opportunity. I think when you think about next year and you frankly think about the enhancements that they've made to assortment, both in Macy's and Bloomingdale's, it's not expensive for where it is, and you look at the landscape of department stores that are public companies, it's Macy's, Coals, and Dillard's. Macy's has an opportunity on valuation to move higher.
Do you think that early next year we're going to see pretty big price increases across the board for retail goods.
You're going to see more price increases coming. But keep in mind this innovation and newness that we have, you don't have a comparative, so we'll have to see what those prices look like. Consumers are cautious and discerning, but they'll buy what they don't have.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, a gior 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