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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortenn. 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.
All right, let's talk a little bit here about the outlook for equities, particularly as a lot of people look at this bullmarket and wonder whether it can continue into twenty twenty five. Price targets are coming in for the new year, and we should point out price targets for the past year, well, they were light. John Sofas though he was always bullish, and he had a good eye on what he saw and what he thought we would
get in twenty twenty four. And now he's out with his note for twenty twenty five, seeing that the bullmarket has more room to run, writing that the pivot to easier monetary policy we believe supports our vue that the market for US equities is still mid cycle, and he says that the technology led double digit gains of the large cap stocks over the first three quarters of twenty twenty four, likely to broaden out to other sectors, styles,
and market caps in twenty twenty five. Please say that John joins us right now here on the big program, kicking us off here on this December thirty first. Happy new year to you, John, and let's talk about those forecasts going forward. What supports some of these targets I'm seeing targets come in now, including yours, into the sixes, into the seven thousands for the S and P five hundred. Is this all earnings driven or are we going to see some multiple expansion as a part of that as well.
Great to be on surveillance this morning with you, and happy new year to you and the whole Bloomberg team as well. I must say that with US it's a combination. It's always you want to see revenue growth.
You want to see earnings grow of that's what matters most of the market.
But I think overall there's room for multiple expansion to play a role in here the private investor over the years I've been in this business for forty one years has changed a lot over the years, and with what has taken effect in terms of retirement planning over the course of the last forty years in which we've seen to find benefit pension.
Plans go by the wayside social security.
The amount of income that it can provide or what percentage it provides an individual of income during retirement means people have to invest more. So we think many private investors today, instead of investing in five stocks for the actionable idea of the day, are investing much like institutions would for intermediate to longer term goals, and we think
that supports higher multiples. While on the other hand, we think the effects of technology on all eleven sectors that has been shown since the financial crisis crisis right up to date through the pandemic and now with AI in the process, offers a lot of opportunity here we'll see equities move higher.
We'll expand a little bit here on that theme of AI. That was a big part of the trade that we saw in the market, certainly in the first half of the year. A lot of questions though towards the second half of the year about when we start to see the material gains from that on the bottom line, on the top line for that matter as well. We see that in twenty twenty five, John, I.
Think what we'll begin to see it more and more this year.
It's been primarily the amount of investment that has been made in AI, both from within the technology sector itself but in the other sectors by managements that want to remain very vibrant and effective in attracting investors' attention in terms of creating greater efficiencies for revenue and earnings grows and on the other and we think it's the consumer is going to be a big part of the upgrade that began.
This year and.
Likely will gain some traction in twenty twenty five and on forward.
But all this stuff takes a bit of time.
But for investors who have patients, are diversified, know what they own, why they own it, and have right sized expectations about how different asset classes, different sectors cyclicals versus defensive, etc.
Operate, this looks.
Like a time of both opportunity and risk, and the main thing is to have some tolerance for fluctuation and a tolerance for risk that is realistic and right sized.
John, how much of the bull case is dependent on capital flows from the rest of the world and the absence of kind of economic resilience in Europe or China. Do you see international investors bolstering the US market maybe more so than domestic.
Gosh, you know, that's an awfully good question.
I think over the years we've seen private investors from abroad increase their exposure to the US.
A lot of that.
Because of the influence of the technology sector, with the innovation that occurs here at the in the design stage of technology. But in addition to that, you know, the factor is in an uncertain world, the US strength of the US dollar also attracts foreign investors to invest in the US, while meantime central banks and sovereign wealth funds may actually stay at home. Many of those foreign funds, we think it's the individuals will continue to invest for diversification in the US. But John, you.
Mentioned that point of the dollar, that it attracts international investors, doesn't it disincentivize bid so an investor in say Japan, hypothetically that maybe wanted that realm of safety or kind of innovative technology technological exposure. Maybe looks at the strength of the dollar in three months time, it says, actually, this isn't worth it.
Well, actually, we would have to say that the strength of the dollar is relative. And I think where with the dollar strength where it is right now, for instance, it almost disincentivizes US investors from investing abroad because the
foreign currencies are weak or versus the US dollar. On the other hand, for foreign investors where their currency is weak versus the US, investment in the US enhances dividends, enhances gains because investing in a stronger currency helps your performance if you're a foreign investor with a weaker currency when you reconcile your trades, or you don't get a loss in translation but gaining in translation.
I am curious on here if you can talk a little bit here about how some of the policy decisions that we're expecting out of Washington could affect the performance of financial markets. And I want to start specifically on the teriff's side, because there are some concerns about the bottom line effects on corporations and obviously the inflationary effects on consumers.
I have to say, Romaine that the greatest concern relating to tariffs, of course, is on the traditional sense of tariffs. Everybody can remember tariffs presaging the Great Depression at all. But the effect of tariffs during the first Trump administration and during the Biden administration, when he actually kept many of the Trump tariffs and even increased them, was not
anywhere near as concern as might have been expected. We think the idea of some of the numbers that are thrown around by the President elect in terms of what might impose on tariffs, much of this, we would think is part of that art of the deal approach that
the President elect takes when negotiating. But the other side of it is, if you consider the US economy versus producing economies, of all the goods that our consumers buy, both businesses consumers as well as individuals, we're buyers of size and so we're a very attractive place to sell your goods to, which might mean there's more wiggle room for countries that want to sell into our country or be export goods to us to win our import dollars.
So to speak. And we think it'll be interesting to see how that works out.
But we think most of the talk on the tariffs based on the cabinet and the experience of the cabinet, as well as the president's experience after having had four years in office prior to this. We think it'll be more of the bark, will be louder and much more create more fear than the actual bite. And we also think the negotiations will probably work out better because countries are going to look to want to keep the US as a major source of.
Their exports.
John great stuff as always always insightful all year long, and we expect that as well in twenty twenty five. Have a happy new year. John Stolf is there over at Oppenheimer Bloomberg survey showing that right now, the average the median price target right now for the S and P to end next year right around sixty six hundred. The highest estimate in that survey came from the man
we were just talking to, seventy one hundred Chrety. We talk about this idea here of whether expectations heading into twenty twenty five are going to match up in the same way that we saw with those low to high expectations in twenty twenty two. We do want to turn our attention right now to the commodity space. And specifically energy oil markets. Well, they're pushing higher here in the last trading session of the year, this after we got a report that factory activity in China did expand for
a third straight month. Pablo mulchinoff over at Raymond James. He's looking ahead to next year. He says that, well, they're forecasting oil prices to be largely range bound. However, the main energy story of twenty twenty five, which was also the main story of twenty twenty four, is set to be electricity rather than oil. Pablo joins us right now to talk a little bit more about that, and Pablo,
let's talk about it here. I mean, if you had told me coming into this year that some of the biggest gains in the equity market would be utility and power companies, I would have said you're crazy. But here we are at the end of twenty twenty four talking about utilities and power companies that continue to continue to be the story next year.
Yeah, and this is the derivative trade on AI. So the euphoria around AI touches what we might call the picks and shovels of the electric power industry. So the utility stocks, the equipment provider, So everything from you know, guest turbindes, wind turbines, solar panels, battery systems, and also the construction companies that are physically building all of this energy infrastructure to accommodate the boom in electric power consumption.
Well, we talk about the building of this infrastructure, and you have obviously new infrastructure coming on here in the US, we have old infrastructure, old nuclear plants coming back online. Here. Is there enough out there, I guess if you will for these companies to draw on or are we going to be facing significant shortages in power given some of the demand needs out there that we know of, at least when it comes to all computing and AI.
Well, our listeners do not need to worry about, you know, physically running out of electricity. You know at any point in the foreseeable future that that's not going to happen. What is true is that power prices are already trending up. In fact, they've been up since pre COVID by about twenty five percent, and we should expect power prices to continue moving higher in part because of the additional demand
from the data center build out. And look, let's also keep in mind the geographic differences here, the bulk of the data center, or the largest portion of the data center buildout is happening around Washington, d C, Northern Virginia, Maryland, a little bit into Ohio. You know, there's not as much happening in the western half of the US. There's also, by the way, data center build out AI related in Europe, in parts of China.
So this is a global story.
By nor did Virginia has the largest portion, so naturally that's where the infrastructure needs to move forward at the fastest pace pavel.
When I first learned about how utility grids worked, I was pretty surprised to learn that you can use both oil and natural gas, and sometimes natural gas can be cheaper in utility grids as well. There's a big conversation in the US right now about exporting a lot of extra natural gas and energy to Europe. But if you see this AI data center buildout in the US, do those flows get redirected?
Natural gas going to Europe will be limited not so much by the ability of American gas for NEWS to pump as much as they want, but rather by Europe's need.
To import LNG.
And here's why I say that since Russian invaded Ukraine three years ago, Europe's consumption of natural gas is down by fifteen percent. I'm not talking about down fifteen percent from Russia. I mean that's practically at zero. By overall, Europe is using fifteen percent less natural gas.
So guess what that means?
Less need for natural gas from any source you know, US, Katar, Norway and Azerbaijan and so forth. So that's really where the constraint is going to come from.
So there's no necessarily relationship between the natural gas needs of Europe or the natural gas needs of other folks in the United States versus say, the AI build out.
We have plenty of natural gas in North America to both. So natural gas will certainly play a role, particularly in the eastern half of the US to support the data center boom. Now in the western half of the contraries,
I said, AI is less of a factor. But keep in mind we also need to replace cold planks that are being retired, and this is why we're going to be following an all of the above strategy for the electricity mix natural gas, wind, solar, and in certain cases, but also long lead times nuclear as well.
I am curious though, Pavel, do you think that at least here in the US, that government policies coming out of this new administration will be supportive of some of those renewable energy initiatives like wind, nuclear, et cetera.
Number one thing we need to understand about government policy as it relates to electric power is that it is preductinently at the state.
Level rather than the federal level.
Electric utilities are regulated by state level utility commissions. There is a little bit of a role played by FERK and the Department of Energy in Washington, but number one is the state level regulation.
So here's an interesting fact for some of your listeners.
Twenty nine states have a renewable portfolio mandate for electric utilities, including, by the way, some red states like Texas, Missouri, and Montana.
Yeah, and abition to see whether that holds and how that interplay between those states and the federal government goes forward. I do want to ask you a much more straightforward question about the oil market, and particularly about the mobility of oil. Obviously, there are a lot of concerns about geopolitical issues and the disruption flows of oil. You have the wars obviously going on in the Middle East, and
elsewhere that have also disrupted the flow of oil. Do you see any sort of right sizing in that next year or are these sort of I guess issues that are going to just remain lingering for a good portion of the year.
For the past twelve months, we have had two major wars Russia Ukraine and of course.
What's happening in the Middle East.
Despite that, oil prices have barely moved since January twenty twenty four. Or why because we also have to take into account what's going on with demand, and demand has been weaker than expected, in large part because of China. So number one question for next year is not so much geopolitics, it's good old fashioned supplying demand. What's going on in China with the economy, and by the way, with electric vehicle sales. Half of China's auto sales are
now electric. That's a big deal. We're also watching the dollar, strengthening dollar as we have seen pressures commodity prices across the board, including oil.
And the third thing we're watching is OPAK.
Opak has been very disciplined since COVID with supply. At some point in twenty twenty five, OPAK will begin to unwind its production cuts, which means more barrels on the market, and that may put some pressure on the price of oil as well.
All Right, Pablo Krits Pablo Mulchanov over at Raymond James a closer look here at the energy market the outlook for twenty twenty five. We begin this hour, though, with equity futures sitting on modest gains, stops hoping to snap a three day losing streak. Here on the final trading day of twenty twenty four, the SMP having a wonderful year, a blistering year, the index up about twenty four percent.
Matt miskin O of John Hancock seen a limit though, to further gains, writing that it's going to be hard for equities to stomach much more upside. While we still prefer US equities based on the better fundamentals, we recognize the magnitude of outperformance in twenty twenty four is not likely to be replicated. Matt joined us right now to
talk a little bit more about that outlook. And Matt, maybe we don't see the same gains we saw in twenty twenty three and in twenty twenty four, but should we expect at least some meaningful gains in twenty twenty five.
It's certainly possible romaine, but what we're seeing here is heavy is the crown really for US equity leadership and US economic leadership. Frankly, after certain stints like this where US economy is just blown past most global economies, the US stallar has strengthened a lot, so it's up about six percent in twenty twenty four. A stronger dollar makes US less competitive on a global basis. It helps actually bring down inflation because we're buying stuff from abroad, but
it is difficult to stomach for economic purposes. Then rates have been higher, so we have high quality bond yields ten ye yields higher on the year. That's a bit of a slowdown. And then there's massive expectations out of the US economy and markets into twenty twenty five. So the earnings estimates for twenty twenty five for the S and P five hundred are still about fifteen percent, so
there's a lot of optimism. One of the biggest assets the S and P five hundred and US large cap stocks have had over the last several years has been conservative and more kind of bearish sentiment the sentiment dial has been turned up significantly to end twenty twenty four. We think that's becoming a bit of a liability as we walk into next year.
Well, that's what I am confused about here. We talk about how crowded some of these trades are. We talk about the lack of hedging that we're seeing in the equity space, and the idea that you have valuations at least to some of these companies that at least by historical standards, would be stretched. I know there are some people that want to reinterpret history, But what do you
do in that situation? Do you reallocate, do you stand by your conviction that maybe some of those stocks can go high or what?
Yeah, momentum is not a fundamental factor, and momentum was the number one way to outperform, the only way to outperform, frankly in twenty twenty four. So what is momentum. It means you look at the best performing stocks of the last six to twelve months and you allocate.
The most of those. So basically, chasing performance was rewarded in twenty twenty four.
But to your point, Romain, there's other things that drive stock markets, whether it's valuations, whether it's earnings, and that those parts of the market have been left behind this year, and there's a bit of a dog's of the Dow type formula where usually the worst performers can sometimes become the best performers in the subsequent year this year ending this year, the dogs of the Dow kind of mantra looks more realistic as a potential turnaround or catalyst into twenty twenty five because.
We are so stretched on the valuations. We're at about.
Twenty two times on four pe on the S and P five hundred, the highest in history at least the last thirty years has been twenty four not there's about nine percent upside we can get on valuations. Earnings estimate's already great. Dimmiting yields are the lowest in history. So to your point, it's hard to eke out gains in the more expensive stuff.
The better value stuff come around.
Yeah, sorry, why do you believe that In the essence of when you see sell offs happening, you're seeing a lot of babies thrown out with the bathwater here. And if you believe that maybe some of these underperformers can come back next year, how much of a risk is there that just risk appetite alone goes along with it.
Yeah, that's the tie that lifts all boats and the risk appetite. But what we're seeing look is into next year there's just hard to get more valuation upside on the other parts. It's not necessarily call that they're bad companies that there are going to see this, you know, really bad performance. It's more just saying the multiples can expand in more like mid.
Cap stocks and small cap stocks first.
Large cap stocks internationally also has been really a tough performance year. European equities are only up about two percent and US dollar basis, they're very cheap still, so what we could see is just a rotation or even I would say downside protection because the valuations are so much more attractive. See, those are the types. We're just trying
to manage risk the best we can. And frankly, the high flyers don't look good to us because of the valuations and part of the value space that's deep value, the earnings aren't is good. We're trying to apply quality at a reasonable price as our mantra into twenty twenty five.
So then is the best way to hedge the equity market, in essence, the equity market, because if you're looking at the volatility in the bond market, is that really a place to go hide.
We think it will be into twenty twenty five. Inflation is likely to come down. Inflation is the nemesis of that bond market inverse correlation. Really that hasn't been around for the last year or two. But inflation has come back a bit to end the year. We think that's more sentiment driven. Do you think that comes back down? It's twenty twenty five, and really it goes back to housing. I mean, we're going to get some housing price data today.
We're really dialed into mortgage apps housing price data. Housing made up about sixty to seventy percent of the inflation narrative over the last several years. If that can slow down it into twenty twenty five, inflation comes down, bonds act like bonds again, and if that happens, a balanced portfolio really can look much better from a diversification benefit standpoint into next year.
Matt, I want to go back to something you just said. It kind of startled me. One of the great things about having a Bloomberg termo in front of me is I can kind of check everything on the fly.
About dogs of the Dow.
They were dogs all year long here, I mean, I was just taking a look at the dogs coming into this year. We're talking about underperformance by about what twenty five percentage points relative to the S and P five hundred, just to use that as a comparison. And I'm looking at some of the ones that will probably be the dogs going into next year. I guess the ones with the highest dividend yields, like of Verizon, Chevron, am Jen
and Johnson and Johnson to say the least. I mean, some of these names were the same dogs coming into this year. And I am curious as to whether this is also about sentiment and attention. If all the attention is on tech and AI and other things, like, why should I expect anyone to really embrace a healthcare stock or even just a consumer staple stock or a telecom stock.
Yeah, so momentum, like I said, was the best performer, and all the other other factors did not work, so you had to chase performance. If this is not a year of a rotation, it's got to be the nineteen nineties. Oliver again, So there's only been three other times where there's been double digit or sorry, twenty five percent back to back games like we're looking at here. Potentially the only time it went three years in a row was
in nineteen ninety nine. So we're gonna have to kind of bring out the popcorn and watch maybe some Jurassic Park or Friends, or we're gonna have to get our
nineties culture back. But nineteen ninety nine. You gotta be careful what you wish for because if we do get that third year where it's another moment, sorry, oh, another moment go ahead some year, it's going to be tough because then you got to be careful what you wish for, because then we got the last decade after that, so we would start to peel back that momentum trade and rotate into higher quality but value parts of the market.
I mean one thing though, too, about those comparison with the nineties, and a lot of people will make this comparison, which is the idea that in the nineties you were dealing with a lot of companies that just did not necessarily have the fundamentals to support those valuations. We talk about a market and I checked it this morning, seventy percent of the gains, the point gains in the S and P five hundred attributed pretty much now to about nine socks, basically the MAG seven and a couple on
top of that. But all of these are names that are just cash monsters. In Vidia, Apple, Amazon, broc On, Meta, Tesla, Microsoft, Alphabet, JP, Morgan, Netflix, those are man I.
Agree, No, we've been overweight tech. We've got that, but it's just hard to see the same kind of return stream that we've gotten out of them into next year. You know, you can only do outsize return. There is reversion of the mean over time usually with markets, and we're in the most concentrated market in history by a huge factor. So forty percent of the market is just in those top ten stocks. And I'm talking about the SMP five pointer. That's never happened before. It's never even
been close to this high before. So reversion of the mean would suggest that at some point those trillion dollar megacap companies have already built in the valuation. So that was great cash flows. I'm not saying, look, we've got it in the portfolio. We've got a bit of an overweight relative to other parts of the market.
Yeah, but going into next year chasing it doesn't make a lot of sense to us.
Finding other opportunities cross a portfolio, other acid classes makes more sense.
In our view.
Matt Miskan over at John Hancock. Happy New Year to you. We'll catch up with you in twenty twenty five.
This is the burg Surveillance Podcast, bringing you the best in markets, economics, angio 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.