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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. Black Rock releasing their twenty twenty five global outlook, writing we stay in risk on as we look for transformation beneficiaries and go further over weight US stocks as the AI theme broadens out. Waeley of Black Rock is with us here in New York Way. It's good to see you.
As always, Thanks for having me.
AI beneficiaries. At the moment, it's been the big AI enabler, the likes of video, which has been the big winner. How does that story change? What's the next phase of this trend?
We continue to like the big tech part of the AI beneficiary. So far this year they've been carrying the way in terms of earnings growth. Looking at twelve months trailing, Magnificent seven grew their earnings on a forty grew their earnings by forty five percent a year on year basis versus the rest of the market actually growing only four percent. So there's a significant difference. Continues to be very, very concentrated, but over time we do expect the beneficiaries through broaden out.
We're looking at energy, We're looking at utility, We're looking at industrials as we build and finance the transformation right sources, and we will have to look at the combination of public and private market as the theme plays out. We continue to think that this is an environment of transformation
rather than environment of your typical cycle. So, given all these magaphorics, not just AI but also low carbon transition, geopolitical fragmentation, we're learning real time what the longer term trend is heading towards instead of the fluctuations around a typical, stable, longer term trend, and that has significant implications on investing over the long term. What is neutral in this environment?
Right way, You can't talk specifically about this deal that Black Croc announced yesterday about buying this credit fud manager. But you talked about the convergence of public and private markets, how much you're increasing your allocation to private markets as part of the sort of extra over overweight of this broader theme.
While private market has been growing significantly in recent years, and looking ahead, a private market is expected to double in AM by the end of the decade from the twenty twenty three level. And with in that, actually infrastructure and private credits are likely going to play a big role both as we think about building the transformation and
also as we think about financing the transformation. And so far, if you look at allocation to markets for a lot of investors, they are quite heavily in real estate in private equities. So private credit and infrastructure are really exposures that we do think will grow both in terms of the asset base but also in terms of their allocation in investor portfolios.
That's where I wanted to go this question of what it means to be even more bullish on US equitism in.
The story of AI.
Where are you focusing and getting more bullish and have you ever been more bullish on some.
Of these names?
Well, right now, as you know, we have been bullish on US equities for all of this year, so we're dialing up risk taking even more because we do believe that earnings can broaden out. Right, we talked about this year being still quite concentrated in terms of Big Tech doing the heavy lifting. Next year, Big Tech Magnificent seven expected to grow their earnings like eighteen percent versus the
rest of the market a high single digit. You do see the gap closing and that broadening out is one reason that we believe there is more momentum for US acodes to run higher. Another reason is that people look at how expensive US athletes are, how concentrated US equities are. Our study shows that if there are good reasons mega forces structural forces that could potentially change the longer term trend,
the mean revert doesn't quite apply. Mean reverts to what if the destination and the makeup of the destination is changing, Which is why we're not over indexing on the current valuation level, especially as we look at investing over the tactical horizon of twenty twenty five and the near term. Text cuts and deregulation talks can drive sentiment further, which is why we're leaning into it.
When you look at your global outlook, you talk about the focus on the United States and what you're seeing in terms of security priorities, national economic priorities at the expense of others. Who is the US winning at the expensive when you look at it the biggest.
Well, when we look at twenty twenty five, US exceptionalism is a theme that we expect to to play out for the entirety of this year. Within equities. That means that we prefer US accolades versus the rest of the world.
We use a.
UK aqualitly downgrade to fund our US aquity upgrade, so there is a bit of a kind of leaning back into US aquilas. But within duration within government bonds. Because the US exceptionalism also is associated with greater fiscal spent, we actually prefer international duration like UK guilts market over government bond the US duration, where we expect term premier to come back even more reflecting the higher fiscal trajectory. We also continue to like quality income within a credit.
Even though spread is very very tight from a total yield perspective, it is reasonable and the tighter spread really reflect the fact that the government have become more indebted and private sector has been actually managing their leverage somewhat more reasonably.
Well, it's good to say thanks joining us here in New York City. Thank you, Thank you very much, Willy there of black Clok, the team over at Stay Street right in the following. We expect the narrative of rake cuts and resilience to hold in twenty twenty five and for our projective soft landing to materialize. This landscape extends our favorable outlook for equity markets. Lori Handel's Stay Street joined us now for more. Laurie, welcome to the program.
Do you not think that the policy changes that we could see in the next twelve months would be potent enough to disrupt the kind of resilience that you're looking for.
Well, it's too early to tell.
I mean, obviously there are a number of cross currents and what the Trump administration is proposing that could be a threat to what we've seen as a soft landing so far.
But until we.
Actually have the ink dried on some of those policies, it's hard to know how those cross winds will actually impact real economy.
The political changes elsewhere have been a threat to markets elsewhere, and that's for sure. Check out the Euro holding onto one of five. Briefly looking at one of four again this morning over in South Korea. We've seen the disruption there as well. Laurie is their scope for some performance x US at a time when a lot of people are on this program saying buy one thing by America.
Yeah, well, right now, we still are on the momentum Bandwig. And also, I mean what worked well in twenty twenty four is likely to persist in twenty twenty five, and that suggests that US large cap in particular has room to run here. But what we've also been talking about is broadening out. So it's not just about the high
flying mag seven tech names. It's about financials, it's about potentially energy, it's about other places like consumer discretionary that may benefit from an upgrading of the US economic prospect.
So it's a little bit of a nuanced story.
But yes, sadly or not so sadly, we're still by American large cap is our primary call.
I can't find one person who's not Laurie, And this, to me is really a key question. How do you hedge against the idea that at some point the moment does run out?
Yeah, well, I think there are a couple of things that we're doing.
I mean, first and foremost is we are trying to avoid those higher, high flying names and looking at quality or companies that can be a bit more durable through this kind of cycle. The other thing is broadening out a little bit, looking at small cap us for example, which might have a little bit less vulnerability to some of these global cross winds, and to look for a diversifiers. So we have had a position in gold in our portfolio because, as you've seen over the last couple of years,
stocks and bonds are often moving in locksteps. So getting some diversification into the portfolio so that you have something that's going to zig when the rest of the world's eggs is very important for us as well.
This is important.
Are you basically saying that sixty forty and the concept behind it has been upended that essentially we are looking at bonds that no longer are the diversifier you're looking at moving out into other types of companies and goals. You didn't mention bonds once within that So at a certain point does this have to fundamentally upend the way people construct their portfolios?
Necessarily?
And in fact, I think in some ways we're in a better position than we were a few years ago when interest rates were zero. So at that point in time, we were very much in the camp that bonds just weren't providing into kinds of benefits that investors typically needed to enjoy from them.
But we do now have some income in bonds.
So despite the fact that equities have powered forward, you know s and p up twenty five percent or so on a year to day basis with fixed incomes, kind of earning a coupon, it's still earning a coupon. So it's really more about.
A nuanced positioning.
So definitely still retain that allocation of bonds we think that they're going to return at least coupon perhaps plus.
But looking for other things, especially if we have some you know, draw down risk in the equity markets.
Well, when you look at potential draw down risks in the equity market next year, is it policy coming from Washington. I know you're bullish in the fact that potentially we're going to have these tax cuts looking at your research, but how do you look at tax cuts potentially next to the walls going up and higher tariffs.
I mean, this is the thing.
There are crosswins even within the stated policy objectives, right, So if you think about immigration, potentially it takes labor away from sectors that are already a little bit vulnerable. Think housing, if you look at tariffs, obviously, that creates vulnerability around the inflation front. We do think that the Fed is going to cut here in December, but we think that next year's cuts are a bit in jeopardy as we wait for this agenda to kind.
Of play through.
So that's what's really tricky for investors right now is it's hard to know precisely where the dost settles.
If investors wanted a base case for next year and how potential Trump policies might impact the FED, would you say, there's this idea of pauses for twenty twenty five or even potentially a hike.
Yeah.
So we had originally penciled in four rate cuts in twenty twenty five, and we're now really lowering that, looking at maybe two, probably a pause around the beginning of the year, in part to see how these policies do shape up. And by the way, the Fed, if they do cut this month and especial they cut for twenty five business points still have kind one hundred basis points.
So while we think that's that there's more to.
Be done and we'd like to see them do more, we think that it's likely that a pause in early twenty twenty five is warranted.
Luriy all the FED speak over the last few days, just giving us the impression that they believe, these Fed officials believe there's a long way to neutral. I was going through some of what Fed Mary Mary Daily had to say, Well, the Fed, Chicago Fed president goals, We had to say Governor Waller more recently as well, where are you on that? Just how far away are we from what they consider neutral to be?
Oh, we agree there is a long way to go for neutral, But the problem is that we could have some inflationary pressures budding in the early part of twenty twenty five, and so one of the things that they also have to be very mindful of is that they don't cut so aggressively that they're in a position of having to hike more rapidly than they would have liked. So we've always said that this inflation trajectory was not going to be a sort of smooth one way direction.
There was likely to be able to bumps along the way.
So it's more a question.
Of timing, but we do think that neutral is quite a bit lower from here.
Jim and Pound speaking at one forty later on this south afternoon, Lurie, appreciate your time, enjoyed the outlook. Thank you. Lori Heineld of State Street. Most Ian Lincoln with this to say, the incoming federatric has been consistent in the messaging that wild Rake Cup decisions are being made on a meeting by meeting basis. There is appetite among committee members for another move this month. Ian joins us now
for more Ian, good morning, good to see you. You've identified this and I want to go straight to it. Let's not bury the lead. What's the two year at four twenty? Fed's coming out and saying we're all confident, we're above neutral. We've got a long way to go. They want to reduce interest rates. Yeah, we've got this two year yield that has just stubbornly above four percent, just sort of stuck there at four twenty. What's that about.
I think that the market at the moment is trading is still treading the result of the election. They're more worried about inflution or a surge of reflation. They're more worried about what happens when there's a renewed trade war. They're not listening to the Fed. They're not worried about the FED cutting in December then going again in Q
one and Q two. In a typical environment, one would expect effective FED funds, which on December eighteenth will be four thirty three, to function as a ceiling phenomenal rates. When the FED is cutting right now, we could very easily find that uninverted sooner rather than later, which I think would create an interesting dynamic for the market for sure.
So who's right? Is a FED right or is the market right?
At this moment, I think that the FED is correct in continuing to normalize rates because they're normalizing rates, not because the economy is slowing, not because the jobs market has turned over, but because they believe they have won the war on inflation. And I think that's a nuance that we as at market often overlook. Normalization is not easying, it's just cutting back to neutral time.
And this really does go to the point that I think the sort of battle of the e ens I'm going to call that all morning really goes to where you can take a look at something like the Jolts report and say it's either really solid and shows ongoing strength, or you could see that the overall trend is downward.
What's the right signal at a time when you hear companies that are talking about reinvesting in their businesses hiring after the election uncertainty has been resolved, really leaning into the whole idea of American exceptionalism.
Well, I'm very sympathetic to Ian's argument that we are overdue for a spike in the unemployment rate. The trend has been lower, but the reality is the data continues to show a resilient labor market as a theme. We have an unemployment rate at four point one percent that's very low by historic standards. The concern, and I think is shared among a lot of the EANs that I know, is that there's going to be an eventual spike in the unemployment rate that then gets the consumer on their on.
Foot when it comes to the a port on Friday. What number would give the Fed a reason to say we're going to.
Stay on pause.
We need to see a very significant headline print or a three handle on the unemployment rate. You give me three fifty headline payrolls and I drop the unemployment rate, then the question becomes in this legitimate question is neutral in fact higher? Have we not been as restrictive as
five point fifty might have been in prior cycles. I really think it ultimately comes down to whether or not we see a unexpectedly higher CPI number, not payrolls, because again to the point, they're cutting because they believe they've won the war on inflation, not because they're worried about jobs.
Right.
So when you look at twenty twenty five and you alluded to this, this idea that the market is taking the cues from the political economy, the policies that might come out of Washington, what does that mean for the Fed come January?
Well, there are only so many things that Trump can do when he immediately takes office without Congress. So I think that the Fed pauses in January to see what those things are. So they take that median off, They reassess the situation, They see the trajectory of growth, They see if the type of tariffs that are announced are the type that they would characterize as a tax on
the consumer or would really trigger reflation. I suspect it will be more of a tax on the consumer, a one off increase in CPI, and then we just move forward.
And do you think that people are under estimating the chance of a slowdown, a material slow down in the US economy as everyone talks about incredible profitability and this incredible boom in the stock market and beyond.
I would say that at this moment people are underestimating the chance that we have a slowdown. What I'm the most concerned about is historically the FED has been very successful at taking the edges off of the cycle on the upside and the cycle on the downside. This is what central banks are designed to do, and that has resulted in all the major corrections occurring as in the
form of a crisis. So where are the imbalances? Rucker high stock prices speaks to this idea that there's a lot of optimism out there, and a lot of optimism that's overlooking the potential downside. So a little bit nervous in terms of valuations in the equity space as well as generally in risk assets.
Try and set policy for that. The two way risk into twenty twenty five, both to the upside and to the downside.
Yeah, well, I have to say I'm not a little happy that I don't have to do it. So good luck to all the people on the committee.
Good luck to Chairman exactly, who speaks later on this afternoon. Ian, thank you, it's going to see it. Thank you, sir Inlingan there of BEMO. This is the Bloomberg Sevenance podcast, bringing you the best in markets, economics, antient 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 opp