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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.
Sanal Desiah, Franklin Templeton writing another FED rate cut next week seems to have been fully discounted. This FED has proven to be very reluctant to disappoint markets, Sanal joins us. Now, Sanal, you've been saying, and thank you so much for being here this morning.
Great to be here.
You've been saying that you think it's a mistake that you don't think this is an economy that requires another rate cut. Why do you think the market hasn't responded more negatively to the likelihood that isn't just what they're going to get.
I don't think you're going to get a look, we're on the borderline of what isn't isn't acceptable. I think as far as the market's concerned in particular, remember we're still dealing and we're just coming out of a data vacuum, right we're just emerging from that. I think we get into the first half of next year and the Fed
would have cut fifty basis points this year. I think the market's assumption that we're going to get three four more rate cuts next year, that's I think completely unclear to me.
Right now.
The first half of next year I think is going to be really strong from a growth perspective, and potentially if we actually get those two thousand dollars fifteen hundred dollars tariff rebait checks going around, that means you're you're going to have tailwinds not just a growth but also to inflation.
So where is the inflationary pressure going to come from? Because right now it's not coming as much from the housing sector. We've seen rents actually decline in number of places, huge push to bring down energy costs, maybe not on the electricity side. What's the biggest inflationary impulse here?
Can I Can I turn that on its head? Wait, Lisa, where has the disinflation been? Do you know since the middle of twenty twenty three, we've been bouncing along at basically three percent, We've dropped by a few tenths, we've gone up by a few tenths. We're running at a headline of basically three percent. Disinflation stopped two and a
half years ago. Now it's against that background that I'm looking at expansionary physical policy, potentially a boom coming from CAPEX and AI, and we're going to get I firmly believe that one of the main drivers of that regional spike that we saw a few years ago in inflation was those fourteen hundred dollars checks which got sent out. And now we're talking about checks again, and where is the inflation going to come from? I think it's demand side pressures.
Do you agree with what Lisa Shalatte told us last hour, which is basically, if we get a new FED chair, actually earlier this hour, if we get a new FED chair, potentially one of the first things we're going to do is in the policy towards three percent inflation target instead of two, basically accepting three as the new two.
Haven't we already. I'm just asking you seriously. It's two and a half years and the FED. The FED has cut by next week it will be one hundred and fifty basis points while being fifty percent above it above its target. So if I think about one hundred basis points we got last year, it was against the background of higher inflation than we are at today. So I guess where I'm coming from. Is all this focus on whether the new FED chair is going to drive this Fed dubvish.
It's moot we have.
A Dubvish FED.
I've said it before.
Last Talkish FED governor we had was Paul Vulco, and that's maybe okay. But I'm just saying that if we are running around, you know, bouncing along three and then you get some drive, you could get a pickup not to six seven, but maybe to three and a half four. I don't know, and I just don't know that it will be the type of backdrop against which we can get the aggressive kind of rate cuts that there's a.
Bar next year. As long as they cut next week, the bar next year is going to be much higher.
I think it is higher if we are correct in terms of those tailwinds to growth. Now, you know, many things can go completely wrong. Nobody anticipated COVID, for example. There are many things which can go wrong. But if I look at what we have right now, if I look at the kapex plans, which four hundred and fifteen billion this year, five hundred odds next year. I mean, just to put this into perspective, Germany is going to
do one trillion euros over ten years. The private sector in the US is doing a delta of about a trillion in two. Of course it's going to have a growth impact.
So why not just go wholeheartedly into risk assets and to go into speculative grade bonds because ultimately it's either fed put if things deteriorate, or it's an acceleration of growth, or make these companies more able to repay their debts.
I think valuations valuations, there is a certain question of absolute risk. I don't think you buy the entire market. I still believe in being aggressively neutral. I think the curve is going to sleep without a doubt. In terms of the risks to the scenario, I don't think the risks are going to be coming mass from a massive uptake in defaults until the bottom drops out of the economy. That's what I'd be looking for, maybe not even the bottom dropping out, but significant weakness, which we are not
currently anticipating. But do you go whole hog in, No, because spreads are tight, right, so the valuations for fixed income as a whole. As I'm looking into next year, I'm going to get clipping coupon, taking income cliping coupon, But you know, not anticipating a massive rally from where we are right now.
Stay with us.
More Bloomberg surveillance coming up after this.
Rolling in Binkie Chada of Deutsche Bank with the most bullish take out there, calling for the S and P five hundred to reach eight thousand by the end of next year. Writing this in twenty twenty six, we see robust earnings growth and equity valuations remaining elevated. Banky joins us. Now, Banky,
good morning, thank you for being with us. Good morning, so having me what makes you so incredibly bullish given what we're seeing right now, which is that winners don't take all, or they might take all, but there still are a lot of losers in the AI space that has been driving a lot of the games.
So far sure, So you know, I'm not sure that I would characterize my outlook as being so bullish. We have fourteen percent earnings growth for next year. We had fourteen percent earnings growth in the third quarter. We're looking for about fourteen percent.
In the fourth quarter.
So from an earnings point of view, you know, it's not unreasonable. I would say if you think about what average earnings growth for the S and P five hundred is outside of recessions, it's eleven percent. So we've been bobbing up and down basically around that level for the last two two and a half years. So moving up just a little bit, we were just a little bit lower, So I would argue it's just a little bit higher.
We you know, in terms of the price outlook or the S and P five hundred target, we don't do earnings and valuation. We think valuation is more a result. We do our price target on the basis of our demand supply framework has three elements. Basically, what is existing equity money doing, is there new money coming in, and what's happening on the supply side, which is the buy back. So the buybacks are tied to earnings, so you're can
have forty percent earnings growth. We're talking about gross buybacks of about one point four trillion dollars next year, and that's with holding the buy back payout ratio flat. If we go to where I began, which is what is existing equity money doing, a discretionary or fundamentals based investors positioning is neutral to slightly underweight.
So in terms of the risks that everybody.
Is talking about, I would say the fundamentals based equity investors are actually focused and positioned for those risks. So I would say that the wall of worry is really high.
Yeah, you haven't mentioned the US economy or the growth backdrop once.
Our outlook is for growth actually to pick up a little bit, and that has to do with some of the modalities basically of the OBBA and if you believe that, you know, people don't respond to the tax rate and until it's refund time.
And they see their checks. But that's sort of just sort of the distribution.
I would say, you know, if I look at the last two and a half years, we're talking about median GDP growth of two point nine percent, so let's call it three percent, So that's pretty robust.
But I would say even bigger picture.
You know, keep in mind that for the last two years, the macro consensus has very systematically underestimated macro growth, and it's you know, we're talking about trend growth of two two and a half percent. If you underestimate by one percent for two and a half years, that's kind of a big number, is the way I would put it. So I would say the market, the macro consensus, our economists a little bit less, so you know, are still very much focused on the risks.
So the equity market has to climb basically.
You know, the traditional wall of worry, and I think it's actually positioned for that. And so I mean, you know, if you look at our positioning measures, we are sort of in the middle just going to the top, and the market actually getting bullish from and positioning in a bullish way. I mean, it's nine percent just from here to the top. I mean, if I look at basically the buybacks, you know they're going to give you around ten or eleven percent by themselves.
So you put those two things together.
At the world where the new money, basically all asset classes are benefiting from this big boom that has its basically roots back in the pandemic when households ended up with basically way too much cash, about two and a half trillion dollars in excess of trend holdings. And so the new you know, from new income and new savings, if you're already to overweight cash, it is going to go into financial assets as long as the economy is okay.
And that's exactly what's been happening. But it's been happening for two years. And so the question is, you know, you can look at a chart of household cash holdings relative to the trend line and it's sort of at twenty twenty eight levels already, So it's got some room.
To really feel like you're trying to convince us, even though you're a very high price target compared to your peers, that you're actually not that bullish. You keep talking about this wall of worries. What's top of mind for risks of twenty twenty six.
So you know, like I said, eleven percent earnings growth is typical, I would say S and P five hundred. You know, price returns on average historically or eleven percent, So forty percent is more much higher than eleven percent.
Is the first point that.
I would make and I think that you know, one of the things about that average sort of eleven percent return, This.
Is not where you do it.
I'm just talking about, you know, a few aspects of historical returns. I think the thing to note is that basically, if you take the years of positive returns, and you say, you know, I'm going to take the years where the market was really positive, not sort of point one or one percent, so we have a cutoff of two percent.
If you break the two percent.
Threshold, the average price in return is actually twenty percent.
So you could argue, you know that, I'm rather very okay. And what I would say is.
In terms of thinking about next year, the first known catalyst is Q four earnings.
They start in the middle of January.
So I think Q four earnings are extremely important and we should focus on it for a second. Because Q three earnings came in well better than expected, and it's left actual Q three earnings above what the consensus is for Q four. I think the consensus is simply stale because it implies we're going to have a severe sequential contraction in earnings, so we're going to get either buybacks or big seeds.
Here's the issue that I'm having right now. The argument that you're making is liquidity one, and it's that this is a market with a lot of liquidity still in it and looking to go to work, and that ultimately companies have a lot of liquidity, the investor has a lot of liquidity, and money market funds just hit eight
trillion dollars for the first time ever. Is this essentially a central bank that has held policy relatively loose to the growth and isn't going to take the punch bowl away, so keep on playing.
I don't attribute much of it basically to the FED or central bank policies.
I would say it's really.
Been about, you know, the resilience of the US economy, which owes its roots back basically to the global financial crisis and the great de leveraging that happen then, and then of course the pandemic. So you know, we're dealing with the world where balance sheets are just much much stronger, so the capacity is much stronger, so the ability to you know, absorb and withstand shocks is just much better.
I think we overemphasize interest rates. I mean, you know, after the global financial crime, since we had interest rates at zero.
For a very prolonged period, and.
You know, the textbook logic or the narrative would be therefore, you know, everybody was spending or things sort have been much worse. But the fact of the matter is that you know, for the entire duration of that period of low interest rates, the household sector was de leveraging and continue to do so.
And in fact, it didn't stop on the story raising rates.
Okay, so the sign is exactly wrong here at the simple point I'm making is other things matter besides interest rates. We listened to you know, a number of banks in the last quarter that you know, is the housing market going to come back? And and and and you know, as some banks say, you don't think it's really about interest rates because the twenty five basis points here or there, and of course it's the ten year and not the short rate that matters. But it's it's really been about
the uncertainty. The uncertainty not just about you know, macro policies, but also about the labor market and sort of where we are in the cycle and all of the risks that be all focused on.
Stay with us, multiple INPEX dividance coming.
Up off to this.
Joining us now Angela Zino of c f R A. Angelo just sort of building the discussion of the new phase of the AI build out. Do you think that we're going to start to see a period if not only winners, but also true losers, both when it comes to prospects as well as stop valuation.
I think when you when you look at how this market is reacting right now, and it's one where you know, it's really it's really interesting because you've got these narratives that continue to change where everyone's looking to see who that winner is. And I do think ultimately you're going to see, you know, a list of winners and a list of non winners potentially losers within the overall tech space and AI ecosystem, and I think we're still trying to sort of who that, you know, who those winners
and losers are. We've got a really good understanding of what that looks like on the infrastructure side, and I think we've got less of an understanding of what that
looks like still on the software side of things. But as far as kind of this next phase that we're building out, I mean, we do think we're kind of moving from a phase over the last three years where it was one where listen, all you had to do was announce maybe some some large you know partnership or deal with an open AI or in a video or what have you, and your stock kind of you know, really just popped. Whereas we're moving to this new phase
where it is more based on execution. On the infrastructure side, it is you know, who can build you know, those data centers out and actually execute. On the devices side, it's who's going to come out with the best devices and on the software side of things, and who's going to come out with those best capabilities that the enterprise space is actually going to want and it can actually be monetized.
Angel though, was the appetite there? I'm thinking about the Information report yesterday on Microsoft talking out now there's lower expectation for getting businesses to sign up for some of these AI tools and things like agents.
I think there's an appetite. I think the way we're looking at things right now is, listen, the consumer has
really adopted AI at this point in time. You look at numbers from the alphabets of the world, and then probably the best indication of how much the consumer has really adopted AI, and you're talking about you know, toting generated at one point three quirtrillion, you know, the most recent numbers out there in October, and it's really been kind of this hockey stick parabolic movement in terms of
tokens generated. On the consumer side, it's been really a slog on the enterprise side of things, and not necessarily a surprise because when we see these new technology inflections, the consumer overs adopts first, and on the enterprise side of things, it really takes a while. When you look at, for instance, Salesforce's results last night, I thought they were actually really good, and I think the momentum we saw on Agent Force just on a sequential basis was phenomenal.
But you know, the issue is that you can win these bookings, but by the time you know, these actual enterprises go into pilot production and then actually start ramping and adoption adopting these AI agents, it can take several more quarters that we may not see that till you know, later in twenty twenty six into twenty seven.
And Delan, I'd like to go back to the consumer because I'm always struck with the adoption rate with the consumer. But there is a difference between what the consumer will use and what the consumer will pay for. Do you see that difference showing up in terms of what the next steps are in terms of the digital adoption versus the hardware.
Yeah, I mean, listen, I think that's a great point. And again, when we start thinking about the whole monetization debate and what have you, I mean, the reason consumers adopt this stuff, you know, early on is because it's free, right, I mean, they're willing to kind of go out there, try these new offerings, these AI tools because it is free to them. As far as paid services is concerned, you know, again, we're not seeing a type of monetization level that maybe I think some on the street would
hope to have seen. There are definitely power users on the you know, on the consumer front, but you know, in terms of scaling and actually monetizing the AI services on the consumer front, we're still not quite there at.
This point, right.
So, so what would be the pricing model that gets the consumer engage with their pocketbooks, especially a consumer that's used to getting digital goods for free. How do you change that monetize that.
You know, I think that's a great question, and you know, I think it depends on the actual platform we're talking about and and you know, and how this all adopts. I think right now, when you look at the monetization at least on the consumer side of things, and maybe how you know, maybe not the consumer itself, but how
the consumer we're actually monetizing. The consumer is still in terms of digital advertising, right and that's how you know, the alphabets and meatas of the world are really benefiting from all of this. But as far the consumer themselves and shelling out the dollars, at this point in time, I think it's all about continuing to find new use cases for AI and finding something that really is game changing for them where they're willing to pay for it.
But at this point in time, again it becomes difficult, especially in a more challenging macro outlook, to really get
the consumer to really pay up for these services. I think it gets interesting as we start thinking about new devices, especially as Apple starts rolling out on their you know, in terms of their AI mbitions, what some of these developers are going to be able to do with kind of AI capabilities in their hands in some of those powered apps that we're going to be able to see go out to the consumer, potentially late next year into twenty twenty seven.
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