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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.
We begin this hour with stocks holding steady as investors look ahead to that two day FED meeting. John Sofas of Oppenheimer raising his year end price target on the S and P five hundred for twenty twenty six to a street high of eighty one hundred, once again the biggest bull on Wall Street. Writing, monetary policy, fiscal policy, and the continuing progress of innovation and corporate earnings growth are key to growing earnings and revenues in the year ahead.
John joins us. Now, John, you have been the biggest bull and you have been right. Why do you think this time people are getting it wrong about how accommodative both monetary and fiscal policy makers are going to be well.
I think, Lisa, the big thing is, you know, we're in a process of normalization of interest rates coming out of a hike cycle, and a remarkable hike cycle, because the Fed bock raised drakes eleven times on pause fourteen with only five cuts in this whole process, but no recession, brought inflation growth down from nine point seven to based on the PCE last week sometime between two point eight and three, So you know, it looks pretty good. It
shows sensitivity for the dual mandate, a balance. There's a bit of a walking the tightrope for Jerown Powell, but I think he loves it. He's a real pro and I think, you know, he's got to walk the tightrope here to give you a little bit of balance. So we get enough stimulus for the economy essentially for sustainable growth without upsetting the job cart terribly, and we moved forward and around the world. You know that we've seen interest rate cuts and now the thought that maybe it's
gone too far. I think this is a lot like the different that it's got the override of the Bernanki legacy, high transparency, communications in its policy, the way the FED operates, But it's we're looking for that normalization and inflation tends to be stickier for longer after you've had a period of ontoward levels of inflation. Takes a while to work out in the system, and it's a drama that traders and investors need to work out and play to their benefit.
Right now, the drama is playing out. You are seeing people ratchet back their expectations for rate cuts next week, now next year, to now two rate cuts from three just a couple of weeks ago. I am wondering, though, how much that matters versus the AI trade. I mean, there was a recent GOLBSAC survey of investors and they agree with you on the basis that you will get FED rate cuts, but they disagree that you're going to get that kind of screaming return because the AI trade
is hitting some roadblocks, isn't in hypergrowth mode. How much do you buy into that?
You know, some of that sounds to me like the trading establishment in a way, because it's the action where it can you add BIPs to the bucket, you know, in trading, working with the spread and the daily basis I'd have to say this is not just not uncommon. I mean there's always questions. You've got you have to invest a lot of money to do what this proposes to do, whether it's the data centers, whether it's all the ancillary software and the design changes to be made.
But the companies that are doing it are very well positioned in terms of their balance sheet. And when they borrow money, it's probably because they rather keep the cash on the balance sheet and just use other people's money. Oh pm, other people's money the old thing for the old days, right, And so I look at it, it
looks to me AI is for real, you know. I think whenever I talk to people who are institutional users, and I don't mean just in finance, but if it's healthcare, consumer discretionary insurance, what have you, people are using AI and it's and the consumers are using it either for fun or just to shock each other what they can
do with GPT, whatever the heck it's called. You know what I mean, they put your face on somebody else, you know, and you're running down the street place you look like thirty year old, you know, there you go, and it's the whole thing is it's just not uncommon. It just looks to me like and haven't I been here before? But the wonderful thing about this, in a digitalized environment, the market tends to discount both good news
and bad news fairly quickly. And that's what gives us this effect of one day the trader's on the market. The next day it's intermediate long term investors as they buy up the babies that got throughout the bathwater. The next day, then they visit mids and smalls and they go It's a rotating market, but it's it discounts good news and bad news more quickly. Because the digital news travels faster, it's quicker to analyze, determine, and the play is the play is on.
John we got in terms of the play is on. Nvidia is getting the green light to sell the H two hundreds in China. When you look at that decision by the administration, does it say to you that in twenty twenty six, trade tensions are going to be a little bit more quiet than they were this year?
You know, that's a tough one to say, because when it comes to trade tension, it seems to be just part of the way things work. With the current administration, but likely would also continue on with any other administration because that's the way President g operates. Also, there's a balance between fig leaf and the.
Acts.
You know, it's a constant. This is a game of chess, and it's not a friendly one. But ultimately both sides want trade because trade is peace is more profitable than building war machines and battling each other. Look what's happened to Russia financially really when you look at what the cost of doing what they've done to Ukraine has been.
And on the other hand, if you play with your financial partners nicely, you know, and you compete, you really you produce better results for your own people, and you also improve the for China would be the Silk Road and the success of that, the competition that's occurring then, and what it's felt by other emerging markets. It's just, you know, it's just this is the way things work. But the tension, it's like they often say, the market
doesn't like uncertainty, it loves it. The traders love uncertainty. Both sides can benefit intermeding to long term investors. Again, babies that get thrown out with the bathwater. The traders looking for the BIPs a new vanity plate with the trophy car.
Yeah, maybe bonfire of the vanity play. I am curious going forward about how much you see this rotation as durable, given the fact that you still see the AI stall warts as really having a lot of the strength. Are they going to keep leading or do you think that there is this durable shift that is.
That's a great question, and I think what we have seen since twenty three, and many people deny it, has been a broadening of the rally with other sectors sharing the stage with information technology and communication services, which is where the streamers and the social media and the search
engines are as well as the old phone codes. But when you look at it, you're in a situation where other sectors like financials, industrials, healthcare utilities are beginning to find interest by investors more greater diversification in portfolios to benefit from the other nine sectors that can benefit from technology. Any company that wants to keep a competitive edge needs AI. Any company that wants to gain a competitive edge needs AI.
Any company that just wants to maintain a good premise is a value company to attract and maintain investor loyalty needs AI. It looks like into the future. It's you know, here we go, what is it? Back to the future. Yeah, here we go.
Stay with us. Multil intex Savanas coming up off to this.
Ahead of the.
Latest FED decision, the team at Morgan Stanley expecting a cut tomorrow followed by two more next year. Michelle Weaver of Morgan Stanley writing, this is a bullet set up for stocks that are looking ahead towards accelerating earnings revisions and FED cuts based on lagging moderate labor weeks market weakness. Michelle joins us. Now, Michelle, thank you so much for being with us.
Thank you.
It seems to all be predicated in the idea that two rate cuts comes with strong growth. Yes, what gives you confidence that we are going to get strong growth despite some of the weakening that we've seen in recent labor market metrics.
Yeah, so we think that we've seen in the alternative data more softness in the fall. So I think when we get the official numbers next week, we are going to see more softness, but that we're not going to get one of those nonlinear, really concerning type rises in unemployment data. We think the setup is really constructive into next year for a broadening and earnings. If I think about the past couple of years, it's all been about the world cap stocks. It's all been about those who
are exposed to the AI trade. We've seen a lot more weakness under the surface for the Russell three thousand. Over the past couple of years, earnings growth has been flat to negative for most of those stocks. We finally saw that turnaround last quarter with those names growing eight percent. So we are starting to see a more constructive setup
for that broadening. And I think that combined with a FED that is easing but without a really concerning spike and unemployment, is a great setup for stocks into next year.
Is it as simple as saying that some of these smaller companies are deploying some of these AI tools to be more efficient and preserve some of their margins, and that's the reason why you might see now performance.
I think.
I think AI is certainly part of that story. When we think about AI deployment, next year, I think is really going to be the year of the AI adopter. It's taken companies a couple of years to work with the technology to set up the guardrails to retrain their employees to really get AI deployed. Our tech team has
a great CIO survey. They think that by the end of this year, sixty percent of companies will have at least one AI product live the field, and then that will rise to eighty percent by the end of next year. So we are finally starting to see this wave of adoption flow through the market.
Can you see that wave of adoption without layoffs?
I think you can. I think it's I think around the margin, you may see some companies do a little bit of layoffs, but it's largely going to be an incremental story. I think a lot of the messaging I've heard from CEOs on Ernie's calls is we're going to keep headcount flat, but we're going to be able to see more growth. We're going to be able to do more with the same number of employees thanks to AI.
Do you think that AI can also continue if the energy demand isn't quite there so I'm able to meet that demand?
Yeah, it's absolutely a tricky setup around around the power world. Our team has a great model where we take our semiconductor analyst chip sales forecasts, say what's the power needed for that and how much power are we going to need in the US through twenty twenty eight. We're forecasting a forty seven gigawatch shortfall in power just through the traditional grid interconnect power for scale, that's around ten x the power consumed by New York City. So that's a
huge shortfall. But there are a lot of innovative type of solutions that that can apply to this.
So ten new York City's short yes, but through things like natural natural gas turbines, those are behind the meter, those are apart from the grid interconnect process.
And then bitcoin site conversions I think are really interesting. So some of these companies have essentially realized that the power that they're sitting on is more valuable than some of the underlying business. We think there's around twenty gigawatts there, so there's a lot of power to be had there. And then nuclear is the last one that's a little bit more politically challenging, but we may see some nuclear for that problem.
Bitcoin conversion sites, so you're saying that people who previously mind bitcoin aren't necessarily seeing the gains there and so they're transforming that into a fuel essentially for artificial intelligence. Is this the sort of not the death of the bitcoin trade, but really the shifting in terms of where the enthusiasms go that has broader market implications.
Yeah, so I wouldn't say it's the death of a bitcoin trade by any means, But there were some bitcoin miners who masked a ton of energy to be able to do bitcoin mining, and they essentially saw, we're sitting on gold rush here. We have so much power. These hyperscalers need power. They're willing to pay a huge premium for it. Let's just fell off the power. That's a fascinating trend.
Meanwhile, we've been talking a lot about deals and how much deals have been taking place both in the AI and the tech space, but as well as the media space and beyond. I'm just wondering how that plays into some of your forecasts. Is that a positive thing or is that sort of a catalyst for winners and losers that really will differentiate the winners and losers within the investing space in twenty twenty six.
Yeah, it's a very very positive thing for us. We think that you're going to continue to see pretty strong M and A and capital markets activity into next year. I think a lot of the hesitation we saw this year was really around the public policy front. What's going to happen on tariffs, what's going to happen on the regulatory front. How quickly are we going to see deregulation?
Where's tax going. I think now that we're going into next year with a little bit more clarity on that policy picture, I think you're going to continue to see some of that corporate risk taking a little more aggressiveness on them and I front.
At a certain point, is the year of the adapter rather than the adopter, rather than the year of the AI tech innovator? Does that disadvantage the United States over the rest of the world As we see jpmmorgan come out this morning and say they see the emerging equity market outperforming the develop market one for yet another year after years of underperformance.
Yeah, So I think that we're going to continue to see that adoption really ramp up, and that broader diffusion is what's going to really help the US market. It's been so concentrated the return story on the enabler side that as we see that adopter story broaden out, that will be more constructive on the enabler side. Though we did have the announcement, so that company will see some
games there. So there's a little bit more gains to be had in the enabler side, but I do think it's overall constructive setup.
When it comes to the real economy, is the consumer holding up?
It's been really tricky for the consumer. We held our consumer conference last week in New York and we had over one hundred companies in attendance. We got a pretty good read on the consumer from that. I think one key takeaway there was the k economy is still very much in place. We're really still seeing that bifurcation between higher income consumers and lower income consumers. I think you're going to start to see that continue into next year.
But that's really what companies were talking about.
Is that what makes the FED a little bit more complicated next year?
Yeah, I think there's some complication there. I also want to bring this back to the energy story that we were talking about earlier. Affordability concerns are huge, and there's been a lot of discussion around is this demand for
AI power starting to weigh on the consumer? So just bringing those two conversations together, and we've found that in certain regions that activity has really pressured consumer electricity bills in the mid Atlantic, those bills have risen by about eighteen percent, where data center activity is really concentrated.
Stay with US multiple IMPEX dividance coming up.
Off to this, turning to the trade war between the US and China, China's top leaders signaling they are on alert for a potential flare up as they draw up economic plans for next year. Joining us now to discusseswar. Prasad Senior Fellow at the Brookings Institute Esmar, thank you so much for being with us. I want to start with the trade war and the context of this recent move by the United States for Nvidia to be allowed
to sell its h two hundred chips into China. Do we have a sense of where buying those chips fits into China's plans as they try to turn more inward and rely on domestic champions.
So we are looking at competition in one area which is going to be the most intense between the US and China, which is technology. The Chinese government has been very keen on upgrading its manufacturing sector, moving up to value added chain and trying to dominate the high technology sectors. You know, solar panels, electric vehicles and now AI. For
the US, it's a very dicey st right now. On the one hand, you don't want to lose access to the Chinese market or deny China some of these chips, because that means that it gives China much more of an incentive to move forward with its domestic innovation strategy. But at the same time, providing these tips to China, it does make it a lot easier for them to
move forward in terms of that innovation. And of course, the Trump team seems to be betting that this is going to help in video gain significant market share there. Whether that's going to be a durable increase in market share, whether in Vidia can hold on when China competes with all the state resources behind it, I think it's the
key question. But in the short term, in Video's revenues are certainly going to take a big positive bounds, and there are going to be some revenues coming in for the US government, But I'm not quite sure that this is going to serve the long term US national security or economic interest very well.
As far.
I'm wondering the Belton road, the digital Belton road that we've heard Jenson Wan talk about that China would create a system of dependence on some of its technologies and goods in Southeast Asia. How far has China gotten in creating that type of ecosystem where domestic economies nearby really rely on China, both technologically as well as beyond that.
So in terms of trade and finance, China I certainly made a lot of progress through the Belton Road and other initiatives, and technology is what they're coming from. At the moment. I think there is still a sense that China is able to not innovate fundamentally, but take existing innovations, many of which come out of the US, and commercialize them and scale them up in a way that is,
you know, clearly world beating. And that is the advantage that is certainly very relevant in terms of increasing the scope of its technological you know, influence within Asia. That is happening. It is happening a little slowly, and the fact that the US is somewhat receding from the region and many countries in the feel that they cannot disengage from China because they don't have an alternative, trustworthy partner, is certainly helping China in this process as well.
When it comes to China's relationship with Europe, especially now given Ammanu macrom is just there.
He's talking about how it's unstable.
Do you see China going to have to not just dump more in Europe but try have to invest more in Europe because the walls have gone up and it's been so complicated with the United States.
The walls are going up for Chinese exports and they're going to go up more because the reality is that China is now a very very unbalanced growth model, with most of the growth coming from the supply side of the economy, which in normal times is not a bad thing, but domestic demand is not keeping up, and with every passing day, every passing quarter, there is more capacity in
China that needs to be exported. The US has put up walls at least to direct Chinese exports to the US, So Europe and other countries that need exports themselves to boast their economies are going to face The brand in China is very cognizant of this issue, its reliance on exports to power its own growth, but also the fact that wolves are going up to its exports around the world, so it is trying to befriend these countries by essentially
investing in those countries, and this again poses an existential risk in my view for some of the companies in these countries, especially in the high technology sectors, because they could get swallowed up by these Chinese investments and essentially become find it very difficult to compete against Chinese firms operating on their own soil. But that's the direction that Chinese are taking, and at the moment, very few countries are able to resist.
A lot of times the United States will say that they are pushing other countries to do this, to not exactly combat, but have this competition with China. What kind of message is the US sending at the same time when they're basically showing that they want to put trade and economic concerns higher than national security concerns with there's an entroump allowing Nvidia to sell the H two hundred into Beijing.
Yes, some of the policymakers I've spoken to you do point to what they see as US hypocrisy in the sense of trying to put up barriers to Chinese imports, trying to limit exports and trying to get them. There is other countries to do the same, while at the same time the US seems very very willing to trade off many issues that the US claims should be very important, including national security considerations, for short term economic gain, and this in media decision is a prime example of that.
So certainly the message that the rest of the world is hearing from the US is one of great inconsistency and some degree of short termism rather than really viewing the long term economic national security of the interests being the prime drivers of US policy as.
Far over the past couple of years, you and I have talked about a real question of how much the US will lose some of its dominance globally as a result of some of these shifts and concerns that you talk about. We haven't really seen it. You have seen some sell offs arbitrarily in the dollar, sort of momentarily, not arbitrarily, and a real bid up in the price of gold, but have you seen a sustained shift away from the US financial system by some of the trade partners of the.
R In short, NOE, I think the reality is that the US remains a dominant economy and dominant financial market in the world in terms of final consumption demand is still the most important and relatively speaking, in terms of its financial market, debt size and its institutional framework, which is certainly being eroded as we speak. But overall, this package is going to be very difficult for any country
to beat. And despite all the concerns about US government debt, about the US institutional framework, including the central bank independence is one what we have seen is foreign investors have continued to buy significant amounts of US treasuries and other US financial assets, and this includes foreign central banks. Certainly foreign central banks and everybody around the world is trying
to diversify away from the dollar. They're doing so at the margin, but really there isn't much of an alternative to the US and we see that in investor behavior very clearly.
This is the Bloomberg Survanons podcast, bringing you the best in markets, economics, and geopolitics. 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.