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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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 the sour stocks rising as traiders await the FED decision and earnings from big tech. Julian and Manuel have Evercore staying overweight tech on a three month view. While the dust settles, many of these names, particularly the Semis, may remain pressured on a three quarter and three year view. You want to buy these, Julian joins us now for more. Junian, good morning, good morning. I can't believe it's only Wednesday.
I said on Tuesday. It found like it's already Friday. Let's get into these earn little bit like say you say, maybe by over a three quarter, multi year view.
Why because essentially what we saw over the last three days tells you that the importance of AI as a revolutionary technology that's going to advance the world is not only robust, but is an absolute imperative. Okay, and the stocks reacted the way they did on Monday because of this sort of psychological displacement with regard to deep seek.
But what it really means is that now the race is on to implement and from our work twenty twenty five and the work we did almost two years ago now when AI first it was introduced, is that twenty twenty five was going to be the inflection year in adoption and this catalyzes it.
So what does that mean for sector preferences as we shift away from Annapolis to adopt us.
What does that look like?
So there has been over the last year or to a swath of companies across industries who constantly.
Speak to the idea of AI.
Again, a lot of it is largely anecdotal, because I think there's been a reticence to talk about what cost savings looks like versus things that drive revenue, and frankly, companies are still trying to figure out.
What that mix looks like.
But those are the companies that are forward about it, and we're going to hear a lot more. It's not just the earnings calls of the mag seven this period that matter.
It's the earnings calls of the other companies.
And those that are talking about it and telling you how they're deploying.
Are the names you want to own?
Do you think that this is actually the tipping point that so many people were waiting for were suddenly some of the biggest winners. And it's not just in Nvidia, it's also the power generators which didn't recover really yesterday are not going to necessarily benefit in the same way that they did in twenty twenty four.
There's a bifurcation going on, and you actually, if you're j Powell and you're Donald Trump, you like the fact that yields have come in over the last couple of days because the implication is the news that we had over the weekend in terms of deep seek is actually a disinflationary impulse. But the downside of that is as a power producer, it's much more difficult to see what
the next three years looks like. And whenever you have a company or a theme that one moment had sort of this concept of infinite growth, whatever that number was, and then all of a sudden, it's infinite minus a handicap. That's punishing for the stocks.
Is that the right way to interpret the movie yields that it was an expression of greater disinflation as a result of technological advance or was it simply a risk off move knee jerk basically by bonds.
Well, you would have said that except for the fact that yields ended up on their lows yesterday basically unchanged with the market recovering. So I think there was certainly an element of that on Monday. But the other message, and again obviously overnight we've seen more rhetoric about the
intention to reduce the size of government. All in this has calmed the bond market down, and from our point of view, talking about the names and the sectors that we like, the bull market leaders, yield's remaining calm is a very important part of that thesis.
It, Sonning depends why on the conference board numbers yesterday went great? Why have we settled down on bond yoats? Is it just good stuff or is this some pad stuff in that too.
Look, even when things are going gangbusters in an economy. You can always find the one, two or three items that are unsettling. You look deep enough, you find them. But frankly, from our point of view, you're in a mode where and again I'll go back to your introduction, we think.
It's skip not pause.
Okay, why because basically, the trend towards inflation if you think about it, the last several months, very much like the spring of twenty twenty four, you had a couple of months in there where the thesis was questioned about the trend of travel of inflation.
You paused, but yet it kept going.
And the weakening of some of those data elements, continuing claims moving to new multi year highs among them, tell you that the trend of inflation moving lower is intact.
And that's what the Fed wants.
Is that cool? Traite dependent. We'll head down to Washington, catchup with the marine about five minutes time. Is your call on a skip and not a pause? Traite dependent? And what happens this weekend? Avoid tariffsaw implement them?
So very good question, and I think the answered there is is, if you look back, Donald Trump learned a lot from his first term in office, okay. And one of the things that he learned was that the bond market really could call the shots for the degree of policy implementation. And you know how far you pressed once things were announced. So in that respect, there is an
element of that to it. But we do think that, you know, you go back to the original appointment of Vessent, there is an acknowledgment of the importance of financial markets and the desire not to disrupt that narrative to be able to long term implement policy.
We'll get into the details when we speak with Emory in just a moment, but you said, just in general, as a stock analyst, as an equity analyst, more broadly, looking at the path of policy, it looks like basically a repeat of twenty eighteen. And yet in twenty eighteen the S and P ended the year down six and a quarter percent, and why is this time different?
So if you look at it, the path in twenty eighteen was very violatile, and actually at midyear you were up substantially, almost double digits, and then what happened was you got to a point where the bottom vigilantes stepped in. In twenty eighteen, three percent on the ten year yield was the equivalent of five percent on the ten year yield right now, and.
We've already seen.
Whether it's the last couple months, we're going back to the start of this bull market cycle, that once you get towards five percent, the markets don't like that.
And so that is well known.
Which is the reason why the commentary that we will get this afternoon won't necessarily be from Mark Zuckerberg, it won't necessarily be from Sacha Nadella, it won't necessarily be from fedchair J. Powell, will be from Donald Trump in response to fedshair J. Powell with regardless of what he said, and if there is a pause and not a skip, if there is an indication that this is it and they are on and that frankly there's even a chance of them hiking rates again, how big would the tantrum
be in markets?
Pretty substantial. I mean you're talking to help big with the tantrum be in the White House?
Well, I mean we already know that that answer. I mean the question is, you know, this.
Is sort of par for the course, so they already have it and pre write they basically just presco anyway, carry on.
But again the point being here that at the valuations where we are in the market. Both you know, less than perfect and or very good news is met with violent reactions. So basically we have deep seek. On Monday, we have, you know, a pretty substantial selloff, but that was preceded by ten days of literally parabolic gains given the fact that the inflation news was so good. So
where's the next three to five percent? Well, let's see what we hear from the White House, and you know, let's see what the corporate what the dialogue around deep seek is in these reporters this afternoon. The long term trend of travel is still higher in our view.
At least we were talking about this earlier this morning before we came on air, that we were basically seen from Donald Trump, the President, a similar approach that we've seen from Elon Musk, the CEO, but this time to federal government and not to a private company.
Similar approach, I would say, basically the same approach. In fact, the email sent to federal workers yesterday had.
The subject fork in the road.
That is the same email subject that Elon Musk used in an email to Twitter now Acts when he was talking about downsizing the staff. There can you do the same in a federal government, the courts will.
Decide Juda and Emmanuel. Of ever, course, still with us, Julian, A lot to unpack here. Let's start with trade. Lisa mentioned GM. She's right to pick up on General Motors. GM's numbers went bad, The outlook was okay, nothing wrong here. Stock was down by close to nine percent of the close. How investible are somebody sectors some of these stocks without getting that clarity on trade?
Well, I mean the share proce reaction, yes, spoke for itself. But again similar to how one is thinking about the share price reactions in the mag seven, et cetera on Monday to deep seek. These are the kinds of things that if you're a long term investor, you know that whatever comes out in the beginning, whether it's it's you know, twenty five percent across the board or what have you.
And we know that the automobile industry is going to be the most impacted if that kind of tax is taken towards Mexico, but that it is not likely to sustain itself infinitely.
It sort of never has.
And those are the kinds of times, particularly at valuations, when you're talking about four and five times earnings. Granted, the earnings will be handicapped, but that's where long term investors find value.
Just hold on a second.
Are you saying that you bought GM yesterday.
I'm not saying, okay, I'm.
Just wondering, you know, is it too early?
Right? Is it?
Basically this right now is noise and you can't really get involved in it. And at a certain point you can start to say, all right, now I can start picking up the pieces.
Well again, it's it's it's evaluation sensitive thing. A lot of these companies, if you look at it, we like five year average valuations. Okay, a lot of these companies are trading at substantial discounts to their five year average valuation. So I have a numerical advantage coming in that allows me to sort of ride out the volatility, even if it's multiple quarters for that kind of you know, potential change in earnings.
Chilly and certainly volatile, volatile week, that's for sure. I have an apost few days, gentle amen. While of Ebico Basis shout out to Mulk and Stanley, saying the search in long term bond yields has created a headwind for US equacies, which have ridden valuation expansion for the better part of twenty seven months. The market narrative is now
focused on show me Earning's achievement. Lisa John's staff more, Lasa Kimonic Komarnick cost some Earning's achievement over in Europe ass them out just absolutely stunning, and we saw how stock investors rewarded them. Would you look for from some of the big tech players not just the southfternoon, but over the next week.
So look, I think obviously, you know, tech is under the spotlight, you know, not just given the fact that their performance has been somewhat really lackluster since you know,
the first week in December. But you know, the expectation for twenty twenty five and twenty twenty six is that earnings growth rates are going to decelerate, right, and that that element has been math and that's what's kind of baked in, And so I think people are looking for that guidance more than what they do for the fourth quarter, but looking for that guidance to see, you know, are in fact the tech companies more measured or are they
more optimistic? And I think that's that guidance forward guidance that's really going to carry the day here, because you know, coming into twenty twenty five twenty twenty six for tech companies, I think some of the expectations were a little bit more realistic.
Does it get hard is to justify the big spending they've been doing following the news of the last week and the price sanction of Monday.
Certainly, you know, it raises the question on what is your capex efficiency?
Right?
Do you really need to spend you know, as much capex and build as many data centers with as many GPUs that use as many in video chips? Are you going to be able to, through process and software engineering, as we've seen, do things you know, cheaper and faster, especially if you're willing to use an open source chassis. And I think that these open source chassis are going to get more and more and more sophisticated, and they're free.
And that's that's.
I think the magic here that we're going to have to watch and look. I don't think that this is new news to Sam Altman or or you know, to the folks at Microsoft and Google, but I do think they're going to now.
Have to talk about it.
Earning Season used to be launched by the big banks, and it seems as if now that's shifted, it really is the tech players and there is a broader economic read through depending on what happens there. We've been talking a lot about whether we are reaching the tipping point at which investment in AI is moving away from the chips and the data centers into broader application.
What would you have to hear at today's.
Earnings reports to think this is truly that tipping point.
I think it's it's them, not you know, taking up the guidance on cap X. I think it's them answering the questions, hey, we've put the number out there at X, you know that's our number, right, and being somewhat combative with analysts on that. I think that would scare people if they're if they suggest that there's no incremental upside to their CAPAX spend.
As an investment, does that make you more optimistic about the rest of the universe they could potentially benefit from AI adaption.
Yeah, So that's to me, I think the great question Lisa, Right, So I think that there's two things.
I think there's.
One among the mag seven themselves who are going to be the ones who actually grab onto this and say, you know what, we've actually been studying this. We do think we're going to be able to be more effective, more efficient and spend twenty percent less. And then there's going to be the folks who are the adopters, right, who are apps, guys are who are actually developing tools that are using you know, agent AI, the sales forces of the world, the accentures.
Of the world.
Who are that next wave of companies who are who are going to say, hey, we're using these tools, We're driving efficiencies and effectiveness, we know how to do this, and that they're the next market leaders in this you know, tech diffusion cycle.
Is it too early to jump on that theme? Would you think the starting gun was found on Monday?
I well, I think the starting gun on it was probably fired in the fourth quarter of last year. If you look at those stocks, they've started to move, but you know, for them, we still think it's kind of bottom of the first inning, top of the second.
When do we start to see the big efficiency gains and sectors like the financials We've been hearing about this now for years. When it comes to the bank, Yeah, the banks could benefit big time. You could see them become really efficient we hear from the CEOs, each additional dollar revenue will become less and less labor intensive. Are we close to that?
So I want to define close? Right? Look, I think a lot of effort is being expended, a lot of money,
a lot of consulting dollars are being expended here. I still think that in terms of moving the needle on margins, you're still probably two to three years away from seeing, you know, companies truly be able to say we're hiring many fewer people, our productivity has gone up by you know, x, Y or z. Because it's most of these businesses, the stakes of getting it wrong are so high that before you really start pulling people out and relying on machines
to do your you know, client service or your customer interaction or your billing or whatever, you're going to have to know that it works.
This is all very nuanced, and a lot of areer clients are probably thinking.
All right, market's going to go up or down, and.
What do we have to look at to figure out where we should invest? And if there is some sort of macro theme, it really does come down to the yield space. This idea that you see some of these stories is potentially constructive, earning's growth is potentially positive, and yet it all hinges on what happens today.
We've about to share J.
Powell, not necessarily today, but just generally with the bond market.
Can you talk about that relationship? Sure?
I mean, look, I think what we've seen is, you know, the magic number has been four point five percent. When we get yields through four point five percent on the ten year, we've seen those positive correlations between yields and stock prices. You know the quote that Jonathan started with it, you know that starts becoming a headwind to valuations. Now, why is four point five percent such a magic number?
Right?
I constantly explain to people, Look, we've been in an economy that's been nominally growing at more than five percent per year, and as long as you're growing faster than your cost of capital, you're going to be able to cover your interest payments. Right as those interest rates get closer and closer to that nominal growth rate of five percent,
that ability to cover pay interest payments gets harder. You start thinking, well, are some of these companies actually going to have dented margins because they're their cost of capital may actually be six and maybe you know GDP is only five and so you know, we're we're watching the direction of the long end. What we have observed is that a lot of the movement on the long end has been driven by two things, not inflation expectations, actually.
By our analytics.
What we're looking at is we've had positive economic growth surprises, right, so that's taken up the real component. And we've had an increase in the term premium. And as I know, you know, you know, having kind of you know, studied fixed income for a really long time, you know, over the last you know, eighty years, term premiums on the long end have been as wide as one hundred and fifty basis points.
Term premiums, for your listeners.
Who may not know this, are basically just the extra risk premium that investors demand for policy uncertainty, right, for for the fact that time over time things change anything from policy to technology to.
Et cetera.
And so, you know, I think what we what we're looking at is, you know, what are the drivers of those interest rates. What has been interesting is FED expectations got crushed in the fourth quarter. So for us, our observation of what's happened over the last you know, six eight weeks is it hasn't been that much about the FED. So this is a very long winded way of me answering your question. Look, I think Powell today is gonna
be very measured. I think he's going to say very little in this press conference, and I think he's going to try to say as little as possible about anything that has to do at the White House, anything about tariffs, anything about debts and deficits. I think he's going to really walk a very fine line, and he's going.
To stick to the script of we're data driven. That's it.
We've had some stronger data. We think inflations under control. We're watching and waiting.
So all of that said, if the FED is no longer in the driver's seat, the policy uncertainty is in the driver's seat. What kind of move up we're looking at a tenure right now four point five to three percent. What kind of move up would you have to see real serious declines inequities.
I think if we surge back through four seventy five, you know sometime over the next month, that just stops stocks in their tracks again.
Just twenty two basis points away. Lisa is good to see you gay Lisa shan At that of Morgan Stanley on the federerser the former Kansas City FED president Esther George jounderstand for more, Esther, Welcome to the program. We're all looking forward to Chairman Power a little bit later. How boring can he make this and is that the objective later on this afternoon?
Oh, I think he'd love to make it just as boring as he can, in the sense that it doesn't stir up new speculation. So we'll we'll see. He's got a tough job.
Well, what do you think, Esther, the idea that right now markets are really concerned that the FED might be on a path to basically hold rates here for the rest of the year.
If he has asked that, how would you characterize not doing anything today a pause or a skip? How will he answer?
Well?
Is I think we got a clue from the December meeting right the minutes have told us that there was a sense that inflation was not coming down quickly enough, that that disinflationary process may have stalled out, and so for their mandate they have to be cautious at this point, I think, and watch to see how things will unfold. The challenge for them, of course, is it is for many people today, is saying, how do you manage through
this uncertainty? How do you look at the risk and the outlook ahead when you don't have clarity in the moment, And the truth is you rarely have that clarity. It'd be unusually high right now in terms of uncertainty, which means you have to pivot, in my view, to thinking about the long run, and that where I hope we hear the focus not so much on next month's data and the next but really where we're coming out in the long run for inflation esther.
There's also the added complication right now that we have a really disparate FED. Right the different FED members seem to be pretty split. Is this a unique feature right now? Does it seem like it is more divided than it has been when you are there or in previous administrations?
So I think there is always a diversity. That is the design of this committee. I think what creates what may sound like dissonance right now comes at what I call turning points. There are times in the economy when the decision making is less clear, when the path ahead is less clear, and that's when you will tend to see surface in this discussion a range of views, and depending on how strong those voices are, the chairman has to bring those together because you have to make a decision,
and sometimes that decision is to wait and see. And I think today is going to be one of those times.
I'd love you of you on what you'd be doing. How would you balance the evolving data with expected policy changes? Why would you put the most weight?
So for me, the weight is always on thinking about the inflation because that is the most direct influence that the central Bank has on its mandate. And having seen the disinflationary process slow down, we are now in a fifth year of inflation running well above the Fed's target. I would be in a position myself to say we can wait, we should wait. The economy is performing well.
We have a number of risks that are evolving here in terms of telling us what the outlook might be, and now seems a particularly good time to sit on the sidelines and wait for more clarity.
Esther, it's good to hear from you. Miss your voice on the FMC as the George there, the former Kansas City FED president. This is the bloomberg surveillance 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.