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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a 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 for.
Those of you just joining us. Looking at the markets, equity futures doing okay. We begin this out with stocks relatively higher as we get results from both Meta and a bullish outlook from Tesla, supporting equities. Mike Wilson and Morgan Stanley saying in the near term, the best outcome for equities is that rates continued to decline. In the longer term, the best outcome for stocks is a reacceleration in earnings, growth and macro indicators. Mike joins us now
for more. Mike, good morning to you, sir.
Good morning.
Let's try and put those two points together. Shall we yeos need to come down the wise impultan. But in the longest term, we need economic growth to performance wound for earnings to re accelerrate. Does that come with higher and just rights with high yields, with hot sound premium.
Well, this is the game.
I mean, you know four point fifty is that we're right at it right now as we speak, which is kind of interesting. I mean, that's the kind of line in the sand where you know, if rates go higher, even if growth is better, it's going to restrain multiples. So what we really need is that sort of that sweet spot between four four and a half where growth is not falling off a cliff.
The FED is doing their thing.
It's you know, I think people are talking about what the Fed's not cutting. Well, they cut one hundred basis points and back end rates one up. So I'm not so sure that pausing is really all that bad for stocks in the short term. And now, of course we're an earning season, right, so it's all about idiosyncratic behavior in the short term.
Well, you say earnings, they need to show, they need to deliver. What does that mean at a time where storytelling is so important and it's not just the actual numbers. It's what you say about them, your tone, how many exclamation points you use.
Well, it's showed me time, right, So there has been a lot of storytelling going on and I think we're seeing a separation of the winners and losers even last night, right, And that's good. I mean that creates opportunity for stock picking. And like one theme we've had is sort of the you know, adopters versus the enablers within AI and very simplistically don't want to oversimplify it, but that's basically software
over semiconductors. And that's been working, not just since Monday, that's been working for three to six months.
So as usual, the market's gotten ahead of it.
There's going to be themes I think that pop new themes that pop up this year, and that's really our job.
Has that pivot happened? Can you say that essentially the tipping point at least in the market zeitgeist was on Monday, where really the adopters are now going to absolutely rip while the videos and the Microsofts, the enablers are going to take a leg behind.
Well, like I said, it's already happened.
So the question is is it does it persist, Well, we're really excited about it is not even that trade. But when does the technology get diffused into the broader economy. That's the true broadening out story where you can get small MidCap companies performing. We're not there yet, okay, because we don't have the solutions right. That's what the application layer is, where the solutions are going to be built on the compute platforms, so that that could take a
year or two, you know what I'm saying. Now markets will get ahead of that, but in our view, that's really a second half story, or a twenty six twenty seven story. So that's why our view on the index has been We're probably going to be choppy here for the next three to six months. A lot of anasma's coming out, Fed's on pause, still about uncertainty around you know, the implication of these policies, both globally and domestically.
So we take a break here.
This is curious to me. Tesla actually warned about the potential for tariffs and the potential for that to hamper some of their revenues. Didn't seem to dent their stock at all. GM talked about it.
That was it.
I mean, they basically delivered. They had the forecast, but shares tanked.
What did you learn from that?
Well confirmed what we already knew, which is the retail community is very active right now, very active, and we see it in our data. And they just love these stocks test Law. You know, you can name, you can name a bunch of stocks that they just buy every day. Not just not because they're dumb or they don't know what they're doing. It's just they're buying into these themes and and and then of course that you know, creates demand from institutional investors too, So don't I don't think
it teaches anything new. Last night, that's a that's a continuation of something that's been going on for six months.
But these are things you would site down fight because the towl wents behind them, at least the buying behind them is that powerful.
It's very consistent.
I mean, you come in every day and the same names are kind of are you swooped up? And I don't see that changing unless there's a real, a real you know kind of event.
So if rates were go to.
Five percent, I think that would change. Okay, if we were to get you know, some sort of an indication that oh my goodness, unemployment's going up again and the recession risks come back on to the table, or there's an international event, a geopolitical event, something like that. But in the absence of something a real gross shock, I don't see the demand for those types of stocks waning in a short term.
What if a Chinese ai lap comes out and says we can do something that you've spent Indians on five minion talis.
Right, So what happened is that what happened is some stocks got punished and then the money, but the money moved back into the kind of fan favorites. And look, this is the theme for twenty twenty five. I think this is a good thing. We're going to see this capital concentration, right, that money can now go to other places. Right, So financials have done extremely well. That's a new area where there seems to be a perpetual bid. Software is
a new area. Consumer services have done extremely well. And then even areas like media and entertainment. Those have been our four sectors that have shown the relative earnings. Your vision breath, there's some thematics in there as well, and we think that probably continues just to broaden out.
And I understand it's a stock pickers market, But do you think that you've seen enough to say that the equal weight will significantly outperform the market cap weight S and P five hundred this year?
Not yet, And I won't I want to caveat this because typically when you go from a period of market cap outperformance market cap weighted out performance, you usually get the relative outperformance in a down tape. Right, So if you get if you get the S and P market cap waited to go down, then you can see that spreading of wealth if you will, to other areas. Now, I don't want to compare us to two thousand completely,
but it's that's the most similar period. In two thousand, we had a you know, a lot of these text stacks came off in the SMP equal way was basically flat, a lot of indices were you know, a lot of sub indicies were actually up.
So that's what we're looking for.
I think in the first half of this year is the best chance that I can say that could happen, you know, and since twenty twenty two, I like.
To bring this up to people.
Twenty twenty two, right, everybody you know, you know, thinks it was a terrible year for the market. A lot of stacks were up in twenty twenty two. That was the best breaths that we had. So it's a similar setup where I don't think the market's went on twenty five percent. But the point is if the index can give it up, then that capital can allocate to other areas.
They rustle right now by point nine percent on the small caps might good to say it. Good to say always thank you, buddy, Mike Wilson that alf Mulkin standard in the markets this morning, Equities are pretty steady. BONDSAR two as FED Chair Jaypowse signals the Central Bank will
hold rates study for the foreseeable future. Cameron Dawson of New Edge Wealth writing, further interest rate cuts will likely need to come with incremental weakness in the economy, transforming further cuts from because they can to, because they shirt. Cameron joins us now for more. Cameron Goo mornick Ye's greeting, what's your big takeaway from Chem and Pound in that news conference yesterday.
That the recalibration phase is clearly over. He called it that recalibration phase, not this one, which just means that the interest rate cuts that we had which were tweaking policy rates lower in order to get to closer to this idea of neutral is likely behind us, meaning that you'll have to see an uptick in the unemployment rate, You'll have to see an uptick in or a weakening in the overall growth rate in order to suggest that they could cut rates further.
Is this actually a really good signal that essentially the economy is robust and they're basically just taking a back seat and being as boring as they possibly could, exactly as desired.
We think that the.
Fed this year is going to be less consequential than they have been, meaning that they're going to be more reacting to growth. They're going to be more reacting to policy versus driving markets as they have over the last couple of years, as they started the hiking cycle then started the cutting cycle. We think overall that the FED hasn't been nearly as tight as they think that they are.
We think that the evidence of growth remaining so resilient, being above trend the entire time that the FED has been in a tight situation, meaning with the real FED funds rate being above zero, just suggests that we are likely closer to neutral at this point than having those further cuts, which just suggests that this economy is more resilient to interest rates than it was in prior cycles.
If the Fed's taking a backseat, let's take another tack, because frankly, I think a lot of people would rather talk about earnings than the FED at this time, given the fact that the FED is following rather than leading. What was your takeaway yesterday to not just the earnings of Microsoft and Tesla and and Meta, but the reaction to them and what actually gave investors confidence.
I think investors are still willing to dream the dream and have this blank check mentality when it comes to AI and CAPEX spending. But the thing that jumped out to us most in Microsoft's earnings was this use of the word commoditized, that some of this AI will become commoditized. It will become something that everybody has. And the question that we have is that what will the return on
invested capital be for a commoditized product? Very very different than the monopolized businesses that you think of Microsoft with in word processing, or you think of Google within search or Meta within social networking. These are monopolized businesses or near monopolies that deliver huge returns on invested capital have eighty percent gross margins fifty percent operating margins, nearly from Meta, which just suggests that maybe AI roics could be lower.
It's been a long week for this market, Sunny third, they still can We go back to Monday.
Just briefly.
On Monday, Lisa me, pretty much everyone in the show was talking about whether the capex narrative would be challenged. METSA came out and basically doubled down on the whole thing. Now, I didn't expect the c suite to change. The question we asked is whether investors would lose patients. There's no sign of that. This morning, the stock is up. We'll investors keep patient with these companies as they spend tons of money on these projects.
I think as long as they can keep googling Jevn's paradox, maybe they'll keep being patient. I think what's giving people the ability to give Meta the benefit of the doubt on this capex is because their top line is growing so much. And the key story for Meta is that they're using AI in order to be able to drive top line faster. Look at the growth in advertising pricing.
It was up fourteen percent. That's more than double what the street expected, and that likely is a function of the fact that they're using AI to monopolize more of our eyeballs, to demand more of our attention. Now, if top line begins to slow and META is eight percent advertising,
which means it's a cyclical business. If top line begins to slow, I likely think that you will see less benefit of the doubt on this capex because it won't be able to be absorbed as much given this strong profit growth.
Comen Dawson and you ch Wealth is still with us around a table. So Cameron, we've got a threat at twenty five percent on Mexico and Canada, ten percent potentially on China. Europe's going to get it too. That could be a universal tariff. You have a working assumption going into the weekend.
Well, we think this notion that tariffs aren't inflationary or disruptive because of what happened in twenty eighteen is limited in the sense that twenty eighteen terraffs were so targeted and they were on certain items, certain things within supply chains that eventually didn't get all the way through to consumers, which just means that if you're talking about blanket teriffs across the board, we think that this could actually be
highly disruptive to supply chains, potentially inflationary because of that disruption as people are trying to move things around, which just suggests that this could weigh on growth and inflation in a more meaningful way.
That sounds like stagflationhin is that what you'd be expecting.
It's definitely a risk.
And when you also throw on top of that the potential for the labor force growth to slow down because of immigration, both of these things suggest that a potential upward pressure on inflation, potential downward pressure on growth. The question is how far do they actually push these through. Tariffs for negotiating purposes are very very different than tariffs
that are pay force. Teriffs that are paid for is because you want to use tariff revenue to offset tax cuts, for example, would have to be far more sweeping, would have to be far more static, meaning once you put them in place, even if people say, hey, well we're going to be nicer to you going forward, it just means that there is that risk that we have that upward pressure on inflation, downward pressure on growth.
I'm glad you mentioned that what the purpose of some of these tariffs are, how realistic it is that they're going to be deployed. You saw the testimony from Howard Lutnik. He also talked about the twenty five percent tariffs that are set to go on Canada and Mexico on Saturday, saying this is a separate tariff to create action. He was talking about the border, he was talking about fentanyl. He's saying, if they comply, there will be no tariff.
How do you, as an investor take different signals from different places and understand how to price in and whether to price in some of these potential levies.
I think the way to approach it as an investor is how you think businesses are going to be able to operate in this environment. If a business doesn't know what tariffs are going to be and if they're going to last for two weeks, because then you see a response from Mexico and Canada, it really is hard to be able to plan in that environment. And the question would be our businesses trying to get ahead of this? Are consumers trying.
To get ahead of this?
And this means that you could see disruption to supply chains even if the tariffs don't stick around.
Which is the point that John was making yesterday. I'm totally going to steal from him when he was basically he was basically asking, you know, have we reached a point where the auto manufacturers other than Tesla are basically uninvestable because of the pipeline from Mexico and how many imports they really have been controlling from that region.
Well, auto manufacturers have not necessarily been the most investable companies even without tariffs, because they're so very capital intensive and low margin. But it does add that layer of uncertainty. And it is interesting that Tesla calls out tariffs being an uncertainty for them in their earnings report. But I guess at the end of the day, Tesla isn't a car company.
Is a state of mind I'm selling. I agree with that. I'm a seller of any guidance that is dependent on tariffs. I'm a seller of the guidance from the Federal Reserve. This market was a sealer of the guidance from GM. The Bank ACCOUNTA didn't even provide any anyone providing guidance when that's dependent on what happens over the weekend, and what happens going forward from tariffs, I think you have to take with a very very big grain of cell, which is what.
We're seeing in the market. So at a certain point, just to Cameron's issue here, if you see even the threat of tariffs on a prolonged level, could you see those disruptions to supply chains, disruptions to profitability for specific companies just simply by virtue of the specter of that happening.
So this is a difficult moment in many ways because parts of this market, the multiple evaluations might be capped if you are exposed to a tariff story. Some of the automobile makers, the auto manufacturers that likes a GM, we saw that earlier in the week, and then certain parts of the equy market exposed to the AI story. I think that's a sense that the perceived value is shifted away from maybe the energy plays of the last year or so. Do you think valuations are capped there too?
Physical over digital or digital over physical really? And I think that that's what the market is coming around to, is that that you have had this big surgeon optimism that the digital world would drive a lot of physical investment. But even Microsoft said yesterday that they would be moderating capex starting in twenty twenty six. So if you're starting to see that slow down, it means that your power providers and your infrastructure providers are also going to see
growth slow down. So it continues to be this world where we think that there's very little more and for error in the multiple. You're at twenty two point three times forward. That leaves no room for negative news. Doesn't mean you can't go higher. We could go into bubble territory, but you would have to see a spark of speculative fervor to get there.
Do you think we did go into bubble territory with certain parts of this market?
I think that we were getting close, and we still have that potential. If the FED comes out and cuts interest rates a bunch of times, and financial conditions ease even further, and liquidity becomes even more abundant, and you see this continued surge in YOLO things like meme stocks
and zero data expiration options. I think that we are on the verge of that being a potential outcome for twenty twenty five, simply because any higher in the multiple poll, any higher than twenty three times that has only been achieved in true bubbles.
Just before you go, we'll do this a couple of times going into the weekend. Do you say those times go on or do you think we avoid them this weekend. I'm not going to hold you to this. I just want to gauge how people think and how they fail.
Let's just run out about a weekend after we get to see your decision.
I think that they might go on for a period of time and then get walked back.
Interesting a period of time being a week Okay, Hamon Dawson, have you edged wealth? I appreciate it. One of the best in fixed income joined us now for more so on design a Franklin Temple sense.
Not good to see you, good to see you, too good to be here.
The chairman said this that policy was meaningfully restrictive, and you believe actually we're now in the neutral range. What explains the difference between the two of you at the moment.
No, the policy is not and has not been restrictive for a while now. And you know I did note t when he said that, it's very difficult to figure out what thel what neutral is. But you know, facts matter, and you look at what the US economy has done over the period of time that we've apparently been in extremely restrictive territory, and clearly we weren't that restrictive because
the economy shows us. And i'd say that I think a part of the reason the FED cannot say that, well, you know, we're far from that, we are far from being in the neutral rate range, is because then the next step would be, well, why aren't you raising rates?
And I don't think they need to raise rates, but.
They're going to need to keep them high for a quite quite a long period of time on the margins.
Now you're someone who raised this prospect of the longer end yields rising quite considerably in the face of a resurgence of inflation. Does this damp in that risk? If there is a FED that might not be saying exactly what you see to be the reality. But isn't moving, isn't really raising, isn't raising rates, but isn't lowering rates either?
Well no, because I think a large part of the reason that I think long end rates are are going to sell off is actually to do with the fact that I think there are going to be a whole host of policies and I actually don't think tariffs are one of them, but I do think fiscal policy risk. So over the next sixty to ninety days, we'll see what happens. But I think those are factors which could feed into inflation. Potentially, how immigration gets executed in terms
of deportations, et cetera, et cetera. That could have negative consequences as well. But I'm more concerned on the inflation front than on the growth front.
From these this is important.
We've been focusing on tariffs as a potential economic headwhen in terms of both the growth but also increasing inflation, you're saying that's the wrong place to look. Which policies in particular are most potentially inflation area that you're watching out for.
So I am watching very much at what happens with.
The budget.
It's really about the fiscal it really is. We are running two trillion dollar budget deficits in an economy that's growing definitely above potential at this point. So that's one element that I'm looking and following very closely. It looks like this Republican caucus is fairly in discipline, so there's some hope that they can't actually expand the budget deficit as much as actually making good on all the promises
that have been put out. That would result in a massive expansion, and I do think that would have a negative consequence immigration. Look, if you actually could throw out four million people overnight, that would be disruptive and it would have inflationary consequences because if you're a restaurant owner and half your workforce doesn't show up, you suddenly need to hire more people and you're going to build up wages, and that's inflationary.
Based on what you've seen with earnings, based in the early indications from the administration, have you changed your view that the bigger risk is to the upside with inflation to then say, a deterioration in growth.
No, because actually I think that something which isn't considered very much is the fact that deregulation actually really is going to result in some positive It's going to have a positive impact because in the end, small business owners confidence are skyrocketed. Yes, I know that they're typically more Republican, it's a bigger Republican base, but ultimately that confidence determines whether they want to hire more, whether they want to spend more on capex. All these things are kind of
positive on growth. And finally, I really don't think tariffs necessarily have a negative growth impact on this country. Of course, the ECB is going to respond. It's a large exporting group. We, as today's GDP showed, are large importers. So tariff's an't good to hurt our growth necessarily certainly.
Going to hurt Europe, China and others if they do go forward with this. Can we get the bond market kill? I sense maybe you think we see five before we see four? Oh yeah, oh yeah.
If we're talking about five or four, I would definitely say five before four because I don't see the rational right now. I need to see that trigger for significant economic weakness, which I'm not seeing yet. I'm not saying it can't happen. I don't think what we saw on Monday with deep seek is that you know the Canarian the coal mine. I really don't think so. But I do think that we don't know. And on this I
do agree with the Fed chair Powell. The uncertainty we're seeing today is not commensurate with the uncertainty we saw around COVID. For example, before we had vaccines, we didn't know when things would reopen not looking at that. If it was something like that, you could call it.
What do you make of his stance regarding the uncertainty it's a policy.
I think Powell showed his origins as a lawyer, and I think that that was a good thing overall. I'd say that what he said was, you know, there wasn't very much there, but he's being honest. There isn't very much he can say at this point. I thought that he actually moderated some of the questions with respect to tariff's in a very very reasonable way. Tariffs are relative crisis guys. It's not going to suddenly take us back to nine percent inflation.
So now does I I appreciate your time?
Thank you?
Sow does I there? Franklin Templeton, the LASiS, on the Federi's and on financial markets as well. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, a gio 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,