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Terminal and the Bloomberg Business App. Chris Harvey of Wells Fargo, the most bullish man on Wall Street s and P five hundred price target of seven thousand and seven, and he joins us now for more.
Good morning, Chris, Good, good morning.
You're uncomfortable with that. I want to give you some credit before we start. Credit to you for not changing this call in the tariff storm of early April. So let's start there.
Why did you stick with it so nine months in the financial market. That's an eternity. The other thing we had seen Trump one point zero. We know his style. It's to go out to the end degree and then to come back in Furthermore, the underlying fundamentals were still fine, and our EPs and our price target wasn't predicated on a strong economy. What we're seeing is the winners continue to win. The ubercap companies have the higher margins, are gaining more market share. There is a real secular trade
in AI that will continue. I was here during the nineties. This is not a fair comparison. It is much stronger and the fundamentals are much better than today than they were back then.
Seven K is not tariff dependent, It is not August one dependent.
No, So people ask, well, what's the fear.
The fear is.
There's a couple of fears. One is do taras start to flare back up? And that's possible, right, we just can't can't predict that. The other fear, which is much more real fear, is what's happening with the Fed? Do we worry about the Fed and confidence in the Fed? Because the back and forth between the Fed and White House, that's not healthy, right, and that can cause problems in the bond market, and that can cause problems with competence. But overall, we're starting to see M and A activity
kick up. We think that M and A will continue to be very, very healthy up and down the capitalization. We do think the FEDS are going to cut. Fundamentals are fine, the consumers okay, And we're not seeing the kind of price increases that people are talking about. We're seeing people say surgical when they're talking about price increases and selectively.
So there's a lot to unpack there. And we'll get to the FED independence in just a second. And what point yields have to rise to before that really triggers some sort of response and equity markets, what about valuations, the idea that you're talking about an eleven percent gain from where we are right now, and the S and P five hundred, after already reaching record highs amid a wall of orion, frankly growth that is expected to slow.
So we talk about this all the time because people say, oh, look at twenty years ago, look at twenty five years ago. The SMP is not the same as it was twenty five years ago. The constittioning the S and P five hundred is much more growthy, it's much more techy, The multiples are much higher, the productivity is much better. The people running the companies are much more uh attuned and and the acumen is much higher, and so the valuation,
yes it's high, but it's justified in our minds. And again, we don't need to see a whole lot of multiple expansion to get to that level. We're not very far from that level at this point in time.
So valuation concerns don't really uh spend You don't spend a lot of time on those. I do want to go to the FED independent side, though, there is a question of what point yields have to rise to before it triggers true concern in stock markets because we've asked that questions many times. People give us a level and then we pass that level and stock markets struggled off and say healthy, healthy, good. Yeah.
I I it's hard for me to really answer that question. The I think what's happening right now is you had Trump come out and say I'm not going to fire powers, right, and I think he needs to go out and say that right. There's a lot of talk and uh rumors and situations in the marketplace. At the end of the day, we need the FED. We need the FED to be independent, We need to be the FED to be apolitical because it is a very important part of our marketplace, and
as long as we can do that, that's great. I don't know if raids really have a play in this. I think it's just cooler heads and need to prevail.
You read Trump correctly when it comes to tariffs. He put out a truth over the weekend about what best potentially laid out to him. When it comes to the market impact of firing Besset, people don't explain to me. I explained to them, says the President of the United States. Did you take that as him basically acknowledging he understands the negative impacts that could have on financial markets.
I think his team understands. I think he understands. I think if you go back and one of them, when we were on the show a while ago, we were talking about will the feedback loop close? Right? Will the administration see what's happening that capital markets and react to that? And they did so. I do think they understand. But I also think that he feels like he's playing with a very stronghand, and to a certain degree he is. And one of the things we are beginning to worry
about it is he's looking at tariff's as a revenue generator. Right, We have what we have with the deficit and saying, hey, this could be a good way to reduce the deficit. We haven't seen the real impact to the economy. What's the big deal?
In that same truth, he said, if it weren't for him, the market wouldn't be at record highs right now. But if it weren't for him, would potentially ready be at your seven double host seven mark.
Yeah, there's a lot of speculation on speculation there. I think we could have done this. Talking my book, one of the things I said, one of the things I believe is you could have put a ten percent tariffon and then just walked away.
Right.
We talked about how there was a seller's tariff and how people whether it's through Airbnb or Amazon, they understand that you had Congress put that ten percent tariffon, walk away and we can do something more productive. But we chose this path and it's okay, it's a little bit bumpy, but we're getting there.
Mike and bumpy. A pityshev accountemy. Without the markets pressuring the administration, why would they pull back going it's the next month?
Well, this to me is the key question. How much is this administration playing chicken on tariffs with the market. If the market's looking past something that hasn't happened yet, does that push them to potentially go even harder because they could extract more that could off set the deficit concerns from the one big, beautiful bill.
And there we go, and you see these countries lining up to really want to do deals and getting a little bit nervous when you have Howard Latnach, the Commerce Secretary, coming on a Sunday show saying August first is hard to stop deal. Also, he's already telling us what to expect next year. He said, of course, we're going to renegotiate USMCA, so we could prepare for more headwinds in terms of Canada, Mexico and United.
It's gonna keep coming. It's gonna keep coming. Chris, just to wrap it up, the US versus the rest of the world, what if you mighte to that debate over the YSIFA.
So we thought that was possible, We thought that was probable early in the year. It happened. Now we're just walking away, which you just don't. We're done, We're good. You had that repricing. Now let's go back to fundamentals. And the fundamentals are telling you back to the US, back to back to growth.
Chris Halveylstfagapre Siedaser. Let's continue the conversation. Claudia Sama of New Century Advisors joins us. Now for more. Claudia, welcome back to the show. It's good to see you, as always. Want to pick up on that space from Governor Waller what he said before our conversation with him, looking across the soft and hard data, I get a picture of a labor market on the edge. Do you get a picture of a labor market on the edge.
That's what I would characterize the labor market.
But I think demon and Waller lays out a very reasonable argument for reading the data right there.
Labor market has had some crap, has some weaknesses to it.
I mean, I think they were maybe more apparent last year's you know, the unemployment rate has been rising.
But he pays a picture and he ties it to data. Again, I think it's.
Really unfortunate that it becomes wrapped in this conversation of it as a politicized view.
Of his I don't see it that way, but just to have that.
Kind of injective of the conversation does tend to undermine what he's saying.
Claudia, do you think, from your perspective, in your years of experience studying the labor market and how that affects FED policy, do you think that right now weakening in the labor market really is a greater concern than a prolonged, protracted inflationary push from the tariffs and from strength that we have seen ongoing in corporate America.
So I would agree that there are several threats on the growth side to policies have been put in place. I mean, kars have an aspect of weakening growth throughout the higher prices we've seen, immigration policy. I mean, there's a whole set of reasons why you look out at this year. We've seen growth slow this year, and that will eventually show up in the labor markets. You definitely
can see those risks. And if one, as Christopher Waller laid out, looks at the potential inflation risks and says these are tempered, we can look through these, then I think you would be right back.
To where we were.
You know in twenty nineteen, where does thateral reserve base with care? They tu preamptively, which is we're not in an environment where inflation is subdued. It's actually been above target for more than four years. There are real rists there. We still don't know what the terear policy actually is. It could be going higher, it could not, like, so there's just a lot of uncertainy. I think with the way that the kind of majority of.
The FED is lining up their arguments makes a lot of sense.
But there is a real perspective, and I would agree that the diversity of thought on the ped and making those arguments carefully with data like that's a good thing. It's just is extremely unfortunate the environment. By having the White House and the President very directly say what they want to.
See in terms of rapes, it's kind of created this.
You know, It's made it really difficult for the fend to have this kind of discipline data conversation.
And it's even more difficult by the fact that the data is really confusing and it can paint a different story depending on how you read it. I mean, we keep kind of wondering what the labor market is showing us, whether it does show some sort of more dramatic weakening, or whether the housing market is kind of ringing a five alarm fire alarm, saying, hey, we're clearly as a problem.
I mean, at what point do you think that keeping rates at this level would really create a weakness that currently hasn't manifested itself in the economy.
We're likely pointed in that direction. I mean, the economy has proven quite resilience. I mean this is not just talking about this year, but in recent years. The higher interest rates, and there are probably a lot of different reasons for that, but eventually, you know, and we do see an interest rates that sensitive sectors like how do we do see these.
Rates weighing down the question?
The reason that the federal funds rate is elevated is because it is trying to push down on inflation.
Once the inflation issue is taken.
Care of, well, then there's no reason to have the rates as high as they are, and you should see them coming down, and that then tells us that the direction they're pointed in, they're just not ready to take that move.
But you know, there are.
Costs, There are costs in the economy to the said having interest rates as high.
As they are, and we will see those costs build as interest.
Rates, say higher, So well, We're not looking at some dramatic falling off a cliff. We're looking at more of a slow grind and it does impact certain parts of the economy, certain consumers, people trying to buy homes. Like that is where the effect is. But the goal is to get you know, inflation down. Unfortunately, you know, we've got data that moving in the wrong directions. That may be temporary, but like there's a reason the rates are where they are.
It's not.
Government but that there are costs.
Governor Waller though, is looking at these cracks in the labor market. Even individuals like Mary Daily is talking about it's reasonable to expect two cuts this year, Claudia, when do you expect the FED to first move?
So it will absolutely depend on the data as they go forward, but there is certainly a case, and I think, you know, keep an eye on the inflation data that's not connected to TARRAF. I mean, I think that's actually been part of the encouraging cases that we've seen some weakness in you know, some discretionary spending areas.
That housing has.
Certainly shown some cooling off.
So I think they're building the data, are building the case.
As long as you know, the terrorists don't really like move much higher. You know, things really go dramatically sideways. I think they're on track for September or October. You know, as the data come in and Governor Walla could absolutely be correct, and we see some employment numbers that are not as positive as recent ones, and that that doesn't move them much more quickly to the cut. But I think this is the data thus far have supported their let's wait and see, and I think that's where they're
going to come down as a group next week. But of course, you know, you can look at the data differently and they are pointed in the direction of cuts. I mean some aren't even looking for this year. But I mean that's you know, they have a lot.
Of coherence in what they're thinking. It's just timing is hard.
It's it's really hard to figure out because timing is hard in the economy.
Cloda, I appreciate itsime. Clodia sound that new century of signed chasms a signical the ISSUS has this to say. Our vice case has been and remains. The US President Donald Trump will not dismiss Fedchad to run PAL at the very least until after the September FMC meeting chance John to snap for Moss, so challengeing given us the best case two months. What happens after that if they haven't reduced interest rights?
Yeah, if the FED doesn't cut at the September meeting, I think the President moves forward with a shadow chair nominee announcement and continues to build the case to dismiss Pale for cause, hoping that Powell will resign. I don't think Powell will resign, but I think that case will continue to be built. What the President really wants is for the FED chair to resign, and you know Pal's
not going to do that most likely. And the other part of this process is the President really trying to socialize with the markets, this idea of replacing the FED chair. The only guardrail working in the United States today in terms of a check on executive power is the bond market, and I think that's what they're most worried about. The September FOMC meeting is critical and we'll see what the FED does. Otherwise we have a shadow FED chair.
Well, wouldn't it be even harder though, for the collective body of the FOMC to cut if he was to get rid of the FED chair or say he was going to fire him after the September meeting.
Absolutely, I think you know, everyone in the markets understands that it's a twelve member FOMC vote. It's not just the FED chair. But the President sees Palell as the obstacle, and he really wants a FED chair in, whether it's shadow or if Palell resigns. Even if Palell resigns, by the way, the FOMC picks the FED chair, So I think what the President's really doing is using Palell as
the punching bag for higher rates. He's also worried. I think that even though the administration doesn't believe the terris will be inflationary, that if inflation does pick up over the next several months, you can blame the FED, blame Pale. But ultimately I think this shadow FED chair idea, which even three or four months ago sounded really far out there or deeply concerning for markets, is now being socialized and probably happens after September.
Well, the Treasury Secretary talked about the fact that there could be confusion with a shadow FED chair if j. Powell doesn't step down after his chairmanship is over, but he still has a governor seat until twenty twenty eight. Do you have any indication that he would stay the course until twenty twenty eight?
Absolutely? I think Chair Powell will stay on the board after his chair term ends, and he stays on the board until the end of.
His term in twenty twenty eight, wouldn't that look very political, Trembles Charles, That would look incredibly political. Most chairs step down.
Absolutely, but I think it would be a really strong statement by Chair Powell, encouraged by some of the other members of the FOMC, perhaps as a statement of very strong independence. And that's why I think he stays on Charles.
There's the question of what happens if, let's say Chair Powell is fired and for cause, let's get get smired in all sorts of legal disputes. There's this issue of does Congress confirm whoever President Trump nominates to replace him? How much unity is there right now among Republican Congress members.
Well, I think you know, whoever is nominated has to be confirmed in the Senate. The Senate, including the Republican Caucus and the Republican leadership, do take fed independence very seriously. So whoever is nominated will be a very respectable and acceptable and very positive person for the markets. It'll be one of the folks that are auditioning very publicly for it. You know, But in the end, I don't think that's going to be the issue that person will get confirmed.
The issue is, you know, will they try to sway the FMC to be more dubbish.
Charles Moss a second of glove that fives as Chiles. Thank you, Seth Angela. So you know I CFIRA has a buy rising on chance of alphabbat at two ten Friest talk and Angela, welcome to the program. That ad model at alphabet How insulated is it right now?
Yes, thanks for having me John. As far as kind of the ad model is concerned, I mean, listen, I think they're doing a lot of great things as far as what's going on across search as well as YouTube integrating AI across the ecosystem. You've got AI mode ramping here on search AI overviews. So overall, I think the monetization potential looks pretty good as far as their AD
based businesses and AI integrating across that ecosystem. You know, clearly there is a risk as we kind of go on here over the next couple of years, eventually open ai and others out there will probably have some sort of ad supported models, and that is you know, clearly a risk here for alphabet So sitting here today, I mean, we do think their ads. Google's ad supported businesses probably grow around in line with the broader digital ad market,
let's call it high single digit growth. But you know, ultimately, as we kind of go into some of these forward looking years twenty twenty six, twenty twenty seven, we're looking at the growth pace of you know, something like search to grow at about half the pace of the digital ad market, just because you're going to have some you know, increasing competitive pressures out there.
Angela, are we underestimating the speed of the adoption of open ai, of chatchpt and some of these algorithmic models that some people find superior to the classic search model. I mean, I was listening to John and man deep talking, and I'm thinking to myself, I've known so many people over the past six months that have utterly transformed their workflow because of chat GPT. Is the timeframe a little bit faster potentially than what we're talking about.
I mean potentially, I mean, well, I guess we'll see here. I mean, ultimately, people are doing search and you know, in a different way than they have historically. But when we think about just overall, what app Alphabet has, you know, across their ecosystem as well, I don't think it should be underestimated. I think Gemini is an enormously powerful tool. I mean, I'm personally a power user of Gemini. I do love the fact that it's across their entire eco
system out there. There is an advantage out there to that. I think that Alphabet is getting extremely smart with Gemini, So you know, I don't think you can completely dismiss Alphabet specifically and what they're doing across the AI ecosystem, not to mention their infrastructure I think is better than
just about anyone else's out there. But again that being said, I mean maybe to your point, with what open ai is doing with chet, GPT and and others out there as well, there are going to be more options out there in the market, and that is something that I think, you know, as an analyst, you can't underestimate and you do have to factor that into your future assumptions. But we do expect, you know, ultimately, their ad supported businesses
to continue to grow. It's just not going to be at the pace that you know, maybe you're seeing from you know, the market here over time because of the broadening out and greater competitive pressures.
A couple of months ago, there was a skepticis them on Wall Street about the amount of money that hyperscalers were spending on R and D on CAPEX, and there was this question of are they overspending? Meta had said we can't spend enough. Do you think this season you're going to see a rewarding by investors of companies they increase their CAPEX spend dramatically or do you think that that's going to be treated with the same skepticisms a couple of months ago.
Well, I think what you're actually going to see this earning season. I think you're going to see CAPEX spending plan plans sustained and not increased. We actually saw Beta increase it last earning season. As far as their twenty twenty five CAPEX guidance, I think, you know, Microsoft has actually done a pretty good job here over the last couple of quarters, essentially kind of flatlining the CAPEX number,
leveling it out. This is their year end, so we'll kind of see what type of guidance and outlook they decided to provide here for investors here over the next year.
But I actually think for the most part, you're going to actually see more favorable return ROI metrics across kind of some of these cloud providers because of how they're spending on the cappet side of things, they are shifting more towards the server side of things here over the next couple of borders and years, and and you know, clearly the growth piece is you know, starting starting to kind of decelerate and level out a little bit here.
So I think kind of the return on investments are going to see considerable improvement here, not only over the next you know, a couple of months, but you know, over the next couple of years, and I think investors will reward that. Maybe to your point, I think the other important point here or item to look out for here this earning season is something along the lines or you know, looking at the op X side of things, something that these companies have really been you know, holding
kind of leveling out here over the last couple of years. Actually, if you look at employee headcount, whether it be from Google, Microsoft, announcing recently some of their head count reductions essentially down over the last kind of two to three years, flat to down, And I think it'll be interesting to kind of see how these all these companies comment relative to what we've seen here from Zuckerberg over the last couple
of weeks and months. I think that's going to be really an important storyliner.
As well, Angelo, I appreciate it. Angela's in O there as CFRA. 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.