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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. This came from Emily
Goodwin of The New York Post. You'll be told this was a great meeting. The relations between the two nations have improved. Take a listen to this. American staff took everything that the Chinese officials handed out, credentials, bernafones from White House staff, pins for delegations, collected them before we cut on Air Force one and threw them in a bin at the bottom of the stairs. Nothing from China
was allowed on the plane. That's the real state of the relationship between China and the United States.
There is a lot of speculation about exactly what was accomplished and potentially how ten some of these relations have remained despite some of the niceties, and that clearly is the uncertainty feeding out through a lot of the different importing.
Joining us, Natzi discussed very lovely of the Pinniston Institute. She writes the following, the summit has succeeded in maintaining a tactical truce, but failed to achieve resolution in the major irritance in the relationship. Mary joined us. Now for more, Mary, welcome to the program. Let's just start with those major irritants, because there will be another summit, potentially in September.
What are they, Well, Emriy just talked about chips.
Clearly, the Chinese have barked at the US export controls.
They have since moved on.
They are now devoted to their own development of their own domestic chips. But if we look back at the last year, we can see that the main irritants were the most proximate erarands were President Trump's acceleration of the tariffs that had been placed on China and his first term, and then the Chinese invoking new export controls on critical minerals potentially very disruptive move for US industry and the US moved to rearm following the war in Iran, So where did we get with any of that? As far
as we know. There may have been some trade discussed, particularly by Secretary Vessant in his Chinese counterpart, but between the two principles, I think we have seen that there was no discussion of export controls and very little accomplished on the trade front.
So the irritants really are still there.
Mary, I've heard conflicting reports about whether this was a good meeting or a bad meeting, So people say, at least nothing bad happened in terms of some sort of big blow up. On the flip side, there wasn't even an affirmation of some of the truces that we've seen when it comes to tariffs and rahere Earth's over the past couple of months.
What's your take on this president?
She's stressed stability, but he wasted absolutely no time in giving the American president the tun lashing over Taiwan, which means that what we saw in China earlier this year, a sense of confidence and growing power clearly was on display. The relationship we're always framed in exactly the terms that Beijing likes to use. The First is primacy. The US China relationship is the most important in the world? Is it the most important to the United States? What about our allies?
Win win? President she always likes.
To talk about the relationship in win win or mutually gainful terms. Yet the President Trump since twenty seventeen has been talking about China as someone who's ripped the United States off?
So how is that going to be win win?
And then lastly, the president she likes to describe the relationship as one of partners, not rival. What about the AI race? What about actions in the South China? See how have we suddenly become partners and these issues that have to do with conflicting goals are suddenly papered over?
So I think rather than just.
A visit that accomplished nothing, this actually set us back in terms of where we are with the.
Chinese In the meantime, What actually happened with all the CEOs from the United States who went over there. Do you have a sense of whether they accomplished anything or involved in any of these meetings?
We don't have any sense of that. I think.
You know, Amory talked about how the chip sales, there's been crickets on that, so we really don't know why they stop to pick up Jensen Wang in Alaska. The other CEOs were there, I suppose to show their support for the US China commercial relationship, which remains important and is a good thing. But as far as addressing some of the problems these firms have experience in serving.
The Chinese market, I think we've heard nothing.
Mary, What do you suppose the future is of the political question around this relationship Domestically in the US. The President did such a powerful job many years ago of really highlighting how damaged people and communities were in this country from Chinese overcapacity and the hollowing out of manufacturing
domestically in the US. That became a rare bipartisan issue in Washington, d C. Is that a political priority anymore going into the midterms later this year and ultimately for the next general.
Well, I've always thought the harm was real, but the diagnosis was flawed.
There.
We know that just attacking China is not an answer to what the US needs to be doing to heal itself.
So I think that now.
The President has decided that we need stability in this relationship, that going in an alternative route will actually cause more harm than good. We need to turn at home and say, okay, then what are we doing at home to meet the challenges that are before us, the same challenges we had before.
Stay with us.
More Bloomberg surveillance coming up after this. We begin this out with stock's pulling back from record highs as bond yields push higher. Alista Pindrov HSBC still bullish, writing, we revise our year end price target on the SMP to seventy six fifty on. We've heard this so many times, earnings strength, but we could see it breaching eight k Alistair joined us now for more Alistair.
Good morning to see.
Having us seen so many upgrades to price targets, can you just take a step back before we get into all of the details. How stellar impressive has this earning season been.
It's been amazing.
I mean, you know, to put it into context, we're getting you know, twenty seven percent earnings grow for the S and P five hundred this year. That's going to be its strongest really since post COVID. The number of companies that are beating has also, you know, basically been since post COVID. Hires and I think the really interesting aspect here. This is just not just a tech on MAG seven. The story strip out tech and Mag seven.
You're still getting thirteen fourteen percent earnings growth from these companies, again very recilent, much higher than expectations. So it's the breadth of earnings which has been the most surprising to us. But again, you know what continues to drive the market higher here is the tech and the AI narrative.
There's a phrase that I'm going to borrow from a colleague of yours at HSBC danger zone max changer zone. Yeah, talks about the danger Zigner were in the danger zone of the bond market.
We are, We're in the danger zone. And this is the trade off now for markets which as soon as we get you know, the US ten year bond yord pushing above one and a half percent, the market's going to have to weigh, you know, the challenge between higher bond your squeezing valuations and the earnings numbers which have
been so phenomenal. But it is a concern, and that is the downside risk here that if we don't get oil coming down, if we don't see clear signs of the de escalation in the Middle East, and you know, progress towards opening the street of her moves. If this continues through June July, you know, the downside starts becoming more apparent for the s and P five hundred here.
So just taking your advice and looking right now at a ten year yield of four point five to three percent, and I'm.
Ready to hit sell.
Why shouldn't I? Right? I mean, if we're in the danger zone, why is that not the World war?
Our view is that our base case is that there will be some normalization of the strait of her moves in the next month or so. Our view is that oil will start to creep back down towards the end of the year, and that's should start to put some of the pressure off bond yields. So, you know, the base case here is that the market is already pricing in a pretty panicky kind of scenario, and we don't
think we're there just yet. I think that you know, what makes us more concerned is again, if this persists throughout the summer, and you know, from an economic perspective, a good way to frame it is that, you know, US consumers have received almost fifty billion dollars in tax refunds this year. You know more so than twenty twenty five. The cost of oil at one hundred dollars a barrel
is fourteen billion dollars every month. So back of the envelope math is if we continue to get oil at one hundred until June July, that to me is when things start to turn a lot more negative. The impact on the US consumer, the impact on the US economy starts to turn more negative, and that's when we might see more serious Sarnings downgrades.
One of the biggest debates right now seems to be putting Parl Quincy versus Sebastian Page. Parl Quincy try to diversify away from AI and different geographies but also different types of companies, so really doubling down saying ultimately he wants to get more into AI and more into the US specifically, where do you sit on the whole diversification issue.
I mean, in a global context, we're overweight emerging markets and overweight the US. Will we kind of like a bit of both. In the emerging markets side that we're still playing you know, tech, where we're overweight Taiwan. We're also overweight materials in latter which benefit, by the way, from all of this AI cape spend from higher copper demand, higher aluminium demand, So you know, I'm actually leaning into
AI almost everywhere. I think what we are really focused on though, in a global context is two things.
One is AI.
I think that's how you diversify, go into the banks which are clearly using AI, seeing productivity benefits from this. And the other theme as well is trying to avoid these stocks which are going to be disrupted by AI. So again, you know, some of these sectors like SaaS, etc. Where we think there's going to be an overhang. Whether it's true or not, I think it's hard to disprove in this current environment. But we want to avoid the areas which we think there's going to be fears around disruption.
So in the kind of diversifications perspective, I'm fine diversifying out of the tech but when we go into the you know X tech names, I still want to be looking into the areas that get the biggest productivity gains from AI adoption.
When I hear EM, I always smile because it doesn't mean what it used to mean. It's now two countries, three names making up a call of the index, the MSCI EM Index Taiwan Semiconductors fourteen percent. A little bit more than that, Sam Sung, it's about six percent of the index. Sk Highenex is a little more than four percent of the index. We're reducing things down to just a handful of names. I just got this note from CIBC Chris Harvey. I'm sure you know him. Chris said this.
By our calculation is SPX SPX attribution. Tech and communications services have accounted for ninety percent of the returns of SPX since the end of jan until yesterday. On an individual basis, nine names accounted for roughly ninety percent of the return over that period until yesterday, but a video responsible for twenty to twenty five percent of the overall return.
Do you think that's a problem. Is not necessarily a problem?
I mean, you know, I do laugh about this conversation about concentration.
It's a risk.
I'm like, well, it's a risk in both way. It's downside and upside. If you think that this concentration, the names that are driving you know, the upside here are going to continue to outperform.
That's great.
And so you take the em story and it's kind of funny because you're saying that you know, EM is not what it used to be. I would disagree a little bit. What was EM in two thousand to twenty ten. It was a commodity cycle. Well, d ram and semiconductors are the commodity of the AI era smart So is it not just that we're in a different kind of
commodity play here for emerging markets? And I'm totally bullish on that, And so I'm totally leaning into this if I think there's going to be more capex from the hyperscalers one hundred and fifty billion dollars in capex estimates just being added for twenty twenty seven and twenty twenty eight. Twenty percent of that goes to the Korean memory names. I'm leaning into this, so I don't have any issue, particularly when you know the Korean stocks and the Korean
memory names trade on six times earnings. To me, it feels like a bit of no brainers to go into.
That's prices go up of those commodities, those new commodities. How elastic is that demand for these particular goods.
I mean, I mean it's there's almost it's completely priced inelastic. I mean you're seeing you know that the memory name is basically saying that entering into three to five year long term agreements with the hyperscalers because there's so much
demand for it right now. And why that's so important is because it reduces the you know, price volatility, and it gives us much more earnings visibility than we've ever had before three to five years of you know, the big hyperscaler saying hey, we're going to take out all of your supply to me, that is is a very bullish narrative here.
Stay with us.
More Bloomberg surveillance coming up after this, let's talk about the K shaped economy. Turning to retoun investors a waiting earnings next week for another reading on consumer spending, the RAYN. Hutchinson of Bank of American writing, we expect t JX, Ross and Burnington to speak to a strong start to the year supported by elevated tax refunds and trade down driven by gas inflation. The Rain joins us now for more the Rank of morning Warnie, I'm going to see how squeezed the consumers right now?
Got is squeeze? Does I think people fear? And remember we're getting first quarter earning, so it's a little bit of a backward looking data point, but consumers were receiving very high levels of tax refunds throughout the first quarter, so that served to more than offset any squeeze they felt from gasoline. I think what's really important and brace yourselves for a big week next week. The forward outlook is, you know, as these tailwinds wean, what happens because gas
prices are still very high. What do you think the wallet? I think that the consumer takes a little bit of a decelerating trend. I think they trade down. I think they use their dollars a little more wisely, and they really search for value.
TJX the last time they had it down, yere, I think you've got to go back to what seat hasan today? Something like that, they find a fantastic run.
I didn't say TJX would be down.
Now I'm going to site they can have another round.
Yeah, no, I think absolutely not. And when you look at you know, we've gone back twenty years and looked at times when gas price is spiked and you look at clothing spending, it falls, jewelry spending, it falls off price. Retail behaves much more like a necessity and goes at its normal trajectory, and the reason is their customer may have to trade down, and then an upward upper income
customer trades down into their stores looking for that value. Right, everybody's wallets are squeezed, they end up taking share.
How much are we seeing a case shaped retail sector? And it doesn't have to do with necessarily the income strata of the clients as much as the success of management team to really put forward a story that either works or really doesn't.
Yeah, I mean what we've seen in a time of a little bit of consumer duress over the past year or so is that if your brand is hot, you are really able to get that share of wallet you Coach the Coach brand is a great example of that. Right, They just put up a twenty nine percent growth rate in North America. I don't think any of us would have expected that a few years ago, but they made some great investments in marketing. They've really elevated their brand
and they've been successful. You can contrast that with a lot of other players, both in the handbag and footwear space. They're not seeing the same success.
Well, I'm going to talk about Nike and Lulu Lemon, for example, which have been underperforming, and we've talked about it a lot on the show. John's been talking about Nike and how they really lost some of their vigor, of the athletic heartbeat that they used to be driven by going forward.
How much can we look.
At earnings as giving a read on the consumer versus a read on strategy. Given the results that we've had so far, and given the consumer spending numbers that we've seen from some of the big cards.
Yeah, the results have been so bifurcated. Right. You'll see retailer, even footwear retailers like on Holdings or Hoka, putting up growth and then you see Nike putting up decline. So it's really a big share shift. And I wouldn't say I wouldn't use Nike as a gauge for the consumer. Nike just didn't innovate like it needed to. And when you have competition nipping at your heels, you really need
good product. They relied on some of their old stalwarts instead of really going out and doing what Nike usually does, which is lead the market with innovation.
You don't want to be apologizing.
I just feel like Nike as a brand has completely lost its attitude and We were talking to the commercial brand before we came on about the Boston Marathon and that commercial they had walking tolerated, right old school Nike sort of get at it, do it, get aggressive, and then they were apologizing for the walking tolerated. People were offended. They pulled the at and went with something else. That's kind of where Nike's at today. That is not what Nike used to be. What changed are that company?
You know, look, they're much bigger and they now target not just runners but walkers, and I think they need to remember that. So what changed. They've had a few different management teams come in, and again I think they lost their focus a little bit on sport. They got into a lot more casual, a lifestyle product, and now they're actually completely refocused on performance product. It will take more time because that's a smaller part of the market, but I think it is the right strategy.
For my branding perspective. Who's got it right right now? We mentioned American Egg have sort of unapologetic founded, some people did not apologize, sales went up.
Who's got it right at the moment?
You know, I think I think there are several brands. Ralph Lauren coach certainly having a bit of a moment. Birkenstock put up really strong growth earlier this week, so there are some brands that are doing quite well. The Gap brand is showing a resurgence that I certainly hadn't predicted, but it's been really fun to watch. So yeah, there are several of them with great marketing and good product and they're kind of coming back from where they used to be.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, an gient 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.