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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. Ohmar Aguilar, Schwabasse and Management writing, we are getting some corrections within the frothy areas of the market. It is time to use volatility to rebalance exposures to reduce concentration. I'm joined us now for more. I'm always good to get your thoughts on things, sir. Let's get into it. What would you be reducing right now? What would you be taking advantage of?
Well, we have been experiencing one of the biggest and largest momentum markets that we have had since the late nineties, and think, you know, the exposures that people may have had to the traditional that momentum you know type trades are very high, and I think we have been encouraging clients over the last you know, two months to try to use this periods of volatility to try to reduce
exposure to that momentum trade. We have seen these, you know, that can actually go very quickly as you know, the AI trade expending on capex and increasing capex. Continue to just emphasize that sort of megacap you know, dominance that we have seen. You know, one of the statistics that we keep on showing is that you know, only seventeen percent of stocks within the S and P five hundred have been able to outperform the market this year.
So that tells you a lot of that level.
Of concentration that you know, if we go back in history, you know, when it comes down to momentum trades, they tend to be online very very quickly, and we have seen some of these headwachs already over the last.
Couple of months.
I've heard this sycrament repeatedly throughout the whole year, and if I listen to people as they offer that encouragement to move out of these names, I would have missed out on the rally because that's what supported the index. What are you suggesting paper should buy instead?
Well, I think if you look at the fundamentals of the economy and you look at where what is happening. You know, we have been encouraging clients to just take this Barbelle approach and take a look at the fundamentals of what is the corporate.
Earnings growth that you see on these areas.
You know, normally what you see in this you know, probably not very clear economic picture because of the lack of data. You know, we have seen the softness in the labor market, We have seen softness in the house and market. We clearly see this deceleration of economic growth with inflation stays you know high, and what that would recommend is for people to start moving into the cyclical
part of the market and being more defensive. We're not necessarily thinking that the economy is going to crush or is going to go into very hard landing.
But clearly we see you know, the potential.
For these to go to US law down and only companies with a strong balance will do. We actually saw on the performance of dividend payer stocks you know, this year. This is the this is the opportunity to take a look at those companies that can.
Actually do well.
So starting to go into that part of the market is started, well, interest rates were probably coming down if they already started the FED, you know, reducing rates.
That also provides a little bit of ability.
For cyclicals and sort of mid sized companies to start doing well. And I think I will emphasize the fact that, you know, earnings potentially is sort of the biggest part of what the market might look at.
OMAR does Defensive means something different today than it meant, say five years ago.
Stability, Lisa, stability is what we actually think about. Defensive is not the traditional consumer staples utilities trade and in fact, utilities tends to be more driven by AI these days than what is the traditional AI.
But it's really more.
Stability in earnings what we actually think about being defensive. You know, higher quality names in terms of profitability and profit margins. You know, stability is a big part of it. Do you think about it companies that did very well through all this period of uncertainty around targets and around you know, labor market costs increasing, et cetera. Where those companies that had very good profit margins, So the are the ones that are able to steal not necessarily pass
through the increased prices to the consumers. You know, those companies that are squeezing their profit margins will have no choice to actually pass.
Through those prices to the consumers.
So we clearly emphasize that ability of continue to have sustainability of earnings, quality of earnings, and healthy profit margins.
A number of people have come on the show this morning, and I've talked about how there still is quite a bit of dynamism under the surface, and you talked about the cyclical sides of the market that could potentially do better, especially if the Fed cuts rates.
Again next month.
At the same time, people are seeing more inflationary pressures come in, whether it's from stimulus efforts, whether it is from the energy costs. And I'm just wondering whether increasingly the idea of diversification is starting to look very different for you, with the bond market maybe not having the same kind of profiles it has in the past.
Well, the versification is clearly the name of the game, and that has not going to change. I think the main concern that we continue to have is the fact that, yes, as we see in the bond market, you know, a steeper yield curve when we see inflation expectations continue to rise, and that is a big component of what I think, you know, we may see we were starting to see a little bit of movement on the credit market.
Clearly this is the time where you.
Know, diversification and maintain the levels of quality in the bond selection is actually a key part of it. I don't necessarily think that duration is sort of a play in the mode market at the moment, but I guess
the expectations have been said. But I think the shape of the yield curve and the movements that you have as you see you know, sticky inflations and you see a continuation of that expectations that we're going to have a more steeper year cleve is sort of a big part of what we are encouraging clients to look at. On the equity side, again, you know earnings, you know potential,
and diversification suggests reducing the concentration. And I cannot emphasize that even more because you know the level of concentration that there is in terms of the majority of portfolios, it is you know, pretty high, and I think diversifying away from it even if the means that having to buy some of the companies that have been underperforming this year is actually a healthy thing to do it for investors.
And I can I just follow up because we get this argument so many times on this program. We can't just buy something counts for the sake of buying something, haunts for the sake of reducing concentration.
Risk.
Concentration has been a theme because that's where the earnings power has been. And I'm trying to understand why you want to go somewhere else. What is it about being somewhere else If it's just for the sake of being somewhere else.
Well, I think the fundamentals or the corporations you know, tend to basically look at, you know, where the market and the price tends to be driven is about that earnings potential and the free type flow generation. And as you're right, you know, the companies that have done very well so far, you know, tend to be driven a lot by that earnings potential free cash flow generation, and
in many cases that have provided a good performance. Now when you look at what that means in terms of sustaining that rate of earnings potential, that's where the risk you know stays and therefore you know the size of that you know, concentration.
When you have companies that could be.
Between three and four percent of the active risk that goes into your portfolios, that tends to be fairly risky. Now, there are areas that are still also generating significant amount of earnings that are significantly potential for free cas folow generation that are not you know, that high levels of valuation.
So looking at those undervaluation companies that still have the same characteristics, the same factors with some of the others, but you don't necessarily have to go into these very high multiples is actually a very healthy thing to do.
Where do I sign the moment? Where aren't they well, you know they.
Are you know significant in areas in infrastructure, there are significant areas you know, within even technology.
If you actually look just a technology excluding you.
Know the max seven, you know there are components within you know, technology that are still pretty good that their capitals expenditure is still to increase their roes and the ros continue to use very healthy there are still being a very this is the time where stock selection matters and looking at factors that drive performance, you know matter you actually see areas within you know, the cyclical markets, whether it's in materials, whether it's in energy, in those
you know, or is there's very very good opportunities that you can have.
You know, again, we have been.
Talking about it, you know, I've been talking into your program about you know, going into small caps. You know, we still think that it's early to go into small cap. There still need to be some structural pieces that could benefit those small cap companies. You don't necessarily have to go all the way and try to overweight small cap.
But then looking at those you know that.
Tend to be you know, multiples that are decent with earnings potential at Flickastion generation is the way to go.
Stay with us more Bloomberg surveillance coming up after this. An increasing number of Democratic lawmakers calling for Senate Minority Leader Chuck Schumer to step aside after famous to stall members of his party from a Green to a Republican deal to reopen the government. Joining US now Henrida, Trace a Vader Partners Henrietta a reality check for politicians in Washington. They've had two already, they had one twelve months ago.
In the general, the general public weren't happy with affordability, the cost of living in this country, and look to Republicans to try and fix it. And they're wanting to vote for whoever is going to come out with a good idea, and their ideology is not cemented, it's not fixed. They'll shift from one party to another with ease. You and I have talked about that. How do you think that sets us up for the midterms next year?
Yeah, I mean, that's exactly what last Tuesday's election showed. It wasn't just that Democrats came out. The exit polling shows that it was Trump voters who went for him in twenty twenty four who swung right back to the Democratic Party this cycle. And that's a combination of the
president's economic policies more than anything else. So what Democrats have done here with this shutdown is not keep an eye on affordability, which was of course the talking point of the Tuesday elections, but the inflation, grocery prices, healthcare prices.
I mean, I'll be honest.
You guys know I don't like healthcare even I know now that the insurance premiums for people over the age of sixty are going to increase nine hundred and nineteen dollars as a result of not extending these ACA subsidies. And we just spent forty one days saying that back to back. We're going to have a vote on it
in December. We'll do it again in January. So I think that for the Democrats, just keeping this message alive is outside of the Beltway, sending the message that has just won an election and looks like it'll be a repeat of twenty eighteen based off what we're seeing in the polling.
To build on that, Henrietta, do you think that this shutdown was futile for the Democrats or do you think that it actually yielded some political benefits.
They get yielded a lot of political benefits. I'll cover a couple. Number one I think is setting up Schumer to step down and pave the way for the senator from Hawaii to come in and be the next Democratic leader in the Senate side. That's pretty plainly something that's building within the Democratic conference on the Senate side. I
think that's something that Schumer is ushering in himself. And he took a lot of arrows by voting against this bill, by agreeing to let the eight moderates cross the line. It's exactly however many you needed. I think that's what leadership does, especially on the Democratic side. You've seen it in the past. Joe Biden just did it last year. On the messaging side, think about where the numbers are.
President Trump's approval rating has cut again in half. You went from negative seven to negative thirteen in the polling averages just since October. And on the congressional ballot in generic polling, the Democrats went from plus one in the generic ballot.
On October first to plus four.
Now that's enough to get you the midterm House election, and that's the goal of leadership.
There's a lot of.
Time between now and the midterms, and it really includes the beginning part of next year when we could potentially get tax rebates. You can call them the tariff dividend, you can call them whatever you want.
But a lot of people are.
Expecting more money in people's pockets come January and February. How much do you expect that to really skew things the other direction back toward the Republicans heading into the midterms.
Why do you need a two thousand dollars rebate? What's the problem is the inflation still rising? Is affordability still a problem? Didn't we just pass a one big, beautiful bill with three and a half trillion dollars of deficit increases.
Why do we need a two thousand dollars dividend check.
That, by the way, will not be paid for by tariffs because the tariffs don't bring in that kind of revenue. In the two thousand Cares Act, we passed the exact same kind of rebate check Trump is talking about right now. It costs two hundred and ninety two billion dollars. The tariffs have brought in eighty nine billion dollars. If we give two thousand dollars to every eligible American, that's off
four hundred billion dollars spending provision. So you're going to increase the deficit to provide tax cuts to Americans who are suffering from inflation because of taris. I don't think that's a winning message.
At a time when it's a question mark of the policy itself and whether it which stands. They screwtiny at the Supreme Court in the coming month as well, Henriette said, where do they have space to offer some kind of giveaways and change policy?
You know, it's It's amazing because when I speak with Republicans, they plainly don't want to go through the very difficult activity of passing a fiscal year twenty six budget and a fiscal year twenty six reconciliation bill. Democrats wouldn't want to either. It's extremely difficult. Voters opens up all your members to vote e rama. But what you could do is you could get sixty votes to extend the ACA subsidies and then think about what we just talked about.
You get every family with two sixty year olds in the House on Medicare and Medicaid, you can get nine hundred nineteen dollars for each of them back in their pockets.
If you are a household with kids with twenty.
Thirty forty year olds, the ACA subsidies get extended, you get two hundred up.
So there's a pretty easy path to.
Sixty votes if you want it, and we'll have those votes in December and then again in late January. And if you want ustimate the economy quickly get money back into consumers pockets, the AC s is a really fast way to do it, and a lot of Republicans would like to see that too. Look at Alabama, Boozyana, Mississippi.
That's where those voters are.
Stay with us.
More Bloomberg surveillance coming up after this. Dan Skelley of Mork and Stanley writing, while the fundamental backdrop for the market has improved from the panic stricken spring, our current valuations, investors are not being compensated for a high degree of policy and earnings risk.
Dan joins a snap for more dank and monic.
Morning, John.
Do you think that catches the pushback we're seeing across several single names out of the past few weeks.
Definitely.
And by the way, I think the volatility in the rotation that we're seeing among single names is healthy. I mean, the idea is if everything was going up euphorically, then maybe we could talk more about a bubble. But you are seeing the market reward winners and penalized losers, and so I think that's a healthy trend. I think, frankly, there's seemingly a bubble and everyone guessing whether or not we're in a bubble or not.
A bubble in bubbles correct, not in the credit market, credit markets wide open.
Suppose somebody is spending. Do you think that reminds the case?
I think that remains the case and is likely to be so for the foreseeable future. You've seen some of these bond deals way over subscribed, as you know, in the last couple of months, and so we're just not yet at that point where things are starting to look more concerning.
Bubble of a bubble, bubble in bubble and bubble took. Okay, honestly, this is so derivative.
I'm having a hard time increase.
Of the bubble in bubble talk, I know, but it's true. There is this feeling that right now there is a lot of fear out there. I just want to go back to the point that you made that it's healthy to see swings like this. It's healthy to see swings in one stock name evaluations mark evaluations of two hundred and sixty four billion dollars.
In one day.
The idea that we saw that kind of gain just on Monday alone in the likes of Nvidia, after seeing two hundred million dollars lost in one day, how is this healthy? Doesn't it really point to concentration risk in another kind of way in the index?
Sure, it's an excellent point, Lisace. I'll say a couple of things. So first is what I'm describing is among the mag seven themselves, you saw a handful half of them up on earnings and half of them down on earnings, And so I think that's really what we're looking at. But I think to your point, in terms of absolute market values, it certainly speaks to the crowding that's happened not only this year, but going back fifteen years.
Really since eight. We've seen this winner.
Take all phenomena for almost two decades now, and it speaks to just again just how much the market share winners have differentiated themselves versus everyone else. Last point, you reference ninety eight ninety nine, which we're starting to hear more and more of. Obviously, let's not forget that in the stretch from kind of the fall of ninety nine to the spring of two thousand and NASTAC doubled over a seven or eight month period.
That is truly what a blowoff top looks like. We haven't seen that of yet.
There's also this.
Question of how far the AI trend is diverging from the underlying economy, and we keep going back to this how difficult it is to get a gauge on what's happening with people feeling pretty negative on the economy, pretty negative about their spending power. At the same time that you're seeing these runaway gains and these expectations for all this profitability and efficiency.
How do you scare that?
So it's a case shaped market economy, it's a case shaped socioeconomic recovery. Post COVID, everything is diverging. We wrote about this recently in our letter, talking about the market is not the economy. The economy is not the market. And when you look at the changing nature of this economy really since COVID, but going back I'll say a decade plus, it's a services led economy. All we've done is wring our hands around tariffs and trade. This year
trade is eleven percent of GDP. This is a service's economy. AI spending is being funded largely by cash flow, so we're seeing that as being somewhat more insulated from ebbs and flows in the economy. And increasingly it's a high end consumption market. I mean, one of the things we haven't talked about enough, we think is that ten percent of the population controls forty.
To fifty percent of the spending.
And that's a cohort that's been reflated in terms of wealth effect exposure to acid prices, houses and stock markets, and so we're seeing that bifurcation across not just the market, but every component of the changing nature of our economy.
Does that make you want to expand out to some of the areas that are more susceptible to spending, whether it's on the high income, which seems like an AI trade at this point, or whether it's on the lower income. The sort of bet on some sort of cyclical improvement.
Very selectively where there's also a fundamental catalyst. So we don't want to just make macro and factor bets. We want to also marry that with some type of idiosyncratic catalysts in whatever stock call or sector call you're making. For example, financials, Obviously there's a lot of macro inputs rates the economy lending, but at the moment idiosyncratically there's a capital market's recovery, there's the regulation coming from the administration,
So you always want to have some type of fundamental catalyst. Lastly, as we've seen expectations around the FED dial down for December, we were almost one hundred percent priced a month or two ago. Now we're sixty percent price. We've seen all of those small cap and higher cyclical stocks trade off as well. So tell me what the Fed's going to do in December. I'll tell you if I want to make that trade.
Well, there's some excitement that maybe we'll get some economic data. How relevant is that data to this market?
It's super relevant.
And all of your guests and you all have been talking about this concept of flying through the fog, which we've been doing with the government data. We think basically trying to triangulate all the different inputs in terms of private market surveys and providers. We actually might see a slight tick up in the unemployment rate when we come out of that fog in the following weeks.
Is not enough to hold back the index because we've had the lust each ob numbers a year at a stop.
Market's been just fined.
Probably not, So it's a great point. Probably not.
And the index is going to continue to follow the AI sentiment and the earnings trend, which continues to be really strong.
So what's your highest conviction trade heading into your end?
So heading into year end, I have to say that the AI power and the AI infrastructure basket, which has sold off more recently, still looks really really compelling. We came into this year expecting capital spend to be three hundred billion. It's tracking towards five hundred billion. But in terms of what we heard from the tech players over the last month, we're going to look at maybe seven
hundred billion going into next year. So if you think downstream in terms of all the industrial power in different utility components, we think that trade still looks really compelling, and it's sold.
Let's come off a little bit off the highs.
Stay with us multiple impax Savannan's coming up after this.
Venue.
Christianer mcmarkley's maintaining his bearish s and P five hundred year end target of sixty four point fifty as earning season continue news when it joins us now for more Good morning, sir, good morning, sixty four to fifty, justify yourself my front.
So that is a base case, and we have an upside case of seven thousands. Figue that you look at it more as as range at this point in time. But listen, we have been it's just that the market has been moving ahead. So we moved our price target in early September, right, and so already the markets moved ahead, so you know, we remain cautiously optimistic. Actually, looking into
next year, we are more optimistic. We expect earnings to increase, you know, double digits, ten to eleven percent, so I think, and the earning season right now is extremely robust.
I mean, this is surprised.
Even as to the upside, we were more optimistic, but this is building momentum from the second quarter.
Yeah, what's happening in corporate America that's generating double digit earning growth?
What are these companies doing?
So?
I think one is.
If you look at the tech companies specifically, they're already monetizing AI to a decent extent, and that is showing up in their overall profitability. So they're laying off people and yet they're highly profitable and they're still spending. So that's one part of it. Af of course, is being tested and adopted to varying extents. Still, enterprises sage is quite low. But one of the interesting things we are noticing right now is operating leverage is improving to a
broader cross section of industries. In other words, companies are doing a better job at cost control relative to their sales growth. Now that has been our fundamental concern outside of tech, especially that there's been a problem pressure on margins.
So it doesn't mean it's good across the board.
Some sectors are still having a tough time, for example, stables, discretionary, but overall we've seen an improvement in cost control relative.
To sales class, so more positive operating leverage in the system.
It sounds like you're kind of leading into the ballcase. At what point do you just reject the base case and go with the ballcase heading into your end?
Good question, So if you wait for two weeks you'll know the answer.
Here you might come the base case, so you know, the the point is, you know.
We normally come up with that outlooks, you know, sometime towards the second half of November, where we you know, up data numbers, so this year, next year. So directionally, it's very evident that the US is turning out to
be strong. So especially when you compare US to the rest of the world, which means Europe and Airbag, the divisions are running better, the profitability is running better, the expectation of margins are better, and that's the reason why we created a higher multiple than the rest of the world.
You've been traveling around a lot.
I don't know how you made it back.
Congratulations, But there is a sense that the dialogue is completely shifted from earlier this year, where it was so America go into Europe for the promise of growth, the actual spending of Germany. That's flipped was what was the environment, like, what was the sentiment.
Like, yeah, since I just came back from Europe, and so there's a certain layer of frustration over there because my trip earlier, I would say, in early March, there's a lot of skepticism about us, about tech, about what multiples you pay for it, about AI more broadly speaking, and underlying that was the enthusiasm of what the fiscal sort of spending expectation out of Germany for example. So I think what many of them will realize is that they were wrong. So they were right for about two months.
So there's a level of frustration on that. There's also this fear of missing out, so the question of do we jump in or not. So that's an overall question. But if you look at a scale, like somebody was pointing out to me, you know, germal fiscal spending in Germany over the next ten years is going to be in a few hundred billion dollars. We're talking about wanted to have trillion in AI capex in the next few years. So the scale of what's happening over here is simply astounding.
But I think some level of skepticism I sense in terms of the return on investment in AI that is I think reasonable because nobody knows, which is a fact,
as to what the true profitability will be. And that is important not in itself, because the the scale of spending is so massive that the market is effectively putting one hundred percent probability that this is going to be truly transformational, more so than the four other big tech cycles we've had since the mid eighties, from the PCs to internet to mobile in the middle of cloud, and we have AI now that better play out because that's what the market is telling you is going to happen.
That's why people are so skeptical. I just heard from my Bloomberg subscribe it directly. I can share the message with you. We know the enormous aion capital spend numbers, but what we don't know is the return on that capital. The market is discounting that the returns on the Aion campex will be significantly superior to the tech company's legacy returns. Is this really going to be the case? Is it durable? Feels like a stretch? Do you hear a lot of that kind of sentiment on the road.
Yeah, so I think I hear a lot of that, And I think the frustration the difficulty is literally nobody, even if you talk to tech experts, have an idea about how to quantify the scale of productive improvement. The other thing is, you know, still a lot of it is coming from having a better cost pace right, in other words, being able to do more with less. But the real use case will also come in the top
line itself, which is where in the early stages. And like I said, enterprise usage is still in the early stages. So I think that skepticism is reasonably warranted. But what I do point out, and I think we've discussed it in the past, the big tech as a group who are doing most of the spending, their multiples have generally been easing over the last two to three years, so they are earning into the multiples they're spending. But I think the big question now is also shifted into the
funding landscape. So far, all the funding has come from organic cash flows, and in fact the big tech companies are spending fifty to fifty on buybacks and on capital spending. But going forward, given the scale of spending increasing, their credit markets are going to be tapped in varying to varying extent public private asset back and things like that.
That's a question.
It's that goodnews toy stocks.
Well, you know, some.
Amount of bladdagh being used by companies is actually optimal, right, so you're using a balance sheet efficient sly. But it also means that the equity markets now have another source to take a queue from in terms of how risk is being priced right and where is risk clearing and how does it compare to what we see the equity markets.
But if you look at the scale as of now, we broadly estimate that in the tech area AI related there's been about call it one hundred and sixty odd billion which has been raised in public and private markets. If you look at the marketcap of big tech companies, I'm not even to include Oraclelendus it's touching twenty one trillion. So I think the scale is very modest and many of these spenders are highly profitable, but as.
The scale of spending.
So if you tell me that a trillion is going to be funded in credit markets, that's slightly a different story, right, And I think that's what people are asking.
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.