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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. We begin this out with markets on hold, as a strong September payrolls report put stocks on a four week winning street. Edgardenny, I of Yourdenny Research things the Fed can take the rest of the year off. Following Friday's strong September employment report, Federal fun Futures Markets predicts five or six ray cuts over the next twelve months. We're predicting none and done for the rest of this year. Edgar Denny joined us
now for more EDGM Danny, let's talk about that. Is that one jobs report enough to say they're done for the year.
I think it wasn't just the jobs report. We also had a very strong purchasing manager's index for the services economy, and that's where the strengthen the economy has been. Initial unemployment claims have remained very low, and so I think there have been actually quite a few numbers. As you know, the City Group Economic Surprise indexes positive again, and that's one of the reasons the body yield is back up. It's a good indicator of the direction of the body yield.
And if you're right and they are done, and we reprice this yield curve higher and we reduce how many interest rate cuts a price for the next twelve months. How well does this equity market perform in your opinion?
Well, I think it performs differently. I think we've currently seen that this bull market has been led by the pe. The evaluation multiple has gone up dramatically. Earnings have also been going up, which she wouldn't really have a bull market unless you really had the earnings trending higher. And for the S and P five hundred, five hundred that are all time record high, that's not the case for this midcaps, the small and MidCap SMP four hundred and
six hundred, their earnings have actually been flat. I think the market continues to broaden, but instead of broadening out to the Rustle two thousand, which would would be correlated with interest rates going down, if interest rates stay here, I think it broadens out from the Magnificent seven to the S and P four hundred and ninety three.
It's something as different though, this time for this earning season than it was in August. In August, we were talking about the high bar that equities had to reach. This time, it's somewhere below five percent that we're expecting earnings growth for this quarter.
The bar is certainly lower. What does that mean?
Earning season is about to be upon us? Can this not be the leg of the next bowl market rally? Whether or not rates are being cut.
Well, my preference is exactly what's happening here. I would prefer that the market goes up on earnings from here rather than on valuation. This is not a cheap market. We've got the buffet ratio. I think it's two point eight. It's in an all time record high. That's the price to sales ratio. The forward pe for the S and P five hundred is about twenty two, with a Magnificent seven selling at almost thirty and the rest of the market at nineteen, So you know, you're not getting any
bargains here. But what the market, I think will do is go up on earnings, and we're going to have another quarter. Earnings are going to go to a record high in the third quarter.
It has been a market, though, that has been able to rally without the mag seven, without the megacaps for the most part. In the second half of the year so far, only two point nine percent of the rally is attributed to those mag seven stocks, according to bespoke. Is it a market that, even though it is overvalued, at least is more healthy, at least is more broad Well.
I think it's healthier if the stocks that go up that it broadens out to the rest of the market, the abreast of the S and P five hundred, beyond the Magnificent seven. But again, you know, those multiples which are at nineteen could easily get over twenty here very quickly. And so I think the health of the stock market's going to depend on earnings. I'm a little nervous that everybody's turning so bullish and all of a sudden, everybody's
talking about six thousand. I started out the year talking at fifty four hundred for the S and P five hundred by year end, and that was an outlier. I had to raise that to fifty eight hundred. And now you know that's a kind of number where people are talking about six thousand. So I think there's a little bit, you know, I had a steam here building up that could be disappointed.
Ed you were ahead of the curve.
In your note today, you also talk about before we get too cocky, you say we should know it that we aren't completely rolling out the possibility of recession. What could trigger a recession for the US economy right now?
Yeah, Well, we had been thinking that the economy was surprise to the upside. We've been saying that for two and a half years. Don't underestimate the economy, don't underestimate the consumer. Looking ahead here, we're thinking that the economy is going to continue to perform quite well. And so I think that's consistent with where the bond yield is.
I think interest rates have normalized. I think the Fed really has to reconsider what is the neutral rate, which, by the way, I think is a fairy tale number. It doesn't exist. It's totally a theoretical construct. But all in all, I think the market goes higher on earnings.
Okay, but what about the geopolitics. You also have one eye looking at.
Yeah, well twenty percent. You know, I don't want to get cocky about this thing. As I wrote, I think there is a chance of a recession here, which is a twenty percent probability in our minds, and it is geopolitically related. I know it's a little bit hard to believe, but you look at the history of geopolitical crises, and more often than that they've actually been buying opportunities. The reality is this geopolitical crisis so far really hasn't given
anybody a buying opportunity. So there's still a possibility that with this war between Iran and between Iran and Israel getting to be a more direct confrontation, that there could be a sell off related to that.
Youthin is a part of the market, then there's a little bit too stretch. Is an index level coal a sector? Coal?
What is it? Well? I think that it's stretched in terms of valuation, and I think that part of that is because we do have a very passive investment orientation in the marketplace when people get into the market. More often than not, they're getting into ETFs, and ETFs really
don't get very concerned about diversification. If you know, if you have an S and P five hundred ETF and thirty percent of that is the magnificence of and that's what you're buying, whereas managed portfolios might be more conservative, and so that's not enough diversification.
I just want to walk away with the right impression of where you stay, and I don't want to mischaracterize you for the rest of the weekend. At the moment, it sounds like you're bearish. Is that fair?
No, I'd say that our view is that it's we're at the right place in the market relative to evaluation and earnings. I think we're we could get to six thousand. I guess what I'm saying is I hope we don't see a melt up here because I don't like melt ups. They forced me to have to figure out when to tell people to sell. And I think earnings are going to continue to drive the market higher at a slower pace.
So ed if you think that we can continue to move forward, but there's some distortions in the market, it's overvalued. Are you in the Cliff Assness camp of AQR that this is a less efficient market and that these types of mispricings can continue on for longer because of forces like passive management.
I think that's a very good point, you know, I agree with that. But at the end of the day, that's the theoretical notion. And the line is is this market going higher? And I think it is going higher. Look, we've got six trillion dollars sitting in money market mutual funds. They are all time record high, and so is the stock market. In other words, the stock market got to a record high without people actually panicking out of money
market funds and getting into the stock market. So there's a tremendous amount of liquidity in the system and there's a lot of buying. On a global basis, I would continue to overweight the US on a global portfolio. I think the China things kind of running out of steam here, and I think people are going to go back to overweighting. The US's kind of the safe haven in the global stock market. Arena.
John Danny, let's finish there. What is it about Shina you dounbelieve in?
Well, they've got some major structural problems they created. The government created its own mess here with the demographics. They got very rapidly aging demographic profile. The consumers are stretched. I don't think they're going to be going buying additional apartments. So even if they managed to stop the debacle in the property market, that's not going to be a source of economic growth. All in all, it's a it's a government run. It's an autocratic government running an economy that's
done extremely well when they capitalism flourish. Now they're not.
If your Anny research, i'd appreciate itself between the down to a Franklin template of right, we continue to believe in a self landing, which is bullish for equities compared with the more bearish expectations of an imminent recession. Katrina is whether it's around a table here in New York KA training co Mornic, good morning, let's start on Friday. It's like Friday never ended. What did you make of that?
I think that we've had We've had some bullish momentum in the market. We have been in the self landing camp for a long period of time in terms of we think that there are so many tools that have been available to be able to kind of land this economy on that landing strip and do something in terms of, you know, managing the inflation and getting that down, which I think we can kind of check mark on that. We'll see the data that comes later this week. You
look at the employment outlook, it's been bullish. People are good, and so I think that the Fed has actually done a very very good job here.
There's a feedling on Friday that good news is still good news. Equities will hire. Bond yards were two, They're up again this morning by seven basis points at the front end on a ten year, up by three. Should they be anxious? Should equity bills be anxious about what's developing in the bond market?
Again, I think that we've all I grew up where we used to look at the bond market and it would inform us as equity investors, And now I think that the narrative has shifted. I think that we've got so many indicators coming out of equity markets, and I think that the equity markets have been at the forefront of some of the bond markets.
So, Katrina, you also, though mentioned some of the bearishness and the technical backdrop, the fact that hedge funds need to take down their exposure with the volatility that corporates are in a blackout period, how much does that weigh on a potential rally in this equity market.
I think if you combine those two things, which are the kind of the hedge fund exposure, you look at the fact that that we've got this blackout period and buybacks have been a big driver of some of the earnings growth as well as the incremental buyer in the market. And then we cannot forget about the election. The election is causing uncertainty because we actually don't know who's going to win this time.
And for a lot of people that's.
Good news because it means it's still up in the air and there's still a chance for one candidate to pull ahead. But when you have uncertainty, the market doesn't like it. You'll see, you know, the kind of those spikes in volatility, and you'll see that uncertainty get priced in.
But for risk with a really strong backdrop, how much does the election really matter?
Besides the rhetoric?
The potential volatility doesn't really change the long term outcome when you have earnings and expectations are really low, a potential bar to.
Be and again a labor market that's very strong.
I think in terms of the election, First of all, I think on tariffs, we're in agreement that both parties have got incentives to continue that tariff regime. So I think that way we can kind of say, doesn't matter which side. But think about taxes, that is the area and taxes. I always look at an income statement. It's a big number, and so if you have any discs, you've got a lot of disparity in policy, particular as
it relates to corporate taxes. And obviously if you have a regime where there's a reduction in the corporate tax rate, that is bullish for equities and the offset. So I think that that's the unknown that we have. And no, I don't think we're going to have the next day change in tax rates, but it could happen fairly quickly, particularly if you get a Republican's fleite.
Well, also because TCJA is expiring next year, so taxes are completely in focus. But if you're concerned about the corporate tax rate, do you care more about the composition of Congress than you care about who's in the White House.
I still do care about who is in the White House because I think that that is the driving force, that is a representation of America, and I think that they're the person who kind of drives where we end up as a policy. I think, you know, as a country, we have this kind of tension in that we do believe that lower taxes.
Are good for America. They're good for American business.
But we do obviously have some fairly high deficits out there.
We do, and there's new projections actually what those deficits would look like from Washington from the Grecial Budget Office. About whether tariffs or Trump. You mentioned inflation and tariffs. If you think both of these candidates are interested in using tariffs as a policy, and we just got data that showed wage growth accelerated by next year, shouldn't we be concerned again with inflation?
I think on the wage growth that's a really big lagging indicator in terms of the inflation outlook. So I would say that any kind of job related inflation lags what we expect to see. In terms of how do we expect tariffs to impact It really depends on how we respond to them. If I have a company, a small company and the alternative is to buy something domestically versus a cheaper Chinese import that suddenly gets inflated up. It's good for America because I'm you doing.
That in house. So I think that the inflation number is not.
Directly a collery of the fact that I'm increasing tariffs and then suddenly I'm going to see inflation in America. I think it really is going to depend on what that adjustment is. And I think a lot of companies have been doing a lot of actions where they're matching they're manufacturing to where they're selling, so that these tariffs may not be as impactful as we initially thought.
Let's get your equity calls the US versus the rest of the world, within the US large versus small, How are you thinking about things?
I think in terms of the US market, the momentum of the US market, and that is something that we're bullish on. We are concerned about that concentration. We've looked at the concentration and there's no necessary research that kind of says, well, a highly concentrated market will sell off x percent because you have different situations. So on the concentration, though,
that is something that worries US. We do see a situation where you can have some of these large companies flatish means that they're going to grow their ownings, which is what the market's expecting, and they're going to grow. The valuation will decline as the earnings increase, and you kind of had a kind of tempered market return, and that's good for the overall equity market. What we're seeing is that that now that bullishness in the top of the market is starting to filter down, where I think
people are focused is going straight to small caps. But I think that there's actually a really big middle in America that is getting ignored, and that's the part of the market that I actually like at the moment. The small caps in a regime where you're anti FTC may not have that takeout premium, so there's a little risk there. But that mid part of the market I think could actually be where.
Opperation is to apect a preference within the mid caps.
In terms of sector preference, I would go towards some of the industrial names, where I think that they've got that resiliency to be able to take advantage of moving things around that they're not going to be hurt by that rising tariff regim and maybe they've got some ability to benefit from new policy.
There has been some of that the mag seven, it's thirty percent weighted in the S and P. Bespoth points out, it's only accounted for two point nine percent of the index has gained so far in the second half.
Is it a healthier market now? I don't think it's quite yet healthy.
I think you've still got those Magnificent seven still dominating.
Even the numbers you.
Quote sound very small, but it's still dominating returns and dominating the narrative. I think that what we're seeing, however, is people starting to look at what are the second derivatives of say the AI, and that's where they're going into the MidCap names. I also think that some of the exposure that you're looking at in the Magnificent seven, people are starting to say, well, maybe I don't want an in video, I want an in VideA that you know, the second deriva, So the picks and shovels.
Do you understand at this point how big cap tech reacts to lack of FED cuts lack of magnitude of FED cuts at this point.
In terms of understanding, I think that we have to go back to find that's one oh one. I'm so sorry, but you know the problem with some of these names when you've got such high earnings growth expectation which they're
delivering on. Let's to be very clear, you know, any type of movement in interest rates, you have so much of the value as sitting in that terminal number that you know, interest rates become something that they're very, very sensitive to, even though you would say they're probably the least leathered companies and they would have the least short term exposure, but the valuation component and that terminal formula is what's really driving them.
Katrina, it's going to see you as always to catch another there's Katrina Downte there. Franklin Sempleton. Bobdah A cross Mark Global Investment suggests it's hard to be bearish monetary policy is now easing, even though there is limited evidence that had been a major drag for the US economy to begin with. Any caution towards equities has admittedly been wrong or at least premature. Bob Doe John just now
for more, but welcome back to the program, buddy. Let's just pick it up where we left things on Friday payrolls. Big blowout jobs report is good news, good news when you're seeing this repricing in the bond market.
First of all, it was one month. Look at all the prior months. How many downward revisions have we had. I'm not saying it wasn't a good number. It was an outstanding number, no question about it. But when you look at the unemployment data around the isms, both manufacturing and services.
They were weak. So which is it? Which has it? Right? Time? Will tell?
Put the inflation question, as you've all we've just been discussing, is back on the table.
So Bobby, just raise an important question. Which one was the headfake? The summer deceleration or the re acceleration coming out of the summer.
I think they're both true.
Economies don't move in one direction NonStop. So where I think we're going to have this fits and starts. Some people call it a bumpy landing. I like that term, and I think that's what we're in for.
It be a good number and that are not so good number, and they'll confuse all of us.
Yeah, great, wonderful, Great to hear that, Bob. I know in the meantime, you are looking for a significant economic slow down or mild recession that had been at least your base case scenario. If this is just one month, does it change it at all?
Bob?
It certainly lowers the probability of us getting that right.
When I look at all the statistics over several months, to me, it's still pretty clear that the economy is slowing. We're seeing that in many of the employment numbers, not we're standing last Fridays. We're seeing that in ability to find jobs, people trying to find full time jobs, settling for part time jobs. Economy slowing. We just don't know how fast that's happening. And of course the FED has seen some of that too, we got fifty basis points.
But you know there are numbers still very high relative to other things. How many things can you find that have not nominal growth as strong as the FED funds right now?
So it.
Is leaning on the economy even with this cut.
Can you just help me sort out then, what kind of economic environment we're dealing with here, Bob? If you're worried about a slow down, but now we need to worry about inflation again, how do you square all.
Of those oh, that can happen in many many cases in the past, economy slows and inflation's picking up. I'm not arguing for stagflation, but we've had that many times before, and I guess I should enter the fact that pees are in the twenties. When the pees are that high,
things better be nearly close to perfect. So if there's fly in the oint, man, whatever that fly is, that twenty two pe has got to be questioned somewhat hard to see a lot of upside frequities, maybe not downside, but hard to see upside.
Bob.
I know you keep trying to stress it. This is just one month, but how do we reconcile how good this month was, which all the survey data showing that actually jobs plentiful, that's coming down, jobs hard to find. More people are saying that's what their picture is right now in the labor market.
That's why I'm raising the question that it's one month and all the other things the same statistic prior months. All the other numbers are showing not so fast, that the economy is great and that there are plenty of jobs. So let's see what next month brings and watch all the other statistics that you just accurately point out do you.
Just then take maybe sixty or seventy off this payrolls report because of the revisions we've seen in the past.
Oh, that's probably not a bad thought. I had come to grips with that, but that's probably a good idea, Bob.
I want to talk to you about what's happening in this bond market. We're starting to see a reinversion, never mind a disinversion, and bub. I wonder for an equity market strategist, for an equity market investor, what they should be doing with what's happening in the bond market. After we heard from tons of people coming on this program who are saying, get out of cash, deploy it into risk, go out further along the bond market, take on tour
ration in the bond markets, take on credit risk. But what's your advice now.
Yeah, I think people that have a lot of cash, that have enjoyed high returns, put a little to work. The ten year over four is a whole lot more interesting than the ten year that was below three seventy five, not but a couple of weeks ago.
So I would take periods of weakness in the bond market and do some adding. You don't have to be a hero. Take your time. But that's what's weighing on the stock market.
The rise and interest rates, the rise in oil prices, and you know, maybe the economy isn't okay. The employment report may say, But on the other hand, why are earnings revisions so negative for the third quarter?
Howld up, Bob, this is an important point you suggested. We've got to the point in the bond market where yields up on good news is now band news for requities?
Yes, I think.
You know, most people say when the tenure gets about four, we begin to have those problems. I don't know if it's exactly four, but the pace of the increase in yields also, John, I think has to be brought into the equation, and that is weighing on stocks.
So let's get into the stock market, lift a lid on the index. Where do you want to be? Where do you want to avoid? With all of that in mind, so I'm a.
Broken record for quite some time, I've argued for companies with high earnings, predictability, high earnings.
Persistence, and strong and growing free cash flow. You might call that quality.
Because all the unknowns we've been discussing and debating back and forth here, I want to have companies that are somewhat independent of the economy. Those dots have done just fine as the market has moved higher. I think if we get any kind of selling squall, these names will do even better.
Bob, does I mean this market's ability to broaden out, to go beyond the mag seven, go beyond the cash rich companies, go into small caps?
Do not see the market able.
To do that?
Then if you're still looking at this maybe safer part of this equity market.
So I'm not sure that the magnificent seven or five or whatever the number is, is this safest part Because of the big valuation differential between the top ten if you will, more than thirty times earnings and the other four hundred and ninety call it eighteen times earnings.
I think the market can continue to broaden. I'd say within the S ANDP, within.
Large cap stocks, not so much down to small We need confidence that we have a really good economy for the small stocks to do well. As you probably know, almost half of the Russell two thousand companies are losing money. That's not real attractive.
So, Bob, in this environment where higher yields can indeed punish equity markets. Yet again, how worried are you for Thursday CPI report.
I think we have to have our antenna up on it. Look, I never say back to the employment report.
One month makes a trend, but this notion that the Fed had inflation under control it's going to inevitably get to two percent has to be in question. I've questioned all I think there's anyway we get two percent inflation unless we have a recession.
Bubb tell across Mark, Bob, appreciate it, sir, You've been pretty consistent on that point. Go to catch up after payrolls on Friday, looking ahead to SEEPR on Thursday.
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