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Let's talk about these markets here.
You know, it's been around triple in the equity markets, bonds are hanging in there, feels like we're in a trading range.
The dollar nobody wants to buy the dollar.
The gold higher yet again, thirty four hundred bucks close to and bitdog. I mean, is Tom kean to like to say that's higher as well? So it seems like people are rulling to take some risk out there. Let's talk to us a professional who does this stuff for a living. Mona Mahajan, Senior investment strategist for Edward Jones. Mona, what are the conversations like when you go on the road talking to your institutional investor clients at Edward Jones.
What's the conver station these days? Yeah?
And you know, over nine million households as clients. We have twenty thousand financial advisors across North America. Every county now in North America represent in the US representaation.
Edward Jones is based in Saint Louis.
Based in Saint Louis.
Wow, they've been r one hundred and two years, so yes, to your point, you know, look, we were down twenty percent earlier in the year. There was some anxiety building around the tariffs, and to your point, as we pulled tariffs back, or as the administration pulled tariffs back, and as the economic data actually is surprised to the upside for the large part, whether it was earnings growth GDP
now looking quite strong, labor market hanging in there. We saw this round trip nearly now over twenty percent rally in the S and P five hundred.
And I think.
Investors really want to know our investors are long term investors. But one, should they still be in the tech magnificent seven trade? That's a question that comes up often. And two, how should they think about bonds here? And I think that's one that will continue to come up. I know we have a couple of interesting auctions later today, but generally speaking, we say at four and a half percent,
you know, we always refer to that Tina trade. There is no alternative US treasury market, deepest most liquid market in the world, very regulated and offering interesting yield for those long term investors.
We get CPI in just like two minutes. Are you expecting it in anything?
You know, We're hopeful that it comes in line with what consensus is. We will probably see a slight tick up on headline and core CPI this month, but keep in mind energy prices versus last year at least have come down substantially. And the other thing we like to point out, remember that two thirds of the CPI basket is actually services inflation. And so while we are talking about tariffs and trade that primarily impacts goods inflation about
a third of the CPI basket. But if we are seeing a bit of cooling, you know, consumers maybe not taking as many vacations or eating out as much, that services number will cool as well.
What is the Edward Jones kind of economic call, be guys thinking recession or we've kind of we've avoided that.
Yeah, you know, our base case continues to be no recession and cooling an economic growth. Certainly, we were above trend last couple of years, like two and a half percent, really nice last year. Could we get a few quarters as tariffs do settle in as consumers, maybe it's offten a bit in the next couple of quarters below a trend growth, so maybe sub two and a half two percent, absolutely, but we don't yet see that negative GDP growth number emerging.
This actually looks like a pretty positive report. I mean, inflation still has you know, that two handle on a year on year basis, but it is lower, which means that we're not seeing necessarily that feed through from any tariffs. And then if you have the removal or an agreement of tariffs and trade between China and the US, is that remove another headwind all together. And that's sort of why now we're seeing futures having a nice pop now within the market.
Yeah. I mean, if Michael mckeeber was sitting here, I don't know where he is, by the way, he's on TV. Oh he's on TV. There he goes, I'd say.
Hey, man, where's the inflation. I thought with all this tariff stuff, there'd be some inflation.
I think he's proud of respond. You don't know. Yeah, we're going to see it.
If we're going to see it, you will probably see it sometime later in the summer. In July data, maybe August data, I don't know. We're joined here by Mona Mahadgen, Senior investment strategist Edward Jones.
She is in our Bloomberg Interactive Broker studio, Mona. When you see a.
Benign inflation print like this, does it give you a sense that maybe this economy and maybe some of these companies are going to be in a better position.
Then maybe we've maybe initially feared.
Yeah, you know, A couple of things keep come to mind when I see this type of print. Number one, it does look like, as we just talked about, the services side of the inflation print came out slightly softer than expected. So as we talked about two thirds of the basket is services, and if that part of the economy is starting to just cool a bit, that will be reflected in the broader CPI basket, I think a
two handle. To your point, we're still closer to that two percent target than we were really any time over the last year or so, so that is also probably
a benign factor as we think about inflation. But I'll finally also note as we think about companies and how they're managing tariffs, certainly during this period of pause, it is possible that companies continue to build inventories, and as they are building inventories, they don't have to then pass through as much of that price increase, and so we could see you know a lot of companies even thinking
about Christmas inventories. If that continues between now in July, companies have adjusted their innovative they find a way around some of these headwinds that we see in the economy.
Does that hurt them later though, if the consumer winds up getting hurt and they're stuck with all that inventory.
You know, it will come down to consumer resilience. And thus far consumption has held in there. We look at second quarter GDP, potentially consumption looks above two percent higher than the first quarter. So we are seeing a consumer that's relatively resilient. But yes, overbuilding inventories can come back to bite you, but from a consumer perspective, it's not a bad place to be. They're not going to experience some of this dramatic move.
And tariffs that we might have seen because you know what overbuilding inventory means for me.
Paul, see there it is, yeah, and we all know Alex and her sales not one of the seventy three forecasters in Bloomberg survey had penciled in a zero point one percent core CPI increased.
That's according to Chris Anstey, senior editor for Bloomberg News on the Top Live, which is just awesome by the way, folks.
You've got a Bloomberg from On.
The Top Live folks, and when big stuff crosses to take they're all over.
So mona, just real quick, We'll let you go.
But I mean, does this you know, kind of a little bit more of a benign inflation outlook?
Does it kind of change the.
Way you guys are going to be talking to your clients in every county of the United States.
Yeah, you know, Look, I think this one print alone doesn't change the overall narrative. What we will say is we're up twenty percent plus in a pretty short period of time. Could we get more bounts of volatility ahead, Absolutely, especially as we digest some of this summer news, you know, post ninety day pause, et cetera. But as we look towards the back half of the year, we do think the setup back half into twenty six is not bad. You know, we're seeing potentially a FED that could be
cutting rates. We are seeing ten a tax bill that is in place and supporting on the fiscal front as well, and then of course companies will have a little bit more certainty in the earnings profile may reaccelerate in twenty twenty six. So we do think volatility can provide some opportunities for our investors.
Well, you want smart equity talk here, Alex in this studio right now, two of my all time phaves in terms of equity strategy, Mona Mahadjen Senior investment strategist Aaric Jones, and Gina Martin Adams and Bloomberg Intelligence doing the same thing. I mean, it doesn't get any better than that. Mona, thank you so much for joining us. Appreciate you coming into our studio. Gina read on this inflation data. I
don't know I'm blaming Michael McKee here. I mean, yeah, there's no inflation, it seems like in this market.
No, And certainly the disceleration and services inflation is great news broadly. I think, frankly, what matters and oftentimes gets overlooked though, is the difference between producer price inflation and prices. Yeah, this is something that we spend a lot of time on is Okay, Sure, the headline level of CPI, you want to pay attention to it, But the only real reason to pay attention to it is because of the
FED and the implications for valuations. So this is valuation supportive because it doesn't suggest the FED is going to have to hike anytime soon. It may even support the ease that is now priced into markets coming later this year. But what will matter for profits is how does this compare to PPI coming out tomorrow?
And so what do you think.
He guy is higher? Then we get a margin squeeze.
Right, yeah, we start to get a margin squeeze, and that's frankly where we've been for the last several consecutive months. It's just a tiny bit.
Yeah, I know, I know switching, I know she did the whole thing.
He was walking one out of the studio.
I know.
I know it is important for the FED, right, it is important for valuations, But ultimately we care about where profits are going, and we care about what's happening with margins and companies are you know, despite what you know, this low CPI is not a great sign of what companies are contending with. When PPI is accelerating faster. So you've got a little bit of margin pressure that has
emerged over the course of twenty twenty five. It is likely to contain depending upon what we see in PPI tomorrow.
So yeah, So where do you think the industries are going to be that have that margin.
Ability to control some degree of pricing of power. So far, and we've certainly seen this after the tariff pause, it's all Mag seven, right. If you look at the divergence that has existed so far in the post tariff pause world, it is companies outside of the MAG seven are experiencing the greatest acceleration and earnings growth prospects. Inside the MAG
seven you still have that big moat. As a result, the market has gone back to sort of pre twenty twenty five trends and started to excessively price the stability of the Mag seven earning stream. So where you this is a very consistency theme over the last two to three years, is any time we enter a period of strain on earnings, investors believe just rush right back into MAG seven because they do have some degree of stability, They do have an incredible amount of cash, They generate
a lot of cash flow. They have relatively sticky margins, but you get to a point where this group is priced so excessively relative to the rest of the index, and an he tweaks around the margin. Let's say we get an easier PPI number tomorrow, that's actually great news for the non mag seven. Any sort of tariff resolution
great news for the non Mag seven. So I think you want to really play this as a MAG seven versus x Mag seven trade, which started to emerge as a real possibility in twenty twenty four, got squeezed out by the tariff pause. As the tariff pause ends, we might see the non Mag seven start to come back to life.
Let's see what factors are you guys focusing on these days to leave it there, Yeah.
Yeah, yeah, so the factors. Our factor strategy is run by our con strategist, Chris Kaney. Just updated this, just updated this late late last week, and one of the things that just continues to shine in factor land is low volatility stocks. It's kind of unbelievable, but even in last year's rally in the equity market, low vall was the best performing and just stuck at the top of our factor scoring methodology. It still is at the top of the scorecard. It's not terribly expensive to buy low
volatility stocks. It's all sector adjusted, so we sector neutralize all our factors. But it means low volatility. It just means how do the stock prices behave in an environment where volatility is on trend rising from lows made back in early late twenty twenty three early twenty twenty four. It makes sense that lower volatility stacks would probably perform better. They tend to also have better earnings revision momentum than
the rest of the index. They are more stable as a general rule, and that stability is definitely shining in today's world of volatility.
Before we let you go, do you think the equity market is at risk for a melt up? As we got the trade headlines today, we got the CPI, what do you.
Think, Well, we've had an extra ary melt up already. So when we look at what's really driven the equity market since the tariff pause, it's been almost entirely technical. So we can plot across global equity markets buy beta. The higher beta markets have performed best. That would include, of course, the S and P five hundred, especially the MAG seven which tend to be generally higher beta than
the rest of the global equity markets. I think that trade is largely coming to an end, and the next layer of improvement in the S and P five hundred probably has to be driven by one of two things. Either of much better than expected recovery in the economy because we get tariff resolution emerges and that drives rotation into some of the higher volatility value type shares that have really lagged in the recovery, or you get some
sort of fetties coming. If you get a fetties, there certainly is room for more advancement in some of the underappreciated segments of the index as well. So I think you'll see the market rotate to new drivers. Clearly in the post sort of the pause regime, it's been all beta, it's been almost all technical. There's not been a great fundamental case to kind of jump back into stocks. We've repriced back to our pre tariff levels. We are, you know, now up on the year, so we can maybe move
into an environment of rationality going forward. But we'll see.
I think there's more downside the upside. Yeah, if I were to tell you that, what would you how would you would you argue me, are.
You well your yeah, your suspicions.
Yeah, there's still tires out there, yeah, like triple or more than we had before.
You're what you're That statement is basically accurately reflecting what's in our models, right. Our models are saying, fundamentally, there's not a huge case for this. Right, We're in a regime according to our market regime model as well as our economic regime model, that we should expect very low single digit returns in twenty twenty five. As a general rule, we're there now. We just need to see some other something change in order to justify a greater upside. I'm
always open to that. Remember, the default direction of stocks is higher, so you have to keep that in the back of your head at all times. Usually, to see stocks correct to the downside, you need to see some trigger manifest right now. That trigger very easily could be weaker than expected economic growth, which emerges into the second half of this year as well.
You're so right about just stocks up into the right long term.
When I was very early in my career, I was the third analyst covering America Online, so the third analysts covering the Internet on Wall Street and I put a by on it. I had no idea what I was doing. I put a bio on It kept going up, up up.
But there's a big, big.
Short seller, I won't tell you his name, huge short seller, and he was getting crushed and he called me.
Ten times a day. So what are you doing? What do you do? So calls terrible? I'm like, I don't know, man. The market's going up, stocks going up. Shorting stocks is a tough very hard to make a living.
Yeah, very hard business.
Anyway, all right, but I remembered that that's it's kind of go up into it right by and large.
All right, Thank you so much.
Geena Martin Adams, she is equity strategist for bloom Market TELM appreciate getting Gena's time here in our studios. Let's switch some stocks to bonds, Winning Season, Global head of strategy for credit sites. So when do you see, I guess kind of a benign ish kind of CPI number today? What does that mean for your world of credit?
Sure, it's been a very benign number for CPI. I do think that Gina Martin Adam's point around CPI versus PPI and the read through to corporate profit margins is important, but from a broad based macro perspective, it does seem like the market is kind of coalescing along the lines of the FED being on hold is actually an okay thing for credit spreads, as you won't have seen a big shift hire in inflation or a big downdraft in the labor market, and that really allows spreads to just
kind of chug along as technicals continue to drive. Apparently every financial market seems like all that liquidity we injected into the system during COVID during twenty twenty one is still having some long lasting effects.
So the reaction in the market to CPI was clear, it was by the front end. This sort of clears the runway a little bit for the FED to cut. Do you think that that's a real good takeaway.
I think that it's a tricky takeaway. You know, we are still very early in the tariff game. Who knows where we're going to end up From an inflationary perspective. I think also the fiscal side of the story, when we think about incremental text breaks, which are retroactive to twenty twenty five, that could be a little bit inflationary as well. So to look at this one CPI report and say, hey, we're in the clear. That makes me
a little bit hesitant. You know, I don't think that the Fed is going to be looking at one report and saying, okay, now we can begin to ease rates. Although I do think that next week's messaging may be a little bit more balanced now that we do have a little bit more data under our belts.
So again, you can sit there winning, you know, a ten year treasury four point four five percent roughly more or less. Is that a place to kind of hang your hat or you go on and take some credit risks, because I do know that the best performance in fixed income once again this year is US high yield.
Yeah, it's really interesting, and we have gotten a little bit more comfortable with taking some duration risk within the treasury market. We put that view out a couple of weeks ago as long un yields kind of spiraled to recent high levels. They've come down a little bit since then. Credit is a little bit trickier, you know, when we think about high yield especially, we're seeing very strong performance
from higher quality high yield. So the double b issuers, the single be issuers who are going concerns with very limited near term liquidity needs. But within the world of triple c's, there's been some pretty significant lagging as all in borrowing costs are still pretty prohibitive to a number of companies. You're still seeing some idiosyncratic sectors that are being a bit stressed, some big issuers that are still
facing some pressure. And so to just say, hey, wave in all the credits, how yield looks good is a little bit tricky, especially when we think about trying to put together a portfolio that has a seven and a half percent yield, which is pretty much where high yield and aggregate is right now. You have to really be taking some pretty significant risk, and that is a much more challenging proposition, I would say right now, given this still persistent uncertainty that we have within markets.
I mean, you're the bond person, so you're supposed to be worried and pessimistic. Do you know, is the equity person she's supposed to be up into the right at the end of the day, where's the biggest miss price within the fixed income market?
You know?
I think that the biggest miss price is actually the relative value of agency mortgage backed securities. Versus us investment grade corporates. When we look at the long term history of that relative value, MBS is screening wildly cheap right now. And I realized there are a lot of factors, you know, perhaps Fanny and Freddy exiting conservatorship, going back into the private sectors making people nervous. There are some home building
and housing headwinds. But when we think about that relative value and the downside outperformance NBS usually has relative to investment grade corporates, we are scratching our heads a little bit.
Credit risk that.
Has not been a concern for credit investors really since a great financial crisis, the pandemic.
How do you think about credit risk here?
Yeah, credit risk is interesting, and I would say that we've had a few bouts of credit risk. We did have a pretty nasty downgrade in default cycle and energy and commodity sectors in twenty sixteen through twenty eighteen. In fact, energy was a place that a lot of credit investors, from investment grade all the way down to high yield, had a really hard time generating any sort of consistent
returns credit risk. Right now, I think most investors are looking at the IG market a double B rated part of the market and saying, you know, these balance sheets actually look like they're in pretty good shape. But there
are some outliers, for sure. We're seeing, you know, what's going on with Warner brother Discoveries, what's going on with Bousch Health, what's going on with Altese friends, And it seems like there is a little bit of a game of whack a mole on these idiosyncretic situations and trying to get ahead of what is going to be the next thing in a otherwise kind of vanilla benign market. But you know, that's the thing with credit, it's, you know, always a hurry up and wait type of situation.
All right, Wennie, thank you so much for joining us. Always appreciate getting your perspective. When he sees her global head of strategy for credit sites, I think when you spent basically half for life, I'm going to say at Emory University.
I knew you were going to say that. I'm a huge fan of Emory University.
She did her undergraduate degree there and a jd Mbah, All right, enough, we got the education, we get it smart, all that kind of good stuff, and helping us out on the fixed income site.
You're listening to the Bloomberg Surveillance podcast. Catch US Live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch US Live on YouTube.
Virginia Massado joins US Global CIO for the equity business for Alian's global investors. Virginny, can you talk to us about what we saw earlier this year, which was a decisive move from a lot of global investors out of the US market, particularly US equities and into the rest of the world, particularly Europe. Is that a short term trade? Is that a long term investment strategy? How do you view the geographic allocation?
Thank you very much. So, I think you had a pendulum swing. The exposure to the US, as you know, was driven partially by the benchmarks which had reached a very, very high level. The dollar was strong, and of course the US exceptionalism, if you want, with the innovation and the AID pushed a lot of people in that market.
The gap in terms of valuation versus Europe and Asia had opened up, and with the uncertainty that we've seen since the new presidency, that has created if you want a wake up call for a lot of global investors who said, well, maybe I don't need to be so much underweight in other parts of the world. So that's
number one. Number two in other parts of the world came up new dynamics such as the fiscal plan around defense out of Europe, which is going to be quite transformational, and of course the fact that most investors are not invested in China anymore, wile China has surprised by some of the innovation advantages that it has demonstrated, so as well as Japan. Japan is now back on the map. So you've had those push and pull factors. That's meant
that people have rebalanced their portfolios. However, it's not the end of exposure to the US market for global investors. There's just too many good companies there.
Right, So I'm glad you mentioned China because where to reallocate out of the US Many go to Europe, but also em maybe Brazil, other parts and China. Where else is there interesting opportunity?
So if you look at em in general, Taiwan of course is interesting, not without volatility, but if you think of it as one very large center of excellence for technology, semiconductor and Ai definitely there. India is an area that we still like very much, tipping point in terms of demographics, tipping point in terms of growth if you want, and that consumer wealth growth, and also perhaps a more apolitical nation versus what everything else going on in the world,
you know, particularly around the tariff's negotiation. So that is in Asia what we like. In Latin America, of course some interesting countries and European emerging markets are quite small, so there I would play it mostly through developed Europe.
So again, as we think about Europe, Virginia, as you talk to your clients, is there a sense that Europe as an economic entity and as an investment opportunity has kind of been reborn and it's something you really need to think more about.
Yeah, I agree. So first, you know valuation. Second, rates are coming down. We've had Christine Legard's message from the last cut in rates, so that's been positive. Inflation below two percent, so you've got that macro element that's been supportive. But it's really about that package and we're talking close to a trillion dollar to be invested in infrastructure and defense, which of course will if well implemented, and that's the
big question. We'll really create an energetic ecosystem around infrastructure or technology, etc. So there is an element of rebirths of Europe. But also markets are much cheaper than in the US.
How does then the tarraff landscape fit into that? Do you kind of ignore it? I mean, I hate to say that, but you kind of put it on the side and be like that's going to be what's going to be? Or do you need to re rate based on any sort of baseline ten percent?
Yeah, yeah, exactly. So Interestingly, the ECB has a model that they've run on ten plus forty, so ten percent sort of universal tariff plus forty on China, and their finding is that it would have more of an impact on growth than inflation. Of course, you can't ignore tariffs, but we have a lack of clarity and I think that except for very large unexpected news, the impact of tariffs on markets is diminishing. If you want, the marginal impact is diminishing. However, you have to be very careful
about the sector. So if you take the auto sector in Europe, as you know, big employer are probably going to be hit by tariffs given the you know, the competition between the US and Europe. I think that's an area to be very careful about. But within Europe you have a lot of companies that are relatively immune to the tariffs, and that's where you can also if you want to find good opportunities.
The US technology REGINI.
The technology sector has been the driver of the US equity markets for the longest, as long as most investors can remember.
That's still the case in your perspective.
Yeah, absolutely so you have you know, you've heard me talk about this digital Darwinism trend in a shifting world order. This is exactly you know, playing out. And the digital Darwinism is about how AI and technology is really advancing so fast because that's the way tech moves right, exponential versus linear, that it's creating really a diystruction in competitiveness globally. The US is a very very strong foothold in that area.
But of course, because of the rivalry for the top spot with China, which explains a lot of restrictions that we've put, you know, on China's access to semiconductors, etc. You have a bifurcation of global standards, and this is why I think you still play text through the US, but you also want tech in China and other parts of the world like Japan for example. But absolutely yes, the leadership is still there on the innovation, the ecosystem, and the spirit. I would say the mindset is an equaled.
Is such a good point, and that's why you can't really done out of the US. For example, before we let you go, we got CPI in about an hour. Is it going to move markets? Are you excited?
Well? I think you also have to add this new element of oil right with the Iran negotiation. But I think consensus is for a pickup in core. It is an important number though, because you know the font loading effects from Q one is fading that we had seen. And we'll see how tariffs will impact inflation because we know some of the tariff will be absorbded by consumers, some by companies margin, some of it by currency. So
it's going to be a very interesting number. But I would bet on a slight pickup in court.
All right, Virginia, thanks so much for joining US. Virginia Massive Global CIO covering the equity business for Alliance Global Investors over there in London.
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Let's go to the pros here.
Lori Calvacina, kind of US equity Strategy, RBC Capital Markets and a former resident of the lawn at the University of Virginia. If you don't know what it means to live on the lawn at UVA, go google it.
Laurie, thanks so much for joining us here.
How do you view kind of the earnings out there at the market's discounting right now?
Are we too low in our earnings expectations? Are we too high? How do you view that?
Well, it's a great question, Paul, And look, I think there's a lot of uncertainty in the earnings outlook. That doesn't mean that people like me don't have to come up with forecasts. And so we've got two fifty eight for this year. We have not put out a twenty twenty six earnings number yet. We don't typically do that this early in the year, but we have said you can look at the bottom up consensus for twenty twenty six,
which has been tracking around two ninety nine. And if you apply the typical haircut to it, so in other words, that you know, kind of the typical downward revision, it would come in around two seventy two. So, you know, still very healthy numbers overall. But you know, I will say, Paul, it's kind of you know, intimidating to look at that two ninety nine for next year and say it's way too high. It's got to come down. We think it
probably does need to come down. But that is actually pretty typical for this point of the cycle.
There's some headlines here about President Trump talking about deal with China, saying the deal with China is done, will provide to China what was agreed to, Our deal with China done subject to she's approval. We are getting a fifty five percent tariff, China is getting a ten percent tariff, and the relationship is excellent. So I bring that up just to say, how do you factor in the uncertainty
around tariffs? Is your baseline then for earnings like just ten percent and then you kind of go from there.
So look, I would say, you know, when we think about earnings. What we're saying is just very different reactions to the tariffs by different sectors in the economy. If you look at industrials, for example, they've been very confident and they've been saying, look, you know, we can pass things, you know, any kind of cost increase on through pricing. They sound very confident about their ability to manage through add just supply chain footprints. Things have gotten a lot
sloppier when you look at the consumer companies. Some have had a better tone than others, but generally there's a lot less certainty about whether or not they can pass on prices. And so we've actually seen, you know, not necessarily great reactions to earning's beats from the consumer companies that have reported in recent weeks, because there's all this
sort of cloud and noise in the outlook. I think this next reporting season alex is going to be absolutely pivotal because we're going to hear from those industrial companies and whether or not they really were able to manage through, whether or not they're seeing any kind of impact to demand. It was all kind of sunshine and roses in the last reporting season. We'll see if that sticks and we'll get updates from the consumer companies on how consumers are
responding and how they're managing through. So I think we're just you know, still in a discovery process frankly, even as the numbers are still moving around.
So what's the sentiment out there?
I mean, I know that's one of the factors you look at and other strategist look at.
What is what's this sentiment here? It seems to have kind of whip saw this year.
We started the year feeling really really good about maybe pro growth policies coming out of DC, and then the terriff situation really put you know, a knife in that who since kind of.
Come back here. So I don't know what the sentiment is out there.
You know, it kind of depends on who you're talking to, which day it is, you know, kind of what part of the market they trade, to be honest, Paul. But I would say the best kind of summary I still think is the AAII Weekly Survey. It's technically a high net worth retail investors, but you know, at the same time, I think it captures the vibe that I hear from
the institutional community pretty well also. And what we saw there is that you know, from kind of I think like early March, you know, through early May, we were sitting two standard deviations below the long term average. Sentiment was as bad as twenty twenty two, as bad as the financial crisis, and it has rebounded, and you know, you're not sort of back in net bullish territory on a consistent basis yet, but we're you know, we're less
than one standard deviation below the long term average. We're heading back towards that average. Now, if you go back to last fall, right around the election, we were one standard deviation above the long term average. So you're absolutely in your whipsaw. I would say we're healing right now. We are healing very rapidly, and I'm actually starting to worry we're going to get back to where we were last October and November pretty quickly.
And just to reiterate President Trump posting on social media that the deal with China's done subject to is She's approval and also talking about how their relationship is excellent. Laurie, if things calm down, where do we see the most upside you mentioned going back to those October levels. Is it going to be in small caps?
So you know, it's interesting question Alex. We've gotten you know, a fair amount of questions on small caps in the last few days, and if you look at a relative ratio between small cap and large caps, you have seen a tiny little sliver of small cap out performance.
You know.
It's been interesting to me that we've seen that because small caps do generally whenever there's any kind of problem in the market, they're less able to manage through. You know, I would also say certain pockets of small cap though things like financial do have less direct terrific it's more kind of broader macro risk, so it's not sort of
a monolith down within small cap. You know, we think that they're actually interesting from a de risking perspective in that if you look at the CFTC data, we had actually gone back into net short territory recently, which is something we frankly never saw for the S and P, never saw for Nasdaq. And if you look at valuations on small cap around the April eighth lows, they kind of hit their typical recession lows, believe it or not. So I do think you had, you know, sort of
a really interesting kind of de risking opportunity here. But the catalysts you know, have been you know, sort of hard to identify, given that we're in an economic backdrop that seems pretty sluggish and has been anticipated by many investors to stay sluggish.
For a while.
So to get small caps going, I think you need things like FED rate cuts to come back, or real genuine economic excitement and tailwinds to come back.
So, Laurie, earlier this morning, Alex and I were speaking with a couple investors based in London.
We were talking about that kind of the non.
US trade, the europe trade really coming front and center earlier this year when some of the t and certainty really started to crescendo.
How do you view when you talk.
To your clients US versus maybe non US, particularly European in terms of allocations.
Yeah, so it's a great question, Paul. And you know, I tend to focus mostly on the US. I'm a US equity strategist, but we do have conversations about the US and the context of that US versus non US trade, and I would say that if you think about the non US investor back in March, there was really, you know, an intense apprehension about investing in the US, and we did start to see, you know, money really push into
Europe in a pretty significant way. We had seen big inflows into the US from both US investors and non US investors back around the election, and that really eased back, and we started to see some modest outflows, you know, just in recent data generally for US equities. So we the way we put it, Paul, is there are so many headlines coming out right, whether you're talking about trade or tariffs, whether you're talking about the tax bill and
this section eight ninety nine issue. But it does seem to me what tariffs did was really kind of open the door and a way to the non US investors to look at other geographies like Europe in a more serious way than they had in a long time. And we think it's very difficult for that door to be closed once it's been opened.
She just said, you had two good questions this whole segment.
Wow.
I mean, I don't know. I think that's a I got none. I'm just saying whatever. But the great thing about Laurie is that she doesn't have let Ai do her work for her, Like she goes line by line through these conference calls. Amy with Silverman, the derivative strategist at RBC has her weekly note Doubt, and she highlighted going on a road trip with Laurie and how like Amy's like, let's go have a drink and hang out. Laurie is like, No, I'm line by line looking at
all the earnings reports. Almost Amy, I'm kind of with Laurie on this one. Laurie, what is what is the thing that you think investors are getting most wrong as you kind of go line by line through some of these details, because the narratives are really easy to sort of look at and create, right, what do you think the biggest misconception is?
So I think the biggest misconception is and you know, Alex, we read transcripts, you know, sort of week to week as they come out in reporting season, and I've been reading mostly then we just focus on the SMP because
it's just like an avalanche. But then you know, in between, you know, when things slowed down, I'll kind of read through h. Russell two thousand, my old stomping Grounds, you know, kind of across sectors, and I would say that what I what I get the most frustrated about is that there's no monolithic story out there, especially if you're talking
about Terris. If you're talking about the consumers, all the financial companies, whether it's a credit card or a bank, they're like, Hey, the consumer's spine, the spending levels are good, the delinquency levels are low, all the stats look fine. And then you fast forward like four weeks later and you get all the consumer companies and they're like, the high end is trading down. People aren't smoking as much, people aren't snacking as much. You know, some companies are saying, yeah,
we did see and you know, purchases pulled forward. Other people are saying, ah, We're not so sure. You know. My my favorite sort of, you know, kind of discrepancy that I saw was that the telecom companies all set in this last reporting season or a bunch of them, did anyway that mobile devices were pulled forward by consumers. And then we had some of the producers of those instruments of those devices say, ah, we don't think that consumers did that. Well, who are you going to believe.
Are you going to believe the manufacturer? Are you going to believe the telecom company that actually knows when those customers are due to get a new device? And so, you know, I think that they're just sort of conflicting stories out there. But people tend to latch on if they're in a barish mood to the more bearish narrative. If they are in a more bullish mood and trying to make a more bullish argument, they latch on to
the more constructive narrative that's out there. And I think it's just still really really messy, and I think we're going to continue to sort that mess out in the next reporting season, Laurie, is.
There any sector that screens well for you guys right now? Is I know you guys screen all this by by by industry, sector, by factor as well, growth quality, that kind of stuff. What's kind of sticks out for you guys these days?
Yeah, so I would say on growth value, you know, this is everybody's favorite debate, megacap versus broadening, megacap, growth versus browny, and I don't have a firm, you know,
kind of view on that. I think we've had a tug of war between those two segments of the market, and I think that tug of war is going to continue, And you know, maybe that's a little bit more of a nuanced call that's you know, too much to go into here, But that's probably where I differ the most from consensus, is I just I think that tug of war is there for a reason. I think it's going to continue. I would say on the sectors, you know, industrials,
they're just too expensive for me. You know, we're so we're neutral there. You know, we do recognize that these companies have a better tone on managing through the challenges that are coming through, especially on the tariff side, but we just don't like the valuations. Tech we're still neutral on, but it has started looking better on both our earnings revision and our valuation work, So we're keeping a close
eye there. If you look at financials, and I know I've been talking about this one every single time I talk to you, Paul, but it's still screens really well. You've got you know, really nice valuations. You're really seeing
those driven by the regional banks. And you know, even though you know, I might kind of chide the banks a little bit for not you know, reflecting all of the stuff that the consumer companies are talking about, I do think what I'm hearing from the banks is just a really good ability to manage through and they're kind of a boring sector right now. I think they got stress tests during SVB, and they were a little expensive before all this tariff stuff started, And now you know,
we've got a very reasonably valued sector attractive on certain metrics. Again, So I would say our financials rather is probably the one that's most interesting to me right now.
This may be literally the same question, but when if we do have a tariff deal between the US and China, what sector could benefit the most?
So I think if you're comparing sort of the tariff sensitive areas, you know, the place that I've seen the most commentary frankly, you know, and I wouldn't say it's all of a worrisome nature, But where I would say the relevancy seems to be highest, it's going to be industrials, healthcare, and consumer discretionary. I think out of those three, you've really got your better valuations on the consumer discretionary side
and the healthcare side. Now we're neutral all of those sectors, but if I'm just looking at it from a pure valuation perspective and who's gotten beaten up the most, I would probably say consumer discretion and healthcare sector. You know, they look better than the industrial sector, frankly, because there's just been more worry priced into the consumer stocks, and on the healthcare side, this is a little bit more. You know, kind of weighted my comments to the medtech space.
But we actually when we had our healthcare conference a few weeks ago, we did a write up on this and if you looked at the tariff commentary and the SMP sect, I believe we did the s and P five hundred or SMP fifteen hundred healthcare sector. The tariff commentary was so much higher this time around than what
we had seen back during the first China trade war. So, you know, we think that's, you know, contributed to some of those more attractive valuations that you started to see develop on certain metrics in the healthcare space.
Lourie, are class asking you to appine on just the valuation of the broader market these days, because we've had that big move down and now back up, all in the context of earning's coming down.
Yeah, you know, I think people are struggling with whether they look at twenty twenty five or twenty twenty six. I think that some people want to sort of skip over twenty twenty five. We think it's probably a little bit early to do that, and if you're really going to have a high convicted view on twenty twenty six, you at least need to understand the starting point and how bad or not, frankly, the damage may have been
to twenty twenty five. You know, what I will say is we have one model that's very popular that we developed back in twenty twenty two, and so it's something you know, that people really remember about our work, where we just basically looked at average trailing pees going back to the nineteen sixties. We set up we tested a bunch of macro variables to see what drivers of those pes are and we came up with a set of inflation fed funds in ten year yields, So we slot
in assumptions on those, put them into the model. It spits out of pe. We put that, you know, we marry it up with our earnings numbers and come up with fair value. So the long and short of it is that for twenty twenty five, we look like we're a little bit over our skis right now, unless we get some big step up in the GDP forecast or some big decline in the inflation outlook. Our modeling comes
to fifty seven thirty for next year. You know, depending on different scenarios, I look at I can get you to sixty two hundred and sixty eight hundred for the end of twenty twenty six. Un fair value for the S and P so near term over valued, but longer term opportunity.
Great stuff.
As always Lori Cavsten ahead of US Equity Strategy RBC at Capital Markets and a proud of University of Virginia Cavalier.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple, Cockplay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.
Let's be honest.
I mean, if you're at a Cockta party and you pump into like for the last fifteen years, you bump into a fixed income person, you just turn.
Around and walk away. Already there's no yield, there's no yield.
They got nothing to offer you. Now, However, they're like the kids at the party. I mean, you can send it to your treasury and can get more than four percent.
Karen Mann is one of those people.
I mean investment director of fixed and come at Federator Hermes. She's now the cool kid on the block. Karen, What are you doing in fixed income these days? Because you guys have real yield across the spectrum here?
What do you guys? How do you guys think about allocating and fixed income these days?
Good morning, and thank you for having me. I don't know if I'm quite the cool kid. I think I'm probably it's a really thank you, Alex. It's still really still nerd herd here. But the income is back in fixed income, right, That's where you would pound the table and focus on that yield. And the yields do offer protection from the interest rate variability or what causes the price action part of total return. So when we're thinking about fixed income and allocations, first and foremost, it's our
goal to be boring. This is the boring part of your portfolio. When you wake up in the morning, if the world isn't right, you want to look at that bird in hand, the yield that you've collected, and have some level of satisfaction rather than overreaching. So at this point in time, we continue to like up in quality.
We don't think that there's any need to really reach into the lower realms of credit, and I think shorter duration instruments now focusing on anywhere from cash liquidity, money markets all the way out to the three year part of the curve, continue to be the most attractive part of fixed income.
But it's funny because fixed income has not been boring, Like you can make an argument that you looked at your portfolio over the last few months and fixed income was the scarier part in some ways, with volatility that we're not used to, with rates moving to levels that could be really painful for stocks and the economy.
So true, the volatility has been a little bit gut wrenching and a little bit more than we anticipate from fixed income markets, but we've also heard and seen sharp shifts in policies, and the bond market has reacted. I would comment, and this is a little bit more editorial, but the bond market seems to really be looking and trying to anticipate that next downturn in the market, so sometimes prices aggressively to the downside on that softer news.
But as investors, I think that we're all discovering that we could just muddle along somewhere in this higher than target but not very high inflation environment and in a pretty balanced labor economy. So while you might look at the screens day to day and see fluctuations that aren't what you like to see, we are now viewing data over longer cycles because of the news headlines.
So, Karen, I'm looking at the GO function in the Bloomberg terminal. It gives you the Bloomberg Index browser. He're todate, there's a lot of green on the screen for across the fixed income space, led by US corporate high yield.
How do you guys think about the hig yield market?
I know high yield continues to reign supreme and fixed income, but for US it's still a little little bit too expensive. Our analysts when they're looking at these companies, they are remarking that earnings are fairly flat. These are companies that broadly speaking, don't have pricing power at this point in time. They don't have an ability to grow volumes, so it leaves them still in the situation that they can emerge
from the high yield construct. Moreover, the tariff shifts and changes and the policies aren't really giving them the fodder where they could necessarily grow. The light at the end of the tunnel for the high yield market is really when the FED would start to ease and ease considerably.
And that's not our forecast or the street. So for us at option adjusted spreads or the risk that is paid over the relevant treasury rates at an average of about three hundred basis points right now, we think that that's far too low.
All right, Karen, Thanks so much, Karen Man and vice president over at FEDERI. Herm means sort of the semi cool kid now at the.
Party and a proud graduate of the Pennsylvania State University.
Happy that This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Corplay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Let's take a look at these newspapers today. We do that at this time every single day. Well, Lisa Mateo, Lisha, what you got for us in the newspapers?
Okay, I want to preface this first story by saying I love my son and daughter the same.
Okay, So here we go.
This is from the Times.
Okay.
So they're pointing to this new analysis of global births that suggests that, you know, this long standing pattern of parents hoping for sons rather than daughters to kind of bring on the family name, you know that that kind of thing, that it's starting to shift, especially in places like China and India. So they're saying, what they say, quote is that baby boys are increasingly viewed as a
burden and girl as a boon. So they're saying daughters are perceived as more nurturing, like, hey, they're going to take care of you.
The son's going to go out and take care of his mother and his wife's smile. You're aware of this, Oh totally, yes.
Yes, So that's what they're saying. But they're taking a different place like the you know China with the problem in China is that they're having is that some are since there's more males and females, the males are often unmarried, so other parents are worried that their son's going to be alone, so then they have that to worry about.
Interesting, Oh my gosh, that's fascinating. When you have more girls they're definitely gonna get snapped up by They.
Had that one child policy for the longest time, and now they said two. But I think that people have been so ingrained with one that it's not happening.
It's gonna take some time.
It's gonna take some time. Those chickens and eggs exactly.
I mean I have three, three sons and a daughter, and the daughters by far the one in charge, I mean not even She's the only one that got a head on straight.
See, and she's going to take care of you.
I He's like this.
Thing.
Okay, have you heard of these dolls? They're La booboo dolls.
I don't know.
Is your daughter into the This is a new thing for me.
Okay, I have not heard.
Oh just you wait. Okay, So these are there, like these toothy monster dolls. They're made by this Beijing company, PopMart International.
Yes, but they're all the.
Rage because Rihanna carries them like Black Pink's lease that carries them around and it shares of searche like one hundred and eighty percent this year. But there was an auction. They had this like one of a kind mint green Laboo Boo doll. I that's top dollar is an auction in Beijing.
It was human size.
It's old for about one hundred and fifty thousand dollars. Yes, human size, human size or the human size Laboo Boo doll. But they were like a ton of stuff, like about forty seven other like different collectibles. So they all went for top dollars.
No pictures on YouTube.
See there you go. You have to take a look at them. I'm sure your kids probably might have them. This is the reason to go to YouTube, the Christmas time thing.
This is the reason to Bloomberg surnounced on YouTube to get the La Bubu dolls.
And you don't get this on radio.
On YouTube, Yes, your kids will be asking for them.
No, no, no, no no.
We're reaching out to Alex's daughter as we speak. So let's go to AI. So we've been talking like how AI could possibly take away jobs, right, A lot of companies are saying it's not going to happen. It's going to give people more time to take on bigger tasks, right. But the New York Times actually points to this one company. Excuse me if I'm mispronounced it, mackenzie. It's a San Francisco startup and what they basically want to do is take your job. So they have a goal of automating
all jobs. Right, we're talking about doctors, lawyers, people who write your software, design buildings, care for your kids, things like that.
But they want to just start.
With computer programming first. So that's that's their main focus.
Yeah, I'm going to take care jolly.
There's only three people working there, no five people working there. It started by three guys. But they have these big people backing them, like people from Stripe. You have Google's chief AI scientists, like they're all backing them. But it's an interesting thing because, like people have been worried about their let we get to.
This last one.
Yeah, if time is your left story seconds.
It's like whatever job's AI, who cares. Let's get to this important story.
Okay, yeah, this one is from Business Insider.
This is the important thing.
Right.
We've heard of Hooters a lot of trouble with the restaurants.
Okay, good, Yes, I think you've heard of this one.
So they've been having trouble with the restaurant. But who can come to the rescue.
It might be Hulk Hogan.
His beer brand is trying to make a bid to kind of save them, get the chain growing again. I didn't even know he had a beer brand, but apparently does real American beer.
Have you? Have you tried it? I haven't.
The only Hooters I've been till my life is across the street from the Masters at Augusta National Golf Club. That's where people hang at the Hooters. I'm telling you, I don't know why it is, but anyway, that's kind of the way it.
Is, like make Hooters great again.
There, Alex Steele and Paul swhen you were here, Lisa Taylor, thank you so much. We got the newspaper segment in there for you. There with Lisa Mittaylor.
This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal