Surveillance: Golub Lifts S&P 500 Target

this morning. That is the story Credit Sweets. We were just having a nice casual Friday morning, Lisa night, Tom was away. It was very relaxing, I have to say, Tom. And then the email came through from the team at Credit Sweets SMP five hundred to forty six hundred on Stronger Learning. So let's bring in Jonathan Gollob right now, John,

why the change? Let's start there. Well, I mean, more than anything else, this is an earning story that our earning's estimate, which we put it out at a hundred and eighty five dollars and earnings for the SMP was the highest on Wall Street and it's just too low. The the the the numbers are coming in just too strong, and it's not in one group. Banks are beating by thirty five percent. Um tech is beating by almost thirty percent.

Industrials discretionary companies are up fifty on average. And you know, ultimately we needed to know increase the earnings outlook. That was with drove it and then we as we see that the the overall stock market price was right on our tails, and so we moved our numbers up. John, you know, I gotta congratulate you folks. You're looking at the guy who came out in January and said if you sell tech and go to everything else, you're gonna be out of your minds. In hindsight, John, you look

like a genius. What do I do with tech? Is Lisa mentioned they didn't move on earnings? No surprise there? Are they part of your lift to five thousand? Yes? And no, Tom, I mean we actually think that boring old economies that listen. I've been a growth guy, a tech guy for a very long time, and every kind of stock has its moment in the sun. I don't know if this is the moment in the sun for tech. I think this is the time for old economy stocks

because these are companies with big fixed overhead. With that the tend to respond war to the kind of stimulus that we're seeing proposed by the Biden administration and generally the kind of overheating we're seeing the general economy. Can we see earnings like this continue and the four four six thousand, four six d excuse me for six thousand maybe next year for the S and P without a commensurate rise in yields, without a commensurate read through to

the bond market. And how much is there a feedback loop here? Well, first of all, Uh, my expectation is that we're going to see interest rates rise a little bit from here. And if you actually look at how

stocks respond, they want higher interest rates. And that's because what we're seeing right now with with the tenure bond yield at one point six and we fed funds at zero, it's a sign that the economy is not yet on stable footing, and so the market wants to see the demand for capital strong as a sign that things are are healthier. So if we had interest rates, you know, closer to two percent by the end of the year, the stock market is higher, not lower. Aps to fifteen,

that's an upgrade too. And John, the interesting thing about this note is that it includes a tax handcut as well. Can you set the states for twenty two already? John, Well, you know this was you know, this was actually a big discussion point. What the convention is on Wall Street is until the tax changes happened, you ignore them. But the reality is the markets not ignoreing it. So we basically said, we know that this tax thing is likely

to happen. Um. The consensus view is that that that that Biden doesn't get is twenty eight percent, but that the tax rate goes to that's about a four percent hit to earnings. Now four percent hits earnings is a big deal, but the earnings this season are beating by so um. We moved our number from to ten to two fifteen. But if you compare me to other strategists on Wall Street who haven't done that, I'd be a two five if you if you ignore the taxes, so

big numbers. Did you move on a revenue gross up or was it margin resiliency or both? You know? In general, Tom, first of all we're seeing is is that both revenues and margins are seeing a lot of flexibility. But the whenever you see an economy reopening after recession, it's always the margin line, which is where all of that incremental upside is going to be. And the one mistake that analysts and investors portfolio managers doesn't matter, they always underestimate

is operating leverage. How much a small change in economic growth creates huge change in profit margins. And that's that was really the big deal here. Before you go, I just a gage sentiment. When you hit send to clients on Friday. How I received was this? What was the response? Like, I'll tell you that. You know you're gonna laugh at The single biggest um comment we got back to people's come on, you don't think we can get to five down. I'm not saying we're gonna go there, but we're eventually

gonna get there. But okay, quote that eventually we'll get there without the time forecast. Just pick one. John is gonna catch up, as always, Jonathan, It's gonna catch up. I'm just gonna turn to pros like Bruce Kasman. Let's bring in Bruce Kasman right now. JP Morgan, chief Economists ahead of Global Economic Research. Bruce, let's start there. How difficult it is to forecast in this environment? For you?

Right now? Well, I think it's difficult to tie down exactly how strong the economy is doing, but I think it's pretty simple to recognize that we're in the midst of a boom here in the US. And you know what I also want to emphasize is, partly off the conversation you just had is Europe's about to join us. So there's gonna be fairly broad based strength in the global economy for the next six months or so. Bruce Kevin,

Good morning, Tom Keenan in York. I want to go to Cassan Economics, which is your twenty six page must read Friday evening. The world stops. Everybody sneaking looks at it as they pretend they're doing social work, and bruth the first chart is always the most important. You have a spectacular US chart of the partition of inflation of

goods and services. When does service inflation catch up? Um, well, it's not gonna fully catch up, partly because, as you've been noting, there's supply shortages and goods prices are going to continue to rise rapidly. But I think March was the first month where we started to see service price inflation pick up, and I think it's gonna be the big event in the next few months that overall inflation is going to be lifted both by service prices normalizing

and goods pricing staying strong. John, I think this is the absolute key metric with that job report that we're gonna see Friday as the path of service inflation. There is a real mystery tour and wages the compositional story, Bruce picking up again. We've got to talk about wages and whether wages will be useful for the next several months. How much longer will we have to look at a labor market that is distorted by the events of the

last twelve months. Well, I think when you look at the big gains and jobs, you're also seeing I think the rotation back towards the depressed service sector, and I think in terms of wage inflation, that's actually gonna be a depressing effect. I do want to emphasize, especially if we're talking about inflation. There's two very different stories here.

One is how much pressure we getting as we get this booming growth and we normalize, and we think we're gonna get a fair amount of inflation pressure in the near term off of that. But I think if you look at what's happening in the wage measures that are not distorted. If you look at where levels of service

price inflation are, we're still pretty low. So I think, as the FED has been doing, you want to look through some of the near term dynamic, which I think is going to be powerful, and recognize we still got a way to go before we normalize inflation. And I hear that although near term dynamic is difficult to say when you talk about the Intel CEO coming out over the weekend and saying that the chip shortages are going to continue for years, he doesn't see it easing very

much at all. How do we decide this is transitory? At what point in the year can we say, Okay, now we have a true assessment of the post pandemic economy. Well, I don't think it's going to be easy, um and quite frankly, I think what we're gonna see in the next few months is not going to be very very

indicative of the trend. However, I do think if we're right, that we can carry strong growth into next year, given where the labor market is, given what the FED is trying to do, I'm a big buyer the fact that we're going to have a trajectory of higher inflation. I just think this year's move is not going to be particularly indicative of the magnitude of that acceleration, but it's happening. I think this is not what we've been living through

for the last twenty years on the underlying dynamics. Just don't buy how strongly the near term is gonna be sending a signal. We've stopped talking about a K shaped recovery a bit, Bruce, and I'm wondering how much the K shape recovery not only has persisted, but will hamper some of the full employment metrics that we see later in the year. Well, we do have an economy in which there still are some sectors that have really badly

hurt that haven't recovered. And even with what we're looking at over the next three six months, we're still not expecting jobs to get back to where they were before the pandemic, at least till sometime early next year. So there's still a lot of damage they're scarring. I think the important point about scarring is a macro economist is this is scarring that is going to be very painful in some parts of the economy, but it's not hitting

the financial sector. It's not reflecting an overhang of housing or capex. Uh, it's not hitting major e M economies. This is not gonna hurt the macro economy the way the scarring after the Global financial crisis did so. Recognized starring, but recognized it's not the same kind of macro driver either growth or inflation going forward. Bruce, I know you took your call from James Diamond yesterday afternoon. He was sort of thinking about two thousand and twenty one and Ford.

Let me ask the same question, Jamie Diamond, ask you do the wealthy escape higher taxes? Do you just assume if we get the tax policy we're talking about, that the fancy people somehow ex escape the tax burden. Well, I think taxes need to go up if we're gonna be financing this infrastructure built and and other things, and it's built into our forecast that there is an increase

um in taxes. I do think we should understand that against the backdrop of what we're seeing in terms of wealth gains, against the backdrop of what we're seeing in terms of the economy overall, that's not going to be a near term drag on the economy. We can have a long debate about or the optimal level of taxation is. But I don't think either on the capex side from higher corporate taxes or on the household side, that tax increases in the next year or two are going to

be a drag for this economy. I probably's always gonna catch up, gonna catch up this Monday morning, Jap Morgan. Right now, we talked to Conference Board. Going back to before World War One, Conference Board was absolutely definitive in corporate America addressing the labor arrest of this nation across a hundred years plus. Dana Peterson is their chief economist. Dana, you just did a definitive study of the great divide in America that only the Conference Board can do, and

that is I have a job, things are great. I'm out of a job, things are really bad. Has that divide been ever greater. I'm sure they're other times it's been greater, but certainly we have been talking about the case shape to call to me here where you had people who never lost their jobs, they received stimulus checks, and they were able to save and pay down debt and even spend on goods. Meanwhile, you had many people who did loose jobs and they were on unemployment and

certainly are still. We still have eight and a half million people who are still unemployed in America. If we do eight and a half months of one million job formation and we get back to that point, then we have to grow from there. Do you see an economy that can grow jobs once we get back to February, Well, I've seen a comedy economy where we can grow jobs.

Right now, we're seeing labor shortages amongst certain industry, certainly trucking, manufacturing, construction, and even when you look at services, gyms are reopening, restaurants are reopening, and they just can't find people. Um. Some of that's a function of people still being afraid to go out, uh for fear of getting sick, um, but also because of skill shortages, and also it's just

it's just really of a wild market here. Danna. Do you think that services inflation, that the that the actual job increases maybe more persistent, longer lasting than people are currently accounting for. Well, that's certainly something that Chair Powell talked about. There could be some wage pressures here, certainly as we get into later on in the year where more people are more willing to go out. Businesses in person services are reopening, and we could see prices go

up there. And also in terms of inflation, Um, we're already seeing uh hearing rather that corporations are thinking about raising prices due to the fact that you have the supply chain bottlenecks. You also have commodity prices rising, especially for energy, and they're looking to pass all that on to customers. So we're potentially going to see faster prices

both in consumer prices and wages. Jenny Ellen seemed to weigh in siding with the FEDS line so far, saying that this is all transitory, that we're gonna return to a lower inflation standpoint, and that Joe Biden's spending plan won't materially juice inflation going forward because it will be spread out over a decade. Do you buy that argument, Well, there are two parts of that argument. One is transitory factors.

And indeed, we do think that some of the inflation pressors were going to see in the second quarter and over the course of this year and maybe a little bit next year are transitory. They related to the pandemic. Uh. Certainly, they're also related to supply chain UH disruptions, which are also related to the pandemic, and those things are probably going to fade. But other types of inflation, especially with respect to UH inflation around building homes is probably here

to stay. People are working remotely, people looking for more space, and we don't have enough homes. Meanwhile, the chip shortage, semiconductor chip shortage, that's not going to be solved overnight. You can't build a chip plant overnight. And so some of these types of inflation that we're seeing are going

to be more persistent. When we're looking at the administration's plans. Well, certainly, if you have much faster growth, you're probably going to see some inflation pressures UM, and that's more or less what we're expecting. What do you hear from the clients the corporations of the conference board, Dana, there's so many walls of worry you just beautifully laid out. Some of those the worries now are comical within this boom economy.

What do you actually hear from business people? Well, we're hearing that they think this year is going to be great in terms of growth. Our own forecast is six percent growth. Other people, but for next year, UH we're

hearing that they're very much concerned about inflation pressures. They're also concerned about trade just given the fact that the US and China are still uh having somewhat frosty relations around trade and intellectual property matters, that this is going to spill over into next year and that we're going to see potential slow and growth material slowing. Tom, that's what happens when you cut off the guests. They stopped talking.

I mean, you know, this is really really important. Respective is really really important, tomm Ethan Harrison, Bank America just publishing it, was just going through the note quickly, so let's bring it to our audience. Unfortunately, there is a trade off between the speed of the recovery and its length. Then it goes for a number of bullet points. Ironically, the much faster US recovery likely means a shorter expansion

than in other countries and other cycles. And of course, reflecting on the very very exceptionally long cycle that we had long cycle we had in the previous one. Then I want to bring you in on this because Morgan Stanley have pushed this idea to shorter, hotter this time around. Denna, what's your view on that, Well, I think that makes sense just given the fact that this was a recession unlike any other. We essentially just kind of cut the piggots off right and then we're turning them back on.

And it wasn't the case that we had some asset price blow up or something really major underlying a structural factors that cause the recession. It was a pandemic and basically government said, well, this is dangerous, so let's shut off half of the economy, the services sector. Now we're

turning things back on. So, yes, things are gonna be hotter for a shorter period of time, but most likely we're probably going to get back to pre pandemic levels of activity and then probably settle in at a lower growth rate, a growth rate that's probably more consistent with where the economy was just before the pandemic. So the destination is not a bust. You don't subscribe to the boom bust argument. It's a return to trend. Yes, Indeed,

Danna Patterson always gonna catch up. Danna, thank you, Conference Point chief Economist, and Danny, you know how it was when Tom Spakes just kept talking right now in the pandemic, Howard Foreman joins us. He is a radiologist, but far more than that is the builder of public health and public service studies at Yale Universe City Professor of Radiology, Economics, and Public Health were thrilled the Dr Foreman could join

us this morning, Hawd Foreman, there is a pandemic. But what's so different now is in this modern America and our modernity, we use technology. We have a technocratic solution to everything. How does the technocracy of America try to

come out of a pandemic? Well, it's not easy because we have you know, we have different classes of people now, people that were able to work very well from home, who had very low exposure and infection rates to the to the virus, but nonetheless had their lives turned upside down. And then you had a lot of people that we refer to as essential workers, and probably more than that

are essential workers. But they had to run the buses, they had to run the trains, they had to sort of move the food and other goods back and forth between people, and their infection rates were much higher. And we decimated large population throughout this country. And so we're gonna have to rationalize that over time, but recognize that we do suffer almost as a country from post traumatic

express disorder of a type. We've been through a trauma, We're continuing to feel the reverberations and the anxiety that exists even after the trauma is starting to wane. There's so much work still to do. To doctor, I just wander from your perspective whether you think we have an irrational fear of COVID nineteen of this country as we are here today. I think we do now, and I

certainly have not said that before. I think we're getting to a point now where what we are seeing and experiencing is much closer to a bad flu than it is to what we experienced earlier or what places like India are experiencing right now, and we should start to think about how we manage a bad flu as opposed to how we manage the pandemic that wiped off about six hundred thousand people and maybe more if you really look at the numbers from the United States dr They

are really strong words to come from someone like yourself, As you say, this is not something you've said before on a program like this. What would you suggest undepends the reluctance of health officials to say what you just said. You know, we've made a lot of mistakes over the last fourteen months, and nobody wants to full prey to hubrists that. You know. You look at at Moody in India saying in March that this is now over. I

don't think anyone wants to full prey to that. And it's a lot easier for me to opine and and know that I have ninety or likelihood or higher of being correct than it is for a public official who, um, you know, really holds that very very strong responsibility to the entire public in their hands. Um. So I don't really dismiss their difficulty in moving faster in that way. I do think that what we've learned is that the f d A as an as an entity within government

can move very quickly. The CDC seems to be much more deliberate, and maybe given the fact that this is a pandemic, this is a crisis, we need to hold them accountable to being a little bit quicker and analyzing data in a manner that befits the fast moving nature of this pandemic. Dr Foreman, you say that there is basically you know, what wants to say it's over and

be the person out there saying that. But there is a difference between saying it's over and saying this is something we're going to have to live with and we're going to have to exist with the coronavirus being here in a perpetual fashion. And how much do you say that at this point because we've gotten to a place where the most at risk people are not going to be necessarily at the biggest risk for dying because they've been inoculated, and that the risks of continuing with social

distancing and not having kids in school is greater. Yeah. No, and I think we are moving that way. I think that the people that we're equivocating about school three six, nine months ago, which included me early in the pandemic, are those that now feel that we must be back to school. UM. Yale University, my employer, is going to be back to a very close to normal function by the end of August and probably mostly over the summer

as well. I think that we're gonna see them and we're gonna have to watch the way private actors respond um as well, because private actors, including the Yale University, are the ones that can make the bold moves and show the public that this works, just as they were able to do bold moves a year ago relative to

where we were in the pandemic at that time. Talking about bold moves, Dr Foreman, what would you do with respect to some of the travel restrictions currently in the United States with some of the guidance from the CDC as to what people who are vaccinated can do. Um. Look, most of those are being lifted in most regions. There are parts of the country where the pandemic is still worse. Michigan was, Oregon is UM So it's really hard to

make a blanket proposal. But I do think lifting travel, you know, travel restrictions in keeping with vaccination, I think is a reasonable thing. And I think it also signals to people that we know that once you're vaccinated, you are very safe. You're not perfectly safe, but you're not perfectly safe from the flu either in a typical season, So you are very safe at this point once you're vaccinated. There is you know, one big uncertainty ahead is what's

the durability of the immunity. Immunity from vaccination, is it going to waite? I'm one of the earlier people to be vaccinated. I completed vaccination on January six. Is my immunity gonna wane by September, October, November December, or when is it gonna wane? So there is a lot of uncertainty still out there, but I think we have plans for that as well, in terms of booster shots, in terms of managing and monitoring variants. I think that we're

gonna do well with that. How A Place come back soon. It's been good to catch up, good ahead from how it fulman That Universities. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg

dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg