Surveillance: Growth Rate Peaking, Says Kostin

chief US Equity Strategies for Goldman Sachs. We've got a whole bunch of questions as he resets for SMP five thousand, But David Constant, we must celebrate as you do at Goldman Sachs with a fully staffed team. Constant, today in the office, I want you to explain the path to get your team ascons at Goldben Sacks again. Well, I uh want to definitely congratulate all of our whole team. The entire team is here for the first time in fifteen US UH so we're pretty happy about that and

the process has been halting. We had some density restrictions in terms of the seating arrangements, but given the way we've been able to use some extra offices. We're all here today, so I'm happy about that. We'll change is David for you. As the team gets back around the table together again, what's the big difference. Well, the difference is just the interaction and being able to have small conversations about different issues that come up on a computer

screen and call someone over to point it pointed out. Uh. You know, some people wear masks still, but generally speaking, everyone everyone, everyone absolutely has been vaccinated, twice vaccinated and things like that. It's just a much more efficient way to communicate. Of course we're doing that before when people remotely, but just an incremental amount of communication. So I think that's really helpful on our teams were really happy about

about that. And I think in my conversation with clients, you know, more and more of them seem to be to be coming back to UH working from their their their offices, and there's different portfolio managers have different time time frames UH to re reengage. But right here today my team US port follow strategy. We're all here. Well, let's shine a light on one of the debates at the moment. Imagine you the team happen right now. The

nastacs made a bit of a bounce. David and early in the conversation, ely in the conversation on this program, we were talking about whether there is a correlation or a causation between what happens with rights and what happens with growth, Big tag, What are even the team saying about that? So, the interplay between growth and rates and inflation, it's obviously has a lot of different dynamics, and I would unpack that in sort of two ways. How does

inflation affect the equity market broadly speaking? And then which sectors in particular? And so we think about it. The transmission mechanism, on the one hand, is on valuation, because the impact of higher inflation leads to generally higher rates and that has an impact particularly on the longer duration, longer expected growth stocks. But there's also a transmission mechanism through margins, and so I think we need to bring

both of those together. Think about it. What is one of the attributes of the technology sector is they have extraordinarily high margins and they've been relatively immune upon intended their relative immune from the higher inflation curtailing their margins. Uh So, on the one hand, you have a suppressing or a depressing effect on valuation for inflation and what that means for rates and the valuation of that long

term expected growth. And another hand, you have the durability of their margins as compared with some other more cyclical sectors where their margins may not be so robust in terms of ability to pass through those higher input costs. I think those are the two things that we are uh trading off one against the other, and I think are My view is that the margins are going to become the more dominant topic of conversation. The idea of

transitory is a debate we will be having consistently until October. Right, we'll put a stake in the ground and say that's for six months, and so the Fed has indicated its view. My colleagues at Golden Sacks Economics team also have a view that the inflationary impulses a relatively transitory and then we'll receed back towards the two core pc next year. So that's sort of the issue. We're going to have

that repeatedly. I think the more interesting analytical debate with portfolio managers is around the durability of margins and margins Jonathan and Tom and Lisa have recovered now to their pre pandemic levels, So they're already back to where they were pre UH February of two thousand twenty. And so question is from here where we're going, And my view is margins are going to be relatively flat and a big variable there is the tax rate, the corporate taxes.

If you told me for a moment we did not we will not have UH corporate tax reform, then would have earnest growth of around ten from this year into two. Now that's not our view. We expect there's going to be an increasing corporate taxes and that is going to mean that growth in earnings is gonna be around five. So they paid multiple for a five percent growth as opposed to tempercent growth. David, this has been the story

that big tech can pass on pricing increases. Big tech reign supreme again and again and again, and that is why it is the top holding for so many companies, for so many investors. At what point do you start to worry about concentration risk yet again, as hedge funds double down on say Facebook positions after already having large, large positions outstanding, Well, it is interesting you mentioned UH Facebook as it is the largest stock in our hedge

fund very important position to basket. We have on Bloomberg been tracking this now for twenty years. Every ninety days we're looking at around two point eight trillion dollars of long and short exposure. And that's the most uh, sort of most most important position. Uh. It's ap planted Amazon that previously had that position. We just published that last week.

And so yes, it's a big topic of conversation just how sort of dominant these can be now right now, Lisa, these five stocks, the big five companies that we all know are comprising around or so of the spquity cap. But last September that was so the actual concentration is diminished slightly. Uh. And perhaps more importantly is in the growth index. If you look at to say, the Russell

one thousand growth index. This was a big issue for diversified growth mutual funds where the passive index weight in the Russell one thousand of the five largest companies put a number of funds in excess or tripping if you will, the diversification requirements of the sec that has suppressed and that has come down a little bit. As these companies as big and dominants, they are relative to the rest of the market, they've receded a little bit in terms

of their concentration. So the question we think about and the discussions with fund managers leases well, just how further can they run? If you think what happened year every year in revenue growth in the first quarter they were up forty one percent compared to the rest of the market where they were up modestly in terms of sales growth. And so the idea in a and even think of the worst part of the pandemic in the second quarter last year, the worst part of the pandemic. Year every year,

these companies had eighteen percent revenue growth. Rest market was around seven. And so we're looking forward to ask ourselves, well, these companies are pre durable in terms of their growth. They're expected in terms of revenue growth three times faster than the rest of the market. In terms of top line sales. They trade at basically about five multiple points higher, uh multiple than the market markets like one times right now, uh these are six times. So they're trading at a

premium valuation, no question about that. But they're also offering both growth. David, in the time we've got left, I've got any ways to go here and I do want to congratulate your team on their Amazon research of a couple of weeks ago. I thought it was great how you went to cash flow. There's a lot of people out there cautious short term or a constant long term view, and one of them is Douglas Cass. Doug Cass is cautious right now, and Doug Cass is saying, I don't

care what constant thinks about the bull market. There's no volume out there. How does volume play into your view of the equity markets? Well, when I think about it in terms of liquidity, in terms of low versus high liquidity stocks and groups of companies that have more or less liquid from a from a trading perspective, and the markets actually awarded companies that have relatively lower liquidity. And that's just a factual statement in terms of the performance. Uh.

You know Doug. I know Doug. I haven't talked to him in a while, but he's generally more on the bare side and the short side. So it wouldn't be surprised you have a more more cautious take on the

on the world. To be fair, the market right now in SMP has four thousand, two hundred Our target for the end of the year is around fourth and three hundred, so pretty modest upside to be very clear, and that is likely to be shifting from more cyclicals, which has done really really well so far, towards more of the growth.

And the idea behind this intuition Tom is the economy is peaking this quarter in terms of growth rate like ten percent, and that's gonna decelerate, still grow, but at a slowing pace, and that's where the transition and handoff to some of the companies that are positioned to grow at a more extended level. And the intuition behind that is the companies that are investing in their business and

that is what makes some companies differentiated from others. The techical company invests eleven percent of its cash FUF from operations to grow its business. And there's a portfolio of companies, whether it's seventy and so it's big companies that we talked about earlier around so it's an enormous amount of investment to grow into two and make no mistake about it, all of the conversations with fund managers are about the

growth prospects in to right. David love catching up with because David, We're excited to have around this table at one point in the future, maybe in the next time. Lean over, Oh, Lisa, Lisa, could you plass me the tank please? Right now, Let's go to Marvin Lowe. He has the State Street and their senior global macro strategists

always writing really cogent notes linking FED policy into the markets. Marvin, I want to go from Mr Gorman and Morgan Stanley gaming out two thousand twenty two to the chairman with a way to the world on his shoulders to what it means for the equity market. I want you to explain to our radio and TV audience what this FED babel means for stocks. You know what. It's as simple as how much liquidity and how ultimately dumbased the FED

makes it for the market. UM with negative really guilds, you've got to you've got a repressive financial system, and equities benefit from the fact that there aren't that many alternatives. If you're buying UM a church of security at this point, you're buying into the view that you're going to lose money after inflation. Ultimately, UM in terms of how you part the FED, in terms of whether or not they're correct that inflation will be trenditory. Is the key that

all of us are asking right now? Yeah, I think this is so important, Johnny for a radio audience, we've really got a state that we go from Gorman to Powell and then the jargon is dj I and john I did that for you. That's the Jones. Thank you. Industrial Marvin. When you responded to that question, you weren't talking about a shift in the FET's reaction function. You were talking about the data may become again hotter than

they anticipate. Do you think that's the lower bar here to disagree with their forecast, to say that actually it will look a little different in the future to the way they anticipate. Yeah, I mean, I think I think the real challenge is that the FETE is giving us a message that um it has it hasn't believed in the forecast in the past. That's why they become outcomes based. But everything is based on their view, UM that data

is going to be transitory. So from one instance, believe us that you know, the numbers are are going to get back to normal into something that is um much more familiar to what we've seen before. But at the other side, we don't necessarily believe what we've seen in the past is accurate. Um. The risk is that the risk is that not only the data comes in hotter remains hotter. I think is kind of the important part of it. UM. And the FED is so far behind

the curve UM that it's hard for them to catch up. Um. You know, not not necessarily saying an eighties type of environment again, UM, but we're talking massive balance sheets with the potential for for slip ups. Shure, absolutely, Mom. And do you think in one way that contradicted themselves when they say we're an outcome based federal serve, but also we will give you a long enough late time to know when we're thinking about talking about talking about whatever

when it comes to type rink. Yeah, yeah, absolutely. And I think and I think what we saw earlier this year in terms of yields, in terms of real yield UM kind of coming off the bottom feel being less negative fuel UM is an example that the market is not necessarily a hundred and comfortable with the Fed's ability

to do everything that it says. UM. Having said that, to push against the FED UM where it does have covered to remain where it is now, is something that kind of keeps us in the range even though we've had data on really both sides in terms of surprise to the upside and downside. Marvin, where's the bigger risk right now that yields go up or that yields go

materially lower. I think it's materially lower, to be honest with you, because to get materially materially lower, you've got to really um abandon the growth that we expect to have not only from reopening, but from the fact that we've got as much savings as we have and we're predicting above trend for at least the next year year and a half or so. If that's the case, and a lot of people would agree with you, that isn't the FED doing exactly what people would hope the FED

would do. I mean other words, run the economy as hot as possible, because the downside risk to the economy, the downside risk to yield, is way worse and more difficult for them to combat than the alternative. Yeah. Absolutely, and I think that's why risk assids remained um as supported as supportive as they have been over the course

of the last couple of months. Despite you know whether it's of medical virus volatility and or inflation volatility, kind of making twins in the market, Marvin, So much of the exercise right now, and I take this at a macro level, is all this news slow coming out of an original natural disaster into something original a boom economy. We haven't seen this in forty seven. What should our listeners and viewers do given a boom economy? How do

they allocate given the macro flow of news? Well, um, you know, and I think and I um rates and the FED is the backdrop around that. So so long as we've got these negative yields in a booming economy, it's really supportive for risk assets. It's really supportive for taking that equity risk. And I think that becomes part of the asset allocation discussion. Um. And then and then we start to pars things that this has been a market where we're looking for those that might benefit more

than others. Yeah, John from Coventry says, go Matthew, right now, let's go Matthew Marvin. When you see the real yield come up from a substantial negative level towards zero as it did in Switzerland, because they're seeing German tenure. Is that a linear flow or is John's using this phrase reaction function? Is that a linear or quadratic movement? I think I think that the market should be able to handle zero percent really yields UM. You shouldn't need a

repressive financial system for companies to do well. There is a level with within kind of that really yield discussion when it becomes much more positive than zero that UM you wind up with alternatives UM and the risk reward

amongst different asset classes are coming to play. But a zero really yield, which is at this point from a tenure perspective, still eighty basis points away, shouldn't be enough to derail how companies are able to still perform well UM in an environment where you've got positive growth, mom, And do you think Europe can handle zero row yots? Yeah, that's that's certainly a much different type of UM equation. You know, their demographics are different, UM. Certainly the amount

of fiscal stimulus that they have is different. It's going to be it's going to be harder. And I think that's the conundrum that ECB has UM as they try to sound as dubbish as they can, but ultimately you know, is moving along the same normalization path without as much of a without much much of a growth response that

that we're seeing here. Ultimately the mom and isn't then the tension the issue hit the the U S treasury market can't trite and a vacuum that it's the global on market and then you've got to move towards zero real yield. It's on a ten year treasury. Can you imagine what it looks like cover in Europe? It's it's the conundrum of the ECB Um. You know, it's still a lot of different economies with a lot of different speeds, and you've got one organization trying to keep it all

together with one number. Whereas you know, certainly for us with the dollar um and a more cohesive economy, it's it's much easier. Good luck, Jane tent and the next day see may sink. Yes, yes, absolutely, Um. You know the focus is going to be on what they what they do with PEP. It's going to be um. You know, everyone certainly is looking at the size of the balance sheets and that being the first stage of normalization. The envelope themselves, the envelope structure itself leads itself to a

natural tapering process unless we hear differently. So um, it's an important meeting in the middle of summer. Absolutely, Mom and gonna catch up as always, Mom and love that given straight the global Macrost strategical they've tweeted up to eleven times this morning. No, it's not President Trump of a few months and quarters ago. It is Lizanne Saunders

piece of advice. Folks, if you haven't signed up for Twitter, your single reason is the early morning chart set up of liz Ane Saunders l I Z A N N S O N D E R S. And the biggest problem, Paul, is not one single tweet is average. That's smart. Smart. Do you do this yourself or your kids helping? You know? Well, not not my kids. But I have an incredible UM research associate, Kevin Gordon, who's uh two years out of college and joined the two years ago, and he puts

a lot of the charts together. Rich Kevin Gordon g O R to be sure, And by the way, thank you for selling my Twitter handle because I have had a rash of the posters. YEA, well, I can understand with your claim over the years. Listen, I'm gonna go to your right, which shows under performance by tech and consumer discretionary. We're talking big tech under performing others. David Costan says, a renaissance occurs is a thing is going

to have a good Q three. So I think we're we're already seeing a bit of movement back into some of those what were oddly the defensive areas of the market. Last year. You know, big tech in the Big five became the covid eras defense because it was pretty much the only ecosystem that was operational and helpful in that environment. And I think given what's happened with the tenure yield stalling a bit here, uh, economic growth a bit weaker.

I think the view that maybe inflation actually is transitory, I think you've got a bid back toward the growth side of the equation. I think it's still be choppy. I think we'll see kind of value in growth factors volleyball a bit much like we'll the consumer discretionary and tech on one end of the spectrum, energy and financials on the other end. And that's been the name of the game for quite a few months now. But growth factors are finding a bit of a bit. Yeah, so

we've noticed the town. I were just discussing that. The Over the last couple of days, the inflation talk is kind of quieted down a little bit. What is your view, Lasann about kind of where we are with inflation. I mean, the Fed obviously has had a very consistent message about it being transitory. What are your thoughts, Well, look up

transitory and the Oxford Dictionary. It's not permanent. With that basic definition, you could you could find that you could call the seventies there of of inflation transitory based on that fairly simple definition. So I suppose it's all a function of how long you define that. We know the base effects will say it as early as June, we're seeing some of the supply disruption start to ease a

little bit. We some of the speculative froth has come a bit out of a certain segments of the commodities market. There are longer term issues. I think the problems and semiconductors probably don't get solved imminently. And then it's a question of the psychology of inflation that doesn't get enough attention. Uh. It ends up this when it turns into a spiral.

It has a lot to do with psychology. The psychology of workers demanding higher wages, the psychology of companies deciding to try to pass those on consumers in turn um feeding that into wages, so that spiral comes not just based on the math, but also based on psychology. So I think watching labor market indicators and then trying to uh to gauge that psychology will be key to whether this truly is just a short term phenomenon that set to fade imminently. I think the pay attention to the

bondo market. I think the bondo market is a more rational um viewer of what goes on in the economy than at times the stock market is. So I think the stalling and the tenure yield may be indicative of inflation problem that is not quite as dire as some equity market watchers might suggest. So lazy, and that labor market point is I think really telling here if we you know, you really have to have wage inflation have

any meaningful inflation in this economy. So when you see the McDonald's of the world raising their minimum wage to thirteen and Amazon to fifteen, is that just anecdotal points or do you think there really is something to that wage inflation story that we need to keep an eye on, well, it's more than just anecdotal, but I don't think it's

yet a sign of significant and sustainable upward pressure. I can do what was part of the equation back in the the nineteen seventies, because if you look more broadly other than those one off and they're big companies, and I think that it's important that they're boosting wages more broadly, more industries are whether you look at indeed on Monster postings are actually sub two thousand and nineteen levels. I also think we have to look at myriad wage data metrics.

I'd say put at the bottom of your list average hourly earnings because of the mixed shift issue that came into play last year. In April last year, average howlely earnings were up a point to in a month where we lost twenty million jobs. That was simply because the jobs lost skewed towards the lower and the wage spectrum, which boosted the average. The exact opposite is happening now, so unit labor costs, employment cost index of those would

be the metrics. Atlanta FED has immediate measure called wage Tracker, so those would be the labor market metrics I would focus on, and then they're still all generally fairly tamed. Listen, profit is so in people will say, well, I only want to invest in companies that are profitable. How do you define? How do you study the profit of an individual company? For that matter? Is sec here? I mean? Do you do? You do you do Graham doubt and coddle and go down to net income or do you

go up the income statement? Or well, beautifully for me, I don't have to do that anymore. I I know, I know you don't do it. But what what what Saunders one oh one? And how you measure profit? Well? I think certainly in this environment you have to do some normalization. Um. I like the methodology that I saw first pioneered by Steve Luthold, which is five year normalized earnings, and it's it's actually a couple of interesting combos in there.

It's it's four and a half years of a historic earnings,

not as far back as Schiller, but reasonable. You can skip over some of the extremes, like a COVID situation two quarters of forward earnings, so you get a little bit of that embedded forward and then takes the midpoint between operating earnings and reported earnings, and I have found that that's a pretty smooth way of looking at earnings, that that blends that necessity of looking at what they've actually earned, Understanding the market tends to be forward looking,

also understanding, especially in extreme environments, that the spread between reported and operating can be significant. And that's about the cleanest way I've seen to analyze the overall market an individual company or a broad sector. Lissene Saunders on Twitter at l I z A n N S O N d E r S. I think I got the spelling right. Twelve thirteen charts every morning really quickly. She's a small firm. Charles Schwab is their chief investment strategists. It's now time

to frame the FED. We can do that with Julia Corneto macro policy perspectives, a president and founder. Julia, the equity market is voting, it has been up. Maybe it's a raging rally, is Doug Cast calls it? How do you use the stock market within your FED economics to FED? The stock market rather is voting optimism right, right and share. Powell is a financial conditions guy, so he does use financial conditions broadly to calibrate how easy or how supportive

policy is. And right now the markets are saying, yes, policy is supportive and it's gonna work, and it's going to create a strong recovery. And I think that's exactly where they wanted to be within the equation. Where do you see that with an investment We don't talk enough about it. It's a smaller number than consumption, but investment, well, it's got a volatility. What is that volatility right now into the end of the year. Well, we saw a

very strong investment recovery last year. In fact, investment ended up stronger at a higher level than pre pandemic by the end of the year. So UM, I think that's that bode dwell for or gains in productivity this cycle, and also for that optimism you talked about earlier. Companies are putting capital to work. They obviously see prospects for making money by doing so. So I think that that's

a very good signal. As you say, there is some volatility, and it probably won't keep rising at the pace we saw on the second half of last year, um, but it does seem to be on a positive track. Judy, how do you gauge productivity and how easy is it to get a clean rate on what is happening in this economy. It's really hard right now. I mean it's gonna be hard for a while. Everything is going to be extremely noisy this year. UH, with the reemployment of a lot of people, with the shifting in the mix

of workers. UM, we've seen as we usually see a strong productivity UH performance during a recession as companies struggle to survive by squeezing every bit of efficiency out of their operations that they can. UM. But I think, you know, so it's gonna take a little bit of time to see whether we settle at a higher trend in productivity than we did last mile. Last like always saw pretty

disappointing performance throughout the recovery and expansion UH. And I think that there is some thought that you know, the pandemic accelerated business transformation. It brought forward a lot of plans UH, and that could result in higher productivity. And then the question is how do we balance that against the frictions associated with dealing from Where does work from home go from here? How do companies navigate and manage their workforce with some employees wanting to stay remote and

others wanting to come back to the office. That's going to be a management challenge. Judy, how do you think about what's happening in DC and how you plug that into your forecast your outlook for this economy. I think a lot of what we're seeing right now is sort of the political theater around the infrastructure bill. We're not adjusting our forecast because we do think it's going to get past. And the question really for us is how big is it and how much of it is paid

for through higher taxes? Uh, and that still seems to be in a state of flux. But overall, we do think that the bulk of the infrastructure proposals goes through. The question is just as a bipartisan or a party line vote. Well, but Julia, there's a question of how much this higher inflationary regime that people talk about hinges on this presumption that you talk about the infrastructure will get past something resembling where it is right now in

the proposals. Yeah, No, I think it is an important contributor to the outlook. Although you know, I think remember that infrastructure is something that gets spread over ten years, so it's not a replacement for a fading fiscal impulse. Um, we are going to see a fading fiscal impulse. We've had a tremendous recovery push that has been stoking a lot of the supply chain pressures. That's going to ease back as we move through the year and into next year.

But underlying that is a pretty decent recovery so far. So UM, we we expect given the GDP tracking, we're gonna see a nice bounce back in May hiring. I think April was the outlier. Uh. Maybe we do have some frictions reconnecting people to employers and some sectoral reallocation, but there's a lot of demand out there and I think ultimately that's going to lead a strong labor market recovery and you won't need we won't be as reliant on the fiscal impulse to get a decent economic performance

next year. So I don't think it's the be all and end all. I do think it's UM, it will cause sectoral reallocation. You're pulling in resources for this infrastructure, uh, you know, agenda, and that will move resources towards that from other sectors, so that that might be different otherwise, But I think we are going to hand the baton back to the natural expansionary dynamic towards the end of

this year and internet. Julia, can you elaborate a little bit about April being the outlier and expecting hiring to really pick up what has been responsible for this labor market shortage at a time when there are still so many people out of work. Yeah, I think there's a lot of frictions. There was actually a really nice article on on restaurant workers in the Washington Post this morning

that was talking to the workers themselves. We're coming out of the pandemic, and we shouldn't forget that a lot of people have made changes in their lives. They think about their work differently. Now is forever changed. If you are on the front lines, Um, you don't look at your sector the same and so you're making decisions about where do I want to be, what do I want to be doing, and what am I willing to work for?

And so we're seeing that negotiation happening right now that it's not a question of whether people will return to work, it's where they'll return to work at what wage and then how that all sort of settles out in coming months. But we've got millions of people who are actively looking for work, Julie. Very quickly, you're one final question to your point on wages, are they transitory? Yeah. I think what we're seeing Tom is something similar to what we're

seeing on the price side. So you've got a a excess demand for workers in certain sectors that's going to lead to a level shift up in their wage race. We're seeing that very clearly, uh in the leisure and hospitality sector, so uh, and I think that's long overdue. So that's great news for those workers. That could be a relative price shift, right, we could see less buoyant wage gains uh if that's compressing profits in other at

the top end of the wage spectrum. And that's something we saw at the end of the last cycle pre COVID, when we were in a very strong labor market. We saw the lower wage workers getting the strongest gains, the biggest raises, and the top end workers seeing their wage gains flow a bit and that kept the overall wage bill UH sort of moderate, the growth in wages moderate.

And I don't see any reason why we shouldn't see that same kind of dynamic with a relative shift with lower wage workers, especially frontline workers, getting the biggest raises as we reopen the economy. Jenny always enjoy catching out with you, particularly this morning, Jenny carting out of that of macroid policy perspective. 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