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Earning seemed to be coming in pretty solid. Is it enough to support this market? Lori Cavacina joins us. She's had a US equity strategy at RBC Capital Market.
She's usually on the road.
When she's back in New York week Reverence see if she can come into the studio, and we appreciate that. Y. What are the conversations you're having with your clients these days as you do travel around to see them.
Everyone's nervous, everyone's jittery. I wouldn't say that people are super bearish, you know. And maybe one good example is I was in London a few weeks back, and I'd been there in December, and in December everyone was parish. This time it was more wary, cautious concern. I got back to the States and started running around a whole bunch of different cities, same kind of vibe.
So jittery, of course, there's a lot of uncertainty, so I want to dig into why, what's driving this jittery ness from them. I mean, of course, we have the SP five hundred up about fifteen percent year today, looking at the VIS index hanging around the sixteen handle right now, Where are people feeling? Why are they feeling this?
So I think valuations are at the end of the day. The one thing I hear in just about every meeting, and what we see in our own data, is that we're not at tech bubble extreme. So I know there's lots of talk of a bubble, but we are. Whether you're looking at SMP top ten names, SMP market cap weighted NASDAQ one hundred, kind of the workhorses of the market from the earnings perspective, they're bumping up against the ceilings of kind of the pre and post COVID era
and they're not breaking through. We haven't seen any expansion on the PE multiples if you look broadly across the indexes since August. So I think people are feeling that. You know, some clients who have been really bullish on CAPEX back in the summer, saying like it's just not quite as strong as we thought.
It would be.
You know, I've had a number of conversations on rate cuts, and we were really hearing a lot about that in June and July, and now I've had some people say to me, well, yeah, rate cuts are bullish, but we already pulled all that forward. So I think it's a
sense of you know, valuation whiplash. And then of course, you know, the AI of related stocks are doing well now, but they have had some difficult days and there's been a lot of jitteriness on those not from people who are bearish on the theme, people who have bought into the theme but have seen how far it's run and now concerned it's hitting some speed bumps.
Do you think earnings are going to be strong enough this quarter? And then the guidance into the to the last couple months of the year then into next year, are earnings gonna be enough for this market?
So I think earnings are a solid foundation, but I think the sentiment around earnings has also gotten overdone.
And what I mean by that.
Is if you look at the rate of upward revisions, it hit twenty eight percent for the S and P five hundred in late April. That's typical of a trough and a decline outside of a big crisis. Fast forward to mid August, we had rallied into the mid sixties on that stat, and that's about as good as it
gets if you're not recovering off a big crisis. And now that stat has been decelerating, and it was I think abound fifty two percent in our update we took late last week, so you're not quite a negative revision territory. We're seeing basically every sector to clerate except tech, which is kind of stalled around all time highs. So the big question is is tech going to join the rest of the crowd and start to decelerate or is it
just going to stick around at all time highs. The only sort of industry or sector I can really remember staying at all time highs for an extended period of time was home building pregfc Ah.
Yeah, I used to cover homebuilders for your Equity scene, and it's interesting to watch the rally that we saw there.
But I want to dig back into tech.
As we've been spelling out here, We're going to hear from a lot of the big names this week. The conversation has really been in are we in a tech bubble.
What do you make of that?
So, you know, I started in two thousand.
I literally got my job in March of two thousand when they were out they were giving out finance jobs to polysym majors. But you know, I saw the implosion. I didn't see the build up. But what I see in my data today, again, the valuations are not back to where they were at that point in time. Yes, they're extended. They're also extended for the rest of the market, So I don't think it. I think it's a broader
valuation problem. We have some charts where we look at net income share of the top ten market cap names against the market.
Cap share, and there is a gap. But there has been a.
Gap where kind of the market cap share has exceeded the net income share, you know, for you know, the better part of the past decade. I think there's more earning support to this trade than there was in the past. Is it maybe a little too exuberant? Probably?
But is it a bubble? I don't think so.
So what sectors or factors are screening well for you now? I'm guessing it's kind of few and far between, given how the lift we had.
Yeah, I mean, anything AI related looks expensive, so that's going to be industrials utilities, you know.
And also the tech sector.
Had been looking more neutral on our models, but now it's looking elevated again. Consumer discretionary also looks expensive. That's our one underweight sector. We're neutral those others I mentioned.
We're still overweight.
Financial is definitely more nervous in the in the wake of sort of the private credit issues, but our bank's analysts have thought that pain was overdone, so we're sticking with that.
Overweight.
Materials we've liked, and then we haven't upgraded the healthcare sector, but we have written in some of our weeklies that on a tactical basis, if you're worried about a pullback in the market, which we are, it looks like the best defensive option. We've generally been market weight the defensive sectors. But we've got nice flows, nice valuations, good earnings revision trends that are decelerating but are not as decelerating as
much as say industrials and materials. Got policy risk, but maybe the worst of that's behind us.
So moving and learn into the macro.
What did you take away from the Ladist CPI report, especially given the fact that we have the SPED meeting coming up on Wednesday, well get it.
So you know, what our economists have said was they were not so worried about, you know, kind of this inflation report right that, you know, they thought this was going to be a pretty reliable report.
They also said that you got a lot of help.
From owner's equivalent rent and they don't expect that to continue that sort of the pressures on goods are you know, on goods pricing is persisting. They're seeing some pressure on services. So they're still worried about inflation and core terms hitting about three and a half percent in the middle of next year. Our rates team has said we get the cut this week, but they think there's a pause in December.
They think we get two more cuts next year. But I would say as a house view, I think RBC has been a little bit more concerned about inflation and it's reverberations on the FED than maybe some other shops.
Laurie, as you know as well as anybody, a good solid bull market needs some healthy pullbacks from time to time for some sustainable period of time. We haven't really had that in this market.
We haven't I think the worst we got.
You know, we've had some big rumblings in some of the tech names. We've had the momentum trade breakdown, you know, briefly in both the Russell and the SMP. You know it has been enough damage. You've also seen the gyrations and gold retail passive flows are starting to deteriorate. I see a lot of signs of fatigues and that things are not necessarily completely healthy under the surface. We've been
looking for a five to ten percent draw down. If it gets postponed, we don't think that it's derailed that pullback. It's possible it's going to get delayed, but I think at these valuation levels it's inevitable.
So some people have been talking a lot about market froth. The you're here, how much further do you see equities rallying? I mean, it has been a really relentless year, especially if you think about two years previously, we were seeing more than twenty percent returns on the S and P five hundred, and going into this year, there was a conversation about whether or not we might not even reach close to that, But here we are sitting at fifteen percent gain on the year.
I think We're going to have to, you know, keep a very close eye on the technicals. And here my year end target is actually below where we are now. We do have a second half of twenty twenty six target up around seventy one hundred, and some of our modeling, frankly can get you seventy four seventy five hundred. That's our sentiment and cross asset work, which were the most bullish models for this year. So you know, I think that you can only really get there if you have the pause that refreshes.
But we'll see how it goes.
Laurie, thank you so much for joining us. We always appreciate getting a few minutes of your time.
You know how busy you are.
Lori Cavacina, she's head of US Equity strategy at RBC Capital Markets.
To stay with us from Bloomberg Surveillance. Coming up after this.
This is the Bloomberg Surveillance podcast. Listen live each weekday starting at seven am Eastern on Apple Cocklay 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 with the President in Asia.
It kind of feels like that's where the focus is right everyone you know in Washington. And maybe that's a good thing because Washington still closed. You're not pretty quiet, they're not open for business. And we were down there a couple of weeks ago for a remote broadcast and boy, you can go to any monument outside you know, you know, the Lincoln Memorial my favorite.
Not a lot of people there, not a lot of tours.
I mean, it's just and the buses are not going around, parking spots available.
On the street.
A little different, a little.
Bit different there.
Henrietta trust Jads is here, co founder managing partner of Veda Partners, Henriette. As we go into week I don't know four here coming up for this closure. What's the feeling in DC these days? Is this a is this good for anybody? Is there lasting damage for anybody? Or is just nobody really paying attention here?
It's really kind of a surreal, suspended animation kind of place right now. The House Republican Conference is not even in session, so they're not in DC. So the temperature on the Republican side, from my perspective, is a lot more calm.
They just are you.
Know, the president doesn't care about this or voters don't care about this, so therefore we don't care about this.
And then on the Democratic side, there's a little bit more action.
A keem Jeffries is calling the entire Democratic Conference back to DC this week, so they will be there, they'll be press briefings, they'll be talking about the ACA subsidies, and they'll be trying to generate some sort of momentum in one direction or another. But as you just pointed out, as long as the president is not engaged, there's not going to be any forward progress. So the government will should be shut down for at least another probably ten days at a minimum.
So are there any sort of long term consequences that you should expect coming out of a government shutdown? Of course, this is the second longest, the longest government shut down being about thirty five days.
Right, Not even is there a long term impact in terms of just what the government can do. They'll all get back up and running and the same employees will still be there. All these firings that russ Bott has done will be overruled by the legal courts, as has been the case in Stone Started and we'll get back to business. And there's not even really an impact from the voter's perspective. When they have shut down in the past,
Republicans haven't paid a price for it in elections. The next cycle, it's it's a full year away from the twenty twenty six midterms, so voters are going to forget about this. Move on, we'll reopen. The one thing we don't want is a rolling stream of shutdowns. So hopefully they'll reach a deal to reopen and then they'll keep it open for at least a year, for six or seven months.
All right, all right, let's leave that word is. We've got I live in the state of New Jersey. We have a governor's election there. I did my early voting this weekend. There's one also in Virginia. How are the How's the Democratic Party, how's the Republican Party?
Looking at those two states, you know, I think.
It's interesting to have a conversation about those elections in the context of the shutdown, because one party or the other could generate some momentum based off of what happens on.
The Tuesday election.
So if Democrats pick up both races in Virginia and New Jersey, which is what the polling is currently suggesting. I think Dems are head by five in Jersey and by twelve in Virginia. Then you'll see at least a media narrative or you know, a talking point for the
Democratic Party. The voters are turning away from Trump, they're turning towards the Democratic Party, and if it goes to the other direction, the reverse and it would probably be even more extreme for the Republican since that's not consensus and expectations from the polls.
So I think it could generate some.
Momentum right when Trump is returning to d C, right as we're heading into what should be a Veterans Day recess starting on Friday, November seventh, and that could move some things around on the shutdown front.
Where are your eyes most fixed story?
Now?
Are any of these races expected to be close? Not really.
I think that, you know, we constantly see New Jersey as the great white whale for the Republican Party, So there's a possibility of some sort of movement there. People will be looking at margins, but pretty much we're expecting a Democratic win in Jersey. In Virginia, it should be.
A sort of blockbuster year four.
Democrats as the minority party going into twenty twenty six, So there's Supreme court cases and judges elections in Pennsylvania, fifty in California. There's a lot of things to watch, but it should all generally go in the Democrats' direction, as it would in the reverse if Democrats controlled everything right now. So not expecting anything major to come out except for that potential momentum play and media narrative to come out of this.
Henrietta, I can give you some local color here.
Being in the Greater New York, New Jersey metro market, we were just getting crushed with TV political ads. It's just brutal what mister Cindarelli, the Republican candidate for governor, is not doing. He is not running on the cotails of President Trump. He's not invoking Trump and trump Ism and magat at all. Does that surprise you or what does that tell you?
Well, voters tend to vote in sort of a swing. They go in one direction one year, and then they decide they don't like what they just did and they go backwards, Especially when one administration is being really proactive. We're really active, passing a lot of legislation very much in the news all the time.
Voter send a not like that.
So it makes a lot of sense for Republicans, especially a state like New Jersey, to run away from MAGA, to run away from Trump, because Trump's approve all rating, especially on his core issue of the economy and inflation, is seriously underwater. I believe the worst he's had in both of his terms is standing with voters on the economy and inflation.
And that's, of course due to the tariffs. Voters don't like.
The one big, beautiful bell, so I'd be running away from it too.
All right, We'll see Henrietta Trees, co founder managing partner Vida Partners, to stay with us from Bloomberg Surveillance coming up after this.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Coarclay, 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.
We continue to face a dearth of economic data with the government shut down here. We did get some CPI data last week you know, a little bit higher than I think the Fed wants to see it, stubbornly a little bit higher than where they want to see it.
So what does that mean for our Freder Reserve.
Let's check in with David Rosenberg, he's founder and president Rosenberg Research and Associates. And David, we actually did get a piece of government inflation data last week. I love to get your thoughts on it here and how you think the inflation outlok may influence how our Freder Reserve looks at the interest rate scenario.
Well, as far as the CPR reports concerned that came out on Friday, it's really not a case of inflation still being above the Fed's target. The Fed can't be focused on lagging indicator. It has to before focused on where inflation is going to be a year from now and two years from now, because it's policy moves influenced the economy and with a lag. So when I hear well inflation is still well above the Fed's target, my eyes just rolled. It's really a meaningless comment.
It's where instlation is going right.
Well, if the Fed rolls that way, then they wouldn't be nudging the market towards a view that they're going to be cutting this week and probably cutting one more time between now and the end of the year. So I think that the bottom line is that when you look at Friday's number standalone, the headline in the core came infractionally below expected. And we're finally starting to get some help out of the dominant rent and OEER metrics, which have lagged well behind the actual deflation that we've
seen in residential rents in real time. But there are inherent lags that are built in. And the other part of this is that you know, when you're taking a look at the core good CPI, you know it's no longer deflating, it's inflating. But the terraff impact so far in the good sector has actually been fairly mild. If I was it the FED, I'd be encouraged by that.
So how exactly are you expecting them to interpret this? I mean, of course, all eyes are on this upcoming meeting, and in the midst of the fact that we do have a major absence of data here.
Well as it comes to, you know, the inflation side, you know what the FED should really be consumed with is where inflation expectations are, and when you look at the broad array of inflation expectation metrics, they're running at the oh my lord, two point three percent. We look at five year and ten year tips break evens, they're not that far ahead of where the feds the facto target is. And yet the FED funds rate is at least one hundred basis points above neutral. So that's ry
line up. And of course the Fed's got a duel Man date, not a single mandate. And the labor market is showing signs of cracking. There's no doubt that the firing rate is low, you know, heading into the government shutdown, looking at initial job as claims they weren't really doing anything more than just stabilizing. So companies are still hoarding labor. But the problem is that the hiring rate has you know, fallen dramatically and to a point now where employment is contracting.
We don't have the nonfim pyial numbers, but we have the ADP private sector employment numbers, and they've declined in two of the past three months, so we're building up slacking the labor market. Cracks are emerging. They can't ignore that. At the same time, you could argue that inflation has been stubborn.
But you know, there was a.
Time when inflation was nine percent, you know, back in twenty twenty two, and people were saying we'll never see three percent again, let alone getting to two percent. Well we're at three percent, So I would still say the trend is down when I hear about sticky sticky sticky, the overall trend is still towards disinflation. I think we've got to be amazed that we're still roughly around three percent even with the tariff impact. And if we get some more news out of residential rents, which I think
are going to be this disinflating further. And remember that's the dominant force. You know, the teriff impact on the good side, is really a small share of the CPI. We continue to see the rental disinflation in the CPI DA that people will be surprised by this time next year how low it's going to be.
So follow up on that, David, because this is a market that we've been told for years and years and years, the housing market. We have a housing shortage, and rents been reflected in rents and the high cost of housing and the housing affordabilities just out of reach for so many consumers out there. Talk to us about the real estate market, and how do you think that may impact the economy?
Well, Housing affordability has begun to improve, actually because of two factors. One, of course, is the bond induced mortgage market reliefs that we've seen, but are also coming off five consecutive months of home price deflation. And the gold standard for home prices quality adjusted is the case Shiller Home Price Index. It's down five months in a row. That's not a blip on the screen. That is a pattern.
So you know, when I hear about that there's a supply shortage of housing, how do you explain that in the context of five straight months of negative readings on the case Shiller Home Price Index. The problem is that demand has fallen below what you can argue is a tight supply. You can only get negative pricing in anything if demand is faltering relative to the supply curve, no
matter what that supply curve looks like. And so the other part of this equation, of course, that nobody looks that because we talk about the stock market all the time being underpinned by you know, ten percent growth and corporate profits, is that is that personal incomes are actually deflating. We have this unusual circumstance because of the equity wealth
effect on spending. That consumer spending in real terms since April is up two point six percent at an annual rate against the backdrop of negative one point two percent in real disposable income. So the problem even though affordability has begun to improve at the margin, remember that the denominator is income. And because the stock market, the labor market is showing cracks, personal incomes are starting to actually
contract in real terms. And if I'm sitting at the FED, that that is that's an alarm bell because personal incomes represents seventy percent of total labor income and drives seventy percent of the economy ultimately, which is the con The question is how long can the energizer bunny last because of the equity wealth effect of declining savings rates when personal income in real terms is contracting. You know when I mentioned that negative one point two percent trended in
real personal supposed to incomes since April. Nobody believes me until I show them the data. And you know you're talking before about are we heading into recession? Wellg news for you when it comes to real personal incomes. Not profits, mind you, but real personal supposed to income already is in a recession.
Well, David, you did mention markets here, and of course we know markets closed at a record high last week. When we look at the equity market, even with all the disruptions of the year, whether it be geopolitical tensions, terrorffs, inflation concerns, we're still seeing markets rallying here. How far do you expect this rally to continue? Is the optimism already baked in?
Well, I've been saying that for a while. But you know, as Bob Ferrell, my hero and mentor famously posited, exponentially rising markets can go further than you think, but they don't correct by going sideways. And we are in the further than you think zone of the stock market. So I think we're an extra innings. But you know, only a brazen full would say to you that you know this is going to end, you know, tomorrow, next week or next month. The momentum and the sentiment is just
overwhelmingly strong. You know, I was saying these same things back in nineteen ninety nine. The market didn't peak until, you know, March two thousand, So could it go even further than we think? Absolutely, We're we're in a two stand aviation event when it comes to the multiples in the stock market, and we've been there for several months now.
But you know, bubbles can typically last, I mean on average, when you talk about what is a bubble, A bubble is anything north of two cent reviations above the historical norm. And we've been there for some time, but you can actually be there for you know, eighteen to twenty four months. So the clock is ticking. But I'm not going to tell you that it can't go on further over the here tournament. It probably will.
David, thanks so much for joining us. Always appreciate getting a few minutes of your time.
David Rosenberg.
He's a founder and president of Rosenberg Research and associate to.
Do this.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on applecar Play 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 check came Alis mttail and see what she's got with her newspaper segment.
All right, I thought of this one with you, Paul, Okay. I know you're a Landman fan.
Okay, So a Yellowstone.
And yellow exactly.
So it's the guy behind it, right, Taylor Sheridan, So the Wall Street Journal sources are telling them.
Also Tulsa King too. That's another one.
He signed a deal to join NBC Universal when his contract with Paramount expires in twenty twenty nine. And this is a huge deal because he's one of the biggest providers of shows at paramounth Plust. So the difference at NBC Universal. They're saying he's going to create films for the movie studio Universal Pictures in addition to the TV content for NBC and the Peacock streaming. But the timing
of it, I mean, think about it. It comes less than three months after David Ellison's sky Dance acquired control, and Ellison was saying that, you know, he wanted to keep Sheridan on board. So this is like some interesting news behind Yeah, all the.
Really tapped into a vein of kind of programming that some people like to really see and like the and play it up.
And he's pretty done good at it.
You know what.
It's interesting he said he was an actor and he was tired. I think his term was I was tired being on the fifth page of the call list right for actors, and so I just said, I'm gonna start writing my own stuff and producing my own stuff.
And that's and now which created this empire?
Really are?
I've never seen you aloseing I have.
I've seen either of them. I hope Tulsa King was pretty good.
Is another one that that he does. So he's just he's on a crazy hot streak. It's a great win for NBC Universal and it's a big, big loss for paramunt because Paramount Plus has really relied heavily on his programming to kind of launch that Paramount Plus. So that's a that's a big loss.
It is definitely Okay, So Halloween season, right, we got fall fever in the air. We're talking pumpkin lattes, right, apple picking, love it, love it. But some people are going all in. They're paying stylists hundreds, sometimes thousands of dollars to decorate their porches. Okay, wow, I just put a reef on my door and I call it today,
like with a scarecrow and that's it. But these people, and what the Wall Street Journal is saying, which is interesting, is that they're like Insta porches, right, because it's all about the Instagram and what you post, and if you're having family over, you have to impress. So it's sparking this like micro economy, the senior little micro economy for the season where people are paying a lot of money.
So they have like jack O lanterns, corn stock moms, Halloween decorations, all this on their porches, some of them. There's one company, it's actually called Porch Pumpkins in Texas. They say they're going to decorate about thirteen hundred households throughout the area and people pay like big money for this. It's it's crazy.
I don't know.
I look down a Jersey short town where in the winter time there's like nobody there. Yeah, but they still decorate their house to the nines and it's completely dark, there's nobody there. It's like a competition sometimes like he has the better port. It's not like they went out to the local store and got a couple of pumpkins. No no, no, no, no.
They hired something they get they went professional.
They had people like Halloween this time is flying My goodness.
Well there's people are really nuts about Halloween, Like sure it's big, but skeleton a lot of people.
It's like as bigger, bigger than Christmas. I was going to say, a.
Major US holiday.
Yes, yeah, well that's what they're saying.
This is becoming like the charismas like and they say they get more bang for their book because they get Halloween and Thanksgiving in one.
They seem let's see.
Okay, So this last one, it's about Apple's iPad pro. I don't have them, but users are saying that that it heats up and that's the problem with it. So Apple says they have a fix. This is from Mark German. He says they're working on a vaper chamber yet to improve cooling performance on the gadget as early as twenty twenty seven. Now I don't know if either of you had the iPhone seventeen promise fourteen.
No, no, not yet.
Okay, well, this technology is actually in that new iPhone, so they're going to bring it to the iPad.
But what they're.
Saying is that, you know, it's a good chance to like get people to upsell, like that's why they put it.
In the iPhone seventeen. So now more people.
Will spend because they're like, I don't want my hand heating up, because that was the issue with it, the titanium case. Little hand will heat up if you were on it for too long.
I don't know.
Just sitting out on the beach like I'm app to do in the summertime, I can go ten minutes and then my phone just goes dark because.
It's too hot. Oh it, he's up.
Yes, yeah, and.
We got to fix that or somebody's got to fix that.
See see, well maybe you have to go for the iPhone seven.
No, you know, anyways to make us upgrade always.
Exactly all right, John Tucker still got the clip phone, So please miss say I thank you so much. That is the world famous newspaper segment. You know what you love it here on the Bloomberg Surveillance program.
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