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We're not going to bring in David Cosson. He's Goldmen Sacks's chief US equity strategist on the latest price target increase for the S and P five hundred, because of course, David, really interesting here. This is by far and not the first time you've done this this year. At what point do tariffs become problematic for you?
Well, the idea of tariffs are baked into our forecast right now. We're looking for earnings growth this year of around seven percent, and earn his growth in twenty twenty six also around seven percent, and investors are now starting to turn their attention into next year's earnings. I know we're only early part of July of twenty twenty five, but the investment analysis looks into next year and discounts
that back. So the idea of tariffs, we're assuming somewhere in the mid teens likely to be the final level. The effective rate for tariffs last year, as you know, is around three percent. It's already up in the low double digits right now, but the real insight will probably be late this year when we'll have sort of a
run rate level of tariffs. But from our perspective, the market investers are soorth thinking about the mid level of teens mid teens, and that's probably what's going to support an earnest growth of seven percent.
That's why the market was higher.
Companies seem to have near cas aar wrote for us at Bloomberg Opinion, really fat margins right now, so they can absorb to some extent these tariffs.
One thing about the falling way.
In the last thirty years, margins have gone from five percent to twelve percent, that's net margins, the S and P five hundred and five to twelve. What are the driving factors of that? What are the building blocks? Lower cost of good souls, lower cogs. About half of the five percentage points of that improvement in margins comes from there. Lower tax rates another reason, lower interest expense. Those are the reasons why margins have moved higher. And so we
look out in the next couple of years. Tariffs are a way of increasing the cost of good soul. That's a downward pressure likely to be a downward pressure on margins. Some of the debt that's rolling over for some companies actually rolling over to higher level, and so Matt what you want to think about this is the tariffs are a downward pressure, and then who is going to pay for those tariffs? Is that going to be the supplier? Is that going to be the consumer? Who's going to pay for that?
What do you think about the effects of one big, beautiful bill now that we have it, and Stephen was obviously a huge part of creating that legislation. Now that we have that certainty and now that you can investors can calculate put it into their.
Models, is it a good thing? Well?
I think the clarity, as you just referenced, is really the important thing for portfolio managers and for corporations. Corporate executives thinking about capital spending decisions given in policies, things like that all are enhanced when they have some clarity on what the policy is likely to be.
So in that regard, the fact that it was passed.
Means you can look forward and see what are some of the fundamentals, and the idea of the economy is decelerating but still growing is an important backdrop. And the idea that the Fed is likely to be cutting interest rates three times to the Golden Zachs economics forecasts three times starting in September twice next year. That is an environment where bond yields are likely to also be lower.
Tenure treasure yields probably around the four point two percent, and that supports our forecast of around twenty two times multiple for the SNP five hundred. So that valuation which is current today. If we think forward Ernie's growth seven percent, that lifts the s and P five hundred and our view to six thousand, six hundred by the end of this year, sixty nine hundred, six nine hundred by middle of twenty twenty six for next twelve months. That's the
general backdrop. Again, the clarity on policy is important, and now investors have moved beyond sort of this year, really beyond the tariff discussions. The view is it will be eventually resolved, and what's the general thrust of a business.
You can make an argument that some of the market has already been looking beyond some of the current policies, trying to feel the impact of deregulation, lighter regulation. KBW bank indets now ought more than twelve percent. It's almost Super Bowl aka bank earnings next week, and so that'll kick off this earning season will be really interesting to watch every single bank except one in the KBW Bank indexes up on the year. Have we seen the best.
It's going to get? I think important aspect to think about.
We've had an incredible twenty five percent rally in the last ninety days, a twenty five percent rally in the S and P five hundred. It is a really really narrow breath market. It's really led by some of the largest companies in the market. That's fine, but the idea of the median stock, the typical company is down eleven percent, eleven percent lower than it's fifty.
Two week high.
If you look at the MidCap stocks, look to the Rustle two thousand, these stocks are down basically you're ten percent or they are trading ten percent lower than their then fifty two week high. As a consequence to that, the idea of some opportunities in these other sectors are where we are focusing our discussions with portfolio managers. The alternative within the financial sector, banks have had a terrific rallies.
You just referenced a lot of dividend increases once the CCAR results came out, and so what are some of the areas within the financial community that have that have lagged on a relative to our model and the alternative asset managers, there's certainly one one category that we focus on.
What do you think about the.
FED path?
As you've pointed out, people are already looking to twenty twenty six, right, and at that point President Trump is going to be able to put very likely a yes man, right, someone who wants to cut rates dramatically.
In the chair.
Do you expect that to that person to be able to push those cuts through? I mean, are you looking at three percentage points cut in twenty twenty six?
Well, what matters more for the stock market is real interest rates, real tenured bond yields, So you think amnominal yields, we're looking at something in the vicinity of a four four quarter percent, which is supportive of a valuation as they indicate around twenty two times forward multiple. And that is the area that investors in the equity market are probably more focused on than specifically the path of the
FED policy. Now are baseline forecast is you're going to get because inflation is going to come lower, the economy is gonna still grow, and the FED has that capacity to be lower and lowering rates. So that's the general path who we're anticipating and that supports the market is generally moving in a positive direction at this juncture.
So I'm going to ask our producers to pull up a chart g hashtag.
BTV four four zero zero.
This is a Bloomberg Intelligence analysis of the top twenty or so firms that have benefited most from tariffs in the top or the bottom most impacted, like the worst performers, the ones that are most impacted by tariffs. The divergence is real.
There has been a.
Bounce back from the bottom of April. However, the best performers have been up almost twenty percent. The worst formers are performers are still down almost five percent. How does Goldman think about this? In baskets? What does well? And do the ones that have not performed well do they continue to lag into next year?
Well, the idea of margins is at the core of investor discussions right now that we have, which is who is going to pay for those margins? Is that going to be the supplier, Is that going to be the corporation absorbing them? Is that going to be the consumer at the end of the day of paying for that? And in historically speaking, it's the consumer that ends up absorbing much of that cost.
And now a lot of companies.
Advanced their inventory at the beginning, so they that makes the analysis a little bit more complicated. We look at the share prices that you just showed in your graph, that could be complicated by the idea of this is how the share prices are performing, what about the fundamentals? And we're going to kick off next week on the fifteenth of July with all the bank earnings, and the next six six weeks or so, we'll have much more clarity in the question of how is it that companies are dealing.
With these tariffs? Who remember the tariffs only.
Partially were implied were applied during the second quarter, so this second quarter still is uncertain. Now it's been pushed out in many cases really until maybe perhaps August first, so there's still a transition process here. But in terms of those stocks, there's only a lot of questions as to who's going to pay for the tariffs and our view generally as the consumer, it's going to be ultimately fast on the consumer.
You were you were here for an historic event.
David Nvidia passed four trillion dollars in market cap. We've fallen back a little bit below that, but we're there, and we've seen this company and this industry power the US stock market for three years now in a row. How much more room is left for this gold rush to continue? I mean, where do you think we are if you were to compare AI opportunity to a baseball game, and what inning are we right now?
Well, let's think about that in baseball getting there's sort of phases of that. If we think about phase one, two, three, and four, in Vidia is absolutely in phase one.
We'll call that the early innings that.
Are necessary in order to build out the infrastructure. That's the leading edge of the infrastructure. That then you have the utility companies, you have other semi conductor companies, you have some of the hardware companies. That's sort of the second phase and the infrastructure. Now where we are, I would say, is where two and a half years November of twenty twenty two is when chat GPT was introduced.
We're two and a half years in. We'll say perhaps that whole transition process is maybe five years, so we're sort of halfway to first answer your question, maybe we're halfway through one scenario and so you've gone from the leading edge in the video, you've had the infrastructure, now
you have the applications. And most companies. When we talk to most companies and ask how is it that they're using AI, they're still looking for getting their data codified in a way that can allow the AI generator of AI perhaps to make them more efficient.
So that's the third phase.
The fourth phase is what's the long term implications for corporates? And so another way of sort of summarizing this is, is the transmission mechanism for AI through the margin channel better margins, more efficiency, or is it through the revenue channel? Is that companies can boost their output and get better sales.
Those there are different companies that are that are that are going to benefit or be different ways in which they can benefit in So this is one of the things I find most surprising is that only half the companies in the S and P five boundary chose to discuss AI on their quarterly conference calls. Only half the other half chose we're mute on the subject.
David, we got to leave it there. We're hitting a hard break. That is, David Cosson of Goldman Sachs know you're on the road a lot, so appreciate you joining us here in studio.