Reaction to May CPI
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This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk about these markets here. You know, it's been around triple in the equity markets. Bonds are hanging in there. Feels like we're in a trading range. The dollar, nobody wants to buy the dollar. Gold, nobody wants to buy the dollar.

Higher yet again, $3,400, close to. And BitDog, I mean, as Tom Keene would like to say, that's higher as well. So it seems like people are willing to take some risk out there. But let's talk to a professional who does this stuff for a living, Mona Mahajan, Senior Investment Strategist for Edward Jones. Mona, what are the conversations? Like, when you go on the road talking to your institutional investor clients at Edward Jones,

What's the conversation these days? Yeah, and over 9 million households as clients. We have 20,000 financial advisors across North America. Every county now in North America, in the U.S., represented. And you guys, Edward Jones is based in St. Louis? Based in St. Louis. Wow, they've been there forever. Yeah, 102 years. So yes, to your point, look, we were down 20% earlier in the year. There was some anxiety building around the tariffs. And to your point, as we pulled tariffs back,

or as the administration pulled tariffs back, and as the economic data actually surprised to the upside for the large part, whether it was earnings growth, GDP now looking quite strong, labor market hanging in there, we saw this round trip, nearly now over 20% rally in the S&P 500. And I think...

investors really want to know our investors are long-term investors but one should they still be in the tech magnificent seven trade that's a question that comes up often and two how should they think about bonds here and i think that's one that that will continue to come up i know we have a couple of interesting auctions later today but generally speaking we say four and a half percent you know we always refer to that tina trade there is no alternative u.s treasury market deepest most liquid market in the world

very regulated and offering interesting yield for those long-term investors. We get CPI in just like two minutes. Are you expecting anything? You know, we're hopeful that it comes in line with what consensus is. We will probably see a slight tick up on headline and core CPI this month. But keep in mind, energy prices versus last year at least have come down substantially. And the other thing we like to point out,

remember that two-thirds of the CPI basket is actually services inflation. And so while we are talking about tariffs and trade, that primarily impacts goods inflation, about a third of the CPI basket. But if we are seeing a bit of cooling, you know, consumers maybe not taking as many vacations or eating out as much, that services number will cool as well. What is the Edward Jones kind of economic call?

thinking recession or we've kind of avoided that? Yeah, you know, our base case continues to be no recession. Cooling and economic growth, certainly we were above trend last couple years, 2.5%, really nice last year. Could we get a few quarters as tariffs do settle in, as consumers maybe soften a bit in the next couple quarters below a trend growth, so maybe sub 2.5%, 2%, absolutely, but we don't yet see that negative GDP growth number emerging.

This actually looks like a pretty positive report. I mean, inflation still has, you know, that two handle on a year on year basis, but it is lower, which means that we're not seeing necessarily that feed through from any tariffs. And then if you have the removal or an agreement of tariffs and trade between China and the U.S., is that removing another headwind altogether? And that's sort of why now we're seeing futures having a nice pop now within the market. Yeah. I mean, if Michael McKee were sitting here, I don't know where he is, by the

He's on TV. Oh, he's on TV. There he goes. I'd say, hey, man, where's the inflation? I thought with all this tariff stuff, there'd be some inflation. I think he's probably respond. We don't know yet. If we're going to see it, if we're going to see it, you will probably see it sometime later in the summer, in July data, maybe August data. I don't know. We're joined here by...

Mona Mahajan, senior investment strategist, Edward Jones. She is in our Bloomberg Interactive Broker Studio. Mona, when you see a benign inflation print like this, does it give you a sense that maybe this economy and maybe some of these companies are going to be in a better position than maybe we initially feared? Yeah, a couple of things come to mind when I see this type of print. Number one, it does look like, as we just talked about, the services side of the inflation print came out

slightly softer than expected. So as we talked about, two thirds of the basket is services. And if that part of the economy is starting to just cool a bit, that will be reflected in the broader CPI basket. I think a two handle to your point, we're still closer to that 2% target than we were really any time over the last year or so. So that is also probably a benign factor as we think about inflation. But I'll finally also note, as we think about companies and how they're managing tariffs,

Certainly during this period of pause, it is possible that companies continue to build inventories. And as they are building inventories, they don't have to then pass through as much of that price increase. And so we could see in a lot of companies even thinking about Christmas inventories. If that continues between now and July, companies have adjusted, they're innovative, they find a way around some of these headwinds that we see in the economy. Does that hurt them later though, if the consumer winds up getting hurt and then they're stuck with all that inventory?

You know, it will come down to consumer resilience and thus far consumption has held in there. We look at second quarter GDP potentially, consumption looks above 2% higher than the first quarter. So we are seeing a consumer that's relatively resilient

But yes, overbuilding inventories can come back to bite you. But from a consumer perspective, it's not a bad place to be. They're not going to experience some of this dramatic move in tariffs that we might have seen. Because you know what overbuilding inventory means for me, Paul? Sales. There it is. There it is. Oh, yeah. Let's do this. And we all know Alex and her sales. Not one of the 73 forecasters in Bloomberg's survey had penciled in a 0.1% core CPI increase at

That's according to Chris Anstey, senior editor for Bloomberg News on the top live, which is just awesome, by the way, folks. If you've got a Bloomberg terminal, the top live folks, when big stuff crosses the tape, they're all over it. So, Mona, just real quick, we'll let you go. But I mean, does this, you know, kind of a little bit more of a benign inflation outlook? Does it kind of change the way you guys are going to be talking to your clients?

in every county of the United States. Yeah, you know, look, I think this one print alone doesn't change the overall narrative. What we will say is we're up 20% plus in a pretty short period of time. Could we get more bouts of volatility ahead? Absolutely, especially as we digest some of this summer news, you know, post 90-day pause, et cetera. But as we look towards the back half of the year, we do think the setup

back half into 26 is not bad. We're seeing potentially a Fed that could be cutting rates. We are seeing potentially a tax bill that is in place and supporting on the fiscal front as well. And then, of course, companies will have a little bit more certainty and the earnings profile may reaccelerate in 2026. So we do think volatility can provide some opportunities for our investors. Boy, you want smart equity talk here, Alex. In this studio right now, two of my all-time faves,

in terms of equity strategy. - I know. - Mona Mahajan, Senior Investment Strategist with Eric Jones and Gina Martin-Adams from Bloomberg Intelligence doing the same thing. I mean, it doesn't get any better than that. Mona, thank you so much for joining us. Appreciate you coming into our studio.

Gina, read on this inflation data. I don't know. I'm blaming Michael McKee here. I mean, there's no inflation, it seems like, in this market. No, and certainly the deceleration in services inflation is great news broadly. I think, frankly, what matters and oftentimes gets overlooked, though, is the difference between producer price inflation and consumer price inflation. I was just going to ask. Yeah, this is something that we spend a lot of time on is, okay, sure, the headline level of CPI is,

You want to pay attention to it, but the only real reason to pay attention to it is because of the Fed and the implications for valuations. So this is valuation supportive because it doesn't suggest the Fed is going to have to hike anytime soon. It may even support the ease that is now priced into markets coming later this year.

But what will matter for profits is how does this compare to PPI coming out tomorrow? Yes. So what do you think? Because if PPI is higher, then we get a margin squeeze, right? Yeah, we start to get a margin squeeze. And that's frankly where we've been for the last several consecutive months. I thought I was supposed to focus on CPI, not PPI. I know. I know, Paul. Now you guys are switching it up more. I know. You missed it. You did the whole thing.

He was walking Mona out of the studio. I know, I know, I know. It is important for the Fed, right? It is important for valuations. But ultimately, we care about where profits are going and we care about what's happening with margins. And companies are, you know, despite what, you know, this low CPI is not a great sign of what companies are contending with when PPI is accelerating faster. So you've got a little bit of margin pressure that has emerged over the course of 2025. It is likely to continue depending upon what we see in PPI tomorrow.

Yeah, so where do you think the industries are going to be that have the ability to control their margin? Some degree of pricing power. So far, and we've certainly seen this after the tariff pause, it's all mag seven. If you look at the divergence that has existed so far in the post-tariff pause world, it is

Companies outside of the MAG7 are experiencing the greatest deceleration in earnings growth prospects. Inside the MAG7, you still have that big moat. As a result, the market has gone back to sort of pre-2025 trends and started to excessively price the stability of the MAG7 earnings stream.

So, this is a very consistent theme over the last two to three years, is anytime we enter a period of strain on earnings, investors flee, they just rush right back into Mag7 because they do have some degree of stability. They do have an incredible amount of cash. They generate a lot of cash flow. They have relatively sticky margins.

But you get to a point where this group is priced so excessively relative to the rest of the index and any tweaks around the margin. Let's say we get an easier PPI number tomorrow. That's actually great news for the non-MAG7. Any sort of tariff resolution, great news for the non-MAG7.

So I think you want to really play this as a Mag7 versus ex-Mag7 trade, which started to emerge as a real possibility in 2024, got squeezed out by the tariff pause. As the tariff pause ends, we might see the non-Mag7 start to come back to life. Let's see. What factors are you guys focusing on these days?

I'm just leaving it there. What factors? Yeah, so the factors, our factor strategy is run by our quant strategist, Chris Kane. He just updated this. Just updated this late last week. And one of the things that just continues to shine in factor land is low volatility stocks. It's kind of unbelievable, but even in last year's rally in the equity market, low vol was the best performing and just stuck at the top of our factor scoring methodology.

It still is at the top of the scorecard. It's not terribly expensive to buy low volatility stocks. It's all sector adjusted, so we sector neutralize all our factors. But it means low volatility. It just means how do the stock prices behave?

In an environment where volatility is on trend rising from lows made back in late 2023, early 2024, it makes sense that lower volatility stocks would probably perform better. They tend to also have better earnings revision momentum than the rest of the index. They are more stable as a general rule, and that stability is definitely shining in today's world of volatility. Before we let you go, do you think the equity market is at risk for a melt-up?

As we got the trade headlines today, we got the CPI. What do you think? Well, we've had an extraordinary melt up already. So when we look at what's really driven the equity market since the tariff pause, it's been almost entirely technical. So we can plot across global equity markets by beta. The higher beta markets have performed best. That would include, of course, the S&P 500, especially the MAG7, which tend to be generally higher beta than the rest of the global equity markets.

I think that trade is largely coming to an end and the next layer of improvement in the S&P 500 probably has to be driven by one of two things. Either a much better than expected recovery in the economy because we get tariff resolution emerges and that drives rotation into some of the higher volatility value type shares that have really lagged in the recovery.

or you get some sort of FedDs coming. If you get a FedDs, there certainly is room for more advancement in some of the underappreciated segments of the index as well. So I think you'll see the market rotate to new drivers. Clearly in the post sort of the pause regime, it's been all beta. It's been almost all technical. There's not been a great fundamental case to kind of jump back into stocks. We've repriced back to our pre-tariff levels.

We are, you know, now up on the year so we can maybe move into an environment of rationality going forward, but we'll see.

I think there's more downside to upside. Yeah. If I were to tell you that, would you argue me on that one? Well, no. Your suspicion... There's still tariffs out there. Yeah. Like triple or more than we had before. That statement is basically accurately reflecting what's in our models, right? Our models are saying fundamentally there's not a huge case for this, right? We're in a regime, according to our market regime model, as well as our economic regime model, that we should expect...

very low single digit returns in 2025 as a general rule. We're there now. We just need to see some other, something change in order to justify greater upside. I'm always open to that. Remember, the default direction of stocks is higher. So you have to keep that in the back of your head at all times. Usually to see stocks correct to the downside, you need to see some trigger manifest. Yeah.

Right now, that trigger very easily could be weaker than expected economic growth, which emerges into the second half of this year as well. You're so right about just stocks up into the right long term. When I was very early in my career, I was the third analyst covering America online. So the third analyst covering the internet on Wall Street. And I put a buy on it. I had no idea what I was doing. I put a buy on it. It kept going up, up, up. But there was a big drop.

big short seller, I won't tell you his name, huge short seller. And he was getting crushed. And he called me 10 times a day saying, what are you doing? Your call's terrible. I'm like, I don't know, man. The market's going up. Stock's going up.

Shorting stocks is a tough way to make a living. Yeah, very hard business. So anyway, all right. But I remembered that. That's, I learned that thing. Stocks kind of go up into the right by and large. All right. Thank you so much, Gina Martin-Adams. She is an equity strategist for Bloomberg Intelligence. Appreciate getting Gina's time here in our studio. So let's switch some stocks.

to bonds, Winnie Cesar, global head of strategy for credit sites. So Winnie, you see, I guess, kind of a benignish kind of CPI number today. What does that mean for your world of credit?

Sure, it's been a very benign number for CPI. I do think that Gina Martin-Adams' point around CPI versus PPI and the read-through to corporate profit margins is important. But from a broad-based macro perspective, it does seem like the market is kind of coalescing along the lines of the Fed being on hold is actually an okay thing for credit spreads.

as you won't have seen a big shift higher in inflation or a big downdraft in the labor market. And that really allows spreads to just kind of chug along as technicals continue to drive apparently every financial market. It seems like all that liquidity we injected into the system during COVID, during 2021, is still having some long-lasting effects.

So the reaction in the market to CPI was clear. It was by the front end. This sort of clears the runway a little bit for the Fed to cut. Do you think that that's a real good takeaway? I think that it's a tricky takeaway. You know, we are still very early in the tariff game.

who knows where we're going to end up from an inflationary perspective. I think also the fiscal side of the story when we think about incremental tax breaks, which are retroactive to 2025, that could be a little bit inflationary as well. So to look at this one CPI report and say, hey, we're in the clear,

That makes me a little bit hesitant. You know, I don't think that the Fed is going to be looking at one report and saying, OK, now we can begin to ease rates. Although I do think that next week's messaging may be a little bit more balanced now that we do have a little bit more data under our belts.

So, again, you can sit there, Winnie, you know, a 10-year treasury, 4.45% roughly, more or less. Is that a place to kind of hang your hat? Or do you go out and take some credit risk? Because I do know that the best performance in fixed income, once again this year, is U.S. high yield.

Yeah, it's really interesting and we have gotten a little bit more comfortable with taking some duration risk within the treasury market. We put that view out a couple of weeks ago as long end yields kind of spiraled to recent high levels. They've come down a little bit since then. Credit is

a little bit trickier. You know, when we think about high yield especially, we're seeing very strong performance from higher quality high yields. So the double B issuers, the single B issuers who are going concerns with very limited near term liquidity needs.

But within the world of triple C's, there's been some pretty significant lagging as all in borrowing costs are still pretty prohibitive to a number of companies. You're still seeing some idiosyncratic sectors that are being a bit stressed, some big issuers that are still facing some pressure. And so to just say, hey, waive in all the credits, high yield looks good is a little bit tricky, especially when we think about trying to put together a portfolio that has a seven and a half percent yield, which is

pretty much where high yield and aggregate is right now you have to really be taking some pretty significant risk and that is a much more challenging proposition I would say right now given this still persistent uncertainty that we have within markets I mean you're the bond person so you're supposed to be worried and pessimistic Gina's the equity person she's supposed to be up into the right at the end of the day um where's the biggest misprice within the fixed income market

You know, I think that the biggest misprice is actually the relative value of agency mortgage backed securities versus U.S. investment grade corporates.

When we look at the long-term history of that relative value, MBS is screening wildly cheap right now. And I realize there are a lot of factors, you know, perhaps Fannie and Freddie exiting conservatorship, going back into the private sector is making people nervous. There are some home building and housing headwinds. But when we think about that relative value and the downside outperformance that MBS usually has relative to investment grade corporates, we are scratching our heads a little bit.

Credit risk, that has not been a concern for credit investors really since the great financial crisis, the pandemic. How do you think about credit risk here?

yeah credit risk is interesting and i would say that we've had a few bouts of credit risk we did have a pretty nasty downgrade in default cycle in energy and commodity sectors in 2016 through 2018. in fact energy was a place that a lot of credit investors from investment grade all the way down to high yield had a really hard time generating any sort of consistent returns

Credit risk right now, I think most investors are looking at the IG market, the double B rated part of the market and saying, you know, these balance sheets actually look like they're in pretty good shape. But there are some outliers for sure. We're seeing, you know, what's going on with Warner Brothers Discoveries, what's going on with Bausch Health.

what's going on with Altice France. And it seems like there is a little bit of a game of whack-a-mole on these idiosyncratic situations and trying to get ahead of what is going to be the next thing in a otherwise kind of vanilla benign market. But that's the thing with credit. It's always a hurry up and wait type of situation.

All right, Winnie, thank you so much for joining us. Always appreciate getting your perspective. Winnie Cesar, Global Head of Strategy for Credit Sites. I think Winnie spent basically half her life, I'm going to say, at Emory University, which is phenomenal. I knew you were going to say that. I'm a huge fan of Emory University. She did her undergraduate degree there and a JD MBA. It's not pretty there. Enough's enough. All right, enough. We got the education. We get it. You're smart, all that kind of good stuff. Super smart. And helping us out on the fixed income side.

If this government spending in defense goes towards things like R&D that have dual-use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long-lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

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You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Virginia Masanuf joins us. Global CIO.

for the equity business, for Allianz Global Investors. Virginie, can you talk to us about what we saw earlier this year, which was a decisive move from a lot of global investors out of the U.S. market, particularly U.S. equities, and into the rest of the world, particularly Europe? Is that a short-term trade? Is that a long-term investment strategy? How do you view the geographic allocation?

Thank you very much. So I think you had a pendulum swing. The exposure to the US, as you know, was driven partially by the benchmarks, which had reached a very, very high level. The dollar was strong. And of course, the US exceptionalism, if you want, with the innovation and the AI, pushed a lot of people in that market. The gap in terms of valuation versus Europe and Asia had opened up. And with the uncertainty that we've seen since the new presidency,

That has created, if you want, a wake-up call for a lot of global investors who said, well, maybe I don't need to be so much underweight in other parts of the world. So that's number one. Number two, in other parts of the world came up new dynamics, such as the fiscal plan around defense out of Europe, which is going to be quite transformational. And of course, the fact that most countries

investors are not invested in China anymore. Well, China has surprised by some of the innovation advantages that it has demonstrated, as well as Japan. Japan is now back on the map. So you've had those push and pull factors that's meant that people have rebalanced their portfolios. However, it's not the end of exposure to the US market for global investors. There's just too many good companies there.

Right. So I'm glad you mentioned China, because where to reallocate out of the U.S.? Many go to Europe, but also EM, maybe Brazil, other parts and China. Where else is there interesting opportunity?

So if you look at EM in general, Taiwan, of course, is interesting, not without volatility, but if you think of it as one very large center of excellence for technology, semiconductor and AI, definitely there. India is an area that we still like very much, tipping point in terms of demographics, tipping point in terms of growth, if you want, and that consumer wealth growth, and also perhaps a more apolitical nation versus what

everything else going on in the world, particularly around tariffs negotiation. So that is in Asia what we like. In Latin America, of course, some interesting countries and European emerging markets are quite small. So there I would play it mostly through developed Europe. So again, as we think about Europe, Virginia, as you talk to your clients, is there a sense that Europe as an

as an economic entity and as an investment opportunity has kind of been reborn and it's something you really need to think more about? Yeah, I agree. So first, you know, valuation, second rates are coming down. We've had Christine Lagarde's message from the last cut in rates. So that's been positive. Inflation below 2%. So you got that macro element that's been supportive, but it's really about that package.

And we're talking close to a trillion dollars to be invested in infrastructure and defense, which of course will, if well implemented, and that's the big question, will really create a synergetic ecosystem around infrastructure, technology, etc. So there is an element of rebirth of Europe, but also markets are much cheaper than in the U.S.

How does then the tariff landscape fit into that? Do you kind of ignore it? I mean, I hate to say that, but do you kind of put it on the side and be like, that's going to be what's going to be? Or do you need to re-rate based on any sort of baseline 10%?

Yeah, yeah, exactly. So interestingly, the ECB has a model that they've run on 10 plus 40, so 10% sort of universal tariff plus 40 on China. And their finding is that it would have more of an impact on growth than inflation. Of course, you can't ignore tariffs, but we have a lack of clarity. And I think that except for very large unexpected news, the impact of tariffs on markets is

is diminishing, if you want. The marginal impact is diminishing. However, you have to be very careful about the sector. So if you take the auto sector in Europe, as you know, big employer,

are probably going to be hit by tariffs given the competition between the US and Europe. I think that's an area to be very careful about. But within Europe, you have a lot of companies that are relatively immune to the tariffs. And that's where you can also, if you want, find good opportunities. The US technology, Virginia, the technology sector has been the driver of the US

equity markets for the longest, as long as most investors can remember. Is that still the case in your perspective? Yeah, absolutely. So you have, you know, you've heard me talk about this digital Darwinism trend in a shifting world order. This is exactly, you know, playing out. And the digital Darwinism is about how AI and technology is really advancing so fast because that's the way tech moves, right? Exponential versus linear, that it's creating

really a disruption in competitiveness globally. The U.S. has a very, very strong foothold in that area. But of course, because of the rivalry for the top spot with China, which explains a lot of restrictions that we've put on China's access to semiconductors, etc.,

You have a bifurcation of global standards. And this is why I think you still play tech through the US, but you also want tech in China and other parts of the world, like Japan, for example. But absolutely, yes, the leadership is still there and the innovation, the ecosystem and the spirit, I would say the mindset is unequaled.

It's such a good point. And that's why you can't totally dump out of the U.S., for example. Before we let you go, we got CPI in about an hour. Is it going to move markets? Are you excited? Well, I think you also have to add this new element of oil, right, with the Iran negotiation. But I think consensus is for a pickup in core. It is an important number, though, because, you know, the front-loading effect from Q1 is fading that we had seen. And we'll see how tariffs

will impact inflation because we know some of the tariff will be absorbed by consumers, some by companies' margins, some of it by currency. So it's going to be a very interesting number. But I would bet on a slight pickup in course. All right, Virginia, thanks so much for joining us. Virginia Massano, Global CIO covering the equity business for Allianz Global Investors over there in London. This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple Podcasts.

We'll be right back.

How do you view kind of the earnings out there that the market's discounting right now? Are we too low in our earnings expectations? Are we too high? How do you view that?

Well, it's a great question, Paul. And look, I think there's a lot of uncertainty in the earnings outlook. That doesn't mean that people like me don't have to come up with forecasts. And so we've got 258 for this year. We have not put out a 2026 earnings number yet. We don't typically do that this early in the year. But we have said you can look at the bottom-up consensus for 2026, which has been tracking around 299. And if you apply the typical haircut to it, so in other words,

kind of the typical downward revision, it would come in around 272. So, still very healthy numbers overall, but I will say Paul, it's kind of intimidating to look at that 299 for next year and say, it's way too high, it's got to come down. We think it probably does need to come down, but that is actually pretty typical for this point in the cycle.

There's some headlines here about President Trump talking about deal with China, saying the deal with China is done. We'll provide to China what was agreed to, our deal with China done, subject to Xi's approval. We are getting a 55% tariff. China is getting a 10% tariff, and the relationship is excellent. So I bring that up just to say,

how do you factor in the uncertainty around tariffs? Is your baseline then for earnings like just 10% and then you kind of go from there? - So look, I would say, you know, when we think about earnings, what we're seeing is just very different reactions to the tariffs by different sectors in the economy. If you look at industrials, for example, they've been very confident and they've been saying, look, you know, we can pass any kind of cost increase on through pricing. They sound very confident about their ability to manage through, adjust supply chain footprints.

things have gotten a lot sloppier when you look at the consumer companies. Some have had a better tone than others, but generally there's a lot less certainty about whether or not they can pass on prices. And so we've actually seen, you know, not necessarily great reactions to earnings beats from the consumer companies that have reported in recent weeks, because there's all this sort of cloud and noise in the outlook. I think this next reporting season, Alex, is going to be absolutely pivotal because we're going to hear from those industrial companies.

and whether or not they really were able to manage through, whether or not they're seeing any kind of impact to demand. It was all kind of sunshine and roses in the last reporting season. We'll see if that sticks. And we'll get updates from the consumer companies on how consumers are responding and how they're managing through. So I think we're just still in a discovery process, frankly, even as the numbers are still moving around.

So what's the sentiment out there? I mean, I know that's one of the factors you look at and other strategists look at. What's the sentiment here? It seems to have kind of whipsawed this year. We started the year feeling really, really good about maybe pro-growth policies coming out of D.C. And then the tariff situation really put a knife in that. But we've since kind of come back here. So I don't know what the sentiment is out there.

You know, it kind of depends on who you're talking to, which day it is, you know, kind of what part of the market they trade, to be honest, Paul. But I would say the best kind of summary I still think is the AAII weekly survey. It's technically of high net worth retail investors. But, you know, at the same time, I think it captures the vibe that I hear from the institutional community pretty well also. And what we saw there is that, you know, from kind of I think like early March,

You know, through early May, we were sitting two standard deviations below the long term average sentiment was as bad as 2022 as bad as the financial crisis. And it has rebounded. And you know, you're not sort of back in net bullish territory on a consistent basis yet.

But we're, you know, we're less than one standard deviation below the long term average. We're heading back towards that average. Now, if you go back to last fall, right around the election, we were one standard deviation above the long term average. So you're absolutely right in your whipsaw. I would say we're healing right now. We are healing very rapidly. And I'm actually starting to worry we're going to get back to where we were last October and November pretty quickly.

And just to reiterate, President Trump posting on social media that the deal with China is done subject to Xi's approval and also talking about how their relationship is excellent. Lori, if things calm down, where do we see the most upside? You mentioned going back to those October levels. Is it going to be in small caps?

So, you know, it's interesting question, Alex. We've gotten, you know, a fair amount of questions on small caps in the last few days. And if you look at a relative ratio between small cap and large cap, you have seen a tiny little sliver of small cap outperformance. You know, it's been interesting to me that we've seen that because small caps do generally whenever there's any kind of problem in the market, they're less able to manage through.

You know, I would also say certain pockets of small cap, though, things like financial do have less direct tariff exposure. It's more kind of broader macro risk. So it's not sort of a monolith down within small cap. You know, we think that they're actually interesting from a de-risking perspective in that if you look at the CFTC data, we had actually gone back into net short territory recently, which is.

something we frankly never saw for the S&P, never saw for NASDAQ. And if you look at valuations on small cap around the April 8th lows, they kind of hit their typical recession lows, believe it or not. So I do think you had, you know, sort of a really interesting kind of de-risking opportunity here. But the catalysts, you know, have been, you know, sort of hard to identify, given that we're in an economic backdrop that seems pretty sluggish and has been anticipated by many investors to stay sluggish for a while. So to get small caps going, I think

think you need things like fed rate cuts to come back or real genuine economic excitement and tailwinds to come back so laurie earlier this morning alex and i were speaking with a couple investors uh based in london we're talking about that kind of the the non-us trade the europe trade really coming front and center earlier this year when some of the trade uncertainty really started to crescendo um how do you view when you talk to your clients u.s versus maybe non-us particularly europe here in terms of allocations

Yeah, so it's a great question, Paul. And, you know, I tend to focus mostly on the U.S. I'm a U.S. equity strategist, but we do have conversations about the U.S. in the context of that U.S. versus non-U.S. trade. And I would say that if you think about the non-U.S. investor back in March,

there was really an intense apprehension about investing in the U.S. And we did start to see money really push into Europe in a pretty significant way. We had seen big inflows into the U.S. from both U.S. investors and non-U.S. investors back around the election. And that really eased back and we started to see some modest outflows just in recent data generally for U.S. equities. So the way we

put it, Paul, is there are so many headlines coming out, right? Whether you're talking about trade or tariffs, whether you're talking about the tax bill and the Section 899 issue. But it does seem to me what tariffs did was really kind of open the door in a way to the non-U.S. investors to look at other geographies like Europe in a more serious way than they had in a long time. And we think it's very difficult for that door to be closed once it's been opened. She just said you had two good questions this whole segment. Wow. I mean, I don't know.

I don't know. I got none. I'm just saying whatever. But the great thing about Lori is that she doesn't have let AI do her work for her. Like she goes line by line through these conference calls. Amy Silverman, the derivative strategist at RBC, has her weekly note out. And she highlighted going on a road trip with Lori and how like Amy is like, let's go have a drink and hang out. Lori's like, no, I'm line by line.

uh looking at all the earnings reports i'm with amy silverman on this one i'm kind of with lori on this one um lori what is what is the thing that you think investors are getting most wrong as you kind of go line by line through some of these details because the narratives are really easy to sort of look at and create right what do you think the biggest misconception is

So I think the biggest misconception is, and, you know, Alex, we read transcripts, you know, sort of week to week as they come out in reporting season. And I've been mostly then we just focus on the S&P because it's just like an avalanche. But then, you know, in between, you know, when things slow down, I'll kind of read through Russell 2000, my old stomping grounds, you know, kind of across sectors.

And I would say that what I get the most frustrated about is that there's no monolithic story out there, especially if you're talking about tariffs, if you're talking about the consumers. All the financial companies, whether it's a credit card or a bank, they're like, hey, the consumer's fine. The spending levels are good. The delinquency

levels are low, all the stats look fine. And then you fast forward like four weeks later and you get all the consumer companies and they're like, the high end is trading down. People aren't smoking as much. People aren't snacking as much. You know, some companies are saying, yeah, we did see, you know, purchases pulled forward. Other people are saying, ah, we're not

I'm not so sure. My favorite sort of discrepancy that I saw was that the telecom companies all said in this last reporting season, or a bunch of them did anyway, that mobile devices were pulled forward by consumers. And then we had some of the producers of those instruments, of those devices say, "Ah, we don't think

that consumers did that. Well, who are you gonna believe? Are you gonna believe the manufacturer? Are you gonna believe the telecom company that actually knows when those customers are due to get a new device? And so, I think that they're just sort of conflicting stories out there, but people tend to latch on if they're in a bearish mood to the more bearish narrative. If they are in a more bullish mood and trying to make a more bullish argument, they latch on to the more constructive narrative that's out there. And I think it's just still really, really messy. And I think we're gonna continue to sort that mess out in the next reporting season.

Lori, is there any sector that screens well for you guys right now? I know you guys screen all this by industry sector, by factor as well, growth, quality, that kind of stuff. What kind of sticks out for you guys these days? Yeah, so I would say on growth value, this is everybody's favorite debate, mega cap versus broadening, mega cap growth versus broadening. And I don't have a firm kind of view on that. I think we've had a tug of war between those two segments of the market. And I think that tug of war is going to continue.

And maybe that's a little bit more of a nuanced call that's too much to go into here, but that's probably where I differ the most from consensus is I think that tug of war is there for a reason. I think it's gonna continue. I would say on the sectors, industrials, they're just too expensive for me. So we're neutral there.

you know, we do recognize that these companies have a better tone on managing through the challenges that are coming through, especially on the tariff side, but we just don't like the valuations. Tech we're still neutral on, but it has started looking better on both our earnings revision and our valuation work. So we're keeping a close eye there.

If you look at financials, and I know I've been talking about this one every single time I talk to you, Paul, but it still screens really well. You've got, you know, really nice valuations. You're really seeing those driven by the regional banks. And, you know, even though, you know, I might kind of chide the banks a little bit for not, you know, reflecting all of the stuff that the consumer companies are talking about.

I do think what I'm hearing from the banks is just a really good ability to manage through. And they're kind of a boring sector right now. I think they got stress tests during SVB and they were a little expensive before all this tariff stuff started. And now, you know, we've got a very reasonably valued sector attractive on certain metrics again. So I would say financials rather is probably the one that's most interesting to me right now. This may be literally the same question, but I'm.

when if we do have a a tariff deal between the u_s_ and china what sector could benefit the most so i think if you're comparing sort of the tariff sensitive areas you know the place that i've

seen the most commentary, frankly, you know, and I wouldn't say it's all of a worrisome nature, but where I would say the relevancy seems to be highest, it's going to be industrials, healthcare, and consumer discretionary. I think out of those three, you've really got your better valuations on the consumer discretionary side and the healthcare side. Now we're neutral all of those sectors, but if I'm just looking at it from a pure valuation perspective and who's gotten beaten up the most, I would probably say consumer discretionary and healthcare sector, you know, they look

better than the industrial sector, frankly, because there's just been more worry priced into the consumer stocks. And on the healthcare side, this is a little bit more kind of weighted my comments to the med tech space.

But we actually, when we had our healthcare conference a few weeks ago, we did a write-up on this. And if you looked at the tariff commentary in the S&P, I believe we did the S&P 500 or S&P 1500 healthcare sector, the tariff commentary was so much higher this time around than what we had seen back during the first China trade war. So, you know, we think that's, you know, contributed to some of those more attractive valuations that you started to see develop on certain metrics in the healthcare space.

Are clients asking you to opine on just the valuation of the broader market these days? Because we've had that big move down and now back up, all in the context of earnings coming down.

Yeah, you know, I think people are struggling with whether they look at 2025 or 2026. I think that some people want to sort of skip over 2025. We think it's probably a little bit early to do that. And if you're really going to have a high convicted view on 2026, you at least need to understand the starting point and how bad or not, frankly, the damage may have been to 2025. You know, what I will say is we have one model that's very popular that we developed back in 2022. And so it's something, you know, that people really remember about our work.

where we just basically looked at average trailing PEs going back to the 1960s. We set up, we tested a bunch of macro variables to see what drivers of those PEs are. And we came up with a set of inflation, Fed funds and 10-year yields. So we slot in assumptions on those.

put them into the model, it spits out a PE. We put that, you know, we marry it up with our earnings numbers and come up with fair value. So the long and short of it is that for 2025, we look like we're a little bit over our skis right now, unless we get some big step up in the GDP forecast or some big decline in the inflation outlook. Our modeling comes to 5730. For next year, you know, depending on different scenarios I look at, I can get you to 6200, 6800 for the end of 2026 on fair value for the S&P. So

near-term overvalued, but longer-term opportunity. Great stuff. As always, Lori Cavalcina, head of U.S. Equity Strategy, RBC at Capital Markets and a proud University of Virginia Cavalier.

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This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. Let's be honest. I mean, if you're at a cocktail party and you bump into, like for the last 15 years, you bump into a fixed income person, you just turn around and walk away. Your eyes already glazed over. There's no yield. There's no yield. They got nothing to offer you. Now, however...

They're like the cool kids at the party. I mean, you could sit at a two-year treasury and get more than 4%. Karen Matt is one of those people. I mean, investment director of fixed income at Federated Hermes. She's now the cool kid on the block. Karen, what are you doing in fixed income these days? Because you guys have real yield across the spectrum here. How do you guys think about allocating in fixed income these days?

Good morning, and thank you for having me. I don't know if I'm quite the cool kid. I think I'm probably still part of the- It's relative. That's a relative term. Thank you, Alex. It's really still nerd herd here, but the income is back in fixed income, right? That's where you would pound the table and focus on that yield, and the yields do offer

protection from the interest rate variability or what causes the price action part of total return. So when we're thinking about fixed income and allocations, first and foremost, it's our goal to be boring.

This is the boring part of your portfolio. When you wake up in the morning, if the world isn't right, you want to look at that bird in hand, the yield that you've collected, and have some level of satisfaction rather than overreaching. So at this point in time, we continue to like up and

quality. We don't think that there's any need to really reach into the lower realms of credit. And I think shorter duration instruments now focusing on anywhere from cash, liquidity, money markets, all the way out to the three-year part of the curve continue to be the most attractive part of fixed income. But it's funny because fixed income has not been boring. You

You can make an argument that you looked at your portfolio over the last few months and fixed income was the scarier part in some ways, with volatility that we're not used to, with rates moving to levels that could be really painful for stocks and the economy.

So true. The volatility has been a little bit gut-wrenching and a little bit more than we anticipate from fixed income markets. But we've also heard and seen sharp shifts in policies and the bond market has reacted.

I would comment, and this is a little bit more editorial, but the bond market seems to really be looking and trying to anticipate that next downturn in the market. So sometimes prices aggressively to the downside on that softer news. But as investors, I think that we're all discovering that we could just muddle along.

somewhere in this higher than target but not very high inflation environment and in a pretty balanced labor economy. So while you might look at the screens day to day and see fluctuations that aren't what you like to see, we are now viewing data over longer cycles because of the news headlines.

So, Karen, I'm looking at the INGO function in the Bloomberg terminal. It gives you the Bloomberg index browser. Year to date, there's a lot of green on the screen for across the fixed income space led by U.S. corporate high yield. How do you guys think about the high yield market?

I know high yield continues to reign supreme in fixed income, but for us, it's still a little bit too expensive. Our analysts, when they're looking at these companies, they are remarking that earnings are fairly flat. These are companies that, broadly speaking, don't have pricing power at this point in time. They don't have an ability to grow volumes.

So it leaves them still in the situation that they can emerge from the high yield construct. Moreover, the tariff

shifts and changes and the policies aren't really giving them the fodder where they could necessarily grow. The light at the end of the tunnel for the high yield market is really when the Fed would start to ease and ease considerably. And that's not our forecast or the street. So for us at option adjusted spreads or the risk that is

over the relevant treasury rates at an average of about 300 basis points right now, we think that that's far too low. All right, Karen, thanks so much. Karen Mann, I'm vice president over at Federated Hermes, sort of the semi-cool kid now at the party. And a proud graduate of the Pennsylvania State University. Happy Valentine's.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay 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 1130. All right, let's take a look at these newspapers today. We do that at this time every single day. Well, Lisa Mateo, Lisa, what do you got for us in the newspapers? Okay, I want to preface this first story by saying I love my son and daughter the same.

Okay, so here we go.

This is from the Times, okay? So they're pointing to this new analysis of global births that suggests that, you know, this long-standing pattern of parents hoping for sons rather than daughters to kind of bring on the family name, you know, that kind of thing, that it's starting to shift, especially in places like China and India. So they're saying, what they say, quote, is that baby boys are increasingly viewed as a burden and girls as a boon. So they're saying daughters are perceived as more nurturing, like, hey, they're going to take care of

you when you're older yes so the son's gonna go out and take care of his uh mother and his wife's mother yeah so you're you're worth it oh totally yeah yeah a hundred percent yes yes yes so that's what they're saying but they're saying in different places like you know china what the problem in china is that they're having is that some are since there's more males than females the males are often unmarried so now the parents are worried that their son's going to be alone so then they have

that to worry about. Oh, interesting. Oh my gosh, that's fascinating. So when you have more girls, they're definitely going to get snapped up by all this again. In China, they had that one child policy for the longest time and now they've said two, but I think that people have been so ingrained with one that it's not happening is what I understand. Also, it's going to take some time. It's going to take some time. It's not like those chickens and eggs. It's a very different kind of egg. I mean, I have three...

three sons and a daughter and the daughter's by far the one in charge. I mean, not even close. She's the only one that got her head on straight. See? And she's going to take care of you. I don't know. She's doing her own thing. She's doing her own thing. Okay. Have you heard of these dolls? They're Labubu dolls. I don't know. Is your daughter into

- No. - This is a new thing for me. - No, I have not heard of this. - Oh, just you wait. Okay, so these are, they're like these toothy monster dolls. They're made by this Beijing company, Pop Mart International. Yes, but they're all the rage because Rihanna carries them like Blackpink's Lisa carries them around and its shares have surged like 180% this year.

But there was an auction. They had this like one of a kind mint green Labubu doll. It fetched top dollar. It was an auction in Beijing. It was human size. It sold for about $150,000. Yes. Human size? Human size. It was a human size Labubu doll. But there were like a ton of stuff, like about 47 other like different collectibles. So they all went for top dollar. Oh no, we got pictures on YouTube. Not good. Not good. See?

go you have to take a look at them i'm sure your kids probably might have them this is a reason to go to youtube the christmas time thing this is a reason to do bloomberg surveillance on youtube to get the labubu dolls i mean you don't get this on radio but on youtube yes your kids will be asking for them no no no no no no we're reaching out to alex's daughter as we speak

- Oh, it's about AI. - Okay, so let's go to AI. So we've been talking like how AI could possibly take away jobs, right? A lot of companies are saying it's not gonna happen, it's gonna give people more time to take on bigger tasks, right? But the New York Times actually points to this one company, excuse me if I mispronounce it, McKinsey, it's a San Francisco startup.

And what they basically want to do is take your job. So they have the goal of automating all jobs, right? We're talking about doctors, lawyers, people who write your software, design buildings, care for your kids, things like that. But they want to just start with computer programming first. So that's their main focus. Are they going to take their jobs? There's only three people working there. No, five people working there. It was started by three guys.

But they have these big people backing them, like people from Stripe. You have Google's chief AI scientists. They're all backing them. But it's an interesting thing because people have been worried about their jobs. Let me get to this last one. Yeah. If time is your last story. You love this one. I need 20 seconds on this. He's like, whatever. Jobs, AI, who cares? Let's get to this important story. Okay, yeah. This one is from Business Insider. This is the important thing, right? We've heard of Hooters, a lot of trouble with their restaurant. Hooters, I'm not sure I've seen. Okay.

America yes I think you've heard of this one so they've been having trouble with the restaurant but who can come to the rescue it might be Hulk Hogan his beer brand is trying to make a bid to kind of save them get the chain growing again I didn't even know he had a beer brand but apparently does real American beer have you have you tried it I haven't the only Hooters I've been to in my life is across the street from the Masters at Augusta National Golf Club that's where people hang at the Hooters I'm telling you

I don't know why it is, but anyway, that's kind of the way it goes. Is this like make Hooters great again? There you go. Is that what this is? All right. Alex Steele and Paul Sweeney were here. Lisa Mateo, thank you so much. We got the newspaper segment in there for you there with Lisa Mateo. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

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