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Speaker 1: Bloomberg Audio Studios. Podcasts Radio News.
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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m.
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Speaker 1: Eastern.
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Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks just about edging higher on the S & P 500 on hopes that earnings can pull chipmakers out of the worst weekly stretch of the year so far. Noah Weisberger of BCA Research writing, stay overweight tech, but go for quality within it. The Q3 test of whether CapEx growth is normalizing. or falling off a cliff. Noah joins us now for more. Noah, good morning.
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Speaker 1: Good morning. Good to be here.
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Speaker 2: It's good to see you. It's been a race to raise capital all year. Is the market starting to push back a bit more?
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Speaker 3: I think you've definitely seen the way the market's trading us. We're down a little bit at the index. There's a tremendous amount of nervousness among the clients we speak to. And I think you're seeing, if I had to argue back against that broader nervousness, I think you're seeing a market that's been pretty beneath the index level, right? So the core weaves, the nebuses, the neoclouds are really getting punished. But I think the quality stocks on a relative basis, you know, the hyperscalers in particular, software names are doing better. And I think that's probably a rational way to trade right here. Do you think that pain remains isolated or spreads? I would bet on right now, we're still betting on that that pain remains isolated. I think as you kind of alluded to in your opening comments, earnings season is right around the corner. I think we'll learn a lot about how companies are seeing their own capital raises and positioning in capital markets.
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Speaker 1: And I think that's pretty important.
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Speaker 4: So do you think that the earnings plus potentially an S1 from Anthropic could be the clearing event that this market needs?
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Speaker 3: I think that's how we're thinking about it. Again, I don't think this is off to the races, buy everything, a high beta move. I think we prefer to focus on large cap stocks. We wouldn't play this through small cap or a full risk on. And I think if we still saw pressure on the less quality parts of the tech complex, that wouldn't bother me either. I really do think this is going to remain a bit of a headwind.
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Speaker 4: I do wonder if the pendulum is switching a bit back to fixed income from stocks. About three months ago, whenever you asked somebody, how do you.
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Speaker 1: Hedge stocks, how do you hedge risk, they say.
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Speaker 4: Buy more stocks, because ultimately that was where the potential growth is.
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Speaker 1: Now, suddenly, you have issuance pressures.
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Speaker 4: That are creating a very different dynamic in the stock market at the same time that the debt market's putting up the walls to a number of lower-rated debt. Does that make you prefer fixed income to equity when it comes to a risk-reward ratio?
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Speaker 1: Adjusted basis?
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Speaker 3: You know, I think the other half of that equation ends up being volatility as well, as you said, risk-reward. And there I think you've seen a lot of uncertainty in the bond market. So we look at maybe not the debt markets, but the rate markets, where the move index has moved higher pretty dramatically. And I think there's a lot of uncertainty about the stance of policy. That also has ramifications for stocks as well. I think that's a valuation question for stocks.
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Speaker 1: I don't know that I would.
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Speaker 3: Abandon stocks risk reward, but an incremental dollar going to a high quality, even a hyperscaler debt name. I think they'll be good on that credit, meaning they could turn the tap off on CapEx if they do have a debt problem. That's money good, I would say, higher up the capital structure. So, I'm a little bit indifferent on where that marginal dollar goes, but I would say equity market volatility at the index level has been pretty well contained. We've seen a lot of volatility in other asset markets.
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Speaker 2: Just to be clear, indifferent about whether it goes to a hyperscale of credit or the treasury market?
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Speaker 1: No, hyperscale of credit. Equity and credit right now?
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Speaker 3: Equity and credit right now, which is a little bit of a change in my own thinking. And part of it is the big sell-off we saw in rates over most of the summer.
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Speaker 2: Can you just describe the backup we have seen in spreads and why you believe now you might be compensated for the risk assumed going into some of those credits?
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Speaker 1: Well, I think.
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Speaker 3: Mostly it has to do with the fact that this is planned CapEx spending. That's a choice that companies are making. So that's why I think higher up the capital structure. I don't think there's a lot of default risk in some of these hyperscaler names. They're massive. The revenues are massive. This is a very different world than 2008 or 2009. This is a demand strength driven tightening in the credit market versus a supply constraint. Like we wouldn't lend at any price world, which we saw, which we all lived through in 2008 in the great financial crisis.
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Speaker 2: Default is extreme, but having a balance sheet that might be more consistent with BBB than AA is the conversation we're having here now.
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Speaker 3: And I think you've seen that in the neoclouds, but not the hyperscalers. I think that would be the distinction I would make. And one of the things that we've looked at very carefully, you're constrained to history, but if you look back at return on invested capital, ROIC for these companies, the market has traded over the last month or two, on a relative basis very much in line. High ROIC companies have done better than low ROIC companies within the tech sector.
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Speaker 1: That's not something I would fade. I would imagine that pattern persists.
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Speaker 4: There is a fear, and this has been cropping up for months now, about circular financing, about the idea that all of the AI players are intertwined, and if one goes down, it's going to really raise a serious risk for the others. There was just in the filing, NVIDIA, AMD, and Broadcom are among the ones who've already promised to buy some of these classy shares from Meta, just to sort of increase the circularity here. I just wonder how you view that. Who's the linchpin is this? Is it anthropic that when we find out what their earnings are, and how much they can overcome the fact that token costs are going down, how much they actually are bringing in revenue to support their CapEx. That could stave off some of these concerns, or is ultimately this deeper?
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Speaker 3: I think that's a great point. And you asked me before if it was a clearing event. I think I don't want to... Being kind of dispassionate and historical, if the IPO struggles, if Anthropic's IPO struggles out of the gate, that's what IPOs do. They're priced well by the bankers. That's not what's going to be interesting to me. I think what's going to be interesting to me is exactly what you highlight, which is how does Anthropic, when they come to market for their quarterly reports, what are they saying about their earnings breadth? Who's buying? What's happening if token prices moderate? What are they seeing on the quantity side of that equation? I think that becomes important. The thing that we'll have to be careful when we read it is, If the total market is rising, but Anthropic OpenAI are competing with open source models, then Anthropic's numbers alone won't be completely dispositive about the state of demand. It'll be one of the end markets. So maybe negative for their margins, but good for the overall picture. That would be the one caveat I would put out there. But yeah, we're going to be looking very carefully. I think if they do not come to market, that would be a pretty negative sign. And then let them come to market and let's see what's in there.
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Speaker 4: Do you get the sense that other companies are able to present return on investment enough to continue the spending cycle to justify some of the token expense that underpins a lot of the AI trade?
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Speaker 1: It's a great question.
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Speaker 3: I think we were probably a little bit more confident a couple of months ago, maybe a couple of quarters ago. And I think we wrote about this at the start of the year. We were seeing the hyperscalers return on equity fall. And the question was, how long would the market give them the rope to reverse that? We knew this is a big build-out phase. The path back on a return on equity is by growing revenues and expanding margins. We've seen some of that, but the market I think is questioning it. The one balancing factor I would say is that valuations have compressed pretty significantly over the last couple of months with earnings still strong. So this is not a toppy market. I think the market's been rightly wants to go to show me phase. And are we growing at... 20% EPS growth for some of these names or 30? I don't think no one believes 50, but 20 is still a pretty good number. And the other thing I would say is, yes, this is a concentrated earnings dollar story, but growth is a little bit more democratically distributed across the market, earnings growth, not earnings dollars.
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Speaker 1: Do you think there is some earnings risk for the chip class? I don't want to say no, but I mean, the revenues are strong and demand remains strong. Consensus says no, overwhelmingly. Then I'll say no, too.
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Speaker 3: But I think we're at a point in time where I think one of the worst things you can say about the market right now is we're in an earnings bubble. If earnings bubbles last a long time, I cut my teeth in the early 2000s where it was the great BRICS and China trade. And we kind of knew that was a bubble in commodity markets, but it lasted a long time. Do we need to see 30 percent, 40 percent, no. But we are at the kinked point in the supply curve, right? The supply curve is vertical. And as demand goes up, that's straight profit to the bottom line for.
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Speaker 1: Some of these companies. Now, confusing time, isn't it? It is. It is a confusing time. It is a confusing time. No, thank you.
00:08:34
Speaker 2: No, I spoke there of BCA research. Stay with us. More Bloomberg surveillance coming up after this. So here's the latest this morning. The market widely expecting the Fed to hold at its meeting on Wednesday as policymakers face some stubborn data. Neil Dutter of Renmac with this to say, assume the market is right. Walsh needs a reasonably good excuse for waiting. He could point to financial conditions. It's hard to argue conditions are restrictive. We anticipate additional rate hikes penciled into the outlook for early next year. Neil joins us now for more.
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Speaker 5: Neil, welcome.
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Speaker 1: Why the skip in a few days time?
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Speaker 5: Well, that's a good question. I mean, they keep I mean, I think the way you could say it is that Warsh said he was going to remove a dose of accommodation. And since the meeting, a dose of accommodation has been removed. We've seen credit spreads widen a little bit. So financial conditions. maybe allow them to catch their breath. The data don't. So, you know, you keep hearing them say, you know, there's no sense of urgency. But I think from a risk management perspective, it probably makes sense to raise rates today. Excuse me, this week. So I think what's likely to happen is, you know, they skip. But that really does cement the odds for December. And if the inflation data continue to remain firm, John, it's unlikely. at least in my opinion, that they can kind of keep on this sort of every other meeting pace.
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Speaker 2: Now, I think it's important to recognize why we are here, why we don't expect a move on Wednesday. And it's not because of the data. It's because of the guidance from the vice chair and the New York Fed president. How aligned do you think those two are with the Fed chair?
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Speaker 1: Well, it depends.
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Speaker 5: I mean, this is Kevin Warsh's Fed. I mean, or, you know, I mean, if it was Jerome Powell's Fed, I would say that it's highly likely that they're speaking for the chair.
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Speaker 1: Right.
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Speaker 5: But we're still trying to figure out Warsh. So I don't know. I mean... If they surprise the market, you know, because obviously the Fed knows a lot more about their own reaction function than the markets do. If they end up hiking, then, you know, that basically means the so-called troika is dead. And, you know, Warsh is really the one that's stringing the committee along, not the other way around.
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Speaker 4: If they don't hike, though, then it raises a question about whether the market should follow the data or whether the market should still follow Fed officials, just maybe not Kevin Warsh, who isn't giving forward guidance.
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Speaker 1: Exactly. Exactly.
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Speaker 5: So, I mean, this is this is this sort of speaks to some of the the flaws in the in his communications approach. I mean, it's sort of this forward guidance for the but not for me. You know, at some point he's going to have to I don't think it's sustainable, by the way. I mean, at some point he's going to have he's going to have to tell us what he thinks about things. But I will say, you know, look, I mean, he has provided a very blunt form of forward guidance, which is the committee will deliver price stability. And, you know, so far he's defining that as 2 percent on PCE inflation. We're still very, very far from that goal. And, you know, I think given the data as it's been coming in, remember, the Fed's been overly optimistic on their inflation views recently. For the better part of the last year, I mean, they've been revising up those estimates at every single meeting, I think, going back to December of last year. So, you know, I think. They've been too optimistic from the jump. And I think as they keep revising those estimates higher, which I think is more likely than not, they're going to have to start penciling in more rate hikes into their baseline policy path.
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Speaker 4: There's a line of argument right now saying that the market's doing the work for the Federal Reserve, that the recent declines that you've seen in equity markets and jitters around the AI build-out will hold back the need for the Fed to act overly quickly.
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Speaker 1: I imagine you disagree.
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Speaker 4: How do you disagree most constructively? given the fact that you have seen a real correction in certain parts of the credit market?
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Speaker 5: Yeah, in certain parts of the credit markets. I mean, you do still need to kind of squint to see that widening in credit spreads. I mean, credit spreads have widened. I wouldn't say they're wide. And equity market prices remain fairly buoyant. You know, I think you define if financial conditions are tightening and I'd expect the outlook for inflation.
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Speaker 1: To improve.
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Speaker 5: I don't think it really has. So that's sort of where I'm at with this.
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Speaker 2: Neil, I remember when the former vice chair, Clowder, used to say things like an ounce of protection is worth a pound of cure. And at the time, they were talking about rate cuts. If you move early in small increments, you won't have to do lots later. Does the same apply to hiking?
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Speaker 5: Absolutely. I mean, you're saying that it's not urgent. Do you want to wait until it is? So I think, you know, I kind of I mean, I think this is something that Claudia Assam said and I and I and I agree with her. It may not be urgent, but it's prudent.
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Speaker 1: Right.
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Speaker 5: I mean, it makes sense to go because it's about the balance of risk to the inflation outlook. It's much easier right now to tell a story for why inflation remains persistently above target, at least through March, than it does for inflation. to just sort of magically improve without additional sort of monetary tightening. So the other thing, of course, is think about this. I mean, we're basically saying they're going to hike in December no matter what, right? So you might as well just do it now.
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Speaker 2: Neil Dutton of Ren Mac. Neil, many people would agree with that sentiment. Stay with us.
00:14:04
Speaker 1: More Bloomberg surveillance coming up after this.
00:14:16
Speaker 2: President Donald Trump warning of economic disaster if the Democrats sweep in the midterm elections, as recent polling showing his average approval rating sinking to 38.5%. Jessica Taylor of the Cook Political Report joins us now for more.
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Speaker 1: Jessica, welcome to the program.
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Speaker 2: In which races are you seeing things change from solid Republican to likely to maybe not at all?
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Speaker 6: She mentioned Mississippi, and this is one that Democrats have been bullish about for a while. But we really have seen closer polls in coming weeks and the fact that National Republicans, the National Republican Super PAC Senate Leadership Fund is spending there. South Carolina is another one. We shifted that race from likely Republican to lean Republican, where you have the appointed Senator Darlene Graham that is underperforming there and has struggled to raise money.
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Speaker 5: She doesn't sort of.
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Speaker 6: Have her brother's fundraising or candidate skills. Democrat Annie Andrews has been raising a ton of money and has been able to outspend them on air. So the Republican cavalry has kind of come in for Graham. But the fact that they are trying to shore up these solid red states just tells you it's a combination, I think, of a drag on Trump and a combination of weak incumbents in both Mississippi and and South Carolina, but it's making headaches for Republicans that are already playing defense in double-digit Trump states like Alaska, Ohio, Iowa, and Texas.
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Speaker 4: And just how significant was the controversy over Vivek Ramaswamy's advertisement in the Ohio governor's race? People were talking about this being damaging. Other Republicans have come out and condemned it. Has it been a bigger issue in the broader election, or are people just making too much of it?
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Speaker 6: I think it is a big issue because it's certainly breaking through everything that we see indications of there in Ohio. I mean, one of Ramaswamy's critical problems was that he comes across as very unlikable and has a popularity and favorability problem. And when you're running an ad like this, it doesn't do much to solidify your own favorabilities. Now, Amy Acton's favorabilities have taken a hit with all of the millions, hundreds of millions of dollars that Vivek between his super PAC and the RGA have spent. But this is another test of can money sort of overcome the headwinds that Republicans are facing this cycle. But I think this is a unique case. And I think that this is going to benefit Acton so much that we shifted our race on our race rating on Friday from toss up to lean Democrat that we now see Acton. Now, this could still be a very close race because it is Ohio, but we see Acton as a slight favorite.
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Speaker 4: Jessica, how much of a takeaway do we get about 2028, given the fact that a lot of the challengers that potentially could upseat some of the incumbent politicians are not leaning into their connection with any kind of figurehead in their party? In other words, people who are Republicans are leaning away from President Trump. People who are Democrats are leaning away from Biden, from pick your political figurehead. Does that give you any kind of inkling about what we can expect in a couple of years?
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Speaker 6: Well, I think that there are some people that I'm watching for 2028 that could be in the mix on the Democratic side, that if they post sort of big wins, we expect Josh Shapiro in Pennsylvania to have a big win. We expect Wes Moore in Maryland, J.B. Pritzker in Illinois. In Kentucky, the Democratic governor there, Andy Beshear, is not on the ticket, but he is head of the Democratic Governors Association. And for the first time since 2010, they have a chance to pick up a majority of governorships. They were decimated after 2010 during the Obama years. He's faced criticism for not investing enough, though, in Latino races, particularly in Texas. So there could be some blowback from that. So there, you know, again, I think someone like Josh Shapiro, if they're able to flip several house seats, you can say, look here, I had coattails.
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Speaker 1: I can help the party.
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Speaker 2: I've heard several prominent Republicans suggest, Jessica, we should ignore the polls, that they're misleading. And I think that resonates with some people when they look at the race in Texas, accepting that there are some candidate quality issues with the likes of Paxton, but looking at Tallarico and just thinking some of this doesn't add up. There must be something wrong with the polling. What do you see, Jessica, in the polling? And what gives you confidence that they're given a decent picture of where things are going?
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Speaker 6: What gives me confidence is that in high quality polling, we have seen trajectories that are pretty similar.
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Speaker 5: In their way.
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Speaker 6: Now, there are certainly fake, we've literally seen fake polling firms out there pop up to try to influence the, you know, Twittersphere and different things, and that's very unfortunate. But from reputable pollsters, and we conducted our own polls last week with a bipartisan Democratic firm and a Republican firm, and it showed us that the race in Texas was very close for the Senate, that Abbott was up in the House, that Republicans or Democrats were winning in Ohio and then in Iowa that Democrat Josh Twerk was up nearly well, while as Democrat Rob Sand was up by 11 points in the governor's race. I think it's more important to look at the trajectory and sort of the trend lines of polling than it is from one specific poll. So as long as those polls sort of stand in line, I have a greater confidence in them, just the more polling that we get. But I do acknowledge that perhaps in these rural areas, particularly like Ohio or Iowa or Kansas, they might be under sampling Republicans.
00:19:26
Speaker 1: Interesting. Jessica, thank you. Jessica Taylor of The Cook Political Report.
00:19:31
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.
Speaker 1: Bloomberg Audio Studios. Podcasts Radio News.
00:00:11
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m.
00:00:27
Speaker 1: Eastern.
00:00:28
Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks just about edging higher on the S & P 500 on hopes that earnings can pull chipmakers out of the worst weekly stretch of the year so far. Noah Weisberger of BCA Research writing, stay overweight tech, but go for quality within it. The Q3 test of whether CapEx growth is normalizing. or falling off a cliff. Noah joins us now for more. Noah, good morning.
00:00:56
Speaker 1: Good morning. Good to be here.
00:00:57
Speaker 2: It's good to see you. It's been a race to raise capital all year. Is the market starting to push back a bit more?
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Speaker 3: I think you've definitely seen the way the market's trading us. We're down a little bit at the index. There's a tremendous amount of nervousness among the clients we speak to. And I think you're seeing, if I had to argue back against that broader nervousness, I think you're seeing a market that's been pretty beneath the index level, right? So the core weaves, the nebuses, the neoclouds are really getting punished. But I think the quality stocks on a relative basis, you know, the hyperscalers in particular, software names are doing better. And I think that's probably a rational way to trade right here. Do you think that pain remains isolated or spreads? I would bet on right now, we're still betting on that that pain remains isolated. I think as you kind of alluded to in your opening comments, earnings season is right around the corner. I think we'll learn a lot about how companies are seeing their own capital raises and positioning in capital markets.
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Speaker 1: And I think that's pretty important.
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Speaker 4: So do you think that the earnings plus potentially an S1 from Anthropic could be the clearing event that this market needs?
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Speaker 3: I think that's how we're thinking about it. Again, I don't think this is off to the races, buy everything, a high beta move. I think we prefer to focus on large cap stocks. We wouldn't play this through small cap or a full risk on. And I think if we still saw pressure on the less quality parts of the tech complex, that wouldn't bother me either. I really do think this is going to remain a bit of a headwind.
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Speaker 4: I do wonder if the pendulum is switching a bit back to fixed income from stocks. About three months ago, whenever you asked somebody, how do you.
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Speaker 1: Hedge stocks, how do you hedge risk, they say.
00:02:29
Speaker 4: Buy more stocks, because ultimately that was where the potential growth is.
00:02:33
Speaker 1: Now, suddenly, you have issuance pressures.
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Speaker 4: That are creating a very different dynamic in the stock market at the same time that the debt market's putting up the walls to a number of lower-rated debt. Does that make you prefer fixed income to equity when it comes to a risk-reward ratio?
00:02:50
Speaker 1: Adjusted basis?
00:02:51
Speaker 3: You know, I think the other half of that equation ends up being volatility as well, as you said, risk-reward. And there I think you've seen a lot of uncertainty in the bond market. So we look at maybe not the debt markets, but the rate markets, where the move index has moved higher pretty dramatically. And I think there's a lot of uncertainty about the stance of policy. That also has ramifications for stocks as well. I think that's a valuation question for stocks.
00:03:13
Speaker 1: I don't know that I would.
00:03:13
Speaker 3: Abandon stocks risk reward, but an incremental dollar going to a high quality, even a hyperscaler debt name. I think they'll be good on that credit, meaning they could turn the tap off on CapEx if they do have a debt problem. That's money good, I would say, higher up the capital structure. So, I'm a little bit indifferent on where that marginal dollar goes, but I would say equity market volatility at the index level has been pretty well contained. We've seen a lot of volatility in other asset markets.
00:03:41
Speaker 2: Just to be clear, indifferent about whether it goes to a hyperscale of credit or the treasury market?
00:03:44
Speaker 1: No, hyperscale of credit. Equity and credit right now?
00:03:47
Speaker 3: Equity and credit right now, which is a little bit of a change in my own thinking. And part of it is the big sell-off we saw in rates over most of the summer.
00:03:55
Speaker 2: Can you just describe the backup we have seen in spreads and why you believe now you might be compensated for the risk assumed going into some of those credits?
00:04:02
Speaker 1: Well, I think.
00:04:03
Speaker 3: Mostly it has to do with the fact that this is planned CapEx spending. That's a choice that companies are making. So that's why I think higher up the capital structure. I don't think there's a lot of default risk in some of these hyperscaler names. They're massive. The revenues are massive. This is a very different world than 2008 or 2009. This is a demand strength driven tightening in the credit market versus a supply constraint. Like we wouldn't lend at any price world, which we saw, which we all lived through in 2008 in the great financial crisis.
00:04:31
Speaker 2: Default is extreme, but having a balance sheet that might be more consistent with BBB than AA is the conversation we're having here now.
00:04:37
Speaker 3: And I think you've seen that in the neoclouds, but not the hyperscalers. I think that would be the distinction I would make. And one of the things that we've looked at very carefully, you're constrained to history, but if you look back at return on invested capital, ROIC for these companies, the market has traded over the last month or two, on a relative basis very much in line. High ROIC companies have done better than low ROIC companies within the tech sector.
00:05:01
Speaker 1: That's not something I would fade. I would imagine that pattern persists.
00:05:04
Speaker 4: There is a fear, and this has been cropping up for months now, about circular financing, about the idea that all of the AI players are intertwined, and if one goes down, it's going to really raise a serious risk for the others. There was just in the filing, NVIDIA, AMD, and Broadcom are among the ones who've already promised to buy some of these classy shares from Meta, just to sort of increase the circularity here. I just wonder how you view that. Who's the linchpin is this? Is it anthropic that when we find out what their earnings are, and how much they can overcome the fact that token costs are going down, how much they actually are bringing in revenue to support their CapEx. That could stave off some of these concerns, or is ultimately this deeper?
00:05:43
Speaker 3: I think that's a great point. And you asked me before if it was a clearing event. I think I don't want to... Being kind of dispassionate and historical, if the IPO struggles, if Anthropic's IPO struggles out of the gate, that's what IPOs do. They're priced well by the bankers. That's not what's going to be interesting to me. I think what's going to be interesting to me is exactly what you highlight, which is how does Anthropic, when they come to market for their quarterly reports, what are they saying about their earnings breadth? Who's buying? What's happening if token prices moderate? What are they seeing on the quantity side of that equation? I think that becomes important. The thing that we'll have to be careful when we read it is, If the total market is rising, but Anthropic OpenAI are competing with open source models, then Anthropic's numbers alone won't be completely dispositive about the state of demand. It'll be one of the end markets. So maybe negative for their margins, but good for the overall picture. That would be the one caveat I would put out there. But yeah, we're going to be looking very carefully. I think if they do not come to market, that would be a pretty negative sign. And then let them come to market and let's see what's in there.
00:06:41
Speaker 4: Do you get the sense that other companies are able to present return on investment enough to continue the spending cycle to justify some of the token expense that underpins a lot of the AI trade?
00:06:53
Speaker 1: It's a great question.
00:06:54
Speaker 3: I think we were probably a little bit more confident a couple of months ago, maybe a couple of quarters ago. And I think we wrote about this at the start of the year. We were seeing the hyperscalers return on equity fall. And the question was, how long would the market give them the rope to reverse that? We knew this is a big build-out phase. The path back on a return on equity is by growing revenues and expanding margins. We've seen some of that, but the market I think is questioning it. The one balancing factor I would say is that valuations have compressed pretty significantly over the last couple of months with earnings still strong. So this is not a toppy market. I think the market's been rightly wants to go to show me phase. And are we growing at... 20% EPS growth for some of these names or 30? I don't think no one believes 50, but 20 is still a pretty good number. And the other thing I would say is, yes, this is a concentrated earnings dollar story, but growth is a little bit more democratically distributed across the market, earnings growth, not earnings dollars.
00:07:49
Speaker 1: Do you think there is some earnings risk for the chip class? I don't want to say no, but I mean, the revenues are strong and demand remains strong. Consensus says no, overwhelmingly. Then I'll say no, too.
00:07:59
Speaker 3: But I think we're at a point in time where I think one of the worst things you can say about the market right now is we're in an earnings bubble. If earnings bubbles last a long time, I cut my teeth in the early 2000s where it was the great BRICS and China trade. And we kind of knew that was a bubble in commodity markets, but it lasted a long time. Do we need to see 30 percent, 40 percent, no. But we are at the kinked point in the supply curve, right? The supply curve is vertical. And as demand goes up, that's straight profit to the bottom line for.
00:08:28
Speaker 1: Some of these companies. Now, confusing time, isn't it? It is. It is a confusing time. It is a confusing time. No, thank you.
00:08:34
Speaker 2: No, I spoke there of BCA research. Stay with us. More Bloomberg surveillance coming up after this. So here's the latest this morning. The market widely expecting the Fed to hold at its meeting on Wednesday as policymakers face some stubborn data. Neil Dutter of Renmac with this to say, assume the market is right. Walsh needs a reasonably good excuse for waiting. He could point to financial conditions. It's hard to argue conditions are restrictive. We anticipate additional rate hikes penciled into the outlook for early next year. Neil joins us now for more.
00:09:13
Speaker 5: Neil, welcome.
00:09:14
Speaker 1: Why the skip in a few days time?
00:09:18
Speaker 5: Well, that's a good question. I mean, they keep I mean, I think the way you could say it is that Warsh said he was going to remove a dose of accommodation. And since the meeting, a dose of accommodation has been removed. We've seen credit spreads widen a little bit. So financial conditions. maybe allow them to catch their breath. The data don't. So, you know, you keep hearing them say, you know, there's no sense of urgency. But I think from a risk management perspective, it probably makes sense to raise rates today. Excuse me, this week. So I think what's likely to happen is, you know, they skip. But that really does cement the odds for December. And if the inflation data continue to remain firm, John, it's unlikely. at least in my opinion, that they can kind of keep on this sort of every other meeting pace.
00:10:06
Speaker 2: Now, I think it's important to recognize why we are here, why we don't expect a move on Wednesday. And it's not because of the data. It's because of the guidance from the vice chair and the New York Fed president. How aligned do you think those two are with the Fed chair?
00:10:21
Speaker 1: Well, it depends.
00:10:22
Speaker 5: I mean, this is Kevin Warsh's Fed. I mean, or, you know, I mean, if it was Jerome Powell's Fed, I would say that it's highly likely that they're speaking for the chair.
00:10:30
Speaker 1: Right.
00:10:32
Speaker 5: But we're still trying to figure out Warsh. So I don't know. I mean... If they surprise the market, you know, because obviously the Fed knows a lot more about their own reaction function than the markets do. If they end up hiking, then, you know, that basically means the so-called troika is dead. And, you know, Warsh is really the one that's stringing the committee along, not the other way around.
00:10:56
Speaker 4: If they don't hike, though, then it raises a question about whether the market should follow the data or whether the market should still follow Fed officials, just maybe not Kevin Warsh, who isn't giving forward guidance.
00:11:06
Speaker 1: Exactly. Exactly.
00:11:07
Speaker 5: So, I mean, this is this is this sort of speaks to some of the the flaws in the in his communications approach. I mean, it's sort of this forward guidance for the but not for me. You know, at some point he's going to have to I don't think it's sustainable, by the way. I mean, at some point he's going to have he's going to have to tell us what he thinks about things. But I will say, you know, look, I mean, he has provided a very blunt form of forward guidance, which is the committee will deliver price stability. And, you know, so far he's defining that as 2 percent on PCE inflation. We're still very, very far from that goal. And, you know, I think given the data as it's been coming in, remember, the Fed's been overly optimistic on their inflation views recently. For the better part of the last year, I mean, they've been revising up those estimates at every single meeting, I think, going back to December of last year. So, you know, I think. They've been too optimistic from the jump. And I think as they keep revising those estimates higher, which I think is more likely than not, they're going to have to start penciling in more rate hikes into their baseline policy path.
00:12:12
Speaker 4: There's a line of argument right now saying that the market's doing the work for the Federal Reserve, that the recent declines that you've seen in equity markets and jitters around the AI build-out will hold back the need for the Fed to act overly quickly.
00:12:27
Speaker 1: I imagine you disagree.
00:12:28
Speaker 4: How do you disagree most constructively? given the fact that you have seen a real correction in certain parts of the credit market?
00:12:37
Speaker 5: Yeah, in certain parts of the credit markets. I mean, you do still need to kind of squint to see that widening in credit spreads. I mean, credit spreads have widened. I wouldn't say they're wide. And equity market prices remain fairly buoyant. You know, I think you define if financial conditions are tightening and I'd expect the outlook for inflation.
00:12:58
Speaker 1: To improve.
00:13:00
Speaker 5: I don't think it really has. So that's sort of where I'm at with this.
00:13:04
Speaker 2: Neil, I remember when the former vice chair, Clowder, used to say things like an ounce of protection is worth a pound of cure. And at the time, they were talking about rate cuts. If you move early in small increments, you won't have to do lots later. Does the same apply to hiking?
00:13:17
Speaker 5: Absolutely. I mean, you're saying that it's not urgent. Do you want to wait until it is? So I think, you know, I kind of I mean, I think this is something that Claudia Assam said and I and I and I agree with her. It may not be urgent, but it's prudent.
00:13:31
Speaker 1: Right.
00:13:31
Speaker 5: I mean, it makes sense to go because it's about the balance of risk to the inflation outlook. It's much easier right now to tell a story for why inflation remains persistently above target, at least through March, than it does for inflation. to just sort of magically improve without additional sort of monetary tightening. So the other thing, of course, is think about this. I mean, we're basically saying they're going to hike in December no matter what, right? So you might as well just do it now.
00:13:59
Speaker 2: Neil Dutton of Ren Mac. Neil, many people would agree with that sentiment. Stay with us.
00:14:04
Speaker 1: More Bloomberg surveillance coming up after this.
00:14:16
Speaker 2: President Donald Trump warning of economic disaster if the Democrats sweep in the midterm elections, as recent polling showing his average approval rating sinking to 38.5%. Jessica Taylor of the Cook Political Report joins us now for more.
00:14:29
Speaker 1: Jessica, welcome to the program.
00:14:30
Speaker 2: In which races are you seeing things change from solid Republican to likely to maybe not at all?
00:14:37
Speaker 6: She mentioned Mississippi, and this is one that Democrats have been bullish about for a while. But we really have seen closer polls in coming weeks and the fact that National Republicans, the National Republican Super PAC Senate Leadership Fund is spending there. South Carolina is another one. We shifted that race from likely Republican to lean Republican, where you have the appointed Senator Darlene Graham that is underperforming there and has struggled to raise money.
00:15:02
Speaker 5: She doesn't sort of.
00:15:02
Speaker 6: Have her brother's fundraising or candidate skills. Democrat Annie Andrews has been raising a ton of money and has been able to outspend them on air. So the Republican cavalry has kind of come in for Graham. But the fact that they are trying to shore up these solid red states just tells you it's a combination, I think, of a drag on Trump and a combination of weak incumbents in both Mississippi and and South Carolina, but it's making headaches for Republicans that are already playing defense in double-digit Trump states like Alaska, Ohio, Iowa, and Texas.
00:15:32
Speaker 4: And just how significant was the controversy over Vivek Ramaswamy's advertisement in the Ohio governor's race? People were talking about this being damaging. Other Republicans have come out and condemned it. Has it been a bigger issue in the broader election, or are people just making too much of it?
00:15:51
Speaker 6: I think it is a big issue because it's certainly breaking through everything that we see indications of there in Ohio. I mean, one of Ramaswamy's critical problems was that he comes across as very unlikable and has a popularity and favorability problem. And when you're running an ad like this, it doesn't do much to solidify your own favorabilities. Now, Amy Acton's favorabilities have taken a hit with all of the millions, hundreds of millions of dollars that Vivek between his super PAC and the RGA have spent. But this is another test of can money sort of overcome the headwinds that Republicans are facing this cycle. But I think this is a unique case. And I think that this is going to benefit Acton so much that we shifted our race on our race rating on Friday from toss up to lean Democrat that we now see Acton. Now, this could still be a very close race because it is Ohio, but we see Acton as a slight favorite.
00:16:44
Speaker 4: Jessica, how much of a takeaway do we get about 2028, given the fact that a lot of the challengers that potentially could upseat some of the incumbent politicians are not leaning into their connection with any kind of figurehead in their party? In other words, people who are Republicans are leaning away from President Trump. People who are Democrats are leaning away from Biden, from pick your political figurehead. Does that give you any kind of inkling about what we can expect in a couple of years?
00:17:16
Speaker 6: Well, I think that there are some people that I'm watching for 2028 that could be in the mix on the Democratic side, that if they post sort of big wins, we expect Josh Shapiro in Pennsylvania to have a big win. We expect Wes Moore in Maryland, J.B. Pritzker in Illinois. In Kentucky, the Democratic governor there, Andy Beshear, is not on the ticket, but he is head of the Democratic Governors Association. And for the first time since 2010, they have a chance to pick up a majority of governorships. They were decimated after 2010 during the Obama years. He's faced criticism for not investing enough, though, in Latino races, particularly in Texas. So there could be some blowback from that. So there, you know, again, I think someone like Josh Shapiro, if they're able to flip several house seats, you can say, look here, I had coattails.
00:18:01
Speaker 1: I can help the party.
00:18:03
Speaker 2: I've heard several prominent Republicans suggest, Jessica, we should ignore the polls, that they're misleading. And I think that resonates with some people when they look at the race in Texas, accepting that there are some candidate quality issues with the likes of Paxton, but looking at Tallarico and just thinking some of this doesn't add up. There must be something wrong with the polling. What do you see, Jessica, in the polling? And what gives you confidence that they're given a decent picture of where things are going?
00:18:27
Speaker 6: What gives me confidence is that in high quality polling, we have seen trajectories that are pretty similar.
00:18:33
Speaker 5: In their way.
00:18:34
Speaker 6: Now, there are certainly fake, we've literally seen fake polling firms out there pop up to try to influence the, you know, Twittersphere and different things, and that's very unfortunate. But from reputable pollsters, and we conducted our own polls last week with a bipartisan Democratic firm and a Republican firm, and it showed us that the race in Texas was very close for the Senate, that Abbott was up in the House, that Republicans or Democrats were winning in Ohio and then in Iowa that Democrat Josh Twerk was up nearly well, while as Democrat Rob Sand was up by 11 points in the governor's race. I think it's more important to look at the trajectory and sort of the trend lines of polling than it is from one specific poll. So as long as those polls sort of stand in line, I have a greater confidence in them, just the more polling that we get. But I do acknowledge that perhaps in these rural areas, particularly like Ohio or Iowa or Kansas, they might be under sampling Republicans.
00:19:26
Speaker 1: Interesting. Jessica, thank you. Jessica Taylor of The Cook Political Report.
00:19:31
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.
