S&P 500 Closes Near Record as Tech Keeps Rallying

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1:32Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies and trends shaping today's complex economy. Plus, global business, finance and tech news as it happens. The Bloomberg Business Week Daily Podcast. with Carol Masser and Tim Stenevek on Bloomberg Radio. Officials urged banks to limit purchases of U.S. government bonds and instructed those with high exposure to pare down their positions. The directive, though, does not apply to China's state holdings of U.S.

2:11treasuries. And this move, Carol, framed around diversifying market risk rather than anything to do with geopolitical maneuvering or a fundamental loss of confidence in U.S. creditworthiness. Yeah, it makes me think about this idea and this argument that the U.S. is increasingly becoming uninvestable. But let's see what Stuart Kaiser has to say about all this. He's head of equity trading strategy over at Citi. He joins us here in studio. Stuart, good to have you here. Welcome back. Thank you. Good to be here. Hey, we were just talking with our Stuart Paul about Kevin Warsh's past support of a new accord between the Treasury and the Fed.

2:40And this has to do with the balance sheet, which sounds like increased cooperation. We know in the past that Kevin Warsh has wanted the Fed to shrink its balance sheet. So we're trying to make sense of what it is. And then we just talked about the Chinese regulators advising their financial institutions to rein in the holding of U.S. government bonds. Are treasuries undergoing a reboot, in your view, on the world stage when it comes to, you know, the United States being kind of a sure thing, if you will, in the financial world? And if so, what are the implications of that? I mean, look, I don't know if there's any real alternative for a lot of these countries to invest their reserves.

3:18Because of the size and the liquidity, right? Like, hands down. And look, there is a risk out there in the long end of the government bond curves, I think, but that's globally. We've seen that happen in UK gilts. We've seen that happen in German bonds. We've seen it happen in Japanese JGB. So I don't think really concerned about the impact of fiscal spending on the long end of the yield curve is unique to the US, nor is it something that's kind of snuck up on people. But it is a risk. And if you look at what has triggered those kind of events in other countries, it's generally been things related to fiscal policy, tax cuts, things of that nature.

3:50So it's something that's on our radar. It's probably been on our radar since about last July when all of those 30-year bonds globally got above 3%. As an equity guy, I'm going to let the bond markets tell me when and if this becomes a risk. But for now - But the equity guys keep a watch on the bond market. We do. But I would say if an equity guy knows when the bond auction is, you're in trouble. But big picture, in this case, I think we have not seen the long end of the curve move significantly. We haven't seen bond volatility increase materially either. So for now, people seem pretty comfortable with things.

4:22Well, speaking of the equity side of things, you were plenty busy last week with the rotation that we saw, the volatility that we saw, the moves down, then the moves up, a week that sort of ended really close to where it started. But a lot happened in between with some big moves lower when it comes to companies like software. What is your view on where to be optimistic right now and where to stay away from? Yeah, I mean, so we're still pretty positive U.S. equity risks in general. We've been pretty bullish on the cyclical parts of the equity market since the beginning of the year. I think if you took a little bit of a step back, though, you'd see that this quote-unquote rotation sort of out of tech and growth and into value and cyclicals actually started back in November.

5:00It's not a new phenomenon. What happened last week is the moves accelerated and it got quite volatile. And I think that impacted the way that folks manage risk. And it's also, to be honest with you, a pretty simple math question, right? If you take the MAG7 plus Broadcom and a few others, you pretty quickly get close to about 50 % of S &P market cap. So when you're selling those stocks, you have to find a home for them. And I think just the absolute size of the moves is really what concerned people last week, rather than a change to the underlying U.S. equity outlook. I mean, U.S. GDP, according to the Fed, is tracking kind of mid-4 % range.

5:35Our economic surprise index is kind of off the chart. Earnings were solid. You're expecting some good tax refunds coming up. So the sort of fundamental underpinnings of the market look pretty good. What you're going through is some indigestion after two years of buying tech and growth stocks. You're now kind of repositioning not whether you want to own U.S. equities, but how. And that process has been a little bumpy, to say the least. Well, we talked, too, about the overperformance or performance of small caps last week. They were up about 2.2 percent, certainly outperforming the large cap indices.

6:08The other thing is, if you look at the equal weight S &P, it is easily outperforming the S &P 500, 5.5 % year-to-date for the equal weight, to just under 2 % for the widely quoted S &P 500. So again, that plays into what you're saying, that we're seeing money go elsewhere. But what's to stop the money going back to big cap tech or those hyperscalers? Because it feels like the last two or three years, everyone's like, no, no, no, time to diversify. And yet, that's where the overperformance has been, or outperformance. I mean, I think back in sort of October and November earnings season, you started to see a little bit of a change in this reaction function.

6:45Meta back then was the key one where they announced this very large CapEx spending program and the stock sold off. Right. And that was probably the first time in the last couple of years where a company had been punished for spending more on AI. And look, lo and behold, this quarter, we saw that repeat with a number of companies. But Meta did well, right, off of their earnings because they're showing the ROI on this AI spend. They are. And that's the key, right? This capex spending is undergoing an audit or some other form of very invasive examination. But Microsoft and Amazon were both kind of punished for more capex spending this quarter.

7:17So I think what you're really seeing is within the tech trade, the shift has moved kind of away from the spenders and to the beneficiaries of that spending. We like power generation and the AI data center build out as a way to express that. And then more broadly, to your point, you're also getting a little bit of a rotation out of growth into these cyclicals. So, again, these things aren't necessarily negative for the market collectively, but they do cause a lot of pain in some positions that people have had in their portfolios for 24 months minimum. Alphabet embarks on a global bond spree to fund record spending, borrowing far and wide to finance unprecedented spending plan on its AI ambitions.

7:51$20 billion, a U.S. dollar bond offering on Monday, more than$15 billion than initially expected. Is this a signal of something? I mean, it's the same thing you're just talking about. You know, it's a signal that they have a lot of spending to do. I think, you know, you might have a lot of money. They do. But, you know, Amazon, though, looks like free, negative free cash flow after their announcement. So I think what folks are doing is you can generally carve out the mag seven and say their balance sheets are so big and strong that they can sustain the spending. They're all double A rated or better.

8:20You take a step, even a slight step down in credit rating to, let's say, an Oracle. That's triple B. Right. And that examination is a little more harsh. So I think what you're seeing from Google, frankly, is, look, they're viewed as the current winner in the AI trade. Now, clearly, those winners are changing quarter to quarter. So I think folks are maybe a little more comfortable with them spending. Because to your point, they have the ROI. They currently have the best AI model. If you can demonstrate an acceptable return on the investment, the markets are OK with this. If it looks like it's going to be ROE destructive, then right now you're getting punished for that a little bit.

8:54And I wouldn't expect that to change as this year goes on. I mean, there's a higher bar right now for what you're going to spend this money on. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

9:07They told us to expect change. They warned us about the transition. But honestly, they forgot the best part. This is the chapter where we finally focus on us. LifeMD delivers expert menopause and midlife care right from your home. From hormone health to holistic wellness, LifeMD helps you feel your best for the best years of your life. LifeMD, it's just getting good. Visit LifeMD.com slash goodlife. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game.

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10:26Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind it.

11:14if anybody is not using AI to make their developers who write software 30 % more productive today with the goal of being 70 % more productive. Yeah, wow. So we are not asking our clients to be the first experiment on it. We say, you can leverage what we did. We are happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology. It's getting people to accept that there's a different way to do things. To listen to the full conversation, visit ibm.com slash smarttalks.

12:13GLP One's our guru, Bloomberg News health reporter Madison Miller joins us here in the studio. I just want to start with the lawsuit because I was pretty surprised last week when we got the news that they were going to do this because I thought there was no more. It wasn't legally allowed by the FDA to compound for companies to compound medicine anymore for well, not any medicine, but GLP One's because there's no longer a shortage. Wasn't that the loophole that these companies were using? Exactly. So it was a big, I mean, kind of a risky bet that HIMSS was taking that the FDA just wouldn't do anything about it.

12:43But that is sort of what we've seen happen the last couple of years since the shortage ended. There's been really very little action from the FDA in terms of cracking down on this proliferation of compounded GLP-1 drugs. And so HIMSS has continued doing it. A lot of other companies have continued doing it. So they're breaking the law by doing it? That is the assumption, yes. But the problem is that the FDA really hasn't said much of anything. So it was kind of up to these companies to interpret the law themselves. So in this gray area, they've continued doing it. And that's part of the problem is that it was a little bit unclear, at least to maybe the general public or to some people like what the FDA was really going to do.

13:22And so they've just continued to do it. Some companies have pulled back like Roe, for example, stopped compounding after the shortages ended and HIMSS has kept doing it. And so far, I mean, until now, there has been really little action either from Novo, from the FDA. And finally, I think both of them said enough is enough. All right. So Novo files this lawsuit. All right. So I guess it's going to play out in the courts or there's going to be negotiating or what? We don't really know. Does the FDA have to come in here and make a ruling to figure out what the real ruler law is? Right. So Novo is suing on the grounds of patent infringement, which is something we haven't seen before.

13:59Novo and Lilly have both filed lawsuits against compounding pharmacies, telehealth companies, med spas that are selling these knockoff versions of the drugs, but they haven't gone after anyone for patent infringement yet. So this is actually the drug semaglutide, which is the active ingredient in both Ozempic and Wegovi. Novo is saying that HIMSS is violating that patent in the United States. So that's a big deal. That's a big escalation. And it sort of shows the more aggressive strategy that Novo is taking because they really are under a lot of pressure right now. Why are they under pressure and Eli Lilly is not as under much pressure, as much pressure?

14:34I mean, Novo. So we're going to talk about some deal news a little later, but. Yeah, Novo. They've had different problems, even though the market, you know, they're the only two players really in this market. Novo has had more difficulty because, one, their drugs are a little bit older, meaning that they do come off of patent outside of the U.S. sooner, whereas Lilly has another decade of patent life on its drugs. Novo also has had more difficulties with these compounders because it did not get a handle on the supply shortage as soon as Lilly did. So both companies' drugs were in short supply.

15:06Novo had more issues, couldn't get a handle on it. Lilly got a handle on it more quickly and was more aggressive, really right off the bat going after these compounders. Whereas Novo sort of, I mean, they're Danish. They're a little bit more, less aggressive, I think, than an American pharmaceutical company, but they've had to change that recently. And then in terms of next generation drugs, their pipeline is not quite as exciting as Lily's. And so that doesn't set them up for the future quite as well. I am shocked that we're already talking about like maybe a move towards generics or their patents coming off.

15:39When did they start? I feel like it was just a few years ago. Right. I mean, that's the thing. So Novo's drug, Ozempic, was approved, I think, in 2017, launched in 2018. And so that's the same drug, technically, as Wagovi. Wagovi is just a higher dose version of that. So that was the thing. It didn't really come onto the scene. People didn't start talking about it until a couple of years ago. But really, the drug's been around for a while. And so the clock has been ticking in that time. Should we talk about the Eli Lilly deal? Yeah, let's do that. So this is not a non-GLP1 deal, which kind of speaks to the idea of these companies diversifying.

16:13The company agreeing to buy the closely held U.S. biotech Orna Therapeutics to up to$2.4 billion in cash. Second deal in as many days as the country looked to expand its pipeline beyond Zetbound. What does this do? I mean, this drop. Was that bound or this deal? No, like it kind of speaks to this idea of going beyond. Yes. Of going beyond this industry. Because I kind of thought they were going to be living off this for a long time. But I guess that's why we're not running a drug company. That's exactly why we're not. Because I had the same reaction as you did. I thought like, okay, they got it.

16:45They're going to tweak it. They're going to make a pill. They're going to just kind of keep going. Well, Lily has learned the hard way that resting on your laurels, which is sort of the problem that Novo is facing right now, doesn't work. I mean, drug companies are always, should always be looking toward the next big thing because patents expire. And that's the problem with the drug industry is you always have to be thinking about the next thing. Lilly is the one that brought Prozac to the market back in the 1990s. That was a massive drug. And for a while, Lilly was in a similar position where it was riding high on the Prozac fortune.

17:16And then after that, they really were so ultra focused on like, we're going to be a company that develops neuropsychiatric drugs. And for psychiatric conditions, whatever, this is what we're going to do. And then they didn't have a second act to follow it up. And so I've talked to the executives at Lilly who have said they're really being purposeful about we have to be thinking outside of just obesity. They're looking at immunology, cancer, genetic medicines. A third of their portfolio is gene therapies now. So they're trying to they're still extremely focused on obesity. And they have they're testing drugs for basically like everything in the obesity landscape, you know, from five percent weight loss to 30 percent weight loss.

17:58They want to have something for everyone, but they're also looking outside of obesity, and that's a really important part of their strategy. Can I ask you something going back to, because Novo's going to come off patent sooner. So should we assume that, so then there'll be all these copycats, that folks that maybe were taking ZepBound or something, like we've talked with you that they're not all the same, that they're just going to run to the generics because they'll be cheaper, or they're not going to be able to medically because things are different. Not every drug is the same. They hypothetically would be able to.

18:30I mean, consulting with their doctor if their doctor is like, yeah, you know, generic semaglutide is fine for you. Sure, that's great. If that's the most affordable option, that's what your insurance covers. But we also have this other side of this industry where there's a huge cash pay component and the drug makers, Novo and Lilly, have both worked with the Trump administration to bring down prices for patients in Medicare and also cash pay prices. And I think it's something like a third of patients in this market in general right now, in the U.S. at least, are cash pay patients. So they're not going through insurance and they're paying these lower discounted prices that the drug makers offer through direct-to-consumer websites.

19:08And so the prices have come down much, much faster than we would normally see in such an ultra-competitive market, usually, that it doesn't happen this way. so patients maybe are already used to paying$200 a month for their ZEP bound and they don't want to switch because that's what works for them even though there's a cheaper option on the market it's sort of a question mark as to what happens next so we're talking about this in the context of the way that Americans have um are looking for uh ways to to lose weight we'd be remiss if we didn't talk about some of the messaging in the Super Bowl last night Mike Tyson ad from um it was like a Maha ad out there talking about how, how processed food kills and he's eating an apple at the end.

19:53And he talks about his own struggle, his sister struggle. Uh, is there any, I mean, I know it's kind of a crazy question, but is there any chance that, that the messaging with that starts to work and it attacks the problem that some argue is, is where it starts, right? This idea that we're not necessarily eating healthy and therefore there won't be as much of a demand for these drugs moving forward? I mean, it would be great. I think like everyone hopes, even Lilia Novo say that they hope that people will eat healthier, move more. Like they say that that's an important part of these drugs too.

20:29But I think it's hard because it does, obesity is a disease. And that's the message that these drug makers are also putting out is that Like this is a thing that for some people eating healthy doesn't fix. And even if you eat, eat healthy, exercise, whatever, for some people that just doesn't, they have a certain genetic makeup or it's whatever, like they can't lose weight or it's really, really difficult for them to lose weight. So I think it's like not an either or situation. Both things should be happening and hopefully both things will help bring down the obesity rates in this country. But I wanted to ask you, cause I feel like when we started talking with you that we, you know, we're like, this is the drug that's going to solve everything.

21:08Can these drug makers get additional indications for the medications that expands their patents or something like, like, does that help? I mean, it helps with getting more insurance companies to cover it. So to pay for it, there are some things like if you have a different formulation for the drug, like those types of things, sometimes pediatric indications will help give you a couple more years on of patent life but at the same time it's like it's always the clock is always ticking it's not going to add much at this point and you have patents at least for semaglutide for zempic and wagovi falling sort of all over the world within the next year and so you will have those generic generics out there in the world even if the u.s patent hasn't expired yet it's kind of only a matter of time before we get there i almost feel sorry like i know what like the r &d that goes into this stuff.

21:58Like you kind of understand that argument, having a brother that used to be in farm, like we should talk about this all the time, but you know, right. And that's what I think they're also like, they've really had a hard time with the compounding because it sort of circumvented that a little bit. You're listening to the Bloomberg Business Week daily podcast. Catch us live weekday afternoons from two to five Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. I want to bring in Joyce Wong, Senior client, portfolio manager at American Century Investments.

22:29The firm has about$315 billion in assets under management. She's back here in our Bloomberg Interactive Brokers studio. We haven't had a chance to speak to you since Kevin Warsh was announced as President Trump's pick to chair the Fed. Perhaps he gets confirmed. Perhaps he does replace Jay Powell. How does that change your outlook for the central bank? It doesn't really change your outlook because we did believe that it probably would have been one of the Kevins. And, you know, the other one was kind of eliminated a few weeks ago. So we did have a strong feeling that it would be Kevin Warsh. And the good thing is, is unlike some of the other candidates, he does have a pretty long public history of his views and things like that.

23:10So if we anticipate that he continues to follow some of those paths with maybe a little bit more of a dovish bias, given President Trump. His history doesn't necessarily align with what he said over the last couple of years. Yes, but I do think that he is a pragmatic banker, right? He has experience on both sides. So I do think that he will understand how the Fed does have a pretty narrow tightrope to walk. So we do believe that with him being confirmed as Fed chair, he is likely to cause yield curve steepening. So we are cautious about being very long in the yield curve. But at the same time, I think the last time I was here, we were talking about being on the short end, given that we do think even with Kevin Warsh being confirmed, there probably won't be as many cuts as people are thinking.

24:02I think what was interesting is we've been talking about this most read story on the Bloomberg about Kevin Warsh and maybe kind of redefining the accord between the Fed and the Treasury. and that has been a little bit unsettling to the bond market. But what's interesting is it would basically involve, you know, the Fed balance sheet and maybe being kind of a buyer when the Treasury needed the Fed to do that. At the same time, Kevin Warsh has been out there. As you say, there's a history where he has looked to reduce the Fed balance sheet. So, like, which is it? How do you read between the tea leaves about really what kind of a Fed share he ultimately will be?