S&P 500 Hits Record High as Dollar Selloff Deepens

0:00They 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.

0:32Bloomberg 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. With more on the currency trade and declines in the U.S. dollar, Bloomberg News FX and rates reporter Carter Johnson is here in the Bloomberg Businessweek studio. The declines that we continue to see in the U.S.

1:12dollars, the flows behind it. What's the story that's telling you? Sure, absolutely. Thanks, Tim. Thanks, Carol. And I think what's really interesting is we can look at this on a pretty long timeline. So I'm starting to hear comparisons late last week, today, yesterday, to this feels like early 2025 and Liberation Day all over again. And that's just because, yes, we're seeing some action in stocks and treasuries, but really this is a real sort of dollar-focused impulse to sell. And of course, on a shorter timeline as well, we can think about that in the context of what we saw last week, which was some pretty concerted movement in dollar-yen specifically.

1:50And that was, as we reported, likely because some folks here in the U.S., the New York Fed acting at the behest of the Treasury, were reported to us to be checking rates and sort of calling into some banks and seeing where exchange rates were trading. So on a couple different levels, sort of in the near term and in the big picture, as you mentioned, Carol, questions about the U.S. fiscal position, policy uncertainty, those are all combining right now. Carter, reading in this morning, Bloomberg reporting out the positioning is heavily one-sided. They said since Thursday, roughly two-thirds of options trades in the euro and the Australian dollar have been bets on further greenback weakness.

2:30So is this largely about dollar decline and not about bets on other currency strength backed by fundamentals? It's a great question. I think the answer, honestly, is both. And a lot of that impulse, as we just talked about, is because of a declining dollar and questions about U.S. policy. But we are seeing relatively solid growth expectations in the rest of the world, whether that's Europe, maybe that's in Asia. And that really underpins the impulse to sell dollars as well. If the rest of the world, if growth in the rest of the world was cratering at the moment, we wouldn't be seeing this sort of action we're seeing in terms of dollar sales.

3:08So it's absolutely the other side of the coin as well. We've got stock investors watching and listening to this program. What is the relationship between weakness in the dollar and what happens in the equity market? I mean, you made the comparison minutes ago to kind of feels like April 2025. And we all remember what happened to the equity markets during that time. Absolutely. And I think that's the big question is, will we see that again? Where typically you'd expect to see the dollar weaker as stocks strengthen. They have a negative correlation, particularly the dollar as a traditionally haven asset.

3:41We didn't see that late last year. The stocks, the dollar, treasuries, they were all falling together. So I think that's the big question right now is, will we see that again? I don't think we are yet. But in sort of a different picture as well, a weaker dollar should theoretically support domestic manufacturers. It should support exporters here in the U.S. That's typically what we'd see on a lag. But we also know that that's something the Trump administration has been vocal about as well. A weaker dollar theoretically, again, doesn't work instantaneously, but theoretically supports domestic manufacturing and exporters.

4:13who are looking to sell to the rest of the world. Hey, one other thing I want to ask you, though, but is it about global investors, and we've talked about flows into European equities, is it another sign, perhaps, that global investors are less interested in dollar-denominated investments? It is possible, although I think it's too early for us to say, at this point, as we knew last year. We don't have that data yet, necessarily. And again, if we look at just the relative performance of U.S. stocks, they're doing all right. They're certainly holding up. I think what it could definitely be indicative of, and this is something we've covered a bit here at Bloomberg in the past, is hedging behavior.

4:52And what that means is you're a global investor invested here in the U.S. You might still want your exposure to U.S. stocks and U.S. tech, but you're going to hedge that dollar component of that much more than maybe you used to. Mention Jay Powell tomorrow, the press conference. What are you watching for from your purchase, somebody who watches FX? Absolutely. I think just as we are in the rates in the Treasury's world as well, any sort of forward guidance that we can get from Chair Powell, that'll be a tall order given the spotlight he's under at the moment. But any sort of future guidance about the outlook for rates this year, that'll be particularly impactful for the dollar as well as rates.

5:32Right. If for any indications that there's higher rates coming, we're talking about that could put some a floor under the dollar, correct? That could definitely help. Yeah. And, you know, it's funny. Yeah. No, for sure. J.P. Morgan, when they came out with their big currency forecast late last year, they're bearish on the dollar. But the big risk to their bearish dollar view is the Fed has to turn around and hike. Again, we might not see that, but that's the risk. Although there is, it feels like, a growing conversation about inflationary concerns, which would certainly lead the Fed possibly, certainly to keep rates as is or possibly hike them.

6:05We'll have to see. Carter, thank you so much for laying out the currency trade for us as we continue to watch the U.S. dollar. He's Bloomberg News FX and rates reporter Carter Johnson. Stay with us. More from Bloomberg Businessweek Daily coming up after this. They 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.

6:47Visit LifeMD.com slash goodlife. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. The group of airline stocks as a whole off about 2 % today. Here to talk about that, we're also going to talk about Boeing, which also reported today is Sheila Kayalu. She is Managing Director in Equity Research at Jeffrey. She joins us here in studio. Nice to have you here. Happy New Year. Thank you for having me. I know January's over, but...

7:22Almost. Let's just start with airlines, and then we want to move into defense, because you cover that really closely as well. It does feel like they're all finding their way back after the storm. We're trying to see if there's another storm. In terms of the impact, is it still a case that they're still trying to assess? How do you, as someone who covers some of these names, kind of factor that in? Yeah, in terms of airlines, we're looking for revenue growth. We've seen the same trend across American that we saw at United and Delta. Corporate was up 12%. Corporate momentum continues. I'm taking a very long flight this weekend.

7:53And then main cabin weakness, but it's getting a little bit better. And it's all about cost control. That's why I think United went up the most on earnings, is they really beat out on costs when American Airlines margins came in 100 bps below our estimate. So I think the most polarizing stock is going to be Southwest. I'm really excited for their report on Thursday because they have some lofty targets. The stock's at$40 today. Some people think it's going to$30. Some people think it's going to$80. It's all about they're adding extra legroom seats. And is the strategy going to work? But that's a huge shift for Southwest.

8:26I mean, they're essentially moving away from their DNA, what they're known for and the culture that they're known for. And that's alienated some people already. Yeah, it depends. So the average Southwest fare is about$109. So if you add an option for extra lug room or refundable or seating, if you add$50 to that cost of that airfare, so$159, it's a 50 % increase almost. Does the passenger back away? I'm not sure. But then again, it's only$159. So how do we think about that? And what adoption do we assume? We're at about 5 % adoption in 26. They have a bunch of other benefits as well, baggage fees and cost optimization.

9:07So that's driving their EPS to$3, essentially EBIT tripling off of a very low 25 base. So we'll see how much of that they get. You know, some people think they could get to$4 or even$5 as more of that extra legroom adoption comes in. But it's their first go at it, and we'll see how it takes off. You have a$45 price target. So you're not at the$80, and you're not at the$30. So maybe a little bit higher from where we are? You know, I would prefer United, where they've, if you think about United, they're going to be accounting for 44 % of the new premium seats through 2028. So they're going to be accounting for more than any other airline in the U.S., Americans after that and Southwest because of their extra legroom.

9:51I prefer to bet on that corporate customer paying$1 ,000 plus$100 to achieve that additional corporate fare and that higher margin where United is adding its seats than Southwest adding on that. You know, I think both are given the multiples that they're currently trading at. United is more appealing to me. Let's talk some defense and then we'll talk some Boeing, too. I want to look at shares of RTX. They're higher right now by about 3.4 percent. profit-topped Wall Street estimates, a sign of momentum that the company awaits a potentially huge jump in U.S. military spending. That's kind of where I want to start.

10:28What we've heard from President Trump in the last few weeks, not just with the idea of a$1.5 trillion defense package, but also calling on some of these companies to do a better job, pay their executives less, and also build stuff for the U.S. government more quickly. What are these CEOs to do? There's a lot going on in defense. And that's why I was saying it's an exciting sector to cover because this is the first time that the five primes might no longer exist as five primes by the end of the Trump administration, which is our view. We think that there's going to be, similar to what LHX announced 10 days ago, there's going to be more deconsolidation happening among the primes.

11:04Their budget is going up by$500 billion from a trillion dollars. We don't know the time period of that spending. We don't know how much will be added to actual equipment and R &D versus military operations. But they're seeing an increase, whether it's to fund defense tech names like Firefly, Voyager, the recent IPOs we've seen in the space or the traditional primes. Or suppliers like Aero Environment, Kratos are up 100 % on the year already and we're 27 days in. So it's really interesting to see what happens in defense, but there's a lot of shakeups that I think are going to play out. So it's about seeing who has the best positioned portfolio and who to play from here.

11:41I was surprised. I know when you walked in, we started talking. And I mean, aerospace defense, just the S &P broad index up about 9 % year to date, up about 46 % last year. Is it just because defense spending all around the globe is just happening and everybody's amping it up? Yeah, it's tremendous growth. Internationally, 20 % plus NATO budgets, Japan, Korea. We're seeing countries like Serbia put in orders that never used to put in billion-dollar orders for equipment to companies like Elbit in Israel. coupled with the defense budget going from a trillion to 1.5 trillion makes defense very interesting.

12:17And the administration has been very supportive of defense tech, emerging technology companies, companies that had stagnant revenues for the last decade are seeing 30, 40 % growth. But, you know, as Tim mentioned, you know, when the president talks about an industry, it can be good or bad. So is it good that they're on his radar? But when he's No, he says only make the CEO's$5 million. We're not talking about CEOs. He did back off of the, he didn't quantify in the executive order the pay. But he mentioned it in the social post earlier. He mentioned it, yes. It's a headline that caught our attention.

12:48And$5 million, it sounds like a lot of money, but not for a CEO who's paid over$20 million. Right, the executive pay, the average executive pay, I would assume in any sector is over$20 million. So the caliber of folks you would get into defense would be the opposite of what the administration's trying to achieve. So what do you hear from defense companies about getting some attention like that from the president? Do they kind of brush it off a little bit, like we're talking with them? I think one interesting trend we've seen from the reports, whether it was Northrop or Raytheon today, is the lack of buybacks, because that's what the administration asked for, a focus on additional CapEx.

13:23Raytheon mentioned that. Northrop mentioned that. Boeing mentioned that. So across the board, everyone's like, sure, we're investing. We're going to get you supplies on time. That's our job. and it helps funnel the growth. The Northrop CEO saying, Northrop is balancing the need for performance with affordability and speed to market to meet the US Defense Department's focus on speedy development. Yes, and I think Kathy Ward and the CEO of Northrop said this was the best spending environment she's ever seen in her career. So most of these executives are very bullish. Do the upstarts in defense tech pose a threat to the incumbents?

13:54And I'm thinking of an Anduril that is not yet, and I say not yet because obviously this company, I'm guessing we'll IPO at some point soon. Do they compete with these incumbents? Yes, clearly they're competing and they're collaborating. They're working together both internationally and domestically. The primes are trying to work with, you know, Northrop has a partnership with Kratos on CCA. It's an autonomous vehicle, essentially. So we're seeing a lot more collaboration, but they're also trying to take share. But the budget is growing overall, and that's the bottom line. Although we're not really seeing it in 26, Northrop's guidance is 5 % growth.

14:30They talk about an acceleration from there in 27, 28. Same thing with Raytheon. It was modest growth in defense. It didn't really pop. Yes, it grew in the second half versus the first half, and we'll see how those trends continue. I feel like with all of the geopolitical tensions and the wars that we've seen around the world that everybody comes back to the U.S. military might and the defense companies here in the United States. What is the global picture? Where's the competition? Is there not much global competition, Sheila, when it comes to the U.S. defense companies? So I think it's focused on maybe a few things.

15:02First is missiles and munitions, readiness. We need to have that available, and that's why we're seeing companies like Lockheed increase PAC-3 production from 600 missiles a year. What's PAC-3 production? It's a missile. PAC-3 is the name of the missile. Going from 600 units a year to 2 ,000. That is significant to say the least. That's$8 billion of additional revenues to Lockheed over seven years if they could ramp to those levels. The backlog's 20 years for a missile like that. We're seeing that across the board. LHX 10 days ago or two weeks ago now announced that they are seeing a government investment within their solid rocket motor business that powers missiles.

15:44They're gonna open up 60 factories next year. LHX currently has 250 factories. So that's the magnitude of investment we're seeing from the government. So focus on missiles and munitions. And second, I think it goes back to old school warfare. Everybody thinks helicopters are over and F-35 is a bad program. But if we think about Venezuela, if we think about Iran, what's the kind of equipment we're using? So, you know, it's not necessarily rebuilding an entire fleet for the Navy, but it's doing things that we could use pretty quickly. Just in the last 90 seconds, I want to hit Boeing with you. Shares are down today by about 1.8%.

16:20The company did report this morning a second straight quarter of generating cash, 57 % bump in sales during the final three months of the year. Shares down, though. Is it because of accounting charges for the KC46 tanker program? Is that it? No. Everybody just assumes that's going to happen every quarter. So we're all good there. Why are shares down after a quarter that looks pretty good? So the shares opened down. The call at 1030 got it up. Right. It reversed about four points, and then they're down again. We're a believer in Boeing. Their free cash flow was a loss of$2 billion in 2025. They're talking about positive$2 billion at the midpoint in 26.

16:56Normalized for one-time items, they're saying their free cash flow is high single digits, so say$8 billion. They're reaffirming their$10 billion target. And then they're saying they could go above that. So, you know,$10,$15, it's giving long only as a reason not to dismiss the stock. If this company could actually earn$10 billion of free cash flow, then it's quite compelling at its current valuation. So we're seeing a lot of fluctuations. Are they talking back 27, 28? No, I think that you're going to see 2 billion in 26 and an improvement in 27 and 28. So Boeing, let me just say, you've got a 290 price target.

17:30It's at 244. You feel good about that? Yes. Do you want to raise it? We are supportive of Boeing. We think there's a few positive catalysts. I think President Trump might be headed to China in April. We'll see if Boeing heads there. We haven't seen a China order since, I can't even recall, maybe it was 2019, maybe earlier. So I think Boeing works from here, you know, depressed prices for maxes, maybe 50 % below what they historically sell at today. This was fun. Come back soon. All right. Sheila Kayalu, she's managing director in equity research at Jeffries, joining us here in studio. This is the Bloomberg Business Week Daily Podcast.

18:08Listen live each weekday starting at 2 p.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. We do head back to the White House and Bloomberg News senior reporter Jen Delowy. Jen, good to have you here with us. We know President Trump on his way. I don't think he's landed yet, but we know there is a crowd in Iowa waiting for him. He did say en route to Iowa, talking to reporters, he's meeting in terms of Tom Homan, the border czar. He said he's meeting with the governor in Minnesota.

18:50He's meeting with the mayor, I think, later. And I hear that's all going very well. What are we hearing? Is it all going so well? You know, early reports out, you know, we don't have a great deal of intelligence out of those early meetings. But what we can what we are seeing, of course, is this effort by the president, it appears, to dial down the temperature to do really two things, to express support for Homeland Security Secretary Noem. And at the same time, who's obviously been criticized for her handling of these incidents and her characterization of them. And then at the same time, also try to find a way forward with local leaders.

19:29You know, the president repeated that comment to us several times before he headed out to Iowa, you know, saying that he believes the conversations with the governor of Minnesota are going very nicely. And of course, he was previewing that later conversation today with Mayor Jacob Frey. You know, I was surprised to hear just based on the reporting that we've seen in the last 24 hours that Tom Homan was headed to Minneapolis. Some of the reporting from other outlets indicated that Kristi Noem had been sidelined in some way. She was at a meeting at the White House yesterday. It reportedly went a couple of hours, according to other outlets.

20:08How are you reading into that reporting? Has she been sidelined? The president earlier expressing his support for her, saying she will not she she will stay on at the agency. How are you reading into that? You know, it's important to appreciate that departures aren't always telegraphed well in advance. But for now, the president is very clearly, you know, insisting that she has to support that meeting first reported by The New York Times last night and stretching over two hours included her top aide, Corey Lewandowski. you know, the first campaign manager from Trump's 2016 presidential bid. And also, and it's notable that they came out of that meeting with the president's messaging today about not backing down from her.

20:53And in fact, when asked about Noam's performance, he immediately pivoted to talk about, you know, how she's done a great job on the border, traditional deportation, you know, focused comments from the president there. Notably today on the way to Iowa, on the plane on Air Force One, Trump is joined by his senior advisor, Stephen Miller, who had also drawn a lot of criticism, just like Noam for his initial characterizations of the shooting over the weekend. Stephen Miller had intimated on social media that the man shot on Saturday was an assassin and domestic terrorist, even though video evidence suggests he had been disarmed and hadn't brandished a weapon.

21:33Hey, you know, Jen, in terms of I was going to ask you about who's the architect of all of this, and I think there's been a lot of reporting, but does it really matter because the buck really stops with the president, to be fair? You know, the president, this president in particular, takes ownership of his policies and has been quite happy to tout his deportation agenda. You know, it's something he campaigned on. so vigorously. And in office has really claimed as a source of pride that he's accomplishing his goal of deporting illegal immigrants. What is, of course— And not the only president to do it, right?

22:12We can go back to the Obama administration, to be fair, because I think it's important to kind of point that out. But, you know, Stephen Miller is seen internally as, of course, a big, big factor in this push. Obviously, someone who's been critical of the, you know, amount of immigration and illegal immigration into the U.S. But to your point, you know, Trump has taken ownership of this. This is as much his issue as it is that of a key ally and aid. And it's one where he's we've heard him talk very openly about being frustrated with the messaging on this. Last week, he lamented that, you know, the focus hadn't been on the, you know, the rapists and murderers, as he characterized them, that were being deported.

22:55He even, you know, took to the White House briefing room last week to show pictures of some of the deportees. So that, you know, kind of speaks to his frustration that the messaging has shifted away from where he wants it to be. And of course, you know, that he's lost some control over the narrative here. Polls show that even among folks who care, who support his broader immigration crackdown, there's support is waning for the overall effort in the wake of these two deaths. So then where does where do deportations go from here? If Minneapolis, Minneapolis's mayor, Jacob Fry and the governor, Tim Walsh of Minnesota, are successful in deescalating this, does that provide some sort of roadmap to other governors to then go ahead and say, hey, your federal agents are not welcome here?

23:43You are going to have to find a different way to accomplish what you want to when it comes to deportations. You know, it'll be interesting to see how this gets resolved. I think that will be key to the extent to which it is a roadmap for other countries, other states. You know, clearly the governor and mayor have been very forceful in their eagerness to see these folks leave their area. At the same time, you know, Waltz has in the last day indicated he wants to turn down the temperature. We're going to want to watch what happens with Tom Homan, the borders are that Trump dispatched to Minnesota.

24:18You know, he has focused much more on traditional deportation efforts rather than kind of this broader dragnet or, you know, these broader operations that Kristi Noman has favored. And so, you know, if we see that kind of refocusing back on more conventional deportation efforts, that could be a de-escalation and a roadmap for other states and cities concerned about immigration enforcement in their backyards. All right. Super appreciate it, Jen. Thank you so much. Bloomberg News senior reporter Jen Delowy joining us there. Stay with us. More from Bloomberg Businessweek Daily coming up after this.