The Fed Hikes Rates

0:00If you invest, lead a business, or allocate capital, one-sided views aren't enough. Join me, Brad Rogoff, the Global Head of Research at Barclays, on the Flipside podcast. Each month, I go head-to-head with one of our expert analysts on my global team to debate the economic and market issues that matter most. From inflation and AI to equity and credit trends, each debate helps you see what headlines might miss. Find the Flipside wherever you get your podcasts. for big business ai opened up a world of promise but that world of promise turned into a world of pain cost spiraling data trapped security and governance risks multiplying and roi out of reach that's why enterprises turned to boomi to connect data apps and ai helping them operate securely efficiently and at scale boomi turns a world of ai pain into a world of ai gain as boomi says We got you.

0:56Head to Boomi.com. That's B-O-O-M-I dot com.

1:25of what's yours. The Chase Mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank, NA. Member FDIC. Copyright 2026. JPMorgan Chase and Company.

1:41Bloomberg Audio Studios. Podcasts. Radio. News.

1:50This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. The swirl, folks, is from another time and place. And for all of us with gray hair, including Julian Emanuel, Evercore ISI with us, I got eight ways to go to start this off, and I'm going to start with ECB raising rates, this country, the Damien Sassauer world raising rates, the United States of America raising rates, and London just said no. The city just said no. The Bank of England just said no.

2:30The dynamics now hearken to tensions of long ago. Should equity investors be worried about these new tensions? Well, look, the data tells a story. You know, when global central banks are hiking, you know, stocks have a more difficult time. The bull doesn't die and we don't think it dies now. But the road ahead is bumpy. And look, we've had convergence, divergence around central bank trajectories for a very long time now. And it's more rare that like a Japan and the U.S. would be on the same trajectory. It's a different Thursday morning for the big banks of America. It is. It is. And if you actually look at it, you know, the big banks outperformed massively until several weeks ago and have been correcting.

3:26Because, frankly, when you look at trading volumes, they've been off. But again, you know, when we think about where the Fed is taking us, as as we heard at the top of the hour, credibility has been restored and you cut off the concept of six or seven percent on a 10 year yield, which clients had been discussing with us over the last. How did that happen? Why is that the case? It just, you know, fear that they wouldn't, you know, really address the concept of the 2 % inflation target. And we're here and we're and he's serious. So, again, we've got the market futures, equity futures trading up this morning.

4:11Is that a reflection of, OK, we have a little bit more confidence in this Fed, do you think? Yeah, absolutely. So again, for us, the most important feed-through for the last number of months has been the 10-year yield. Oil pressuring the 10-year yield, 10-year yield pressuring the ability for hyperscalers to issue debt. You've sort of got the release valve here. That's why stocks are doing better. That's why long-end yields are lower. Right. Looking at Brent, Tom, sitting right at$100 a barrel. It's come back. This is very important, folks. I think this is my two cents, folks, worth not even one cent, is that a lot of the move this morning is with the oil pullback.

4:54And that's the Saudi news on the pipeline. Yeah, yeah. You know, it's a jumble. Like I said, it's a swirl. OK, thanks for emailing in. Barack Hurwitz, Michael Chu and Stephen Vandozzi email in and say, start the interview on the acclaimed Julian Emanuel earnings report that those three guys do all the work on. Are we going to have a redux of the last earnings season, Owise One? No, we're not going to, because think about it. We're in the 40s, maybe close to 50 percent year on year growth last quarter. So that was. I'm sorry. Split the difference. 18 percent. So big, you know, look, it's going to be another amazing quarter.

5:34But that was peak rate of growth and peak surprise. And that's one of the reasons the market has been as choppy as it's been for the last month or so, is because investors are digesting the concept that you've reached peak, but they're transitioning to the message that even if that was peak, we're still at a fantastic earnings-driven growth trajectory into 2027. So can equity markets perform here if your 2027 outlook is a more pedestrian, low double-digit kind of earnings that is still, by historical standards, excellent, but relative to what we've seen this year, difficult. Can the market perform in that kind of outlook?

6:17Yes. And the reason is because we have been discounting this for months now. Okay. So in my time of being a strategist, we have never had a year like this year where we've taken our earnings numbers up as aggressively as we have, lagging the brilliance of this trajectory, but haven't changed our price target. The compression has happened. I want to get simple here. After the festivities yesterday, you're not selling shares into the market opening and you're considering acquiring shares out to 2027. So, yeah, no, we don't think, you know, long term, the bull is intact here. OK, the volatility that we saw yesterday, the upside volatility that we're seeing today is is par for the course in September with a new Fed chair with the start of a hiking regime and oil that's still one hundred dollars and midterms in two months.

7:17Yeah, less than two months. Julian, thank you so much. Julian Emanuel. That's you sure to visit here this morning. Evercore ISI. Stay with us. More from Bloomberg Surveillance coming up after this.

7:53Each debate helps you see what headlines might miss. Find the flip side wherever you get your podcasts. For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Cost spiraling, data scattered across disconnected systems, security and governance increasingly complex, AI initiatives struggling to scale, and ROI that remains frustratingly out of reach. The challenge isn't AI itself, it's having the infrastructure AI needs to succeed, which is right where Boomi says we got you. Tens of thousands of enterprises trust Boomi to connect data, applications, processes, and AI.

8:34With Boomi, businesses can eliminate silos, automate workflows, strengthen governance, and create the foundation AI needs to perform at scale. The result? Faster innovation, more efficiency, better business outcomes. Boomi turns a world of AI pain into a world of AI gain. As Boomi says, we got you. Head to boomi.com to learn more. That's B-O-O-M-I dot com. This is the Bloomberg Market Minute brought to you by Comcast Business. The markets faced plenty of challenges this year. Rising energy costs, higher interest rates, pushback to massive artificial intelligence spending. But through it all, stocks keep breaking records.

9:14And some analysts think they still can with a focus on the fundamentals. Nadia Lovell is head of global equity strategy at UBS. Earnings has been good and continues to be good. And while, you know, we might be past the peak in earnings growth, we're not past the peak in earnings level. But others like Miller-Tabak strategist Matt Maley say those challenges could eventually lead to a downturn. Whenever we see a significant rise in bond yields like we have, and a significant rise in oil prices like we have, the stock market always, or pretty much always, ignores it for a while. And Wall Street may be starting to take notice.

9:48A recent Citigroup index shows more analysts cut rather than raise their earnings forecasts for corporate America for the first time in more than five months. That was the Bloomberg Market Minute, brought to you by Comcast Business. One partner powering 90 % of the Fortune 500 and millions of small businesses. When you add it all up, no one does business like Comcast Business.

10:17You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. We need to get a brief and we get it from the trenches of what retail's doing. I mean, Colin Martin joins us right now. This on fixed income is, well, I saw, as Ben Bernanke would call it, hockey stick moves yesterday, two-thirds of the way into the press conference. Brammer and I disagreed on the why of that. But the fact is we saw price down yield up. Does it sustain? I don't know if it necessarily does sustain.

10:57Maybe not in a significant move. I think there is more upside risk than downside risk with long-term treasury yields. But I think we look at the 10 year last year or yesterday, rather, we saw it move down, I think, based on the Fed that the idea that the Fed hiked, you know, the credibility idea. And I think that was the right move. The Fed hiking rates to keep inflation expectations at bay and and to boost the credibility. I don't think they had lost credibility, but the risk was rising. But then we saw yields pick up as the press conference went on. I think due to Kevin Warsh's outlook on the economy, and he talked about the factors driving up long-term yields, they're still very much present.

11:34And a Fed rate hike or two or three won't fix that. The economy is strengthening, as Warsh mentioned. He talked about the potential crowding out from corporate bond issuance. So all those factors are still here. So we think that a Fed hike or maybe one or two more, maybe that puts a lid on long-term yields. But it's going to be difficult to see yields move significantly lower from here. So, I mean, it feels like this is kind of the new normal for yields. Again, 10-year, around 5%. For an economy that has nominal growth of 6%, 6-plus percent, is that kind of a reasonable interest rate environment for that type of economic growth?

12:17Yeah, I think it's very reasonable. We get all these headlines about the rise up in yields. And I worry for our clients at Schwab, a lot of times the headlines are kind of nefarious. Uh-oh, what's wrong? I don't think anything's wrong. And if we go back to the August 19th announcement from Treasury Secretary Besant about the upsized liquidity buybacks, I don't think this is an issue that needs to be fixed. It's indicative of a strong economy, strong nominal growth. And when you are seeing a growing economy and a Fed at neutral or below neutral, it sounds like you should see a positively sloped yield curve.

12:51So, yeah, I think five percent seems pretty reasonable. Colin Martin with us on the redo of the bond market, chief fixed income strategist, Charles Schwab. John Reiting published this moments ago from Breen Capital with all of his heritage with the Bank of England and with the Federal Reserve System, one of the very rare people that's worked for both institutions. And he calls yesterday's press conference impressive, makes very clear that this is a war, so it's figuring out how to do it. And all around much improved and impressive performance. With that is the bond rationalization that price is down, but I'm gathering a coupon.

13:28Was that upset yesterday? I don't think so. On the first point, I think that it was a better press conference that we finally have a pretty clear view of how Warsh is thinking. He thinks the economy is OK, and he made it clear that that monetary policy was accommodative. In terms of bond expectations and what investors should think, you're right, Tom, in that the more coupon you get, that serves as a cushion. So if you're getting 5 % on a 10-year treasury, now not that we're suggesting everyone go buy 10-year just yet. We actually suggest a below benchmark average duration. But a 5 % coupon can really help cushion the blow if yields do rise.

14:08And that's what we're highlighting here. There's probably going to be some volatility going forward. There's ups and downs. You have to take that when you invest in the bond market, specifically longer-term bonds. But we're at a point now where the income earned can do a lot of the heavy lifting for your portfolio, can help drive total returns, and can help cushion that blow if yields do drift a little bit higher. Is that what you're hearing from the Schwab clients? Are they saying, I didn't know I could get 5 % on a U.S. government bond. I haven't seen that in more than a decade. I mean, are you starting to get the inflow of calls to your advisor saying, maybe I should be buying some bonds here?

14:43We're getting closer, and it's funny. I mean, 5 % really is that psychological barrier. And we're starting to get that. We're hearing from our wealth advisors at Schwab. Hey, is now the time, which is good. We want our clients engaged and interested. What we find more, though, is you hear the idea of a potential, not even a potential, the Fed hiked rates with the potential for more. That can be good for things like money market funds. So we know a lot of investors, whether it's at Schwab or elsewhere, sitting and waiting, saying, well, if the Fed's going to hike rates, why not wait in cash? and we tell them, well, you can get 100 basis points or more if you go just a little bit further out.

15:20So why wait for the Fed to hike? Because we don't really know how much they'll end up hiking when all said and done. The blue button, the Detroit Lions blue button. I can press that. Colin, you know, this is the joy of surveillance, folks. We just had John Wright, he constructed David Rosenberg up in Toronto, published 30 seconds ago. And he is absolutely blistering on the press conference. He says a truly head-scratching Warsh press conference. And he notes, as I do, Paul, what broke the price was Saudi and oil. When we went from 109, 107. Where are we now on Brent, Paul? Brent, 102, 103? 102.

15:56We're down$7 on Brent crude. I'm sorry. I think that's got a lot to do with the tone. The future's up 64. I want you to talk about Schwab clients. They're going to get their statement, and it's priced down in fixed income. My guess is they won't panic. But how many months can that go on before your phone line is burning up? No, it is a challenge. I mean, just yesterday, you know, we do a lot of client events. And one of the submitted questions was, I look at my account, I see the value of my bonds going down daily. And so a lot of it's education and messaging. And that's why we like to have those conversations and explain the why and explain that.

16:32Listen, there is a secondary market for bonds. If you hold to maturity, you're going to get that stated yield. And not that we can undo those declines that you saw. But focus on that yield. I got to ask a Paul Sweeney question because I've run out of ideas. So do you go to credit? Do you go to full faith? Do you go to high yield? What Sweeney flavor of bonds do you recommend? Well, I'll say all the above. Oh, come on. It's a Lizanne Saunders answer. We have a favorable outlook on credit, both investment grade and high yield. I got to go to Barr here because the Orioles won. Did you see when we came in?

17:08Yep. Orioles seven, Mets one. It's on the top of the top news page worldwide. Why is that for Bloomberg News? I don't know. I have no idea why that is. I just want to say this. I can't believe I'm saying it. I think, John, the first Tito's and Tang here this morning was great. Single best chart yesterday, Kevin Gordon. In the entire zeitgeist. And all sorts of, when I retweeted it out, all sorts of fancy people picked it up. The Fed story is the economy is going to be fine. Okay. And Kevin had the clearest presentation of that yesterday of anybody. It was like, are you in speaking terms with him?

17:48No, of course. I was going to say, shout out Schwab Center for Financial Research. What was that chart, though? I don't know if I. It was a chart of like how many Fed gurus are guessing the economy will be fine. And the answer is it's now better than it was in 2021 with stimulus. Yep. I can't believe I'm saying it. Don't let Kevin. I know he's not listening. He never listens, but that's fine. Colin Martin, thank you so much. Greatly appreciate it. Chief Fixed Income Strategist, Charles Schwab. Stay with us. More from Bloomberg Surveillance coming up after this.

18:36business app or watch us live on YouTube. Finally in with a Savita Subramanian Bank of America Securities fabulous quantitative study wrapped around equity strategies. She'll carry all. There's like 47 people in her group. I know. I know. What do you do with all those people there? Do you just go to lunch and Zoom meetings? No, I mean, we're all cranking. I mean, And we're doing things faster now with AI. You're doing very AI. Yeah. So you've been, let's make this clear, you've been cautious. Yes. But you've been in the market participating, right? Yeah, absolutely. I think there's parts of the S &P that look amazing.

19:18Can you readjust the MAG-7 now after the Fed meeting yesterday, the hyperscaler debt where you've got Mark Cabana working for it? That's a good start. No, he doesn't work for it. I work for him, I think. Can you say tech is still a place to be? Look, I think tech has gotten really interesting, and we've seen a massive rotation. So we have this thesis that, you know, the hyperscalers were going to derate and price in the fact that they're getting a little bit more levered. They're getting more capital intensive. They're less asset light, and they spend less on R &D and buybacks and more on physical capex, which is generally a reason to expect multiple compression.

19:59And we got that. We also got a big earnings surprise. So I think what we've seen this year is sort of what we were expecting, but better returns than what we were expecting at the beginning of the year. What I worry about from here, less so maybe for tech, maybe semis, I think they're talking about this, is just margin compression next year. And what's interesting is, again, when you look at trends in earnings forecasts, we're seeing margin expansion expectations for 2027. And I've worried about margins before, and I've been wrong. Companies have been able to maintain them. But I think now what we're in is this environment where you want to build, you want to build, and there's a shortage of products.

20:47There's complicated structures. You need this whole supply chain. Things are unavailable. Some things are getting more expensive. of like that to me is margins. That's where the risk is. This market, the performance we've seen this year and maybe for a little bit longer has been really driven by incredible earnings growth. Yes. I mean, just amazing. Strong earnings. So being a former analyst myself, if nothing else, the comps have to be tougher in 2027. How does the market adjust to that, do you think? So that's the question is, is a big earnings slowdown going to drive negative returns or just kind of meh returns.

21:22And our view is, you know, the earnings slowdown itself is almost inevitable. You can't beat 50 % growth or 35 % or whatever we're tracking. But if you think about next year, the slowdown that we're forecasting is from, you know, 30 to 15. And 15 is still a pretty healthy growth rate. So I think that's the question is, where do you see the biggest slowdown? I need to interrupt here. Bank of England, Sterling moves finally off of the announcement. They will not raise rates. Yes, we saw a little move in Sterling, but now it's more tangible. I have cable. This is U.S. and Sterling, a weaker now, testing a 133.63.

22:07And Francine taught me how to look at Euro Sterling, showing Euro strength as well. For our European audience, we've now got a little bit of move there. Paul Sweeney with Savita Subramanians. Savita, how do stocks perform? I guess what a lot of folks are telling us now, you better get used to these higher yields out there, the 10-year, maybe 5%. If that's, in fact, the case, how do stocks perform in that kind of environment? Yeah, I mean, it's interesting. I think that we've never been that worried about 5 % as some kind of red line, even though it feels like that's the point of pain in the market.

22:45I think what's interesting is that when you look at large companies, you know, even these tech companies that are levering up have locked in long dated, generally low fixed rate debt. So it's it's not it's not necessarily anathema. I mean, you know, back in 2007, I think half of the S &P 500 debt was floating. Today, it's, you know, 80 percent fixed. So I think that's the good news. Small caps might have a harder time there. They've got more refinancing risk in some areas of leverage. You have to be selective there. The consumer, I think, you know, what we're seeing now is oil prices elevated and short rates moving higher.

23:26I don't know if that's enough to slow down the consumer because we've had what I think has also been a surprise this year is that we talked about this beginning of the year. You're seeing a lot of benefits to lower income consumers kick in, despite the fact that oil prices and gas prices are so high. You are more qualified with your call, which is a collared trade, folks, down to 7 ,400 SPX. And maybe we go up a little bit like 7 ,800. It's a very tight range. Yeah. The drama on Wall Street now, once again, generational, they rebrand it and all that, is call ready. Where I own a portfolio and I sell calls against it and bring in income to enhance my dividend income.

24:10And if I get a pop, which you're not calling for, the equities can be called away. But if I have a collared trade, this can be a very successful strategy. Do you agree that call writing right now is a premium builder for people? I mean, you know, I'm not a derivatives expert, but I think that at some level. Excuse me. I think it's three degrees in mathematics. Thank you. Continue with the charade. That was for compliance, folks. But look, I think that, you know, we're I don't know if the market remains in a very tight range. I wouldn't be surprised by big swings up and down. But I think the run rate for S &P returns from here is lower than what we've enjoyed over the last 10 years.

24:58Yeah. So, you know, I think yield is very important. There's not a lot of dividend yield in the S &P. So you've got to get your yield elsewhere. One of my favorite areas, and I think where I would be sort of shifting allocations aggressively, and we've liked this for a few years, is large cap value. I think that's one area of the market that is under-owned, boring. Nobody wants to talk about it. What's an example of a large cap value stock? So it's constantly changing. So large value we think of as financials, energy. And those are sectors that I think look pretty good. But large financials and energy look clean, capital discipline, like kind of the opposite of tech.

25:39They've de-levered rather than levered up. But you're also getting some of the bombed out tech companies floating into the value index. So I think it's really a good place to hunt for cheap growth and quality. What is the AI call for you guys these days? It's kind of seems like a change is not on a quarterly or yearly, almost like a weekly basis. Right now, we've got concerns about from some of these AI leaders themselves talking about the growth. So how do you guys think about that broadly defined? I think that it's I mean, I'm not calling I'm not an apocalypse doomsayer, but but I think that it might take longer than what everyone's expecting.

26:23And there might be little hiccups along the way. So, you know, when you think about building physical equipment like plant and property, you know, renovating your house always costs more and takes longer than what you think it will. And I think that's the same thing for this build cycle. So, yes, we think that it's a big priority. It's not going to stop. It's not going to get pared back, but it might just take longer and cost a lot more. Savita, thank you so much. Savita Submarini and driving all of equity strategy. the Bank of America. Stay with us. More from Bloomberg Surveillance coming up after this.

27:09You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. It's going to be a one-hour interview. You're launching an on-tothon with us, ECRI, Economic Psycho Research Institute. They do it differently. He nailed the continued strength of the U.S. economy and nailed this idea of inflation. Your note, written yesterday before the meeting, was absolutely blistering. Is this as good as it gets for the American economy? Yeah, it's not bad. I think we're flirting here with, dare I say, an inflationary boom.

27:49That's what you've been feeling, right? You've got great growth, and you've got inflation that's more than energy. So all our inflation cycle stuff kicked up before the hostilities in Iran. So we've got growth and inflation. Your nominal numbers blow out. Right. Okay. It feels pretty good, right? But you got 8 % last quarter. You got 8 % nominal. You got 1.5 % real. All that stuff in there is inflation. So let's see what happens. Okay, yesterday I brought this up live, and, you know, Bram and I were going back and forth on it. She didn't disagree. She didn't agree with me. Kevin Gordon had the beautiful chart here.

28:29That entire meeting is predicated out to 2029. Somehow the American economy doesn't slow down. You guys have been doing this since the 1930s. Yeah, I can't. At some point, nominal GDP comes in. Yeah, yeah, yeah. And then the squeeze happens, right? So either your growth falls off and your inflation is still high, so margins get squeezed, or inflation comes down, which means your profits aren't what they used to be. So this squeeze happens at some – look, trees don't grow to the sky, right? I can't see to 2029. I can look out a few quarters, and I could say it's holding up. There's no huge downturn.

29:13There's no big bump in the road here. And we have inflation still moving to the upside. Energy prices notwithstanding the long end coming down a little bit because he hiked notwithstanding underlying cyclical direction of inflation. The trend. Mr. Warsh. Emphasize the trend. My only gripe with him is he's looking at the coincident data. I'm looking at the forward data, the trend in the forward data remains up. So one and done? No. Now maybe everybody's adjusted to two and done? No. I think the history shows us they tend to do more than that. So, again, that's kind of where I wanted to go here.

29:58I mean, historically, it's not one and done. Historically, the Fed does two, three, maybe even more. Could it be more? Oh, yeah. Everything I'm saying is, yeah, totally. You should adjust to more. And when you look at where's the gas, right? I think people have come around to the economy's doing OK, despite the K, which is real. I just don't want to ignore the K. But I think it's the inflation expectations component. That's been pretty chill, relatively speaking. And that's where I think there's some opportunity for movement. So, you know, the economy running, I guess you call it hot, right? Yeah.

30:42North of 6%. Yeah, it's hot. I mean, it's 6%. But I mean, how long does that, how much is that is AI? Because that's one of the questions I have, because I'm not sure of the answer. It feels like it's meaningfully contributing to economic growth. And I'm not sure how long that AI investment stage continues. How do you guys think about that? Look, it's all around us. uh we've got the we've got but we have the solo paradox and like the ai version of it which is it's everywhere except in the productivity statistics which have come down right they everybody got excited because productivity edged up towards three percent now it's closer to two um so it's not there which gives you some inflation issue you don't have a structural inflation break i know warsh wants that but he recognizes he doesn't have that and so when he's looking at the coincident data he sees the trend is in the wrong direction i'm telling you we look at the forward trends it's going to continue to go that way one final question within the massive heritage of the economic cycle research is to do it full disclosure folks my grandfather subscribed to equity i remember seeing it you know they're they're in the smoke nice taste his study what What happens after Trump?

31:59The cycle stays. The cycle, look, there are personalities. And for as big of a personality Trump is, he's not the first president to say lower interest rates and do this and do that and spend more money or whatever. I mean, that's what they all do. They all and their variations on it. But at the end of the day, in a free market oriented economy, you're going to have business cycles. As far as I can see, I've looked for centuries in the U.S., and I've looked around the world for almost a century, and the cycles persist. And right now, there's two big cycles, growth and inflation. They're both to the upside.

32:36So I'm leaning a little bit more towards inflationary boom, however you want to express that in your life. Thank you. Locked on out to thumb with us, the Economic Cycle Research Institute. Stay with us. More from Bloomberg Surveillance coming up after this. For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Cost spiraling, data scattered across disconnected systems, security and governance increasingly complex, AI initiatives struggling to scale, and ROI that remains frustratingly out of reach. The challenge isn't AI itself, it's having the infrastructure AI needs to succeed, which is right where Boomi says we got you.

33:22Tens of thousands of enterprises trust Boomi to connect data, applications, processes, and AI. With Boomi, businesses can eliminate silos, automate workflows, strengthen governance, and create the foundation AI needs to perform at scale. The result? Faster innovation, more efficiency, better business outcomes. Boomi turns a world of AI pain into a world of AI gain. As Boomi says, we got you. Head to boomi.com to learn more. That's B-O-O-M-I dot com. This is the Bloomberg Market Minute, brought to you by Comcast Business. The market's faced plenty of challenges this year. Rising energy costs, higher interest rates, pushback to massive artificial intelligence spending.

34:06But through it all, stocks keep breaking records. And some analysts think they still can with a focus on the fundamentals. Nadia Lovell is head of global equity strategy at UBS. Earnings has been good and continues to be good. And while, you know, we might be past the peak in earnings growth, we're not past the peak in earnings level. But others like Miller-Tabak strategist Matt Maley say those challenges could eventually lead to a downturn. Whenever we see a significant rise in bond yields like we have and a significant rise in oil prices like we have, The stock market always or pretty much always ignores it for a while.

34:41And Wall Street may be starting to take notice. A recent Citigroup index shows more analysts cut rather than raise their earnings forecasts for corporate America for the first time in more than five months. That was the Bloomberg Market Minute brought to you by Comcast Business, one partner powering 90 percent of the Fortune 500 and millions of small businesses. When you add it all up, no one does business like Comcast Business.

35:07Running a small business takes everything you've got. But with Chase for Business, you're not alone. They bring together local support and a broad range of resources to more than 7 million customers. With a deep understanding of your day-to-day needs, they provide products and guidance built to help you thrive. Right now, earn$500 when you open a new Chase Business Complete Checking account for new business checking customers with qualifying activities. Offer expires January 21st, 2027. Chase Business Complete Checking has the flexible tools you need to accept payments, make deposits, and manage your finances with confidence.

35:42Learn more at chase.com slash podcast biz offer. Chase, make more of what's yours. Fees may apply to Chase Business Complete Checking Accounts. The$500 offer is available for new business checking accounts with qualifying activities through 1-21-2027. Eligibility and qualification requirements must be met. Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, N.A., member FDIC.

36:32with us. But first, Bloomberg Surveillance and this important conversation brought to you by Eisner Amper. Eisner Amper, they provide assurance, tax outsourcing, and advisory services to businesses that need more than a generalist. Whatever the challenge, we have a team for it. EisnerAmper.com. And we thank them for their support of all of our conversations. First, Bob, everybody wants to know across the arc from the Fletcher School to Goldman Sachs. I mean, he won an award from the French Legion of Honor. I mean, they gave him a baguette. It was fresh. How are you doing? I am doing very well.

37:09Had a very good summer. Lots going on. I thought it would be a quiet summer. Yeah. What do we do? I mean, I haven't heard from Mr. Rubio, I think, in 90 days, I'm guessing. Nope. What does our diplomacy look like after President Trump? Well, our diplomacy looks, if you look at it in a very simple way, like we are weakening our alliances across the board at a time when we should be strengthening them if we want to strengthen our hands do we have the national ability to do that the first went in january let's say after the inauguration whether republican or democrat are you optimistic we could heal our diplomatic process not bring it back to where it was i think you have two things going on.

37:54The Chinese are strengthening their relationships with Russia, with Iran, with Ukraine, and the global south. We're weakening our relationships with the countries that were part of our bulwark in dealing with the Soviets during the Cold War, and we're going to be needing them to deal with the competition from China over the next 20 years. So they're moving in the direction of more solidarity among their allies. We're moving toward greater weakness among our allies. And I think it's a very bad mix and a very bad prognostication for the future. Not something I look forward to. Given that background, we have President Xi coming to the United States next week for a state visit with President Trump.

38:39How do you view this visit? What should be our goals, our objectives? How do you think this will play out? Well, I'm very glad he's coming. I'm very glad they're talking. I think the key issue, given all that's going on in the last couple of weeks, is do they address in a credible way the issue of AI? And that's not going to solve it. It's not going to be one big deal. But as you recall, during the Cold War, an existential Cold War, where we were really, you know, almost at loggerheads on the Cuban Missile Crisis, we actually were able to find certain areas where we understood that we needed to work together.

39:20Because if we did not, you could have disaster for both sides. That was arms control and arms limitation. My view with China is that we're in a very competitive environment on AI for sure. We're not going to slow down competition in terms of new models they're going to develop. But we do need to find ways of minimizing risk, minimizing risk with respect to rogue actors. Chinese are worried about that. So are we. And minimizing risk with respect to autonomous activities by AI as the kind we've seen that can be quite disastrous for both sides. So with all the intense competition during the Cold War, we could work together on certain things.

40:04On China, we ought to work together as well on the high-risk factors that both sides are alarmed, understandably, about. Robert Hormitz with us, folks, an extended conversation. We welcome all of you across America, internationally, and particularly this morning on Sirius XM Channel 121, 21, the way you choose to listen to us, from Vancouver out to the area of Nova Scotia. Mark Kearney, Council on Foreign Relations. Bob Hormance taught me everything about foreign relations. Have you spoken with the Prime Minister of Canada about the fact they will sing the Canadian national anthem, O Canada, at the Buffalo Bills football game tonight?

40:50How screwed up is this, Bob Hormance? I have not talked to him about it recently about that. I have talked to him, of course, about a lot of things. What do our American listeners need to know about the Prime Minister of Canada? Mark Carney is a very able guy, very smart guy, very committed to U.S. relations. I mean, this is a guy who lived here. We worked next to one another, literally next to one another at Goldman Sachs for several years. He wants to work with the United States. And I think the rupture in relations, as he's put it, is something deeply saddening to him and troublesome to us since it's our major partner.

41:29They were the country that protected our hostages in Iran. They stood with us at Normandy. They were critically important to us during the Cold War. NORAD wouldn't work without Canada. It's our first line of defense vis-a-vis the Soviet Union, for instance, it was, and now against Russia. So it's a strategically important, as well as obviously an economic important ally. And when you can't work with China, what signal does it give to the rest of our allies? The only positive thing I see, Paul, is the Montreal Canadiens took Chris Kreider. That's the only thing I see constructive here. Paul Sweeney with Robert Armantz of Kissinger Associates.

42:10Bob, we're now, boy, seven months plus in Iran. Given your experience in five different American administrations, how do we get out of this? How do we kind of minimize the damage here? What's your view? I think we need a longer term strategy. First of all, we've got to deal with the divisions at home. And when everyone sees our divisions at home, it makes us look ineffective abroad. Second, we need to develop much stronger strategic and integrative ties economically and politically and militarily with our allies. The military part actually is working pretty well. The Pentagon is working with a lot of other countries.

42:54But in general, that's critical. The third is we have to figure out some endgame with Iran. I think keeping economic pressure and intensifying economic pressure on Iran is part of the game. because we're not going to put troops there. I mean, I've been to Iran. I've seen the terrain. You're not going to put American troops there. It's hostile politically and it's hostile geologically. And then put pressure on Russia, on Ukraine, because Russia is not only bombing Ukraine, killing civilians. It's also now beginning to threaten these drones on the Polish border. However, it really has very aggressive tendencies.

43:40And unless you put maximum economic pressure on them, on their energy and on them economically, you're not going to bring Putin to the conference table for a rational dialogue and a rational answer. And that sends a lot of bad signals to our allies. So you're going to go to Boston. You're going to go up to your Tufts University, Fletcher School. They're going to sit there. You, Stravitas, will be there, a bunch of other muckety-mucks. And there'll be some 28-year-old kid who's the smartest person in the world on drones. What do you ask the drone experts, Bob Hormats, about this threat we all face?

44:16I think you do what you need to do, which is to continue to improve the quality and the precision and effectiveness of drones. We're doing that. We need to lead in the technology. We certainly need to lead in the technology area. We certainly need to lead in the AI area. But that's sort of a given. The fact is that on AI, the Chinese are going to keep competing with us. And so what we have to do on AI is recognize that with open weighting and the open models, the competition is going to continue and lots of other countries are going to get access to that, particularly open weight, because they can see the interstices of how the thing works.

45:04So what we need to do, I think, is work on defensive measures in a similar way to what we've done in the past to figure out how to deal with the risk to our systems, the risk of biotech terrorism, a whole range of things. And we and China both have an interest in doing that. We're going to compete like hell on the technology, but we also have to work together on the risk factor because they're the same. They don't want a disruption of their system. We don't want a disruption of our system. And we don't want these independent actors, autonomous actors. I got one more thing here. Paul, I want you to squeeze in one more.

45:45Paul Sweeney with Robert Hormats, Ambassador Hormats. Tom started the discussion by referencing Marco Rubio, our Secretary of State. And I believe he's still the interim national security advisor. Almost a non-presence in Ukraine. almost a non-presidents in the Middle East, almost a non-presidents in Iran. It's all President Trump and his acts of diplomacy. How much damage, if any, is being done to our State Department, our diplomacy worldwide? Well, morale there is not good. It's not good at all. Because traditionally, having worked for Kissinger, who would have been proactive on all three of these things, either as Secretary of State or before that when he was National Security Advisor, you expect the State Department to be the lead actor.

46:34Moreover, because they've had the experience, and their people have had the experience, when you get people who are totally out of that sphere, who have been real estate negotiators, they may be very good negotiators, but they've been negotiating in a wholly different sphere, and they don't have the historic background. And when you negotiate in the Middle East, and when you negotiate with the Russians, you need to know the history and the culture to understand how to negotiate. It's critically important, that knowledge. I got three minutes here. This is so important. I'm honored to do this with you, Bob Hormans, with all we've done over the years.

47:10So I got a string of populism within the modern sphere from Huey Long, 1935, through McCarthyism, maybe George Wallace, maybe some Nixonian, Spiratiagnew stuff as well. Maybe I'm out to the new populism today. How do you perceive America after the final term of Donald Trump? Is it a populism event that drifts away? One word they use is it fractures into distillate parts of populism. What do we look like after Trump, forgetting about warfare Republican, Democrat? That's very hard to predict. I would say that you have to do what Eisenhower did after World War II. he assembled this so-called solarium group to look with people like George Ken and others at the strategic interests of the United States.

48:03What are the strategic interests of the United States? Let's put everything aside, all the blame, all the finger pointing, and say what do we need to do? And what do we need to do? We need to make sure that our internal system is functional and effective. That's one, because if it's not, it's a very bad example to the rest. Second, we need to find ways of working again with our allies. It won't be the same kind of alliance, because we want Europe to play a greater role economically, and they're on the front line, and they know it. So that change in NATO that Trump helped to instigate actually is a good one.

48:45And so the alliance will be more balanced with Europe playing a greater role. Much the same will be true in Asia, but we still need that alliance. And third, you need to figure out ways of putting more pressure on the countries that are really adverse to our interests. Russia being one, China in some ways, but we also can find ways of working with China. to have a break with China. It may sound good, but there's some areas where we have common interests and we need to pursue those with good negotiators with a lot of experience over a sustained period of time. Michael Barr emails in. He says, would you ask Robert Hormats at 79, what is he doing every day to be this sharp and this healthy?

49:31What's the Hormats secret? Well, I think keeping an interest in the issues is important. I spend a lot of time with people in the government now, people I've worked with. I teach at Yale. Teach one course at Yale. That keeps me. Does AI ruin the students of Yale? No, actually, we figured out a way of integrating their initiatives on their own. Are they all Democrats? No, no. Not only are they not Democrats, some are both, but we have a lot of foreign students. So we have the ability to attract foreign students, which is critically important. We need to also keep up with a policy of getting the best and the brightest from around the world.

50:13That's critically important. Our whole history has been based on that. We're not doing it now. We get the best and the brightest. It helps us in the technology and other areas. But keeping an interest in the key issues and keeping your eye on the ball. What can you do using your experience? What can I do using my experience to help deal with the current issues? And don't get bogged down in the past. Look to the past to figure out, does that have any answers for the future? Here's your assignment, because you're slacking off at 79. You need to write a redo or at least an epilogue, prologue of The Price of Liberty.

50:49Because this nation, Bob and Romance, is so messed up versus when you wrote that classic book. I mean, the movie writes Paul. DiCaprio? Oh, sure. It was unbelievable. Robert Hormiz, thank you so much. I'm actually doing an e-history of what I've done. Great. Okay. I'd love to see that. Robert Hormiz, thank you so much. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

51:57has worked with independent agents to help protect businesses, homes, valuables, and more. Because planning for the future isn't only about knowing what's next. It's about making sure you're ready for what you can't predict. Let Cincinnati Insurance make your bad day better. Find an independent agent at CINFIN.com. Most meeting note takers get the easy words right and the important ones wrong. The client's name, the acronym. Whisper Flow Note Taker is built to get the hard words right. It takes notes on any meeting platform, Zoom, Google Meet, Teams, even WhatsApp calls, keeps every meeting searchable and connects to Claude or ChatGPT so you can ask, what did we agree to last Tuesday?

52:40Free to try on Mac and Windows at whisperflow.ai. That's W-I-S-P-R flow dot AI. With ChatGPT, you can do more than get answers. You can get things done. Whether you're leading a big project, planning an elaborate trip, or trying to balance work and life. ChatGPT can help. Give it a goal, plus things like files, notes, or project plans, develop a trip itinerary with daily updates, or create a prioritized schedule so you can spend less energy sorting out the details and more on bringing your biggest ideas to life. Get started at ChatGPT.com.