Bloomberg Surveillance TV: July 22nd, 2026 | Bloomberg Surveillance

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[00:00:11]>> This is the Bloomberg Surveillance podcast. [music] I'm Jonathan Ferro, along with Lisa Abramowicz and Amry Houghton. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6:00 to 9:00 a.m. Eastern.

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[00:00:36]>> We begin this hour with stocks pulling back after snapping a three-day slide.

[00:00:39]Max Kettner of HSBC suggesting warning signs are building. He writes the following, "It may well be time to reduce risk in portfolios after the peak earning season in two weeks' time." Max joins us now for more. Max, welcome to the program, buddy. This one surprised me. I get your research every week. I was going through the note and I'm always looking for it. When is Max turning less bullish? This note came really, really close, Max. What's changed?

[00:01:06]>> Um I think there's a couple of things that changed. Now, when we look at the price action just the last six, seven weeks, of course, um that's been largely the semi unwind.

[00:01:13]So, let's be honest, if you had told me semis are going to go down into actually a bear market and the overall S&P is actually flat, um I would have taken it any day. So, that still looks pretty good. But, we've got to face it that actually, outside of that, the rest of the S&P isn't yet participating so much.

[00:01:31]So, I I would say now with peak earning season coming in the next sort of two weeks, there's two possibilities. Either the earning season propels us even higher, particularly from a broad-based perspective, so the equal weight S&P really performing well. That means things like breadth measures, like things like members of the S&P above 50 or 200-day moving averages, that really going to the highest from where we were in 2023 and 2024. That then would say, "Hey, you know what? What else is there to buy?" That there's no more marginal stuff that is actually lagging that I can buy.

[00:02:06]And that's one possibility. The other possibility is we don't see actually that even broad-based earning surprises propel the market higher. Both of which would be pretty bad. The other thing that's clearly changed is sentiment and positioning. When we look at our measure of particularly sentiment among long only investors, that's now starting to push towards where we were during the year opening trade that sort of peak bullishness in 2021. And that surely from a positioning, from a sentiment perspective, when everyone's getting so pulled up, is not a positive going forward.

[00:02:39]>> Max, I just want to highlight something you're saying here I think is important.

[00:02:42]What I'm hearing from you is don't look for the earnings, look for how the market responds to the earnings. That's going to be far more important to you over the next 2 weeks.

[00:02:51]>> Yeah, absolutely. I think absolutely particularly when you compare Q2 versus Q1. Let's face it that when you compare and look at year-over-year earnings expectations, of course everyone says, "Oh my god, the bar is so much higher." That's not true.

[00:03:06]It's just the year-over-year that is higher, and that is largely a result of the really, really good earning season that we had in Q1. Let's remember that in Q1 we had the highest earnings beat rate in the S&P 500 really since the second quarter of 2021. And we had the highest average earning surprise rate across the S&P 500 companies since Q1 2021. Really since that reopening trade, we had an average earning surprise of almost 20%. Well, of course the year-over-year rate expectations are going to be higher then, but the sequential ones, the quarter-over-quarter ones, when you strip out energy and materials, you end up with net income expectations from consensus at about minus 3 and 1/2%. So I do think we can get pretty broad-based earning surprises again. I wouldn't be surprised if we get similar magnitude of earning surprises in the broad-based sense, median earnings growth, um comparable to what we had in Q1, and then it really depends what the market is doing. Are we going to go and get a broad-based rally? Then you want to take some risk off because probably positioning and sentiment goes even closer to a sell signal. If we don't see that coming, then I'm afraid to say it's like, well, what's going to propel us even higher here? We're flat even we continue to be flat even with broad-based earning surprises. In both cases, I think then into September, October, you want to take a bit of risk off the table.

[00:04:27]>> Max, you're in an uncomfortable situation. Waiting is not something that seems like traders enjoy when they're looking at markets and saying we don't know exactly how this is going to play out. What are you doing in the next 2 weeks? Are you just sitting on your hands, biting your nails, and watching the earnings?

[00:04:43]>> I mean, well, hopefully not biting my nails, um but I'm I'm I'm waiting and I'm still max overweight stocks.

[00:04:49]Um so, we are, you know, leaning really still into that broadening of the market. We're still overweight the equal weight S&P. We're still overweight Europe, so we're already been rotating out out of emerging market equities in the last couple of weeks, out of Asia, more into the likes of the Mag 7, where again the earnings bar the bar to beat both in terms of the numbers, but also in terms of the narrative is so low. It's leaning into the equal weight weighted S&P, leaning into value more so Dow Jones.

[00:05:17]Uh so, a little bit still away from a main term. Um that also means Europe, it means European banks. It also means the dip that we've seen in Japan, particularly things like Japanese banks.

[00:05:27]That really doesn't make sense. So, those are the sorts of things that in our asset allocation we're still really, really heavily overweight in the next few weeks.

[00:05:34]>> Max, John was doing a great job of laying out the boiling the frog scenario that's happening in the oil markets and how that's bleeding into yields and just evaluation expectations going forward.

[00:05:43]When you look at something like the 10-year US real yield at the highest level going back to October of 2023.

[00:05:50]What do you do with that? At what point does that start to offer its own pressure to the bullish narrative separate to potentially earnings and the reaction in markets?

[00:06:00]>> Yeah, I think you said it, right, Lisa.

[00:06:01]I think the first step is really going to be earnings. So, we are what we call that danger zone. I've been talking about it in this program quite a lot in the in the last 6 months as well. We are actually in the middle of that danger zone. But, as long as you've got these really, really low sequential earnings growth expectations, for the next 2 3 weeks it doesn't matter. Then, I think if real rates really continue to push a little bit higher, then that's going to be an issue. But, for now, it's really the earnings expectations, the earning season. What I would also say, however, on the real rate side, I'd be actually more concerned if real rates were still lower, because in reality, that means the market has now already turned hawkish. It has already priced in those rate hikes. It has reacted to better data, to, you know, consensus now really starting to believe into in that US exceptionalism picture. What I would say, when you look at, you know, something like Fed sentiment and on Fed minutes or things like Fed speeches sentiment, that's already pushing towards really the most hawkish since 2022. So, I do wonder going forward now into the next 4 5 months that actually aren't we all believing a little bit too much into that US exceptional picture?

[00:07:08]Are we Are we not extrapolating a little bit too much the strength in H1, this fiscal impulse strength that, you know, the almost 20% higher tax refunds that we had in H1? Are we not extrapolating that too much into H2? And isn't there then a bit of a downside surprise potential, nothing recessionary, but just the US not being as exceptional, just great, but not as exceptional. And that, of course, actually from a real rate and then from a risk asset valuation standpoint, you know, perhaps after the midterms would be really good in a classic sort of bad news is good news regime, cuz we could price out the threat of rate hikes then.

[00:07:45]>> And Max, it sounds like you're on the edge of buying Europe at the end there.

[00:07:48]>> Yeah, absolutely. I mean, it's it it is I think, you know, now a picture of okay, maybe into the midterms, you know, with a little bit of too bullish positioning behind the the earning season behind.

[00:07:59]Maybe and and obviously seasonality, right? September, October. Maybe you'll take a bit of risk off, but I think after that, that sets up us up then for a really nice renewed rally again.

[00:08:10]>> Stay with us. More Bloomberg Surveillance coming [music] up after this.

[00:08:19]>> [music] >> So, here's the latest this morning.

[00:08:25]Rising gold prices renewing inflation fears with the Federal Reserve July interest rate decision only 1 week away.

[00:08:30]Treasury yields hovering near highs of the year, putting last week's core inflation prints very much in the rearview mirror. So, BofA Merrill Lynch strategist So Chang writing, "While we continue to expect the Fed to keep policy on hold, persistent market pricing reinforces the possibility of a hike by the end of the year, likely after the midterms." So, BofA Merrill Lynch joins us now for more. So, BofA Merrill Lynch, good morning.

[00:08:49]>> Good morning.

[00:08:49]>> Let's start with the base case. Base case for you is a hold. So, let's start with why. Why hold?

[00:08:53]>> Um only because of the fact that we thought that so far the data has not sent a clear signal that the Fed should hike immediately. And then you have the dynamics with the midterms and Kevin Walsh taking his his job a just a month ago. He probably doesn't want to come in and and raise rates as soon as he was he's been appointed as chair. So, those were kind of the some of the motivations.

[00:09:17]And then you got the two softer the CPI prints, the PPI prints. Core PCE is probably going to be, you know, also somewhat on the softer side. We're expecting 0.18 for, you know, month over month.

[00:09:28]So, that brings core PCE at 3.3%. So, there's not an urgency for the Fed to hike. But the market is fully pricing in a hike by the end of the year. So, at some point, the market's going to dictate to the Fed what the Fed should do. If the market is fully priced for a hike and the Fed doesn't deliver, then the Fed's going to be inducing volatility. So, that's kind of the the, you know, the the spot that we're trying to navigate here.

[00:09:52]>> Can you unpack the move in yields in the US? How much is oil? How much is the Bank of Japan? How much is just deficit concerns as we keep hearing about the mounting bills from the conflict in the Middle East?

[00:10:03]>> So, when we don't have major outlook, I thought maybe the conflict was almost over. The Iran war is is fully back on.

[00:10:10]You have higher oil prices. You're looking at the impact of higher oil prices kind of feeding through to the to all of the other economies in the world.

[00:10:18]Europe and Japan are extremely impacted by that. So, you're starting to see those economies start to markets, I should say, start to price in more more hikes and higher yields.

[00:10:28]And then you're seeing the the route in the in the end.

[00:10:31]Inflation expectations in the in the US have been somewhat contained. But, I am concerned about the trajectory for debt and deficits.

[00:10:39]The Trump administration's asked for 87 billion extra in supplemental funding for the the the war as well as for for the farm bill.

[00:10:47]And you're looking at refunds from IEPA also contributing to higher deficits in the month of June. So, all of that put together, you have a dynamic where you have not only higher inflation, but but investors are starting to get a little bit concerned about the trajectory for debt and deficits.

[00:11:05]>> And the best evidence for this is real yields because you're seeing that right now yields are not climbing higher as a result of inflation expectations.

[00:11:11]They're actually relatively muted, but you are seeing real yields on US 10-year Treasuries reaching the highest levels since 2023, 2.34%.

[00:11:19]How high do you see that getting if the Fed does not hike rates? If the Fed remains on hold despite what the market seems to be suggesting?

[00:11:27]>> So, I mean, we are near the highs. Is it possible for real yields to push higher?

[00:11:32]Yes, you're starting to see some of the the correlations that you typically see between gold and real yields start to come back in play. That inverse relationship is starting to to to come back into into the front. Uh typically investors start to, you know, come you know, buy or or enter into the bond market when real yields look attractive and move away from from gold. But I don't know if you're going to see that backstop bid in an environment where the concern is for debt and deficits. And debt and deficits is not just a US problem. You're seeing this in Europe as well as in Japan. And that's really where I think the global bond market dynamic starts to push play come into play and push yields higher.

[00:12:14]>> What's the window the Fed has to act when the market actually continues to believe them and it's not just empty threats? Given the fact that the market's pricing in hikes and officials continuously talk about how they're concerned about higher inflation.

[00:12:26]>> So historically, if it's like 70-80% priced in to the market, the Fed typically tends to deliver.

[00:12:33]Um you know, we saw a lot of volatility in the July meeting pricing, right? I mean, we went from almost being fully priced in early early last week to not being priced in to now yesterday we started to see that come back into into into play. That's one of the reasons why I had added that [clears throat] maybe the Fed might have to act by the end of the year because it's more than fully priced in for the for the end of the year. It's a question of whether they deliver before the midterms or after the midterms.

[00:12:58]>> Do we need to rethink that? When we say things like typically, they usually Is this a different Fed where typically and usually doesn't really apply anymore?

[00:13:06]>> 100% and that's what makes it all all the more confusing because there's no forward guidance. I mean, this is not, you know, business as usual for the Fed.

[00:13:14]And it's hard to know if if kind of the market's going to dictate to the Fed uh and the Fed is going to ignore the market's pricing. But, you know, as I pointed earlier, I I that that typically tends to to lead to volatility when the when the Fed doesn't follow through on on market expectations. So, the Fed has to decide if they want to comply or or be the inducer of volatility in the market.

[00:13:39]>> Stay with us. Multiple index surveillance coming [music] up after this.

[00:13:47]>> [music] >> AT&T shares gaining after crushing estimates on mobile subscriber gains.

[00:13:56]Joining us now to discuss the man of South, the boss, the AT&T CEO, John Stankey. John, welcome to the program, sir. I want to talk about execution.

[00:14:04]There's so many issues to talk about with your company, but just execution.

[00:14:07]These numbers this morning, John, the street's looking for like 325,000, and you deliver 432,000 monthly wireless phone subscribers in 2Q. What went right, John? What was the strategy behind again that big?

[00:14:21]>> Well, I think going into the break, Jonathan, you referred to the results as fantastic, and I I would agree with you, and I think the team did an excellent job executing. As you said, and it's not just in our wireless business, it was nearly 370,000 fiber net adds. That's a a record for us in this quarter. Um look, what went right is what we told people was going to happen this year as we gave guidance for the next 3 years.

[00:14:47]We said because of the investments we've been making in this business over the last 5 years at a sustained and targeted level, and the M&A work that we had done acquiring more spectrum and picking up some additional footprint from Lumen, that you should see a step up in growth as a result of those things. The team had the asset [clears throat] base it needed to execute and drive growth at a faster level, and you saw the manifestation of that starting to happen here in this quarter, and it's showing up in an accelerated service revenue growth. It's showing up in accelerated EBITDA growth. I would even go into our business segment and point out that we had growth in our strategic services for business for the first time in a very, very long time. And as a result of that, we expect that that's going to sustain itself through '20, so we're we're executing well. We're hitting on all the cylinders in the engine. And when that happens, the business can deliver the kind of results you're seeing, and I'm pretty confident we can keep that moving going forward.

[00:15:44]>> John, there's a number that jumped off the page for me this morning as well.

[00:15:47]It's 42.5. 42.5% of households that purchase the broadband service from you also buy mobile phone service, too. How important is that convergence model been just behind the success you're having, and how important it will it be for the remainder of the year?

[00:16:01]>> It's extremely important. It's actually that number is 45% if you were to normalize it for the Lumen footprint that we just recently brought in that's diluting the number a little bit. And as you know, you see in our report that's been ticking up steadily. And it's it's important because one, those customers are more lucrative customers when they buy multiple products and services from us. Two, churn goes down, and that's one reason why you're starting to see our churn numbers improve this quarter because we're starting to get that benefit of that base that is buying both together from us. And three, brand affinity. The customer's happiness with AT&T and their impression of the brand is much higher as a result of that because the products are better together. So, it's really important we continue down that path, and it's frankly one of the most important things as you think about our competitive positioning moving forward because we can provide world-class networks in both wireless and fixed that tackle 98% of what a customer needs to do on the internet. Occasionally, they walk off one of our networks. And as you look at our partnerships that we're working with the satellite industry, by this time next year, we'll be able to solve that problem. And so, we're the natural place for people to come and meet their needs on the internet and do it easily on one bill with one set of services and one support infrastructure. We think we're in a great position as a result of that.

[00:17:26]>> And John, this is the reason why there has been really a price war between different different providers simply because everybody wants that package, right? They want to get everybody. How has the competitive landscape changed though over the past couple of years with the introduction of satellite services, of what we're seeing with Starlink, of what we're seeing elsewhere?

[00:17:45]>> You know, I don't I don't characterize it as a price war. I think there's been a stratification of pricing for customers depending on what kind of services they want to buy. There's the segment of the market that needs high performing symmetrical gigabit services, very robust wireless plans.

[00:18:03]That segment of the market is willing to pay for that and they pay a premium as a result of that exceptional value that they get back.

[00:18:11]We've played very very well in that space given our asset base. But there's also a segment of the market that's more value oriented and I would say choices have come into the market because of good regulatory posture that have allowed investment that weren't there before and those choices are putting more value oriented products and services at more attractive price points, but the product and service maybe isn't as robust. And at AT&T, we've played really well up market but not as well down on the value space and we've been working hard to get our product portfolio so that it matches up across the entire continuum of the market. You saw that in the results this quarter because our account additions, new accounts to AT&T, hit like a three-year high and that's because we're doing a lot better job down market and I there's nothing wrong with having a more affordable product that's tuned to certain parts of the market. I don't consider that a price war. I consider that meeting market needs as long as you're doing the things that you can do up market which we've done very well on.

[00:19:13]I think when you see margins the way they are at AT&T, this is like a record for us.

[00:19:19]That's a good sign that we're getting that balance correct.

[00:19:23]>> Over the next 5 to 10 years, John, how do you see the breakdown of the mix of broadband and fiber on one hand to the wireless or the more budget-sensitive areas, and then satellite from the likes of that you're seeing from Starlink?

[00:19:37]>> Uh look, my my point of view is they have a fantastic product. There's great innovation that's moving in that space, and it fits a part of the market that hasn't been well served, especially in less densely populated areas. And um you know, the interesting part about that is our investment has largely been in urban and in densely populated suburban.

[00:19:59]Um we haven't pushed real hard in the rural and less densely populated areas.

[00:20:03]That tends to be more of the stronghold of cable companies. Um I think they'll do pretty well in that space bringing an alternative and competition in there. I think it's going to be very hard to come into the more densely urban populated areas to compete with that bundle that I just talked about earlier of fiber that is the best product in the market, best performing. Uh it's the lowest marginal cost, our great wireless density that far outstrips what you can do from directed device and satellite, years of investment in the hard-to-reach places like stadiums. Everybody who went to a World Cup game knows how important being able to connect in a stadium is to experience what goes on socially and actually in the arena so that you can see a few replays that they're not showing there. We've been doing that for, you know, a long, long time, and it's going to be very, very hard to catch up on that infrastructure, and I think we're going to do really, really well competing in metro and suburban areas, which is where our investments have been.

[00:21:03]>> And John, you've talked a lot about how fiber puts you in a really good position in the AI era and how an increasing number of businesses really do need that kind of connectivity and the latency that's so important to to improve. And I'm just wondering, aside from the demand side, from your actual corporate side, if you've been able to calculate any of the return on investment of your own uses of artificial intelligence. I know you've been really vocal about how it has improved in efficiency dramatically. Has there been any ROI? Have there been any structural changes they are able to disclose?

[00:21:36]>> Yeah, we've been we've been really disciplined about this and I'm satisfied that where we've been investing in places like in our software development organization, what we've been doing in our customer service channels, our applications into engineering, some of the things that we've been doing and building the right algorithms for pricing support, that we've gotten very strong returns.

[00:21:59]And as a result of that, I would almost argue people inside of our company maybe think we've been a little too judicious about how we've managed investment.

[00:22:07]We're trying to find that right balance of innovation and allowing things to run in the discipline of ensuring that what we're doing drives return.

[00:22:16]I would also say that I'm very well aware that a lot of this investment is a competitive necessity. When we improve operations like customer service and call centers, I don't know that that's necessarily sustainable. I think those are ultimately efficiencies that get competed away in the market. They go to the customer in the form of lower prices or better service.

[00:22:38]There are the things that we do that really give us strategic advantage like maybe writing software for capabilities that we didn't have before that make us better at pricing or better at driving yields on the network or more efficient.

[00:22:51]Those are the ones that maybe we get to keep some of the benefit on and if I were to say that we need to do something better moving forward, we need more of the ones that drive strategic advantage to balance out some of the ones that we know are just the table stakes that we need to compete in the market and drive the great margin performance that you're seeing right now in the quarterly results we just published.

[00:23:13]>> John, I'd love to finish by talking about the stock as well. Just listening to you speak about the degree of investment you've put into the business to serve these areas, densely populated urban areas across this country. And when I think about other companies right now spending a fortune, raising loads of capital and going through this massive capex cycle. I'm thinking of tech and what's happening there. You're in a different position. You've done some work already. Then I see this headline, you're accelerating the pace of plan share repurchases. Can you walk us through just the characteristic of what's on offer now? Your stock and how well understood you think it is with investors at the moment?

[00:23:47]>> Well, you know, look, I think there the markets eventually get things right. It doesn't mean that they get it right every month or that there isn't momentary dislocations and readjustments. In In my point of view, obviously I'm probably speaking my book.

[00:24:00]I think we're in a little bit of a dislocation right now and there's certainly a desire to raise capital to move to new opportunities in the AI space and you know, I think there's been some rotation out of our stock as a result of that.

[00:24:14]But here's what I know, we've built this business for the future. To your point, we're building symmetrical networks that have as much upstream bandwidth as they have downstream bandwidth and we think that's going to be critical in the AI world just like memory is critical, just like chips are critical, just like data center infrastructure is critical. And I do believe that the market will eventually understand that what we have built is indispensable for the kind of workloads we're going to see in this AI environment working forward and that AT&T is uniquely positioned in the investments we've made over the last 5 years to serve more of those workloads more effectively than anybody else. And eventually the market will figure that out and when the cash shows up, valuation will ultimately correct itself and I have the confidence that that's the case. Our job as a management team is to continue to execute and stay focused on the plan that we've laid out and I believe this quarter is a testament that this management team is [music] in fact doing that.

[00:25:12]>> This is the Bloomberg Markets Podcast bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg [music] TV weekday mornings from 6:00 a.m. to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg terminal and the Bloomberg Business app.