The countdown is on. Everything you need to get the edge at the end of the market day. This is The Close.
Stocks rebound to end the week as earnings optimism provides a better cover for consumer pessimism. Reporting live, I'm Romaine Bostick.
I'm Sally Bakewell, kicking you off to The Close. Let's get a check on markets on this last trading day of the week. The S&P 500 has marched higher and is up amid bets by investors that corporate America would deliver a strong earnings season.
The Nasdaq up, no doubt the OpenAI revenue report was a catalyst. Brent crude has been hovering around $104 amid escalating attacks in the Strait of Hormuz on tankers. That has put the pressure on yields a bit, up about 15 basis points after they had been pretty volatile. The highest level since 2002. Romaine.
Interesting look at this attempt at a technology-led rebound, to be sure, after the technology-led pullback yesterday, with the central tension for investors that has not gone away. Oil still above $100 a barrel, 10-year Treasury above 5.2. Consumer views of current economic conditions, that is at an all-time low. Inflation weighing on households and how they feel.
Yet for markets, earnings expectations, that is what the focus is. That continues to move higher. That is helping underpin the index, at least index-level equity gains, with the S&P 500, which set a record high on Tuesday, slumping Wednesday and Thursday. But today, not far away from reclaiming another record high on this Friday. Unlike Tuesday's record high, primarily led by utilities, today's gains primarily being led by real estate and health care. The S&P 500 health care index recouping all of its losses from the last week, the index of real estate stocks is snapping a seven-week slump, up about 1.6% over the last five-day stretch. 10 of the 11 sectors in the S&P 500 are in the green today, more than 300 individual names. Even during Thursday's index decline, roughly two-thirds of the S&P 500 companies were in the green as well. That suggests what looked like a selloff yesterday may have actually been more of a rotation beneath the surface.
What I thought was interesting yesterday, for eight weeks there has been this chorus about how the breadth of the market has been. They go after the bigger stocks, they sell Nasdaq, and it was decidedly positive, far more advancers than decliners. When I look at this, it reinforces what has been our big thing all year, this highly rotational market where I don't think money wants to leave the asset class of equities and find a new home somewhere else.
Speaking earlier on Bloomberg Television, kicking us off to The Close. Here on The Close is the head of research and CIO of active investments at ProShares. I do want to start with the last point Chris was getting at, this idea that people are not necessarily leaving the equity space. There is a bit of a rotation. I'm curious if you are still in this camp, when we see these types of pullbacks, that is a dip-buying opportunity on a risk-adjusted basis.
100%. You also outlined with some statistics the rotation taking place. We believe it is still a market where you buy the dip, and that causes temporary spikes in credit spreads. The rotation is very much in place and a theme that keeps emerging back and forth. Look at the last month, we believe the winners and losers are likely to persist. Who are those? The winners have been infotech, communication services, consumer staples, utilities. A combination of quality, high-profitability companies with companies that are more defensive and low-volatility characteristics. The underperformers have been early cyclicals, financials, materials, industrials, real estate.
That is a good point about volatility. We talked about volatility at the index level, but there's been a lot of dispersion sector by sector and stock by stock. What about the premium? A lot of talk about the lack of equity risk premium, at least the risk level. If I go below the risk level, am I getting compensated for that volatility?
You do, and here's an interesting fact. Every bull market is always unloved. This was unloved for the longest time because the AI boom was bringing multiples expansion. In the fourth quarter of last year, the forward multiple got to 23, 24. Then we have the surge in aggregate earnings led by tech, now the forward multiple is down. Here we are, to your point, the risk premium needs to be understood in the context of, conditional on the type of earnings you are seeing. Valuations have compressed, which is welcome because bond yields have risen. Equity risk premium is still there. I would argue one has to worry about the available equity risk premium and the volatility that comes with it when your earnings growth is dipping into the low-digit space or far away from that at 35%.
I wanted to ask about France. You recently flagged the sovereign spreads, it may be France and Italy are a risk to watch. If we see a fiscal crisis in Europe, how much could it derail the earnings momentum you are relying on in the U.S.? How insulated is the U.S.?
That is a perfect example of what may bring the buying opportunity for U.S. equities. The natural reaction is to sell everything, let the dust settle, interpret the news, and distinguish the winners and losers. I believe U.S. equities will still be in the buying-the-dip category. For Europe, that risk needs to be watched. Europe has been doing very well, outperforming U.S. equities on a currency-adjusted basis over the last couple of years. You are still in the midst of the energy shock that matters more to Europe than to the U.S., and you are seeing for the first time in many years what it could look like with potential fiscal problems and lack of coordination. President Lagarde today committed again to the importance of the ECB stepping in and ensuring the monetary transmission mechanism is always in place. But we've learned in the past European headlines often get a little bit messy before coordination is achieved.
Is there any worry what is going on in Europe, France, could become more of a global event, or will it still be localized?
When the global picture, especially the global earnings picture and momentum, is relatively weak, that is a perfect catalyst with a high probability of becoming more systemic, more global. At the current juncture, that seems to be a very localized risk, localized only to France. The next step would be, does it become localized to Europe? Far from it at this stage, but it bears watching.
With regards to the moves we saw in yields, how much of it was a function of people looking — foreigners looking back to the U.S. as a safe haven?
I don't think we are seeing — Treasuries are a safe haven, I don't think the demand was into Treasuries because of the risk-aversion perspective. But rather, we got the answer that the clearing price has gotten cheap enough that at 5.3% yields, you attract buyers. That is important to remember when we are worried about the supply dynamics. Let's remember there is always a clearing price that makes it more manageable. And I think we are beginning to see these levels are attracting buyers.
Always a pleasure. The CIO of active investments over at ProShares, kicking us off to The Close. With a closer look at tech and tech talent, and the trepidation behind it on the back of those restrictions on some of those foreign worker visas. We will catch up with Jared Bernstein, former chair of the Council of Economic Advisers. We will go from macro issues to micro issues. Micro-robots specifically. We will talk about the man behind the startup to leverage AI to build microscopic tech, Uber executive Jeff Holden. And we will hear from Charlamagne tha God, his take on what is going on with regards to the world of politics and the economics of podcasting. A big deal. I asked whether he wants some of that cash. All that and more coming up.
We run a really strong operating model. It is a combination of our operating model, technology, and our people. All three work hand in hand to really drive a strong process that has delivered some receipts. 13 quarters in a row of truckload outgrowth, 10 quarters in a row of consistency. When you take that cost-to-serve model, which we know is the best in the industry, apply that to the book, we think there is tremendous opportunity.
That was the CEO of logistics and trucking company C.H. Robinson talking about the nearly $6 billion deal. But the underlying story is about the technology underpinning the deal, the technology that is driving this deal. Companies turning to AI to improve supply chains and boost their margins, and they look to logistics companies to help them get there. Joining us is the founder and CEO of Flexport. A lot to talk about, including some news in the world of diesel. I do want to start with that deal because of the technology and AI components, something you are no stranger to. Give me a sense as to whether, if it were acquired, is it the type of data and technology that makes things more efficient, or is it going to be an integration issue going forward?
It will be a fascinating area to watch. Can companies that build great AI and implement it in their supply chain use it to acquire other companies who are laggards? I can't comment where it is relative to Robinson in that regard. Robinson puts out press about the AI they are doing. Maybe they feel they can take that company on and transform it. I'm not that intimate on what they have been into.
You're intimate in the logistics space and how technology improves that. Give me a sense about this idea of the data out there that needs to be collected and the value of that for businesses like yourself, and making sure people can get what they need from one side of the world to the other.
I think we live in this age of wonders. We spent the last 10 years automating logistics. We've had it in the last six months and the few years combined, how fast we can move with AI, and really good at coordinating complexity. Ultimately that is what logistics companies need to do: take a lot of unstructured data, reason about it, make decisions, and act on it. We launched our Model Context Protocol server that allows AI agents to talk to our AI. We are seeing companies using it to program supply chains in ways — it was always like a pipe dream a few years out, all of a sudden it is here. I believe it is very real, and we will not be the only companies doing it.
Do you find most customers want the more autonomous process, or a human in the loop?
You will see both. The dream is an autonomous supply chain, but the problem is how do you link up the data sources to that and how do you trust it? We have built a lot of tools to trust AI, but for the highest-stake areas like customs compliance, you want an expert human in the loop to provide the governance and make sure we are compliant. But we are finding ways around that where we can have AI writing code, and the code runs the same every single time, deterministic. If you take an LLM, it doesn't always generate the same results, sometimes it hallucinates. As long as it is writing code and the human signs off, you can trust the results. There is a range of new strategies we are putting to work that will work in this regard. In the highest-stakes environments, you want a human in the loop.
We have seen some headlines that Trump is saying Vladimir Putin has agreed to release diesel into the global market and Russia will send another 500,000 tons of diesel in November. What is your reaction to how that will ease soaring costs or bottlenecks and constraints?
In both air and ocean freight, the price of fuel has been a huge barrier. Air freight, about 40% of the cost to cross the Pacific comes from the fuel surcharges. It will be interesting to see if that is enough to impact the price, because a huge amount of the price is driven by the demand for data centers. We are seeing about 30 freighters per day flying from Taiwan to the United States just with data center equipment. To put that in context, that's about 8% of the entire market's data center equipment. That is projected to grow three times over the next year. The fuel price will help, but that will be more demand than there is space in the world. There will not be enough air freight capacity to keep up. That is our forecast going into next year. It is going to be really hard to keep up with that demand.
I'm curious about another issue going on, putting pressure on freight rates, what has been going on with regards to the Suez Canal. I'm curious about the potential for carriers to return and what it does for rates. Will we see a collapse in rates, or more of a glide path down to what the mean was prior to this?
Interesting question. About 35% of the Asia-to-Europe trade on ocean freight has returned to the canal and the Red Sea routing. It had gone to almost nothing a year ago. That is a big impact. It will relieve the pressure on price. It is interesting to see because at the same time that is happening, they have restarted the war with Saudi Arabia, just had a terrorist attack or a drone strike at the airport in Riyadh yesterday. It seems a little bit fragile, to my view. But carriers are starting to return services, some of the holdouts have announced they will go back in October. That is a relief for people if it becomes a safe routing.
That is a great story on The Terminal talking about tanker rates, oil tanker rates, and how you are going to pay almost as much as it will cost to launch a SpaceX rocket up into the air. Do you anticipate we will get broad-based normalization in the supply chain routes and supply chain rates anytime soon?
I mentioned air freight, the big story is data centers. Ocean freight, not a huge story. We have the big surge of volume happening that is hard for people to explain. My personal best explanation is companies got so much money from tariff refunds, over $120 billion issued so far, that companies don't really have other things to do with money other than buy more inventory. So you have a big bubble of inventory moving. At some point we probably work through that and have a glut of inventory. There is no other big story for why the price of freight should be what it is in ocean. We are seeing a $10,000 container from Asia to the East Coast of the U.S., almost back to where we were pre-COVID. Probably the big surge of inventory buying from the tariff refunds. I suspect it will come back down, and the return to the Red Sea will be a big part of that, as is basically an increase in supply to the market.
We have to leave it there. Ryan Petersen, founder and CEO at Flexport, as we continue to march toward the closing bells. Big movers on the day including Delta, hitting turbulence after the company reported earnings that were good but gave a bit of a forecast that caused some concern. That conversation coming up next.
Delta shares under pressure after the airline cut its full-year outlook on higher fuel costs. The CEO saying on the conference call he expects the fuel bill to go up by $6 billion this year. Sully Sykes joins us now, she covers this airline and the others. I want to talk about a company that, when you talk about the most recent quarter, a 16% jump in revenue. We saw capacity relatively flat. The bastion of good news about fuel prices, do you have clarity after that conference call and the earnings report as to when we might see some sort of normalization and their ability to digest these prices?
The fact we started the year and we are at $4.50, the fact they are putting up these profitable earnings quarters is quite remarkable. It shows the resilience of the business, the economy, and the benefit they are getting from their refinery. Not a lot of insights as to the fuel normalizing. But the reality is, the longer fuel is high, the more the industry will push through fares, management adjusting capacity. Delta has shown it has the wherewithal to withstand this and take advantage of whatever corrections there are.
It is interesting because Delta is touting 60% of its revenue came from diverse streams. If you look at those, premium products, which might be hit if consumer spending cools on higher rates, and Amex, volatile and heavily dependent on global trade. Could this diversity prove to be a risk?
That is a good point. A lot of those are tied to cyclical drivers. That said, when you think about loyalty revenue, it is not as cyclical as ticket revenue is. Some are based on purchases with partners or card swipes that continue through downturns where consumers are going elsewhere and spending in places. It gives diversity. You have the MRO business Delta has, maintenance, recurring operations, and that is less cyclical and less maintenance done. So these are all different, diverse revenue streams that should show less cyclicality than pure main cabin ticket prices.
With regards to the growth in the premium business, you see that as structurally sustainable. When you start to see premium overtaking everything else, at least on a revenue basis, is there too much exposure to the affluent customer, or is that not a worry?
I think the problem is not necessarily a problem of premium, you're right. At some point, doesn't the premium passenger get impacted? Which that is the kind of passenger segment that has been really consistently strong over the last five, six, seven years. The market crashes or something like that, the passenger can get impacted. But I think the nuance is the industry has segmented the cabin. It is not just one single premium product. I think there's more durability across the products as you go through the cycle. For example, some of the premium products is premium economy. In the downturn, folks in the business class cabin might downgrade to premium economy and not go all the way to the economy cabin. It is not just leaning into premium, it is also segmenting that experience and premium, and having better resilience than in the past.
Always appreciate it. We will catch up with you soon. Delta first out the gate among the big airlines. The managing director at Raymond James. When we come back, we will refocus on the tech industry. The Trump administration's decision to ban Microsoft, Adobe, and six other companies from a key U.S. worker program. We will talk to the former chair of the Council of Economic Advisers and what it can mean for the labor market. That conversation is up next on The Close on Bloomberg.
There has been no company in the United States that has abused this system more than Microsoft. We have decided to suspend the program for Microsoft, which means they will no longer be able to apply — they will no longer be able to take those H-1Bs and apply for permanent residency in the United States of America.
U.S. Vice President JD Vance talking about the ban on Microsoft, Adobe, and several other big tech companies from accessing a key visa program. Joining us to talk more about the economic implications is Jared Bernstein, former chair of the Council of Economic Advisers. To be clear for our viewers, we are basically talking about the PERM program, a step in this broader process that involves H-1B visas, but this is a way employees who are working for these companies could gain permanent status in the U.S. I understand the argument the administration has been making that, effectively in JD Vance's words, it basically creates indentured servants to a certain extent because the immigration status is dependent on their employer. My understanding with the PERM program, to a certain extent, was the bridge off of that, to use his phrase, indentured servitude status, to something more permanent. What does this accomplish, if anything?
Let me point out I'm here in Silicon Valley, my other policy appointment is at Stanford's Institute for Economic Policy Research, that is where I'm speaking to you from today. I'm in the heart of all of this. There may be 600, north of that, 1,000 workers in this country at any given time, and those tend to be three-year rolling contracts. As the Vice President said, some of those, employers try to get them onto the program, PERM, the permanent labor certification program — that is not permanent, but allows time to stay here and is a bridge to a green card in many cases. What it means is the companies in question are going to have a harder time, if the administration goes through with this, getting employees through these channels. That might sound good to domestic workers in this sector, but the research shows if anything, there doesn't seem to be a lot of competition between these workers. In fact, H-1B and some of these other programs work to expand the sector for all comers. It is helpful for getting the entrepreneurial workers, the workers these sectors need to expand. I don't look at this, and I don't think most economists would look at this, as good.
Give me the fears longer term, the idea of the impact on the labor market and the available pool of talent. I know the initiative is pitched at this idea of creating or retaining more jobs for American workers. But is the risk we see more of these multinational companies relocate these tech workers to Canada or India or whatever favorable environment they could find?
There's a lot of different channels this could play out. Certainly the offshoring you talked about is one of them. Another is our visa system is absolutely a complicated mess. It is a real cluster bomb. One of the things these companies do is try to find other ways to do this. As you pointed out and JD Vance said, this is not touching the H-1B program. Perhaps they will find a way to bring in more workers or continually roll them over. I've never seen these kinds of interventions really do much in terms of blocking companies because they have so many other channels. It is kind of a harassment factor if anything else. You literally have employees at these tech companies whose job is to figure out how to bring in workers under these different visas, of which there are many different types.
Since you are sitting in Silicon Valley, are you hearing concerns from some of the companies about whether this could trigger or continue a brain drain out of Silicon Valley?
What I'm hearing is the kind of concerns I expressed. Less about a brain drain and more about spending time figuring out how to get around the latest barrier the administration put up for them. It is kind of an elegance to the tariffs and protectionist measures. If you block Chinese imports, it turns out they will come at you through Mexico. There are many different channels these firms can use to draft workers from abroad. And for the record, I sit here at Stanford, charting folks who work in these sectors, there is still a robust pool of workers, American workers, domestic workers to go into this space. What I hear mostly, and from some of the younger folks here at Stanford, is nervousness about AI displacing them, not any of these complicated alphabetical-soup immigration programs.
The administration almost simultaneously has said it opened investigations into foreign exchange visitor quotas at nine of the top universities. Does choking off this pathway undermine the U.S. plan to be a global technological leader?
Very much so. This is really one of the ways in which we develop the workforce of the future to help support the innovation, the innovative labs, companies, and firms within 10 miles of where I sit right now. To block those folks from coming over here not only creates a level of ill will between us and some of our trading partners, or even our non-trading partners — by the way, many of those kids are paying full freight, so that hurts the universities as well. I think from an innovation point of view, it is backwards. If you look at patents, Nobel Prizes, the kinds of innovation cycles that characterize places like this where they have agglomeration effects in areas like Silicon Valley, you can see a connection between folks coming here to help in that sector and blocking them. It is very much cutting off your nose to spite your face.
Jared Bernstein, out there in Silicon Valley right now. The Center for American Progress. When we come back, turning to the public markets and the start of earnings season. We will hear from a lot of the asset managers like BlackRock, Charles Schwab. We will set you up for what to watch as part of our Stock of the Hour on The Close, right here on Bloomberg.
Delta kicked us off to earnings season, but it really gets going when we hear from financial companies. That is our Stock of the Hour, a closer look at the asset managers. We will hear from the big banks and BlackRock, Schwab, State Street, and a lot of the alternative fund managers to set us up for what to watch as their earnings come down the pike. We are joined by the lead asset manager and capital markets analyst at Goldman Sachs. Are you ready for next week?
Let's start with BlackRock. AUM at another record, it seems like, although the stock has been a little flat. But give me a sense. What are investors looking for? Growth from BlackRock that you are expecting in this earnings report? Is it organic?
The environment seems challenging. The move in interest rates has caused a lot of volatility. Back to your point, another record AUM from BlackRock. But it is the organic fee growth we pay most attention to. The flows will be something to the tune of $180 billion, a lot of organic growth. Most importantly, we get a lot of organic fee growth. A passive franchise, but there is enough momentum in alternatives and parts of the active business collectively generating high-single-digit organic base growth, tough to find in those traditional asset managers.
I think with a lot of the other products, can BlackRock really be in the private markets business? Is it material to BlackRock's business?
I would argue it is pretty material. Collectively, private markets is north of 20% of the business, and if you think where they are aligned, a lot is private credit, a lot is infrastructure, the segments that are the faster growing, and they have built a sizable network in the channels to really accelerate growth in these businesses. We think it is contributing materially.
When it comes to the AI opportunity, asset managers are making a big play. How do you evaluate the interplay between them making the most of that opportunity and balance sheet management? Do you expect them to bring in more third-party capital? What do you think?
BlackRock and a number of others, for these companies it is one of the more underappreciated themes across the asset management space. When you look at the demand for capex and to build out all things infrastructure-related, the public markets from the hyperscalers will not be enough over the next several years for everything out there. Leaning on private markets, it will be a big theme over the earnings season and into next year. There's a couple of ways to monetize it. Some we distribute to either internal insurance companies like we have seen with Apollo or external clients, predominantly insurance, but other investors, and syndicating. The syndication business when it comes to distributing private credit from AI-related infrastructure is becoming a material driver.
Speaking of AI, I want to go back to BNY and why they made a lot about their use of AI, but I'm also curious about whether it has become more exposed to the rate environment in a way that they hadn't in the past?
They have been — early in this journey we talked about AI, but more from a cost synergies perspective and cost savings. It is still early days for productivity that we are seeing across financial institutions when it comes to using AI. BNY has done a nice job expanding margins over the last couple of years, a big part of the story. We expect the story on margin expansion to be progressing over the course of this year and into next year. AI is early days for a lot of institutions.
About 30 seconds left. Pushing ahead, getting some of those names, is it going to be bad, or should we be more optimistic?
Probably more optimistic than what the market implies. If you look at today, we are at all-time lows in teens for this group. We will see pressure on monetization from interest rates, but we don't see much change from a management fee growth perspective. The retail channel continues to heal in direct lending and other parts of the model. The mid-teens management fee growth still seems durable.
Always a pleasure. Alex over at Goldman Sachs. A nice look ahead to company earnings from the financial companies. When we come back, counting you down for The Close on Bloomberg.
Just about 10 minutes until the closing bells on this Friday afternoon. I'm Romaine Bostick.
A market with fits and starts. The record high on Tuesday, Wednesday and Thursday a little soft, but a rebound towards the weekend.
I think investors are getting ready for positive earnings seasons. It starts in earnest next week. And a look at the major banks reporting as well.
Talk about the relative breadth, but we have the S&P 500 higher. It was saying yesterday when it closed lower, it raised a lot of questions about potential rotation rather than any sort of wholesale walking away of what is going on. You see that on your screen, the S&P 500 up 0.60% on the day. All of the major indices with the exception of the Russell 2000 look like they're going to close out the week in the green. Joining us is the portfolio consulting director at Wealth Enhancement. The count is down to the closing bells. I want to start with the idea of investor sentiment. At a time where stocks are at record highs, but so many investors start to sort of navel-gaze a little bit and wonder whether the best has already happened, whether it is too late to add to new positions, enter new positions. What are you hearing most from people?
Portfolio Consulting Director
37:28 ↗
When it comes to what we are hearing from clients, we recognize people are a bit skittish. We are approaching the fourth year of double-digit returns in equity markets. And the 5% yield on the 10-year gives everybody a bit of a pause in terms of what it means for valuations and equity markets. We like to take a long-term lens. You are still getting earnings growth out of many of the companies within the equity market. And you are getting good income on the fixed income side at 5% yields. I think you are getting a weight in both markets, whether it is equities or fixed income.
Give me a sense on the interplay between yields and what we see in the equity market. On a nominal basis, I can get a 5% coupon. On an inflation-adjusted basis, I can get paid out 3%. There are ways to stack in the fixed income space where I get those gains to 7, 8, 9%. That reads to me like a real competition for equity returns unless you think the next leg of the bull market will be as phenomenal as the first?
Portfolio Consulting Director
38:41 ↗
Absolutely. That is good competition and it allows for equity market investors to be more selective, and we need to rely on some of the earnings growth we are seeing. Still getting almost 30% earnings growth in the S&P 500, 12% revenue growth out of these equities. We acknowledge a lot of this is being driven by one theme in terms of AI, but you are getting strong growth. If earnings do a lot of the hard work, we have seen it this year, that you can get pretty good returns even when the multiple compresses for this earnings growth we are seeing.
You note AI-related concentration in the S&P 500 is near 50%, but you don't want to chase big tech. So how do you stay invested in the Mag 7 without taking on the dangerous concentration risk?
Portfolio Consulting Director
39:40 ↗
It is a great question. When we look at AI in general, you are seeing this concentration risk because it is touching so many different companies. Not just the Mag 7 and tech companies, but in industrial companies, utilities, all areas of the markets. So for us, you want to have a balanced, diversified approach and find areas within the market to balance out the growth you are seeing with AI, with areas like financials, energies, some of the materials companies, health care. There is a way to construct a portfolio so you get some of the value component and not just all of the growth within the equity market exposure.
You are also bullish on banks, which start reporting next week. Bullish on banks that keep deposit costs low. You note the consumer is in a tough spot. Interested to hear more about your thinking on who is well-positioned?
Portfolio Consulting Director
40:49 ↗
When it comes to the large banks, we like the names like J.P. Morgan. We recognize in the higher interest rate environment, loan demand can soften, and that is why we are getting a bit of a pullback. That is where the opportunity lies. A lot of these banks, especially multinational ones, they have multiple ways to win in terms of earnings growth. Not just about the loan growth, the capital markets side continues to do well, activity remains robust, investment banking and the fee revenue business also remains pretty robust. We like a lot of the banks and the financials are relatively cheap. The whole sector, financials, trading at 15 times forward earnings.
Give me a sense of earnings season where overall we are talking 20-plus percent growth on the S&P 500 and in certain sectors it is multiples of that. No one thinks that is sustainable. Doesn't mean you can't take advantage of it. How do you prepare yourself for the idea that at some point we will have a glide path down to a percentage growth level that is more appropriate with history?
Portfolio Consulting Director
42:04 ↗
I do think that sustainability issue is top of mind for investors. That is why you have not seen that exuberance across markets or in equities as you did in the 1990s when we were building out the internet. This time around we are keeping multiples relatively tempered because we know earnings growth, you are getting long-term demand drivers that will continue to be there as they were when we built out the cloud infrastructure for many of these tech companies. If that is sustainable at these double-digit growth rates, it will expand over time. It will depend on what the interest rate backdrop and the cost of capital will be to sustain those earnings growth rates.
I have to ask you, about 60 seconds left. This is about small caps. Do you find on a risk-adjusted basis something to embrace or something to be wary of?
Portfolio Consulting Director
43:10 ↗
In a higher sort of interest rate environment, small caps tend to be more sensitive to what is going on with rates. There are fewer profitable companies within the small-cap universe. If you look out longer term, we think it is an opportunistic time to dabble in if you don't have that exposure.
