Liz Ann Sonders, chief investment strategist at Charles Schwab, says market participants could be in for a surprise as they are not anticipating an increase in inflation from tariffs. She speaks with Bloomberg's Tom Keene and Paul Sweeney.
Bloomberg Audio Studios, podcasts, radio news, what you do and this is a queen of bullet points. Excuse me, Lizzie and Saunders out with not like a year foward's look, but a bullet point view here, Lizzie Sanders, I was talking to the derivatives expert Amy wu Silverman about at H what does all time high do to how we invest well?
It certainly works through the psychological channels, especially for individual investors, and I think it helps stribes some of the momentum. But we also have to look at what's going on underneath the surface. And that's been a story we've been speaking about and writing about really for the past couple of years. Kind of this idea of a tale of two markets, or maybe the you know what Michael Kaine used to say about the duck, you know, calm on the surface and you know paddling like the dickens underneath. And you know, over the past year on a year to day basis, SMP hasn't even had ten percent correction. We've had you know, I tak a record breaking number of all time highs, but the average member within the SMP has had nearly a bear market level maximum draw down, and it's even more extreme for the NASDAK The average member maximum drawed down within the Nasdaq is forty seven percent this year. It's just happened through a lot of rotation and churn under the surface, which you wouldn't necessarily notice if you're only focused on cap weighted index level games, where we do sit still at our near all time highs.
Well, you just heard folks worldwide and particularly across American exceptionalism bottle that what you just heard from liz Ane Saunders, Paul, you can be up this cap weighted, not cap weighted, but the internal churning, and you had that huge Nasdaq negative forty six percent statistically.
Yep, Lizen. So if I just look at SBX up twenty five percent in you today, but the equal weighted S and P five hundred up eighteen percent, is that differential? How concerning is that to you? Or is that more in line with what we typically see?
Well, really, since the mid July initial high in the market that then was immediately followed by a correction in the case of the Nasdaq and nearso in the case of the S and P five hundred, that really kicked in a period of better performance and relative terms for equal weight relative to cap weight. I think that that story still has legs. That doesn't mean equal weight's going to outperform cap weight, you know, every week or every month, but I think that there is some momentum and likely will continue to be in this I guess you would call it a story of broadening out, but it's in the context of what we continue to think will be fierce rotations at the sector level. Sector dispersion is really high, and I think taking an equal weight approach versus say, taking a cap weight X some sort of group X the magnificent seven, I think that's a little bit more dangerous and exercise if you're going to completely eliminate some of those megacap names that are high contribution to capuited returns. I think equal weight still gives you exposure there, but without that same concentration risk.
So I think we got seven trillion in cash? Is that the number? Ziane Saunders? Do we enjoy eight trillion in cash next year?
You know when you're in a FED cutting cycle. We don't know whether we're still in a FED cutting cycle. I suppose we'll know more at the December meeting. Surprisingly, perhaps flows tend to continue to be positive into money market funds. So when I hear this sort of cash on the sideline story suggesting that some are a lot of that money sitting in money market funds, is some immediate we're near term fuel for the equity market. I'm not so sure about that, especially now, given stickiness on the high side across the sort of yield structure, and I think some of that money may have actually come from riskier parts of the market, includingquities, when interest rates were moving up, and I'm not sure that that money quickly moves back into the equity market. So I think at least the money there there that's sticky. But I think if the FED it goes into pause mode and we don't see a continuation of this easing cycle, yes, I do think there could be more money that moves into my markets.
Lizen talk to us about kind of your view of the earnings. We're just finishing up this earning cycle, and we've got a lot of companies or some companies providing guidance for the future. Did you take we're earning strong enough to support this market here or you have some concerns coming out.
Of earnings well, you know, you saw estimates really get cut when you were in the aftermath of second quarter reporting season four third quarter. So we came into third quarter reporting season with an estimate of only four percent growth. We ended up more than doubling that when all was said and done. And that's just the classic example of the bar gets set low and the companies are able to exceed that bar. But you did see downward trend to fourth quarter estimates. There hasn't been much cutting yet for twenty twenty five estimates. I think that's the mo these days of analysts, they're kind of keeping those adjustments closer to the vest in terms of an out time frame. They'll make adjustments to one quarter out. What concerns me about twenty twenty five estimates is they're double digit for all four quarters and it assumes record breaking profit margins. That may be a bit tricky, especially given the uncertainty with regard to Tariff's.
Two quick questions, what's your number one factor to study to analyze into twenty twenty.
Five rate of change in terms of profitability factors versus level?
Do you do cash flow as well?
Yeah, you know, strong free cash flow, a high interest coverage, strong return on equity, those quality factors, I think, but I think the rate of change versus level is maybe more important this year.
Hot Stovely, Kevin Gordon's a free agent. Are you going to bring him back for two thousand?
Of course I'm bringing him back to twenty twenty five. Absolutely, does it charge?
I mean, she's out there, you know, liz Ane's listening to led Zeppa. Gordon's doing all the work. That's the way it's Lizzie Saunders, Kevin Gordon, thank you so much. With Charles Schwab and Sanders as chief investment strategists there as well,