Transcripts For BLOOMBERG Bloomberg 20240703 : vimarsana.com

BLOOMBERG Bloomberg July 3, 2024

I am Katie Greifeld in new york. Welcome to bloomberg markets. When it comes to the s p 500, building slightly on yesterdays losses. S p 500 currently off about. 1 . You did have a selloff yesterday. Managed to open a little bit higher this morning. About 30 minutes in, those gains have dissipated. Big tech, nasdaq 100 trying to say in the green, currently up about. 1 , even though you have that selloff in the bond market continuing. The 10year treasury yield higher by another seven basis points, rapidly approaching 4. 70 on that benchmark 10year yield. We will see if we get there today. First, lets talk about the last of the Big Bank Earnings rolling out this morning. Bank of america and Morgan Stanley topping estimates, with bank of america with one of their best First Quarters on record. Lets get more details. Lets start with bank of america. What went right . Netnet income finally beating expectations. We did not see the same for some large bank spirits are to meet there is not only a bit of a coup, they say they expect Net Interest Income to bottom in the second quarter, which is the current quarter, and rebound into the second half of the year. They say they are stunned by the amount of savings and consumer accounts, cash on sidelines, and they are pointing to a rebound in amend bang and capital markets. Similar with Morgan Stanley. They say we are at the beginning of a multiyear cycle in mergers and acquisitions. Morgan stanley beating on trading in investment banking, still missing on advisory estimates. The ceo pointing to a bit of a rebound. For Morgan Stanley, there is the outstanding matter about probes into their wealth manager. The ceo saying the conversation with regulators is nothing new about onboarding new clients. This is particularly important because we did see earlier in the year Morgan Stanleys stock take a significant hit tied to that news. Now are rebounding on the day. Kailey were finally at the end of the Big Bank Earnings. In just about a minute, tell me your biggest takeaways from this season. The big boys are coming back. The big institutional businesses are now what is looked at to be the next driver. He had trading businesses hold on very strong and very competitive. You had underwriting jump back. Jp morgan bringing 1 billion of debt underwriting fees alone. So as long as that keeps going, you can see interesting movement here in terms of increasing fees. To offset weakness elsewhere if lending to the broader economy will start to slow. Katie appreciate your reporting. Lets be joined by Lori Calvasina of rbc capital markets, head of u. S. Equity strategy. Im so excited youre here because a selloff in the bond market, when it comes to the equity market, you cannot ignore it anymore. You write that generally you think higher inflation and fears over higher Interest Rates are good for the mega cap Growth Stocks. Im excited about that because that is a little bit un intuitive. We have been told higher rates are bad for big tech. Now you see the opposite dynamic at play here. What they are also saying is that broader rotation trade that the crosscurrents are very complex. One of the things we have noticed, and this is what that was alluding to, if you look at the post sbb environment, a very short term relationship for about the past year, is that 10year treasury yield moving up, then we have been seeing any kind of mega cap growth cohort you can come up with. We use the top 10 names in the s p, and those traits have basically been alive with moves in the 10year treasury yield. You think about last fall when we saw the 10year treasury yield spike, that was one of seven sort of periods we saw mega top Growth Stocks really move up. We did some digging then to see what was going on, and if you looked at the top 10 names in the s p against the rest of the s p 500, we found much better Balance Sheets in the extremely big mega cap Growth Stocks. Obviously, that is not true for every single one. But we saw it on the median basis. We think that sort of Balance Sheet fears and Interest Rate fears were one of like 10 Different Things that pushed people from mega cap Growth Stocks last year. I have another chart that looks at longerterm relationships, showing things like when 10year treasury yields move up, the s p 500 Consumer Discretionary sector underperforms. The s p 500 Communications Sector underperforms. Some of those big techish type areas of the market have seen inverse impacts from Interest Rates. Consumer discretionary stocks, tech, expect pressure when Interest Rates are rising. That is a longterm relationship. But in the post sbb world, there has been a quirk on how the mega cap Growth Stocks have been trading. Katie look at Balance Sheets a little more, you make the point that a lot of it comes back to the better quality Balance Sheets, but what do they actually look like for this top 10 names when it comes to things such as duration in this higher Interest Rate environment . We look at duration for the top 10 names, looking at the net debt to ebita levels, and we found they really do not have Balance Sheets in this cohort. I think it is a decent Reference Point for today, we saw 10year treasury yield move up quickly run 5 . The fear was we have to refinance all this debt, and people were not taking many steps on the arguments but wanted things with lower debt levels and wanted safety traits. That is one of the tailwinds we saw emerge during that period, and i think it manifested in a broader safety trade and then overlay the longerterm secular growth gains on things like ai that obviously make people feel better. Katie look at the 10year treasury yield right now, approaching 4. 70 , which is one step on the path may be returning to 5 . Do people need to be worried about heise Interest Rates in the equity market where would that fall, is that the inverse of the big tech stocks of smaller Cap Companies . We certainly do notice that anytime people really get upset about Interest Rate moves or start to price in things like no fit more fed cuts, more fed hikes, you can look at the cpi days, and you do see the small caps take the brunt of the pain when we get a negative cpi reading, for example. If you think about the broader rotation trade for many to come out of the mega cap growth stock, it has to go somewhere else. Small caps are one of those, big destinations, kind of the flipside of the coin. Small relative to large, when you have a tightening fed, small caps underperform. Easing mode and cuts, that typically triggers smallcap outperformance here at think the destination for the rotation trade, smallcap, that cyclical part of the market really cannot work until you get some cuts. Katie interesting. Small caps are fascinating to me. Some people are optimistic about the space. And you look at valuations and forward p es, theyre really cheap relative to some of the other indexes. But sounds like for it to really work, we need to see fed cuts. Yeah. Look, i have those charts. Cftc data, small caps look under owned. Nasdaq and s p cftc data, those big cap growth parts of the market look really crowded, at, in line with, or above. 15 times p e and the russell 2000. Or something much higher in the rest of the market, this top 10 names we talked about before. We agreed, you have all these great things going for small caps, and small caps should benefit if economic tilmans are. If gdp forecasts keep going up, that is a powerful tailwind for small caps. But those are going smack dab into some headwinds right now with the inflation and Interest Rate story. I think it is interesting that so far, small caps are not really breaking the low from november 2023 relative to the s p 500. We will see if i am right about that in couple days. So far, the small caps are fighting back, and i think it is because of some of those good things they have going for them. Katie definitely a space to watch with a lot of crosscurrents but also tailwinds. Have about a minute left with you and we have not talked about earnings. This talk about this upcoming earnings season. There was an interesting note from j. P. Morgan yesterday saying a lot of the good news on earnings, it is already priced into this market. Your take . We all get caught up in the consensus estimate, our forecast as a strategist, and so on. But we need to stop fighting about this i the summer. Estimates are too high to start the year, too high at this point in time in the year. They typically get cut and settle out by june or july and end up close to what the Consensus Forecast was at the middle of the year when we get to the end of the year. Cuts are normal, nothing to get overly worried about. I do think some of the bears in the marketer overstating the case a little bit. The street is that 2. 42 . We will see what happens. I think there are a lot of cost pressures. Management teams are good at defending the bottom line. I do think we have a decent set up. And guidance has been overwhelmingly to the downside, so companies have been trying to keep a lid on expectations. Katie really enjoyed this conversation. Thanks to Lori Calvasina of rbc capital markets. Coming up, Johnson Johnson narrows its Profit Guidance for the year. We will speak to the executive Vice President and chief Financial Officer joseph wolk, next. This is bloomberg. Were you worried the wedding would be too much . Nahhhh. inner monologue another Destination Wedding . . Why cant they use my backyard with empower, we get all of our financial questions answered. So we dont have to worry. Empower. Whats next. Super excited to open up my diploma from Southern New Hampshire university. Im nervous, im excited. [man] okay, lets see it. Lets see it. Oh my gosh. Jesus suarez, i did it and its here. group cheers [narrator] next term starts soon. Visit snhu. Edu. Visit snhu. Edu. Katie one stock we are following is Johnson Johnson. Their First Quarter profit beat wall streets estimates, but it slightly narrowed its adjusted Profit Guidance for the rest of the year. I am thrilled that we have joe wolk, the Johnson Johnson executive Vice President and chief Financial Officer. Lets start with that adjusted Profit Guidance for the year, narrowing to a range of 10. 57to 10. 72 a share. The earlier forecast was for 10. 55 to 10. 75 a share. Why the narrow range . Good morning. Rate to be here with you. Thanks for your interest in Johnson Johnson paired we had a really strong First Quarter, encouraged we will be able to meet the guidance we outlined in january. With the passage of one quarter, we see less risks. From an operational perspective, we took out and raised the floor on our earningspershare, as well as ourselves guidance. There is a little bit of an fx headwind. We end up at the same midpoint, but the part we can control with respect to our business is very much in hand and were very comfortable with where were at for the full year. We saw 7. 6 growth, really bolstered by pharmaceuticals growing at 8. 3 , med tech growing at 6. 3 . As well as that has progressed for the near term, we are really emboldened by the number of clinical milestones we hit throughout the quarter, specifically in pharmaceuticals. We had five approvals, three more filings for approval, and a number of data readouts. And very important areas like multiple myeloma, lung cancer, and psoriasis. On the meditech side, we deceived approval in our marketleading electrophysiology category. We are very active deploying capital. We did announce a plan to acquire shockwave medical. That complements another acquisition we closed earlier this quarter. We increased our dividend for the 62nd and second of year. We maintained our commitment to the level of rmb investment. Katie a lot to get into it with guidance, if you resell for but also lower the ceiling, you end up in the same place. When it comes to the guidance, i believe last year at this time you called out the guidance as being characteristically conservative. How would you describe the current guidance that you delivered today . I would say it is comfortable right now. If you think about what we delivered in the First Quarter relative to consensus on the street, we beat by six or seven cents. We are supplying about three cents with the rays in the operational performance. The reason we are hedging our bets a little bit is because of the clinical advancements i mentioned in the First Quarter, being so early in the year, i would give our scientists every opportunity to advance the pipeline even further, find new molecules, new therapies that could impact patients and improve the longterm performance profile of Johnson Johnson. That is how we are thinking about it. If last year was responsively cautious, i would say we are comfortable with where we are at right now. Katie lets talk about the pipeline and portfolio. I want to talk about solaris, your bestselling psoriasis drug, which revenue came in below estimates. It is expected to decline as similar competition enters the mix. What of the portfolio or pipeline has the best chance of replacing that revenue . The good news is it has already been replaced with the director multiple myeloma. It became the largest Johnson Johnson product. About 75 of ourselves actually are for patients who experience inflammatory bowel disease. Only about 25 are related to psoriasis. We have another drug that grew at 28 , and then one for Prostate Cancer that grew in the 20 plus category. So were very comfortable that the assets that will really carry us through in this decade are already in place to make up for the loss of the specific one you referenced with respect to stelara. The pipeline is emerging. We have an antibody for multiple myeloma that blew away expectations in the quarter and a number of assets in the stable, if you will, that are already on track and improved in our market to replace that. I will remind folks, the loss of exclusivity on still are is not a drop off a cliff event. If you look at the competitors out there who had similar biologics and when generic, they did not experience a dramatic drop in revenue. We expect putting much the same in still are stelara. These are critical diseases. Patients and physicians are reluctant to jump off those therapies when they are working so well. Katie talking about cardiology, you mentioned the acquisition of shockwave. That was earlier this month. How do you see that fitting into the cardiology portfolio . And i want to talk about the dilution, a 10 cent in 2024, 17 cents in 2025. What made you comfortable with that . In terms of shockwave, we are excited about that. It is complementary to the presence and leadership we have in electrophysiology with our webster unit. Acquisition we made and completed at the end of 20 for heart failure, the worlds smallest pump. Shockwave is a different space within interventional cardiology, but it really complements the portfolio. It is a highgrowth margin market, good margins. It is and asset Johnson Johnson can glue use a global footprint and our expertise in other areas of cardiology to expand that platform even further. With respect to the dilution, it comes down to financing. With your prior guest, you were talking about higher for longer with respect to rates. We have significant cash balances, and there is an opportunity cost to using cash that we thought maybe going the debt route would be more advantageous from that perspective given our aaa Credit Rating and the cash flow we generate year in, year out. We are evaluating that and have to hear from the regulators first on the shockwave acquisition, then we will determine the best way to finance that. Katie lets talk about the future. In the notes you sent to my producers, you write ever strong Balance Sheet will continue to enable flexible investment of capital into a combination of organic and inorganic growth. Are there more m a type deals in your future . Possibly. We are always looking at someone asked if we were done this morning, and you really cannot commit to being done or not. What we can commit to his we are always looking. If you look at Johnson Johnsons history of the last 25 years, about 40 of our growth comes from inorganic means. We look through the lens of having that strategic fit, so scientific capability, commercial expertise. Perhaps it is the global footprint. And then layering on the financial returns. Are we earning enough to compensate for the risks we are bearing on their behalf . If we do not say we are done or just getting started, we are always constantly looking. Katie i re

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