US Equities Look 'Robust' Even Without Fed Cuts, SocGen Says

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Watch US Equities Look 'Robust' Even Without Fed Cuts, SocGen Says - Bloomberg on Dailymotion

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00:00So I think there's been a very important theme last year around the de-dollarization,

00:04diversifying away from the U.S., particularly after Liberation Day.

00:07But one of the things we have to realize is that the earnings power of U.S. companies

00:12have essentially outperformed.

00:14And whilst we had an exit from the U.S., investors were forced to be pulled back

00:19in the U.S. equity market because of the earnings momentum.

00:22So I think there is some diversification, but if you look at return on equity,

00:25profitability, innovation, creativity, et cetera, U.S. companies are still ahead.

00:32And the quick point around AI, it's interesting to think about the scale.

00:37I think it's not a sprint, it's a marathon.

00:39So total global GDP is around $110 trillion.

00:43Labor share of, labor income share of GDP is around 50 to 60 percent.

00:48Let's say $60 trillion.

00:49Knowledge workers, 30 percent of that.

00:51So let's say $20 trillion.

00:52So if AI has 10 percent total addressable market, so 10 percent of that $20 trillion,

00:59we're talking $2 trillion in terms of potential revenues and cost savings, et cetera.

01:05And this is where, as AI gets older, because it's a three-year-old entity,

01:11so as it becomes more of a teenager, then the market share will go from 10 to 20 to 30 percent.

01:17And this is where the views from investors, that it's not a bubble, it's more of a boom and part of a marathon.

01:24So let's say it's adolescence or getting near there.

01:27Yeah.

01:27How much pressure could it put on wage inflation if we flip this into a macro story?

01:32Yeah, very good point.

01:33And this is the whole debate around labor productivity.

01:36So today there's a lot of use cases that are being deployed across companies,

01:40but there still needs to be empirical evidence in terms of lowering wage inflation,

01:47because today we see sticky service price inflation.

01:50However, if you look at developers or IT workers, the new jobs offering is down 30 to 35 percent since ChadGPT was launched.

01:59So we are clearly seeing an interesting dynamic, but it's maybe early days.

02:04But over time, this will clearly put pressure on wage inflation.

02:09And that ultimately may solve the debate as to whether inflation is going to go back lower over time

02:16or whether it will be sticky for longer.

02:19So then if you take it back to stocks, can the U.S. stock momentum continue if you don't have as many Fed cuts as priced?

02:27Yeah, so this is also an excellent point.

02:29And I think that the Fed cuts and monetary policy cycle is important to remember

02:35that it was in response to the inflation outbreak we had with COVID.

02:39So we are essentially going back to our star, which is the neutral level of interest rates.

02:44And now it's more around the earnings power of companies and their ability to generate revenues.

02:50So today the U.S. equity market is roughly $60 trillion.

02:53Europe is around $14 trillion in terms of market cap.

02:55So we cannot move away from the U.S.

02:59And even if we don't have lower cuts, the view is that this CapEx and also the midterm election,

03:06because you have relatively lose monetary and then lose fiscal policies and measures by the U.S. administration

03:15to boost the economy into the midterm.

03:17So all of these points to a pretty robust U.S. equity market outlook.

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