Speaker 1:
From the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, welcome Inside the ICE House. Our podcast from Intercontinental Exchange is your go-to for the latest on markets, leadership, vision, and business. For over 230 years, the NYSE has been the beating heart of global growth. Each week we bring you inspiring stories of innovators, job creators, and the movers and shakers of capitalism, here at the NYSE and ICE's exchanges around the world. Now, let's go Inside the ICE House, here's your host Lance Glinn.
Lance Glinn:
Back in March, on episode 460 to be exact, Kristin Scholer sat down with Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily, the must-read newsletter chronicling the pulse of the stock market and economy. After we wrapped the recording, Phil and I had the same thought, how could we take this further? Well, starting today, we're answering that question. Each month Phil will join me for a recurring conversation, breaking down the biggest headlines shaping the markets. You can catch these special episodes right here on Inside the ICE House, wherever you get your podcasts, and by subscribing to Opening Bell Daily. Phil, thrilled to have you back here at the NYSE, excited to get this going.
Phil Rosen:
Thank you for having me, Lance.
Lance Glinn:
So, let's jump right into it. Now, where else to start but of course, the Fed. And there's been this ongoing debate in markets, and frankly even inside the Fed itself, about whether the central bank should start cutting interest rates or continue to stay the course, as it's done, and as it decided to do in the last meeting in July. We haven't seen rate cuts now since last December, so when you look at just where things stand, how do you interpret this real divide playing out and the arguments from both sides of the conversation?
Phil Rosen:
So, first of all, I think the Fed has a very difficult job, and I've said this for a long time, the Fed is a backward looking institution, so their mandate forces them to only look backwards. And that would be a very difficult job for any Fed chair to navigate, however, I think Chairman Jerome Powell, he has not been as ahead of the curve as he could be with all the data that he's been presented with. And our team at Opening Bell Daily, we've been calling for rate cuts probably for five months now. And the fact is, inflation has been cooling, it's been cooler than expected every single month of the year, and the labor market has deteriorated significantly, and the Fed has maintained its position that it wants to do the wait and see approach for tariffs, and any potential inflation that tariffs could bring.
But the real, I think, the real nail in the coffin, so to speak, for the Fed being late, was the most recent jobs report, and that caused a whole wave of headlines, and essentially showed a quarter million jobs were erased from the two months prior. And when you see something like that, it pretty much confirms the weakness that people have been talking about and speculating about in the labor market, but the Fed has... Two days before that, job report came out, the Fed maintained the labor market is still fairly robust and strong. So, I think the narrative really flipped in a 48-hour stretch, and to the Fed's, to their view, maybe they didn't see the jobs report ahead of time, maybe they got it at the same time as everyone else, I don't really know. However, I think the data at this point do point to a pretty deteriorated labor market and the case for cuts is quite strong.
However, we have also people in Wall Street, I think it was Bank of America and Morgan Stanley, they are in the camp that there should be still no rate cuts at all in 2025. That's not my view, and I disagree with that, but their case is pretty much that the unemployment rate is still historically low, and I think that aligns a bit more with the Fed's point of view up to before the last jobs report, and in their view, they see the risk of inflation rebounding as still a very potential threat. So, the last thing I'll say about this, the Fed has not cut rates all year, and the last time interest rates were this high inflation was at 6.5%, and now we're converging on 2%. So, to me, the data is telling the story, but obviously the Fed disagrees.
Lance Glinn:
And yeah, you wrote on August 5th a newsletter for Opening Bell Daily, titled, the Case for Zero Rate Cuts in 2025, According to Wall Street's Top Banks, and you mentioned Bank of America and Morgan Stanley, they're both making arguments that rate cuts should not happen throughout the rest of the year. And so, you have mixed economic data, right? And a weak jobs data. There's, I think, a lot of uncertainty about what's going to come next for the Fed, specifically when it comes to September's upcoming decision. How do you think this uncertainty and the possibility for rate cuts or even the possibility that things are going to stay the same, how do you think those different factors could shape the markets moving forward, and just the broader investment landscape?
Phil Rosen:
So, I think right now we have about 90% odds of a rate cut according to CME data, and I think we will see a cut in September, and you also have commentators that are calling for 50 basis point cut, or even a full percentage point cut, I think Trump a few months ago called for a 3% cut, which has never been done before. So, I do think we'll see a cut. And markets, I think in the last nine cutting cycles, markets have been positive six of the last nine times, with, I think it was an average gain of about 30% through those cutting cycles. So, if we see a cut, and that starts a series of cuts, which is more than likely, I would say, markets should fare pretty well. Because generally the enthusiasm we've already seen from the AI trade, let's say the Trump administration, and even the complacency on tariffs at this point, that will only be accelerated, all that enthusiasm will accelerate once we start getting cuts and this confirmation of a Fed pivot.
Lance Glinn:
So, you mentioned tariffs in your last answer, and Phil, we're about two weeks since the August 1st trade deadline, both for major league baseball, as well as... Well, basically baseball I think was July 31st. But the August 1st trade deadline set by President Trump. And markets have now had some time to react to these latest tariffs. Just what's your read on how investors are processing what came out of that August 1st date, and how would you just frankly describe the mood around tariffs in general, and specifically the last couple of weeks?
Phil Rosen:
So, if we go back to Liberation Day in April, we saw one of the worst sell offs ever in the stock market, and that was the initial salvo of tariff announcements. And since then, each tariff announcement has effectively yielded a smaller reaction in the market. And you can also look at the VIX, the Volatility Index, that has been below its 10-year average for weeks at this point, months maybe. And so, there's low volatility, there's very muted reactions to tariff announcements, so at this point, as I just mentioned, I think the complacency in markets around the tariff news, that is the story right now. And this tells me markets either don't take Trump seriously on his first tariff numbers that he's putting out, or they've come to terms with the fact that we will be existing in a new economic structure that is a higher tariff landscape.
So, either of those two, I think it does point to higher stocks in the months ahead, because if tariffs, which are supposedly the biggest risk in the Fed's view, if those are not moving markets negatively, then it's get to the racing points here where we're going to go higher.
Lance Glinn:
So, you mentioned Liberation Day, right? And that really sharp decline we saw in markets after those first initial tariffs were announced, and then you compare that again to what August 1st brought, and you mentioned obviously the word complacency with it. But do you believe that for investors, of all kinds, tariff talk and tariff policy have sort of become inconsequential to market movement? They almost don't even matter anymore.
Phil Rosen:
I would say that's fair. You might see these fluctuations here and there, but really in the last few weeks, the series of tariff announcements we've seen have not had material impact on markets, and I think a lot of that is just because there are other inputs that markets care more about right now, such as AI, and that momentum in big tech and the AI trade that is dominating the tariff narrative.
Lance Glinn:
So, I do want to talk AI as we come towards the end of our first conversation, we've seen the Magnificent Seven commit enormous capital towards AI, whether that's in chips, cloud infrastructure, software development, you name it... Just what kind of ripple effects are you seeing or anticipating across the market from just this, again, enormous, I use that word a lot, enormous level of investment?
Phil Rosen:
So, if we look at the weighting of the S&P 500 right now, I think the top 10 stocks account for 40% of the index, and most of that account is AI-concentrated names, right? The Magnificent Seven. And that's probably not going to change anytime soon, and that's a historic weighting and top-heavy market right now. And if we look at what that means in the months ahead, I don't expect this AI spending to slow down for these top companies, and I don't expect the enthusiasm for AI to slow down either. So, we could see an even bigger share of the market going to that top 10 weighting. And if you also look at what the Trump administration is pushing for, they've been very, let's say, generous or accommodating to these tech companies. And you have these tariff headlines here and there on chips and semiconductors, but generally, Trump has been inviting these tech CEOs to the White House, and they've been sort of making goodwill with each other.
So, the momentum seems there, and I think the momentum trade and the stock market has been very strong for several weeks as well. So, I expect more of the same, essentially, of what we've been seeing, which is a series of all-time highs, continued tech strength, strong earnings for tech... I think right now the S&P is at about 22 time multiple, and that's... The future earnings revisions right now suggest it's going to go to 24/26, which would be historically very high. So, it depends if you think that's a fair value or not. But a lot of people betting on the AI trade are, they continue to pile in.
Lance Glinn:
Absolutely. Well, Phil, I look forward to these conversations with you every month moving forward, remember, you can find them wherever you get your podcasts, on in the Inside the ICE House Podcast feed, as well as by subscribing to Opening Bell Daily. Thanks for joining us, once again, Inside the ICE House.
Phil Rosen:
Thank you, Lance.
Speaker 1:
That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen, and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week Inside the ICE House. Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
