00:00 Josh Lipton
Well for more on the latest market moves let's welcome in here Lauren San Filippo, Bank of America senior investment strategist. Lauren, it is great to see you. So, let's start Lauren what I was just talking about with Maddie about which is let's focus on bonds, let's focus on yields, I want, get your take Lauren, explain the move we have seen, why you think we've made that move and what that does mean for the stock market?
00:30 Lauren San Filippo
Yeah, a couple reasons as to why the 10-year is budding up against that four 60 level, like you said, Josh. Um, I think number one, obviously, it's that deficit and debt concern. But is that really the new news here for the bond market? Um, it's obviously the third credit rate rating agency um, with that downgrade to US debt. Uh, but I think the bigger picture here is that recession risk has been taken off the table, right? We looked at the poly market odds of recession this year. They're closer to like 60% at the beginning of the month, right? De-escalation and the trade war. Now, we're looking at like closer to 40% of an odds of recession for this year according to poly market. So, um, I think that has to do a lot with what we're seeing in the bond yields and bond markets now.
01:22 Maddie Cohan
Is it a mistake for markets to be pricing out the risk of recession to that degree in your view?
01:29 Lauren San Filippo
No, you know, we've thought this year, actually, the risk of recession is just not that great, right? Um, so we've been in the camp of no recession this year. Maybe cuts are coming from the Fed next year, but we also think that the Fed is on hold. I mean, you've seen a resilient consumer, the economy. I mean, you guys know the story here, the economy is fared pretty resilient as well. Um, and so we think there are some supports and reasons why, even in light of what's happening at the White House.
02:01 Josh Lipton
What are those reasons, Lauren? What would you say?
02:06 Maddie Cohan
The reasons why it's holding up.
02:08 Lauren San Filippo
Uh, well, the consumer specifically. I mean, you have an unemployment rate that's close to 4%. Um, I do think there are some hairline cracks and delinquencies. You look at credit cards, um not housing data, but credit cards autos, right? You see some of those delinquencies hooking up. Um, but generally, I mean, you know, debt service seems okay for the consumer. Um, I will flag though in client conversations, there is some trade down I think, and I'm just hearing this anecdotally, this is not reflected in the hard data, but I'm hearing anecdotally that there are some of those hairline cracks trade down, for example, in grocery store aisles.
03:02 Maddie Cohan
And there is this idea too for the consumer that if tariffs were a headwind, that the tax bill is going to be some potential removal of a headwind when it comes to both markets and for consumer spending. To what degree do you think any of that potential growth in spending from consumers outweighs any concerns about the US deficit that we're seeing play out in the bond market?
03:31 Lauren San Filippo
Yeah, I mean it's interesting. We don't really know yet with the bill, right? We're kind of in like the third inning here. Um, so it's hard to say exactly what will come through. But I think actually, a more predominant factor, and maybe this isn't catching as many headlines, I mean, oil at like 60, that's a tax cut for consumers, right? So that actually serves as a tailwind. Um, we're watching that closely.
04:03 Josh Lipton
You mean to the extent, Lauren, you mean okay, tariffs come and our friends and family take some type of hit, that could be offset by these lower energy costs, is that what you're driving at?
04:18 Lauren San Filippo
Yeah, I mean that, yeah, that could be one factor. Um, yeah, for sure.
04:25 Maddie Cohan
And when you think about how that is playing out in equities, one of the things I'm interested in today is that part of the recovery that we've seen in stocks is of course, driven by the big tech names. Is that going to continue to be the area where we see investors flock amid the continued volatility?
04:43 Lauren San Filippo
Yeah, it's interesting because it makes sense that tech outperforms in a dollar weakening environment, right? I mean, you look at tech where those revenues are derived overseas, right? So, US multinationals generally will perform better in that weaker dollar environment. Um, but I think for tech this year, I mean, sort of took it on the chin during the April drawdown. Now we're seeing sort of the mag 7s today, you said some of the best movers. Um, I think that almost makes sense given sort of their re-rating this year. Um, now, given the earnings backdrop, um, their performance is narrowing and we saw that through earnings, right? That deceleration in earnings growth, that second derivative. Um, you look at in earnings, the six for the mag 7, the six that have reported, it's close to like 30% year on year growth. I mean, that's incredible, Xvidia of course, it's coming.
05:48 Maddie Cohan
Right.
05:50 Josh Lipton
Lauren, when you're talking to clients right now just gauging their interest, um, do they are they interested in overseas? Or no, they tell you I'd rather just stay and rotate within the US.
06:01 Lauren San Filippo
Rotate within the US, um, predominantly. I think there was some concern just when like Europe, you know, was up 30%, you wonder what aspect in your portfolio is sort of catching in on that, right? Um, but I think at this point and this is how we're advising clients as well. We still have this home bias, right? It's still the US bias and I think you have to have a lot of conviction to think that like Latin America is going to go on to rally 30% more, right? Which already has done year to date. I'm waiting for that fundamental story to come through in Europe to really feel like a second leg of conviction or that like the next leg higher will be overseas. Um, and right now, I just sort of think still it's US best in class.
06:55 Maddie Cohan
So what does rotation within the US look like? How do you generate alpha in that approach?
07:01 Lauren San Filippo
Yeah, I mean so you have to look at the year to date leaders and understand that there's more to the story than tech, right? So value, we like that value tilt and it complements that US growth tilt and on days when tech's not working in a lot of cases value is. Um, and so that seems like a good place for us to put some new money to work. Um, even like utilities, we're not getting overly defensive though because that doesn't make sense to us given our call that we're not really looking for a US recession this year.
07:36 Maddie Cohan
Right. No, makes a ton of sense. Lauren, thank you so much for coming by, really appreciate it.
