Bloomberg Surveillance Sep 18, 2026 21m 9m saved
With Nadia Lovell, Head of Global Equity Strategy at UBS · Aditya Bhave, Head of US Economics at Bank of America · Roland Lescure, French Minister of Economy and Finance
Nominal consumer spending in the US is running at 6.3%. Bank of America's argument on this program is that core inflation almost never reaches the target while that number is above 5%.
The Federal Reserve has just started raising rates, which is usually where equity strategists turn cautious. UBS came on saying the earnings story overrides it, and the French finance minister followed with the other side of the same rate move: a spread against Germany of almost 100 basis points and €54 billion of spending cuts announced the day before.
"It's like this magic line, right? We're running at 6.3% right now."
Lovell's published view going into the hour was that earnings rather than the Fed are driving the market. Bhave is one of the few economists with October circled for a hike. Lescure spent 20 years working in markets before he became a finance minister, and was speaking from the meeting of European economic and financial affairs ministers in Dublin.
The full episode is covered here so you can skip it. 21 minutes of audio, 12 minutes of reading.
Here are the 12 calls that matter.
Key Takeaways
UBS expects 25% EPS growth this year and 14% next, which is above long-run trend and above what the multiple is pricing
The S&P 500 multiple has already come in from 22 times to 19 times, so any pullback should be shallow
Bank of America wants 75bps of hikes, back to back in September, October and December, and then done
October is 60% priced and the midterms will not stop it, because the first hike was the politically hard one
Core PCE almost never hits target while nominal consumer spending runs above 5%; it is 6.3% now
If unemployment falls through 4%, wages pick up and the rate discussion goes to 5%
France announced €54B of spending cuts for next year against a 5.4% deficit this year
France borrowed at 0% and now borrows at 4.5%, which moves the deficit mechanically
The 3% deficit target for 2029 stays, because 3% is the level that stabilizes the debt
1. Earnings, Not the Fed
Nadia Lovell came on after the market's best day in more than a month, with a published view that earnings rather than the Fed are what this market trades on. The first question was whether she still expects a pullback.
She does expect volatility, from the hiking cycle
Of course, we've seen historically at the start of a hiking cycle that equity markets tend to struggle a bit. And so we do expect some near-term volatility.
Nadia Lovell
The most recent earnings season came in near 30% growth, she said, which is the base she is working from.
The two years she is underwriting
And when we look out for the rest of the year, we think that this is easily a year of 25% EPS growth and next year 14%. So above longer term trend.
Nadia Lovell
2. A Shallow Pullback at Most
Part of the rate move is already in the price, in her reading, and the evidence is what has happened to the multiple rather than to the index.
The de-rating that has already happened
You've seen the multiple come in from 22 times at the start of the year to now 19 times.
Nadia Lovell
Longer-duration assets and housing-sensitive parts of the market are where she expects the remaining pressure.
Which is why she would buy the dip
But ultimately, we think that this is a market, even if you get a pullback, it will likely to be a shallow pullback.
Nadia Lovell
Asked whether the deceleration from 25% growth to 14% matters, she said it caps the upside rather than reversing it.
What that decelerating profile is worth
It does to the extent of that you might not see sort of 20% sort of upside to the market from here, but we're still looking for still a healthy 10% or so.
Nadia Lovell
3. The Broadening Trade
The composition of the earnings growth is the part she reads as a change in quality rather than in level.
Why the broadening matters to her
And I think also the fact that you're seeing a broaden out of the earnings growth is quite encouraging and proves to be a healthier state for the bull market.
Nadia Lovell
Artificial intelligence is still a key driver, but financials, energy and industrials are contributing, and she pointed to industrials confidence during the week and the recovery in the manufacturing cycle.
Asked whether predictable rate rises help or hurt the rally, she said the market can absorb a methodical 25 basis points because it prizes certainty, and drew the distinction that matters for equities.
The thing that would actually break it
We know that the market doesn't like spikes in bond yields, particularly in the long end of the curve, which tends to have a larger impact on the equity market, just given how debt is termed out.
Nadia Lovell
She also noted the Fed had nudged up its own growth expectations for the next couple of years, so the rate move is not purely an inflation story.
4. Where AI Pays Off Next
A host raised the theory that the neutral rate is higher because productivity is higher, which is the argument Kevin Warsh was making before he was confirmed as Fed chair, and asked where the earnings from that would actually appear.
The monetization she is waiting for
Particularly, I mean, even look like areas of healthcare, like the opportunity to monetize and bring down the cost curve for drug discovery can have huge implications for earnings expectations going forward.
Nadia Lovell
Automation in industrials and what it does to margins is the second example she gave. Today's story is the build-out of the system; the monetization and the productivity gains are what matter for earnings over the longer term.
Asked whether those gains are unique to corporate America, she said no: the US leads, but the supply chain sits in Asia, and the opportunity to monetize may be larger in Asia, particularly in China, where the models cost less and the focus is on selling to consumers.
5. Adding Europe
Europe rarely comes up in the discussion of who enables the technology, so the question was whether it at least benefits from adopting it.
She is a buyer at these levels
We actually do like Europe at these levels, right?
Nadia Lovell
Her advice to clients who are over-indexed to the US is to add some Europe, on the recovery in the manufacturing cycle and because European industrials are tied to both rising defense spending and automation. She put Europe inside the diversification case rather than as a standalone call.
6. Two More Hikes This Year
Aditya Bhave followed with a published position that a Fed which does not believe policy is restrictive should keep raising until it finds the point of restriction. Asked whether the chair is more hawkish than his committee, he said probably, and then defended the framing.
What is genuinely arguable
So, reasonable people can disagree as to where underlying inflation is, whether it's at 2% once you take out the one-offs or we think it's in the mid to high twos.
Aditya Bhave
And what he says is not arguable
But what we do know is that the nominal economy is booming. So if there were an opportunity to get that last mile done on inflation while minimizing the risk of recession, this is it.
Aditya Bhave
He is unusual in expecting an October move, which the market prices at 60%.
Why the midterms do not stop it
Well, October is 60 percent priced. From our perspective, the first hike is really momentous.
Aditya Bhave
The first hike is where a central bank inserts itself into the political conversation; the second is business as usual. Had they not moved in September, he would have expected the cycle to start in December instead.
The sequencing that follows from that
But if they go in September, then I don't think the midterm stopped them in October.
Aditya Bhave
7. 75bps and Done
A host cited Patrick Harker, the former Philadelphia Fed president, saying he does not expect a long cycle. Bhave's number is 75 basis points, and he argued that moving fast is what keeps it at 75.
The path he has written down
But the sooner you do it, the more likely it is that you can stop at 75. That's why we have the 75 back-to-back September, October, December.
Aditya Bhave
Why that is the right size
And the reason we think it's 75 is that's the typical size of a mid-cycle adjustment.
Aditya Bhave
It returns policy to where it was earlier last year, and it matches an underlying inflation overshoot he puts at about 50 basis points, which a Taylor rule would answer with 75.
A host raised Jeffrey Gundlach's comment overnight that in the next downturn yields could rise rather than fall, because of what the downturn does to government balance sheets, and asked whether central banks are buying themselves room. Bhave would not claim that as the Fed's motive but has made the argument himself.
The cost of not hiking
Okay, you're hedging against a small increase in the unemployment rate, but what you're doing is you're losing some dry powder.
Aditya Bhave
And the market is not objecting
Equities are up, bonds are roughly flat, but they certainly haven't sold off. So, this is all good news for the Fed.
Aditya Bhave
8. The 5% Spending Line
The objection Bhave hears most is that inflation falls to target on its own once the supply shocks roll off. His answer is that they roll off into a booming nominal economy, which creates room for demand-driven inflation instead.
The threshold he watches
We've noticed historically that it's very, very difficult for core PCE to run at or below target as long as nominal consumer spending is running above 5%. It's like this magic line, right? We're running at 6.3% right now.
Aditya Bhave
The third quarter looks strong as well, so on his arithmetic the Fed has to get that number back to 5% or 4.5% to have a chance at the target.
9. The Wage Risk
Asked whether he expects wage inflation, Bhave named it as the condition under which 75 basis points stops being enough.
The level that changes his forecast
We're seeing the unemployment rate fall. If that goes through 4%, I think the risk rises significantly that then wages pick up.
Aditya Bhave
Wages accelerating in an economy already this strong is what he calls a full-blown demand boom, and the rate discussion in that case goes back toward 5%.
10. France's €54B of Cuts
Roland Lescure was interviewed in Dublin, where European finance ministers and central bank governors had gathered to discuss the inflation shock. The opening question was whether the bond market is wrong to treat France as the weak link in the euro zone, given a spread against Germany of almost 100 basis points.
He put the sell-off in a wider frame first
Rates are on the rise in the U.S., in France, in Germany, Italy, and elsewhere, including Japan. There's a lot of paper being issued at the moment.
Roland Lescure
Germany is now issuing to spend on defense, he said, and the private market is issuing too, naming the hyperscalers. He accepted that the France-Germany spread has widened and attributed it to the budget.
What was announced the day before
We announced yesterday. 54 billion spending cuts for next year.
Roland Lescure
He called it a big effort, said the government is aware of the deficits and of how difficult the political situation makes passing a budget, and that the aim is to tell the market France knows.
11. A 5.4% Deficit
The deficit will reach 5.4% this year, higher than previously forecast, and the interviewer asked whether 5% next year is credible.
His answer on the target
Yeah, it's both ambitious and realistic.
Roland Lescure
The trend is working against him, and he was specific about why.
The mechanical part of the problem
You know that the natural trend, because of the rise in interest rates, we used to borrow at 0%. We're now borrowing at 4.5%.
Roland Lescure
An aging population and rising social spending do the rest. This year's overshoot he attributed to international shocks and to heat waves in France with a macroeconomic effect: spending was contained but tax receipts came in below expectations.
On the 3% target for 2029, he refused to drop it while conceding that the next president will have to deliver it. His own job, as he put it, is to clear the runway so the planes can take off from May once a new president is in place, with a presidential election next year.
Why that number is the anchor
But 3% is not a magic number. 3% is the number that stabilizes debt.
Roland Lescure
12. The Spread and the ECB
Told that Société Générale sees the spread reaching 120 basis points, and asked whether that would be crisis territory, Lescure declined the premise on the strength of his own career.
He has been on the other side of those forecasts
I've worked on markets 20 years before I became a finance minister. I know what you do with those forecasts.
Roland Lescure
His job, he said, is to reassure the market that the cuts can be delivered, as they have been for the last couple of years through international crises and weak growth, and to avoid financial trouble by staying on a credible path. Asked whether the European Central Bank raising rates makes his job harder in a country with lower growth and lower inflation than most of the euro zone, he would not take the question.
The separation he insisted on
The ECB is doing their job and I'm doing mine. And I'm certainly not going to start commenting on monetary policies in Europe.
Roland Lescure
What he would say is that recent weeks have shown central banks acting independently, which he welcomes. On the executive board seats opening up, he corrected the interviewer that Christine Lagarde's mandate ends next year rather than this year, and made his preference plain.
On who should get the seat
There's great French candidates, there's great candidates, but there's great French candidates.
Roland Lescure
Bonus Insights
The interview closed on Europe's search for growth through new relationships, starting with the idea of associate European Union membership for Canada. Lescure has a personal stake in that one: he lived in Canada for 10 years and holds Canadian citizenship, having been French for 60 years.
His view on the Canadian idea
So, yes, getting closer to Canada is a great idea.
Roland Lescure
France's relationship with Canada has been closer since the CETA trade agreement came into force about a decade ago, and he listed defense, artificial intelligence and green energy as the areas where shared values make joint work possible. On whether the same concept accelerates a conversation with the United Kingdom, he said the substance has to come before the institutional design, noted that the UK left the EU 11 years ago and that he regretted it and still does, and said he speaks to the new chancellor roughly every week.
The hour's bottom line is that the two US guests think this hiking cycle is short, contained and survivable for equities because earnings are growing faster than the multiple is compressing, while the European guest is dealing with the same rate move as a financing problem: a deficit at 5.4%, borrowing costs up from zero to 4.5%, and €54 billion of cuts to defend a spread.
Products, Companies & Tools Mentioned
UBS (Lovell's firm, forecasting 25% EPS growth this year and 14% next and telling clients to add Europe)
Bank of America (Bhave's firm, forecasting 75bps of hikes across September, October and December)
The Federal Reserve (Raised rates and nudged up its growth expectations; the chair is described as more hawkish than much of his committee)
The European Central Bank (Raising rates into the inflation shock; Lagarde's mandate ends next year and France wants a board seat)
Société Générale (Its forecast of a 120bp France-Germany spread is the one Lescure dismissed)
If this was worth your time, send it to someone who has to have a view on this.
Get the latest market chatter as it happens: