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- [00:00]
Scarlet Fu
The FIFA World Cup 26 is coming to North America. Get closer to where business meets the beautiful game with a hospitality package featuring premium seats and entertainment. Get closer to wins on and off the pitch. Register interest@hospitality.FIFA.com Interest how can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business. From fast free shipping to in depth buying insights and automated purchase approvals, they deliver everything you need to achieve your goals. It's not easy to stand out from the crowd. Simplify how you stock up to get ahead. Go to amazonbusiness.com for support. The Chase Inc. Business Premier Card is a pay in full card with flexibility made for business owners who make things happen. Earn a total of 2.5% cash back on every purchase of $5,000 or more, plus earn unlimited 2% cash back on every other purchase, giving you unlimited earned potential to invest cash back into your business. Inc. Business Premier is part of suite of credit cards from Chase for Business designed to meet your needs every step along the way. Learn more at chase.com forward/business card Chase for Business make more of what's yours Account subject to credit approval restrictions and limitations apply. Cards are issued by JPMorgan Chase bank and a member FDIC this is Bloomberg Intelligence with Scarlet Fu and Paul Sweeney.
- [01:27]
Paul Sweeney
How do you think the Fed is looking at tariffs? The uncertainty of tariffs?
- [01:31]
Scarlet Fu
Let's take a look at the sectors and how they perform.
- [01:33]
Paul Sweeney
A lot of investors getting whipsaw every.
- [01:35]
Scarlet Fu
Day by news events, breaking market headlines and corporate news from across the globe. Could we see a market disruption, a market event of people just too exuberant out there? You see some so called low quality stocks driving this short term rally. Bloomberg Intelligence with Scarlet Fu and Paul Sweeney on Bloomberg Radio, YouTube and Bloomberg.
- [01:54]
Paul Sweeney
Originals on today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall street and the global markets each and every week.
- [02:01]
Scarlet Fu
We provide in depth research and data on some of the 2000 companies and 130 industries that our analysts cover.
- [02:06]
Paul Sweeney
WorldW Today it's another major earnings week. We'll break down some big tech earnings from this week. Spoiler alert. The air fueled spending surge keeps racing ahead.
- [02:15]
Scarlet Fu
Plus that frenzy is now spilling over to heavy machinery and oil fracking. We look into how Caterpillar fared when they reported this past week.
- [02:23]
Paul Sweeney
But first, Verizon, the US largest mobile service provider, reported a loss in wireless phone subscribers in the third quarter as a new Chief Executive officer laid out an aggressive growth strategy to reclaim market Share.
- [02:33]
Scarlet Fu
Dan Schulman, a former CEO of PayPal, was appointed just a few weeks ago to replace Hans Vestberg over at Verizon after two straight quarters of subscriber declines and a stock performance that has lagged the two main rivals.
- [02:44]
Paul Sweeney
For more, we were joined by John Butler, Bloomberg Intelligence Senior telecom analyst. I first asked John to break down Verizon's earnings.
- [02:51]
Anurag Rana
So this.
- [02:52]
John Butler
First of all, I'll tell you the dividend is safe, Paul. I mean, that's the good news for Verizon. And it's safe because new CEO Dan Schulman, who recently replaced Hans Vestberg at the helm of Verizon, sort of laid out his new plan for growth. I think the real watchword of the day here for Verizon is to pivot from a very technology or network oriented company to now. Shulman is going to turn them into a very consumer focused company. I think he's really going to take a page out of T Mobile's book. But in terms of promoting, I think unlike T Mobile, he's going to do it in a more disciplined manner.
- [03:39]
Paul Sweeney
So I guess as I think about the wireless business, I mean, we all have a phone in our pocket. It just seems like the only way to grow revenue is either add subscribers, which can be expensive, or raise prices, which. How long can you do that? How do you grow the business?
- [03:57]
John Butler
I mean, that's one thing he talked about was how to grow the business here. And what you're seeing with the telecoms is they're all pushing more heavily into broadband. They're doing a very good job there with Verizon like AT&T, they've got two avenues of growth there. One is fiber broadband. Verizon is buying Frontier, so they're going to onboard about a million new fiber subscribers in the new year. And the other is fixed wireless access, which is sort of that wireless link into the home. It's been very popular with people. So once you get those broadband subscribers, probably more than half of them don't have wireless. And so Verizon's aim is to continue to build that broadband base and then cross sell wireless into that base. You've also got switching activity that goes on in any given quarter. No matter how hard the carriers try, you're always going to lose some subscribers and they're up for grabs. And I think Verizon now is looking to get their fair share of those. And there's also modest, very modest organic growth in the business through population growth and some immigration, although immigration is down this this year.
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Paul Sweeney
Yep, I Don't even know where we are. John, in terms of the 5G, 6G, 4G, are there technological changes coming to the wireless business or are we at kind of where we at in terms of capacity and usage and so on?
- [05:32]
John Butler
So capacity is on the rise. Spectrum is the lifeblood of wireless. The more spectrum you have, the more network capacity you have. To put it in layman's terms, for the average smartphone user, that means higher download speeds. And Verizon is currently activating what's called C band spectrum. It's very high capacity and so you're going to see their average network speeds across the nation edge up over time as they activate that spectrum. In terms of the generational upgrades that you alluded to, the 3G, 4G, 5G, we're mid cycle now, we launched 5G about five years ago and I think you'll see an upgrade to 6G as we get towards 2030. But right now it's sort of status quo on that front, I guess.
- [06:27]
Paul Sweeney
The issue for Verizon is now going more customer centric and as you mentioned, when I read that, it seemed just like what T Mobile has been doing for years and years and years. Going back to John Ledger, is this a strategy you think can be successful for Verizon?
- [06:44]
John Butler
We'll see. I mean, that's their big challenge, right? I mean T Mobile was always the branding king. They did a great job there, just as you said, starting with John Ledger, who made himself the face of the brand. They really did a terrific job there. They went out as a sort of a hip, counterculture, consumer friendly brand. Verizon was at the opposite end of that spectrum, leaning into their great network coverage. They still have that. They have probably the best coverage in the industry, but in terms of network speed and performance, the other two AT&T and T Mobile have really caught up. So the challenge for Verizon now is to nurture a more consumer friendly brand image. Dare I say I'm a spun brand image. I have to chuckle. That really isn't something we would associate with Verizon. But I think Shulman, given his background at other telcos and also in reviving PayPal, has some experience there with branding and I think it's going to be interesting to see he does with Verizon to improve that brand image.
- [07:57]
Paul Sweeney
Our thanks to John Butler, Bloomberg Intelligence Senior Telecom analyst this week. Boeing on Wednesday announced a $4.9 billion accounting charge and delayed debut for its Triple 7 jetliner, a reminder of the long recovery ahead for the US Planemaker. Even as rising aircraft deliveries bolster its.
- [08:14]
Scarlet Fu
Cash, the setback underscores the challenges ahead as CEO Kelly Ortberg works to stabilize Boeing even as the company benefits from surging aircraft orders with support from the White House.
- [08:24]
Paul Sweeney
For more, we were joined by George Ferguson, Bloomberg Intelligence senior aerospace, defense, and airlines analyst. We first asked George for his key takeaways on Boeing's earnings.
- [08:32]
George Ferguson
What I saw from earnings is that the commercial airplane business had about a $430 million loss. When you back out that about $5 billion charge for Triple 7, I think that number was a bit better than consensus, a little bit better than what we were looking for. I think it's another sign that commercial airplane is getting closer to break even. And then in the cash flow statement, Boeing was cash flow positive at an operating level, and free cash flow was about $1 billion in the operating level. And free cash flow, the couple hundred million, I think, you know, that's above where consensus expected it. We saw $5 billion in inventory get unlocked during the quarter. Meaning, you know, Boeing has been sitting on something like $90 billion inventory. I think it's like 87, I think, was the exact number, and that came down to 82 billion because they've been buying from suppliers, putting things on shelves as they try to keep the supply base healthy while they've been going through some of their challenges here. And now they're starting to take that, you know, that inventory off the shelves, put it into airplanes. That's going to, that's going to hyperdrive some of the cash generation of Boeing as they bring that inventory, I think, down to probably a 60 or $50 billion level. So I think those are both big positives. And the charge was largely non cash for an airplane that I think is still very competitive, just gets delayed a bit.
- [10:02]
Paul Sweeney
All right, how about the deliveries of the 737? What's the guidance there, George? Because we know that's the big cash driver.
- [10:08]
George Ferguson
Yeah, so they're, you know, Boeing's kind of out of the game of giving guidance right now, but they've, they said, you know, the FAA has allowed them to go to 42amonth build rate, which, which would be above what they've done in, in the last quarter. I think we've got a. Modeled at about 44 or 45 per month for the next three months. That's because there's still some inventory, airplanes they'll deliver as well as what they're building. Just heard Kelly Ortberg say on the call that he would anticipate sort of Cranking up those build rates from 42 in increments of 5 every 6 months, no sooner. Obviously won't break unless they feel like they've got things stabilized. So I think we've got a path here to higher build rates over, you know, to the end of the decade. So, you know, I would expect that as they get a year down the road here, we'll be probably break even in this business, you know, maybe a little bit longer, but I think we'll be break even in that business. And again, that's, I think all part of the Turnaround is getting 737 to perform. That's the, that's going to be the financial driver.
- [11:17]
Scarlet Fu
So Kelly Orberg has now been CEO for just over a year. He started in August of 2024. I can't believe it's been that long already.
- [11:24]
Paul Sweeney
I know, I know.
- [11:25]
Scarlet Fu
And a lot has happened, clearly. And what I didn't realize is that Boeing is still facing some labor issues. St. Louis area machinists still strike. They've been striking for more than three months. What does this say about Kelly Orberg's leadership and what kind of grade would you give him, George, for his leadership so far?
- [11:44]
George Ferguson
Yeah, I mean, I'd give him a very high grade. Right. Again, I think that, you know, the biggest thing he, he needed to do was like improve morale, improve quality. And it appears to, you know, to be the case. I think, you know, the proof is again, build rates. The FAA returning some, you know, giving Boeing the ability to go to 42 and returning some of their ability to certify some of the airplanes. So I think I'd give it all High in St. Louis right now. You know, St. Louis is where the defense business is centered out of right now. The defense business not performing great, but getting better. You know, I think there's, there's definitely more to come in the defense business as they start building the F47, which is the sixth generation fighter that they won. But that's still some preliminary work. My guess is that the sides are still a little bit apart on, you know, where they want to be for an agreement. And it's not as critical to get those folks back to the production lines as it was to get a commercial 737 Machinists back to production lines. So he's probably doing the right thing for the business here and, you know, making sure he can get an agreement he can live with, especially in defense where it's harder to bear increased costs. And again, I would give them, I give them high grades. I think the company's at a turnaround right now and doing well.
- [13:09]
Paul Sweeney
George, about 30 seconds left. We don't talk about the triple seven much. How does that kind of figure into their portfolio and into the economics of Boeing?
- [13:18]
George Ferguson
Yeah, when it finally gets certified, it'll be the biggest airplane in production. So it kind of replaces 747 and A380 as the queen of the skies. A350 1000 is the closest competitor. It can't, it can't be as densified, it can't have as many seats inside it. So I think you'll find a seat cost advantage in the Triple Seven. It's got core customers in those, you know, in those Middle east carriers, those Asian carriers that are the big sort of east west connectors. And I think it'll be fine. I think the delay will, won't hurt its ability to be sold and it's already got 500 in the backlog.
- [13:57]
Paul Sweeney
Our thanks to George Ferguson, Bloomberg Intelligence senior aerospace, defense and airlines analyst.
- [14:01]
Scarlet Fu
Coming up, air demand is going so fast that the cloud giants are racing to catch up. How did that fare for some big tech earnings this week? That's next.
- [14:09]
Paul Sweeney
You're listening to Bloomberg Intelligence on Bloomberg Radio providing in depth research and data on 2000 companies in 130 industries.
- [14:15]
Scarlet Fu
You can access Bloomberg Intelligence via BI. Go on the terminal. I'm Scarlet Fu.
- [14:19]
Paul Sweeney
And I'm Paul. Paul Sweeney and this is Bloomberg.
- [14:23]
Scarlet Fu
The FIFA World Cup 26 is coming to North America next summer. It's the ultimate celebration of sports and culture and an opportunity to elevate your company. Get closer to where business meets the beautiful game with a premium hospitality package. Build partnerships in the best seats and suites. Achieve goals over world class food and beverage. Get closer to wins on and off the pitch. Register interest@hospitality.FIFA.com Interest.
- [14:51]
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- [15:51]
Scarlet Fu
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- [16:28]
Paul Sweeney
Demand for AI keeps growing so fast that the cloud giants are racing to catch up. At least that was the message this week from tech giants Alphabet, Meta and.
- [16:36]
Scarlet Fu
Microsoft and the company they're looking to catch, Nvidia. This week the tech giant became the first company ever to have a market cap of over $5 trillion.
- [16:44]
Paul Sweeney
The AI spend is not slowing down for more. We spoke with Anurag Rana, Bloomberg Intelligence Technology Analyst.
- [16:50]
Anurag Rana
See, I think the common theme is that capital expenditures are going up which means they're going to spend a lot more money to expand their data center foot footwork and need more chip capacity to take care of the AI demand that they are seeing. So I think that's the common message for all of them. When you look at Microsoft, I think their capex numbers nobody was expecting would go up this much. I mean we were expecting them to rise but they basically came out and said, you know, we thought we'll be fine by now but they're still capacity constrained. The demand is coming through. They talked a lot about their OpenAI agreement. They revised one. You know, I still think they are probably in one of the better places than they have been in the past several years.
- [17:33]
Paul Sweeney
All right, let's just compare and contrast. Meta and Google we had talking about big capex increases. Is that just the market saying hey we trust you? Google with this increased spending, maybe not so much over there at Meta.
- [17:47]
Anurag Rana
You know, if you're looking at between both of them, Google is showcasing that they are seeing the benefit of AI in actual revenue generation from their cloud business. Cloud business accelerated. It accelerated last quarter as well. We are really seeing tangible benefits. Then you have anthropic signing up with Google Cloud to use their TPUs. They, they have the chip business also. The big question for everybody is well Mehta, you're spending all this money, how are you going to monetize it? And they talk about, you know, they're going to monetize it internally through better ads and serving ads. Well, they're still serving me ads, I mean, all the time. Anyway, the question is, where is all this money going and how do you get it back? I think that's where the dichotomy is between these two vendors. And Google has I think done a phenomenal job of explaining to the market what their AI strategy is and why. Why is it working so well?
- [18:35]
Scarlet Fu
So it's a matter of meta not telling a story to investors, a narrative that resonates with investors or that convinces investors the way that Alphabet is.
- [18:44]
Anurag Rana
See, when you think about it, spending 5, 10 billion would be okay, but when you talk about spending, you know, 60, 70, $80 billion of AI related research going into your products, well, where is the, where is the benefit of that? How are you.
- [18:57]
Scarlet Fu
But this is not a news story that they're telling. They told this story last quarter and the quarter before and investors seem to like it.
- [19:03]
Anurag Rana
Fair point. But when you look at now Google is showcasing that we actually see the benefits and actual numbers that we are reporting. So between the two vendors, it's very clear what, what I can see on the Google side, it's not so much gotten, not so much clear on the metal side.
- [19:17]
Paul Sweeney
And I think also another part of it is having used to follow the stock is one of the reasons matter was working so well over the last several years. It was a cost cutting story after the Metaverse debacle. You know, people were concerned about all the spending on the Metaverse.
- [19:29]
Scarlet Fu
Right, right.
- [19:30]
Paul Sweeney
You know, it seemed like they rained out. Yeah, they got, they, they saw the light and they started cutting costs in the stock work. Our thanks to Anuragrana, Bloomberg Intelligence Technology analyst. Next we look at earnings from one of the world's biggest producers of heavy machinery, Caterpillar.
- [19:43]
Scarlet Fu
This week CAT reported third quarter earnings and revenue that beat analysts estimates. The company stated their boost in earnings was driven by their power generators and turbines that keep AI data centers running.
- [19:53]
Paul Sweeney
For more on this we were joined by Chris Cialino, Bloomberg Intelligence senior U.S. machinery analyst.
- [19:59]
Chris Cialino
It was a great quarter. You know, despite pretty elevated expectations coming into the print, a bigger tariff headwind. Cat really delivered very solid 3Q results. It was really driven by higher volumes across all three of their core businesses with particular strength and energy and transportation again. But I think, you know, one of the more encouraging signs that we took away from the results were that orders exceedingly accelerated here in the quarter and we also saw backlog improve sequentially to a record $40 billion so we think we see above average production and earnings visibility as we begin to think about next year.
- [20:38]
Scarlet Fu
Did the company say a lot about the power producing equipment, including turbines and generators that have investors excited about it being kind of a derivative play to the AI story?
- [20:48]
Chris Cialino
Absolutely. So, you know, we continue to hear more and more about AI in data centers and CATS exposure there. Power gen is probably roughly 30% of the energy and transportation business, roughly 15% of the overall enterprise, but it continues to be the fastest growing part of the portfolio. They're bringing on a lot of capacity here over these next three years. I think you'll really begin to see a step change as we move into 2027, particularly on the large engine side. So there is more of a focus and investment on the energy and transportation business and it has become, you know, the biggest part of their portfolio.
- [21:28]
Paul Sweeney
Wow. Are there other companies or let me put it this way, who does CAT compete with in that segment of the business?
- [21:35]
Chris Cialino
Yeah, so there's a number of different competitors and it really breaks down relative by size on some of the gen sets. Cummins is, is a big one, Siemens Energy, and then you also have a few other European and Asian players. But, you know, this is certainly a market that's growing, you know, pretty exponentially here. Backlogs extend several years. So we think we have pretty good visibility at least through, you know, the next three years.
- [22:03]
Scarlet Fu
Does this part of the business mean that Caterpillar will need to rely more on domestic market opportunities as opposed to global market opportunities?
- [22:13]
Chris Cialino
So their footprint is the largest, the energy and transportation footprint is the largest in North America. But you know, I think the opportunity is global. They are a large global producer. They serve, you know, essentially almost all markets around the world. I think even particularly within energy and transportation, it's like something like 100 different countries. So while I think the immediate near term excitement is more focused here in North America, I do think longer term there's an opportunity international as well.
- [22:42]
Paul Sweeney
What, what's the company saying about the impact, if any, on tariffs on their business now and going forward?
- [22:49]
Chris Cialino
Yeah, so tariffs were actually a much bigger headwind than we anticipated in the quarter. And even Cat, I think it kind of shook out somewhere around a $600 million headwind in 3Q. But margins, margins were, were better than expected. Really. Pretty remarkably resilient despite these price cost headwinds. 4Q we'll actually see a step up in the tariff costs. And then as we think about next year, Cat's really been kind of hesitant to pull the pricing lever on A lot of tariffs thus far. We think that's more of an opportunity for them here in the near term to gain some market share. So as we think about 2026, it'll be interesting to see do they continue to offset through more cost and productivity efficiencies or do they lean into pricing a little bit more? But tariffs will step up here in the near term and then, you know, 2026, it still remains to be seen, but I'd expect the demand backdrop to improve. So they certainly should have the opportunity to push pricing a little bit more aggressively next year.
- [23:48]
Paul Sweeney
Our thanks to Chris Chiellino, Bloomberg Intelligence senior U.S. machinery analyst.
- [23:52]
Scarlet Fu
We move next to news from the logistics company UPS. This week UPS said it expects to cut 34,000 jobs this year in an effort to cut expenses and improve profitability.
- [24:02]
Paul Sweeney
This comes despite the company reporting third quarter earnings that beat Analys expectations. For more on this, guest host Lisa Mateo and I were joined by Lee Klaskow, Bloomberg Intelligence Senior Transport Logistics and Shipping Analyst.
- [24:14]
Lee Klaskow
What's going on UPS is they are making progress and they're executing on their plan. And their plan really is to create a network that can not only handle but thrive in an ever changing environment. And that change is being driven by E commerce. It's being being driven by the uncertainty around tariffs. And what they've been able to do is increase productivity through technology, whether it's automation or AI. And that also they were stepping away from business, from Amazon. You know, they noted on their morning call that they're 3/4 into a 6/4 glide down of Amazon business. And the reason why they want to move away from Amazon business, it tends to be lower margin, lower yielding packages. But that's not to say that they don't want to totally walk away from Amazon because their return business is a good business for them. And we're seeing, you know, the success in the numbers and you know, going into the quarter I think investors were cautious or had low expectations and management kind of exceeded those with the results. And their outlook really shows us that, you know, expectations for the fourth quarter in 2026, at least as it relates to, you know, sell side analysts, consensus is probably a bit low and it needs to move higher.
- [25:41]
Anurag Rana
Lee, can you get more into the.
- [25:42]
Paul Sweeney
Cuts that we were talking about? 34,000 job cuts.
- [25:45]
Tim Craighead
Where were they seen it and what.
- [25:47]
Paul Sweeney
Kind of, let's say year over year cost savings does it expect in 2025 from all of this?
- [25:52]
Lee Klaskow
Yeah. So you know what they're trying to do, their overall cost savings, which includes, you Know, the headcount reductions, you know, they're looking to get $3.5 billion in cost savings this year. They've done around 2.2 billion of that so far. And some of the reductions are driven by, you know, they offered early retirement for some of their drivers. They said they've had pretty good pickup with that, and that payoff should be about a year from what it costs, cost something 170, $580 million. And they mentioned on the call that it will take about a year to get to make those costs back up. So, you know, it really should be paying for itself. And they're closing a lot of facilities. So they've, they've closed, you know, something like 90, 95 facilities so far. And that's being driven by. They don't need the network they had when they were, you know, really handling a lot of Amazon business. And now that, you know, like I mentioned earlier, they're walking away from that business. They're kind of reconfiguring their network. And they're also, you know, as I mentioned, they're increasing overall automation. You know, they noted on their call that they've added automation to around 35 more facilities. And about 66% of their packages touch these automated facilities, which is around 300 basis points more than was last year. And that number is just going to continue as management makes more inroads at modernizing their facilities.
- [27:20]
Paul Sweeney
Lee, what is UPS, and maybe FedEx for that matter, how are they kind of talking to you guys about tariffs and how it might be impacting their business just as a big, big part of the supply chain?
- [27:30]
Lee Klaskow
Yeah, you know, it's interesting. So for like a ups, you know, there's good and bad when it comes to the tariffs and the more protectionist policies in the U.S. you know, we've ended the de minimis exemptions, which, you know, stated that if, if a shipment came into the United States and it was worth $800 or less, it didn't have to pay a duty or a tariff. You know, the Biden administration was working towards getting rid of that. The Trump brought that. Trump administration brought that to the finish line. You know, first it was, it was just packages that were coming in from China and Hong Kong. And now that's been, you know, all packages coming to the United States and that's hurting volumes. They noted their U.S. or their China to U.S. volumes were down around 20%. And that's having a negative impact. Now you look at their forwarding business, you know, because of all these packages are now if they are going to be coming in lower value packages have to pay duty, they need to lean more heavily on their customs business. So you've seen their supply chain business outperform this quarter and I suspect a lot of that had to do with the additional fees that they generate from helping shippers clear packages through customs.
- [28:42]
Paul Sweeney
Our thanks to Lee Classco, Bloomberg Intelligence Senior Transport Logistics and Shipping Analyst.
- [28:46]
Scarlet Fu
Coming up, we focus in on the European earnings season so far.
- [28:50]
Paul Sweeney
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on 2,000 companies and 130 industries.
- [28:57]
Scarlet Fu
You can access Bloomberg Intelligence via big on the terminal. I'm Scarlet Fu.
- [29:00]
Paul Sweeney
And I'm Paul Sweeney. This is Bloomberg.
- [29:10]
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- [30:09]
Scarlet Fu
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- [32:10]
Scarlet Fu
This is Bloomberg Intelligence with Scarlet Fu and Paul Sweeney on Bloomberg Radio.
- [32:18]
Paul Sweeney
We've been covering plenty of earnings from US Companies this past month. But European earnings are also resoundingly beating expectations, namely in the European tech space.
- [32:25]
Scarlet Fu
Especially as growing investment in artificial intelligence lifts demand and counters trade headwinds on that and the overall European market. We are joined by Tim Craighead, Bloomberg Intelligence Global Chief Content Officer.
- [32:36]
Tim Craighead
So far, so good. I wouldn't say it's as dramatic as what you're finding over here. We don't have the big tech, you know, to the same degree by any measure. But if you look so far, earnings 20, I'm sorry, 53% beat versus high 20% miss. Europe doesn't play the game like the US where every company is trying to manage estimates and you know, down to the 10th degree, this is a good reporting period for Europe so far. And there's. Yeah.
- [33:13]
Scarlet Fu
What are some of the big themes that are driving earnings growth? When there is growth?
- [33:17]
Tim Craighead
Yeah, it's an interesting thing. I'm going to put this into a little bit of different perspective to answer your question. If you look over the course of the past three years where we've seen U.S. earnings ratchet up, European earnings have been minus 1%. Well, I mean, it's a shocking disparity.
- [33:39]
Scarlet Fu
Yeah.
- [33:40]
Tim Craighead
A big part of that is technology over here, but a big part of that over there is that there's been some really big drags. Autos and energy and basic materials think metals, mining, chemicals were about 27%, not to be overly precise, of the earnings piece in 2022. That group has fallen two thirds in earnings since then to where it's now down to 10% of earnings. And it's just been A massive drag. The good thing looking forward is that those three are A smaller and B, all of them seem to be settling and there's reasons to think they can move forward, which gives a window for other businesses like industrials or technology financials, which have been huge. With earnings growth to start to shine.
- [34:37]
Paul Sweeney
Through in next year, broadly speaking, rising trade tensions can't be good for Europe. What are the companies saying?
- [34:46]
Tim Craighead
Yeah, it's, it's interesting in that if you. It's another element of this earnings story. Now there's not many of the sectors that have actually had positive earnings growth this year. If you look at earnings revision trends across sectors and you have to think part of it is the uncertainty. You know, it could be a direct impact where you're having to pay levies, it could be uncertainty from buyers. So definitely a majority of companies over the first half of the year and even this reporting period have been talked about those two elements, supplier uncertainty or direct impact that are, are an issue for earnings. There's been, you know, a third or more that have said yes, we can mitigate this any other, but it is an issue. And to the degree that things are starting to settle out a little bit, it's another one of those things where we could see some, some positivity as we look into next year.
- [35:43]
Scarlet Fu
What's the relationship between European companies, earnings and AI? You don't have the big chip makers like we do in video that obviously benefit from the demand for, for air in data centers. But you do have asml which is a chip manufacturing equipment maker, so it's tied there. But most of these companies I would imagine are using AI to create efficiencies and create productivity.
- [36:04]
Tim Craighead
Yeah, it's. You hit the nail on the head from the standpoint of ASML is the proximate company there. And clearly you wouldn't have AI to the same degree with Nvidia et al if you didn't have AI. But it's only one company component. SAP is a play if you wanted to be a second derivative, which again is a big component of European tech. But it is much more of what are, what are companies doing to drive their business. And you'll be hearing more and more on this. We're doing some pretty in depth work with their year ahead outlooks through corporate surveys and otherwise on what are the impacts of the AI. And we are seeing, we are seeing companies focus on customer service, better data efficiencies. It's not that much of a headcount issue, even though you certainly see some headlines on that here as well as over there. So it's interesting.
- [37:07]
Scarlet Fu
And then I got to ask you about the one theme that has been driving European stocks, which is European defense companies. This is like where we're going to see a lot of the numbers maybe, because certainly there's a lot of enthusiasm for this group.
- [37:18]
Tim Craighead
Valuations have ratcheted up. Sales and earnings have ratcheted up. The European defense imperative is a critical theme. Everybody's talking about it, from regulators to corporates to investors. Those stocks have gone haywire. The valuations are far higher than the US comparables.
- [37:40]
Paul Sweeney
Really.
- [37:40]
Tim Craighead
Okay. Even if we go to 3.5% of GDP, which is now targeted across the NATO countries for defense spending, it's a question of how much of that can actually be spent in Europe. It's a narrow window in terms of who are the European defense contractors. Ryan Mattel is big deal. There's a huge push from an industrial capacity perspective to make that a broader base.
- [38:08]
Paul Sweeney
Our thanks to Tim Craighead, Bloomberg Intelligence Global Content Officer. This week we were joined by AI expert Peter Werner. He is co chair of Cooley's Global Emerging Companies and Vice Chairman of Cooley's Business department. They represent and guide many of the industries that are most prominent in the startup ecosystem such as AI, space tech and digital health.
- [38:27]
Scarlet Fu
Peter joined the program to discuss the future of the workforce and how AI is affecting various industries.
- [38:32]
Peter Werner
It's such an interesting conundrum. I think about it in two ways. One for us, for our large law firm, for professional services organizations generally and then for our clients, largely technology focused clients, small ones disrupting industries and large ones. There's a real combination and you alluded to it with the investment bankers and Open Open AI's statement recently about trying to train the LLM to take to to simulate the jobs that currently investment bankers entry level investment bankers do for hundreds and hundreds of hours a month per banker. Lots of short term, medium term optimism, right? Reduction of drudgery, people, people getting to go home earlier and get more sleep because they don't have to format hundred page presentations or create tables. Comparing the last version of a hundred page merger agreement with the next version and things like that, that all seem amazing but then you start to think longer term, what does that mean? What does that mean for us? Referenced the junior bankers getting, getting training by virtue of those reps. How are we replacing those reps so that 10 years from now we know who the senior bankers are going to be? How do we get from here to there really interesting and really complicated as it relates to big tech. We got earnings coming up this week for a lot of them. And you've got a ton of companies that work, we work with, that sell into big enterprises that are ready to get acquired by big tech. Like they are selling into enterprises that don't really know what the futures of their platforms are going to be in terms of how they're going to use labor. So lots of uncertainty there.
- [40:19]
Scarlet Fu
Lots of uncertainty. You raise some really good points here. Do you see companies management starting to address how to answer some of those questions like, you know, where are we going to get that senior talent from if they're not going to be in the trenches in the early parts of their career? Because the early part of your career just doesn't exist anymore.
- [40:37]
Peter Werner
Yeah, I can speak most passionately about that from the standpoint of my law firm, which is really a proxy for professional services organizations all over. We are in the middle of trying to figure out, okay, we have first year. So we have 100 first year associates coming to join us on Thursday across the firm and maybe they'll be fine. But what about the ones that we're recording right now, the first year lawyers who are coming here in three years if they're not going to get to do 100 venture capital financings a year, form 100 companies a year because robots are doing it. What we need is do we just need to have a virtual reality simulation of that? And we don't build them out to clients, but we put them through their paces virtually so that they gain experientially still? Or is there a whole new way of training those people? Of course there are also because they're we as an, as a, like, as an ecosystem here in California. Like people understand that. And so of course there are now startups that are saying, okay, we are going to be your simulation platform to simulate the reps that professional services organizations and other knowledge workers wouldn't otherwise get. So hire us to train your junior people so that in 10 years you can make partners or you can make managing directors.
- [41:56]
Paul Sweeney
Are your clients to what extent are they receptive to integrating AI into their business? To maybe a little bit reticent here, they're just not quite sure.
- [42:05]
Peter Werner
Well, you've got, I mean tale of two kinds of companies. You've got these amazing AI native companies disrupting older industries where they are all about it and they're talking in their board meetings about the ratio of headcount to revenue and trying to be really focused on efficiency and optimizing technologies, building everything in a labor light way. And then you've got incumbents who are trying to lift up this big heavy organization and insert AI technology layer underneath it, change the way they've all been doing things forever and start, you know, laying off people. But laying off the right people, retraining other people, that's it. I mean, that's a complicated task across all industries.
- [42:53]
Scarlet Fu
So Peter, what jobs are AI proof? Meaning AI can help you, but it's not going to take your job. Are there any industries? Are there any specific roles?
- [43:03]
Peter Werner
I mean, I'd love to know the answer to that. My instinct is that the most senior, most experienced people with the highest EQ and the ability to read rooms, think laterally, be strategic and creative. Like in the white collar world, those are the last ones to go.
- [43:23]
Scarlet Fu
But that's not everyone.
- [43:23]
Peter Werner
And maybe they never go, who knows, right? But, and then, and then beyond that, I would say there is a correlation between like more manual work, et cetera, and like it's going to take longer to, to replace those jobs. But you still think about the onshoring of like American manufacturing now where we have dark factories that we're building in the US that have no humans working in them. So this is not about all blue collar labor or like physical labor is insulated permanently? I'm not sure, I don't know.
- [43:58]
Scarlet Fu
Our thanks to Peter Werner, chair of Cooley's business department.
- [44:01]
Paul Sweeney
That's this week's edition of Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on 2,000 companies and 100.
- [44:07]
Scarlet Fu
And remember, you can access Bloomberg Intelligence via BI. Go on the terminal. I'm Scarlet Fu.
- [44:12]
Paul Sweeney
And I'm Paul Sweeney. Stay with us. Today's top stories and global business headlines are coming up. Right now.
- [44:21]
Scarlet Fu
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