Bloomberg Surveillance TV: September 24th, 2026

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Jonathan Ferro (0:11)

This is the Bloomberg Surveillance podcast. I'm Jonathan Ferro, along with Lisa Abramowicz and Annmarie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 AM Eastern.

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We begin this out with stocks lower and yields at multi-decade highs. Crude resuming its advance. Ohsung Kwon of Wells Fargo trimming his year-end target to 7700 from 7950, writing oil has also been in the driver's seat for both stocks and bonds. Ohsung joins us now for more. Ohsung, good morning.

Ohsung Kwon (0:52)

Good morning.

Jonathan Ferro (0:53)

What's the downside here? Still 5 to 10 percent?

Ohsung Kwon (0:55)

Yeah, that's what we're penciling in.

And I'm using the camp that the level of interest rates doesn't really matter. It's really the volatility of rates. But if you look at the equity allocation today versus bond allocation, it's 72 percent versus 28 percent. It's at the highest level since 1969

And if you try to estimate what the fair equity allocation should be based on the cost of equity and the 5 percent interest rate, that number should be around 60 percent. So that 12 percentage point gap, that's the widest level since 1969 again. And that gap has usually explained how the S&P is going to do versus the risk-free rate. And if you assume like a 7 percent EPS growth over the next five years per year, that 12 percent basically implies percent access return on top of that 5 percent risk-free rate for the S&P. So that's a pretty negative setup for equities overall.

Jonathan Ferro (1:52)

Let's talk about where we got to that negative setup. Is it because stocks are so good or bonds are so bad?

Ohsung Kwon (1:57)

It's really because of the allocation gap between the two.

Stocks are good, you know, it's inflation protected, you know, earnings are still rising. But we're no longer in the 2 percent, 3 percent interest rate environment. We are firmly about 5 percent now. So the allocation right now is not reflecting the 5 percent interest rate word. And I think that's the risk, really.

Lisa Abramowicz (2:23)

You put out a chart that I thought was fabulous last week, talking about how equity allocations versus bonds are the highest going back to 1969 at about 72 percent. And ultimately, this is what we hear from everybody. Overweight equities, what are bonds doing in your portfolio? They're not a ballast anymore and they weren't providing enough income to justify them versus stocks. Are we getting to a place where bonds are becoming competitive with stocks in a very real way? Do you see that in allocations in a meaningful way?

Ohsung Kwon (2:51)

I think so, at least a little bit.

People who are hesitant to go into bonds are really worried about inflation and physical deficit as well. But if you're really worried about inflation, then you could go into tips.

So I think there are some ways to sort of reallocate your assets, not just in equities, but in more diversified ways. And equity valuation isn't crazy, but it's still pretty elevated. And it's everyone's consensus that earnings are going to continue to print 20% or 15% plus. Our view is that earnings are elevated. Everyone's over earning right now. If you look at the 10-year EPS cycle, by next year, we're going to have one of the strongest 10-year EPS cycles in history. That's only been surpassed by the 1950s bull market after the World War II. And 2027 EPS is expected to be about 42% above the cyclically adjusted EPS, based on our calculation. So everything that we're seeing is showing that earnings are likely cyclically elevated, which argues for lower multiples going forward.

Lisa Abramowicz (4:03)

Let's just say oil prices come down. Let's say they come down by $10 to $20 per barrel. Does this whole thing change and suddenly you become bullish on stocks again?

Ohsung Kwon (4:13)

I think that's the bull case. The war ending or oil prices collapsing. And just purely based on how stocks have been trading versus oil, if WTI falls to $70, $75, then the S&P could potentially test 8,000. And hedge funds have de-grossed quite a lot over the past two weeks. And we've seen massive re-grossing Monday and Tuesday.

But I still think the, based on positioning, I think the pain trade could potentially be higher from here in the near term. But I also wonder who's going to be the incremental buyer other than hedge funds. Because I think retail has tapped out. In the first half of the year, we were very bullish on retail flows because of one big beautiful bill. That money has, is gone now.