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This is Bloomberg Businessweek Daily, reporting from the magazine that helps global leaders stay ahead, with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily podcast with Carol Massar and Tim Stenovec. On Bloomberg Radio.

**Jason Kelly** (0:32)
Our Bloomberg Markets live team writing that the latest reason to worry about the stock market is quite the doozy. Earnings growth has actually been too strong.
We've got with us Michael Ball, Bloomberg News Macro Strategist. He's got a great background. He was at the New York Fed during the crisis. That was 2006 to 2013 is when he was there. I think it's fair to say he's seen some stuff. He was a consultant. He was a macro analyst advising institutional clients. He was doing some trading and now we get him here at Bloomberg.

**Randall Williams** (0:59)
Welcome.

**Jason Kelly** (0:59)
Good to have you.

**Michael Ball** (1:00)
Thanks for having me, guys. Good to be on the show.

**Jason Kelly** (1:01)
I want to start with this idea that earnings growth has actually been too good. Why is that a bad sign?

**Michael Ball** (1:07)
Again, it's what is the next catalyst for the lake higher? We've been pinned at the SBX. We've seen a healthy rotation within that as July really saw a lot of the prior AI winners come off. Then the earnings picture just improved throughout July, broadened. Now, we have that 20-30 percent change in how much we're seeing forward EPS growth.
Now, we can't get too much more given the macro backdrop, meaning where are we going to lean again on for leadership? Is it going to go back to AI or is it going to be continuing breath of earnings improving? The actual economic growth story, although very strong given the uncertainty we're constantly dealing with, with tariffs, with the war, with the general state of the consumer, there's not too much more that we can squeeze out. When I go through all the earnings calls, it's really this margin expansion story because they've been able to hold pricing power. Now, you're asking yourself, what's the next driver for things? It's not like a bad thing. I'm not trying to say you should be getting out of stocks. But if we want to get to the next leg higher, let's say 8,000 on the SPX, it's like how do we get that extra 5, 10% now in earnings growth into the year end? That's the question.

**Jason Kelly** (2:06)
Well, didn't JP Morgan come out this week and say that's what we're going to see? Yeah, this is it.

**Michael Ball** (2:10)
This is the argument though. The consumer has to basically now can't just be AI CapEx.
Now it has to be a broad. The earnings story did show the consumers there. The data was better for Q2. We saw that in the GDP. We're going to get retail sales tomorrow. That's expected to be a little weaker. But overall, the consumer is not as bad. You got B of A saying it's a C economy, not a K economy anymore because they've seen strength in both the bottom and top.
So is this real? Is this tangible? Is it going to equate to the earnings?

**Jason Kelly** (2:35)
Scott Fesson says that too. He doesn't like the idea of the K shaped economy.

**Carol Massar** (2:38)
Well, sorry. Pick your letter here. But Rebecca Humkiss talked about it. And she said the K is still intact. But the lower rung is actually maybe outspending or doing more spending than the upper rung. But it's still there. Maybe the gap isn't as big as it used to be.
Having said that, earnings are important in terms of economic growth, though, right? If we think about it. So what does it mean? A normal correction, perhaps? Like, where are people here?

**Michael Ball** (3:04)
We could tread water. I get your point. I think what I'm a little worried about, and just put this in the grander context, post-July FOMC, we had kind of a grab for upside. Basically, we also had that shakeout of what was going on in a lot of the AI laggers, as we saw Citadel come in, stabilize the momentum trade, basically put a bottom in on the AI winners. Those guys have obviously done quite well.

**Carol Massar** (3:24)
That thing with situational awareness, was that considered as a stabilizer to the overall AI trade?

**Michael Ball** (3:29)
I mean, if you look at momentum, which is basically the SOX index or the AI laggards in July, they all sort of bottomed around the same day. Now, obviously, we also had the July FOMC, which was more dovish, give sort of a boost to sort of financial conditions, rates sort of stabilized, oils being stable. Everything basically flatlined and equities have rallied. But we were up 10% on the NASDAQ since then. Call spreads, call skew, everything you see for grab for upside all kind of at very high percentiles now, which means that people now are basically bulled up again. So again, to go higher now, we need a new catalyst. What is it? I don't know.