Episode summary
What a Fed Rate Hike Could Mean for US Stocks
The Markets
· · 11 min · Guests: Jonathan Shugar
Summary
Jonathan Shugar argued that the market is already pricing in a Fed hike next week after the hotter August CPI print, with about 84% odds for a move and 50 bps by year-end. He said the bigger risk is not a hike itself but the Fed losing control of the back end of the curve if it does not act, because longer-dated rates are now the key pressure point.
On equities, Shugar said the recent flat spot does not change the bigger picture. He pointed to a 19 PE multiple, roughly the 10-year average, and about 30% S&P earnings growth in the second quarter. In his view, that leaves room for the S&P to move materially higher over time, even if the next few weeks bring more volatility.
He also laid out where he sees opportunity and risk: AI spending remains powerful, with hyperscaler capex still rising, while the main hedge is in the 30-year swap curve through payers or payer spreads. Within consumer stocks, he favored experiential names like cruise and events, while sounding more cautious on companies tied to consumer agents and other disruptive software tools.
Key takeaways
- Shugar said the market is pricing an 84% chance of a Fed hike next week and 50 bps by year-end.
- He thinks the bigger threat is the back end of the rate curve, not a modest Fed hike.
- Shugar said U.S. stocks are not expensive at a 19 PE, roughly the 10-year average, after 30% second-quarter S&P earnings growth.
- He expects AI capex to keep supporting semis and related picks-and-shovels names, even if rates rise.
- He prefers consumer experience stocks such as cruise and events, while staying cautious on companies exposed to consumer agents.
Notable quotes
“We have something like 84% odds priced for that, and for 50 bps before year-end”
“the market is telling them that in some ways it's actually more dangerous not to hike because you might lose control of the back end in that case”
“we're trading at a 19 PE. That's the 10-year average”
“We've had S&P earnings growth of something like 30% on the second quarter”
“the experiential type names, whether it's cruise, whether it's events, things that people really want to do and spend money on”
How the episode opens
This is The Markets. I'm Chris Hussey, and today is Friday, September 11th. Before we start, I want to acknowledge that it's 25 years since the 9/11 attacks.
As our chairman and CEO, David Solomon, said in remarks, "Our firm joins the community in honoring the lives lost that day, as well as the first responders, recovery workers, and survivors, and everyone who suffered from 9/11 related illnesses. I'm also joined today on the Goldman Sachs trading floor by John Shugar. John is head of cross-asset sales within FICC and Equities.
John, thanks so much for joining us on The Markets. Thank you for having me, Chris. Great to be here.
Well, first time, long time for you, I know. Tell us a little bit about cross-asset sales. That could encompass anything.
What exactly is it? What we like to do is be like our clients, which is ultra-flexible as to where the opportunity set is. That's really what drives it.
The team is about 25 people, specialists across equities, derivatives, execution, credit, rates, and FX. And so really what we're able to help people do is capture these inflection points in markets, whether that's going from a growth equity cycle to a credit cycle, or whether that is looking at asymmetric hedges. And you've seen the utility of that ever since the subprime crisis to different rate hiking cycles or credit protection, where we look for asymmetric hedges.
And we'll talk a little bit more about that later on. Yeah. Well, it sounds like having the inflection guy here is perfect because we just got the CPI report.
The FOMC meets next week. Looks like we might be in for an inflection. What do you make of the CPI report and the reaction that the market's had so far?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate hike odds
- core cpi inflation
- us stock valuations
- ai investment outlook
- long-term interest rate risk
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “What a Fed Rate Hike Could Mean for US Stocks” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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