WEBVTT - Goldman's Hatzius and Snider on the Outlook for 2026 0:00:02.720 --> 0:00:15.880 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.560 --> 0:00:21.520 Hello and welcome to another episode of the aud Thoughts podcast. 0:00:21.600 --> 0:00:23.120 I'm Tracy Alloway and I'm Joe. 0:00:23.320 --> 0:00:24.280 Isn't thal Joe. 0:00:24.480 --> 0:00:27.600 We always start these the same with someone saying, it's 0:00:27.640 --> 0:00:28.640 that time of year, and. 0:00:28.880 --> 0:00:30.240 It's the most wonderful time of the year. 0:00:30.320 --> 0:00:31.720 That's right, never changed. 0:00:32.520 --> 0:00:33.800 Forecast season, it's. 0:00:33.760 --> 0:00:38.080 The outlook season. It is the moment when every investment 0:00:38.120 --> 0:00:42.400 bank on Wall Street releases they're forecasts for next year. 0:00:42.600 --> 0:00:43.960 Yeah, it is a great time, you know. 0:00:44.159 --> 0:00:45.600 We make New Year's resolutions. 0:00:45.680 --> 0:00:47.720 The time of year, we go back, we make our 0:00:47.760 --> 0:00:50.639 list of top ten things that happened, predictions, as we're 0:00:50.680 --> 0:00:53.800 supposed to. News gets a little quiet often around the holidays, 0:00:53.880 --> 0:00:55.920 so we make up for it by just looking back 0:00:55.960 --> 0:00:56.720 and looking forward. 0:00:56.840 --> 0:00:59.560 And then a year later we completely forget what everyone 0:00:59.640 --> 0:01:02.640 says about the current year and we just move on 0:01:02.720 --> 0:01:05.080 and do the next year. That's right, always forward looking. 0:01:05.280 --> 0:01:08.200 Although I do think, you know, twenty twenty six shaping 0:01:08.319 --> 0:01:11.600 up to be an interesting year for a variety of reasons. 0:01:12.080 --> 0:01:15.880 We just had a CPI number that came out surprisingly 0:01:16.040 --> 0:01:19.479 softer than a lot of people expected. Some people say, 0:01:19.800 --> 0:01:24.440 unrealistically softer with zero percent shelter costs increase, So that 0:01:24.600 --> 0:01:27.560 was interesting. We're going to have a new FED chairman. Yeah, 0:01:27.560 --> 0:01:30.360 there's still a question mark over the impact of tariffs, 0:01:30.480 --> 0:01:33.840 whether we're waiting to see those show up, and what's 0:01:33.880 --> 0:01:36.440 going to happen with unemployment as well, that's been ticking up. 0:01:36.560 --> 0:01:39.480 And then it's been this really incredible year obviously in 0:01:39.560 --> 0:01:43.640 the stock market. The US stock market just continues year 0:01:43.080 --> 0:01:45.600 after year, with a few exceptions here and there, but 0:01:45.680 --> 0:01:49.440 not many putting up massive numbers. And so the question 0:01:49.520 --> 0:01:52.440 is like how long is this realistic, especially given you know, 0:01:52.480 --> 0:01:55.600 all the concerns about concentration and a handful of names, 0:01:55.840 --> 0:01:58.200 some of which haven't really been doing so well lately, 0:01:58.560 --> 0:02:01.920 and so so many on both the real economy and 0:02:01.960 --> 0:02:02.840 the stock mark. 0:02:03.040 --> 0:02:05.840 Yeah, there's definitely been some dispersion creeping into some of 0:02:05.880 --> 0:02:08.520 the big AI names or the tech names. All right, well, 0:02:08.639 --> 0:02:10.400 I'm happy to say we do, in fact have the 0:02:10.440 --> 0:02:14.359 perfect guests plural. We've got two. So we're going to 0:02:14.400 --> 0:02:17.080 be speaking with Jan Hatzias. He's the chief economist and 0:02:17.120 --> 0:02:19.120 head of research at Goldman Sachs. He's been on the 0:02:19.120 --> 0:02:22.079 show a number of times before and we like talking 0:02:22.080 --> 0:02:24.840 to him at least once a year. And Ben Snyder, 0:02:24.960 --> 0:02:29.000 he is the chief US equity strategist, replacing David Costen. 0:02:29.240 --> 0:02:32.200 So thank you both for coming on all thoughts. 0:02:31.960 --> 0:02:33.079 Thanks so much for having us. 0:02:33.160 --> 0:02:33.800 Great to be here. 0:02:34.080 --> 0:02:37.320 Is research outlook time? Is that actually a quiet time 0:02:37.360 --> 0:02:37.919 for you guys? 0:02:38.240 --> 0:02:40.760 It's not a quiet time normally. We actually do it 0:02:40.800 --> 0:02:45.680 about six weeks earlier. Yeah, because actually November tends to 0:02:45.720 --> 0:02:48.520 be a little bit better than December. But because of 0:02:48.560 --> 0:02:52.200 the shutdown and the dearth of data, we decided to 0:02:52.200 --> 0:02:55.040 push it back. It's completely under all control when we 0:02:55.080 --> 0:02:57.400 do it, and why do it at a time when 0:02:57.440 --> 0:03:02.359 you actually have much less information normal? So we pushed 0:03:02.600 --> 0:03:06.520 out a number of reports yesterday, including the global economic 0:03:06.600 --> 0:03:07.440 and market's outlook. 0:03:07.600 --> 0:03:10.400 Can you talk to two of you maybe again? So 0:03:10.600 --> 0:03:14.560 obviously different roles, but on the same team. And obviously 0:03:14.800 --> 0:03:18.079 the stock market US secrety market is different from the economy, 0:03:18.080 --> 0:03:20.520 and you can have years where the economies find stocks 0:03:20.560 --> 0:03:24.040 are bad and vice versa. All different permutations and combinations. 0:03:24.200 --> 0:03:27.040 But how do you think about being in alignment cross 0:03:27.120 --> 0:03:30.959 team and so that roughly you're sort of working under 0:03:30.960 --> 0:03:32.519 a similar set of assumption. 0:03:32.240 --> 0:03:34.840 Yeah, I can talk about that, and not just with 0:03:34.880 --> 0:03:39.400 respect to the US or global economic outlook versus stock 0:03:39.440 --> 0:03:44.880 market outlook. But of course there's currencies, there's em economies, 0:03:45.120 --> 0:03:49.200 there's commodities. Certainly on the macro side, I would say 0:03:49.600 --> 0:03:53.760 we're on the coordinated side of the spectrum. Nobody is 0:03:53.800 --> 0:03:57.560 at one extreme or the other extreme. You can't have 0:03:58.160 --> 0:04:01.440 people that just work alongside one another without ever talking 0:04:01.520 --> 0:04:04.640 to one another. But you also shouldn't have just a 0:04:04.680 --> 0:04:11.200 machine where everything is exactly aligned and there's zero room 0:04:11.280 --> 0:04:15.960 for individual initiative. So we're towards the coordinator side for sure. 0:04:16.240 --> 0:04:18.680 Well, you mentioned yesterday a good time to note to 0:04:19.200 --> 0:04:23.160 listeners we are recording this December nineteenth, twenty twenty five. Ben, 0:04:23.160 --> 0:04:25.880 how do you think about sort of working with aligning 0:04:25.960 --> 0:04:28.000 your views of where markets are going or what the 0:04:28.040 --> 0:04:30.080 meaning of the rally has with the sort of with 0:04:30.160 --> 0:04:31.000 the macro thinking. 0:04:31.160 --> 0:04:32.760 There are a number of frameworks to think about the 0:04:32.760 --> 0:04:34.680 equity market, but a pretty common one and one we 0:04:34.760 --> 0:04:36.920 rely on a lot, is to think of the market 0:04:37.120 --> 0:04:39.880 like a stock, as a discounted stream of future cash flows. 0:04:40.160 --> 0:04:43.080 And from that perspective, the most important driver of stocks 0:04:43.200 --> 0:04:45.440 is that stream of cash flows is earnings, and if 0:04:45.440 --> 0:04:47.599 you break those apart, the most important driver of those 0:04:47.600 --> 0:04:50.200 cash flows is usually the US economy. So we rely 0:04:50.400 --> 0:04:51.760 very heavily on Yon's forecasts. 0:04:52.120 --> 0:04:55.520 So in terms of Yan's forecast, I noticed your forecasting 0:04:55.600 --> 0:05:00.440 strong growth as in GDP, but also rising unemployed. How 0:05:00.440 --> 0:05:02.200 do you square those two things. 0:05:02.720 --> 0:05:05.400 We have flat unemployment at four and a half percent, 0:05:05.520 --> 0:05:08.600 but it's not going down as you might think when 0:05:08.640 --> 0:05:12.760 you're printing let's say two point six percent for real 0:05:12.800 --> 0:05:17.960 GDP in two thousand and twenty six. And a small 0:05:18.000 --> 0:05:20.320 part of the answer is that that two point six 0:05:20.480 --> 0:05:24.479 probably overstates the underlying trend a bit because we had 0:05:24.520 --> 0:05:27.039 the shutdown that the pressed Q four it's going to 0:05:27.040 --> 0:05:29.919 add to Q one. But the more important part of 0:05:29.960 --> 0:05:34.440 the answer is accelerating productivity growth, and we've seen that 0:05:34.800 --> 0:05:38.800 over the last five years. The five years since the 0:05:38.880 --> 0:05:44.760 pandemic have shown about two percent underlying trend productivity growth. 0:05:45.400 --> 0:05:48.640 The prior cycle was at about one and a half percent. 0:05:49.080 --> 0:05:52.440 And I think there's reason to believe that that acceleration 0:05:52.600 --> 0:05:56.279 is still ongoing because it probably doesn't have a lot 0:05:56.279 --> 0:05:59.160 of AI in it. We expect more of a boost 0:05:59.200 --> 0:06:01.840 from AI going going forward in the next five years, 0:06:02.160 --> 0:06:04.679 then in the last five years, and I think that's 0:06:04.960 --> 0:06:08.880 got important implications for the relationship between GDP and unemployment. 0:06:09.600 --> 0:06:13.080 So obviously, like the distribution of growth matters. It seems 0:06:13.080 --> 0:06:15.640 to particularly matter when we're talking about the stock market, 0:06:15.680 --> 0:06:18.000 because you can have sectors that are like very quiet, 0:06:18.000 --> 0:06:21.000 but then you have these gigantic companies that make a 0:06:21.000 --> 0:06:22.839 ton of money and capture a lot of the growth 0:06:22.880 --> 0:06:25.240 that their stock's do incredibly well, maybe it would be 0:06:25.279 --> 0:06:29.240 helpful even before we get to the twenty six outlook 0:06:29.279 --> 0:06:33.000 for the economy, ben like what happened in twenty twenty five, 0:06:33.480 --> 0:06:37.240 What were the underlying conditions that allowed for such like 0:06:37.320 --> 0:06:41.040 another monster year, especially for the Nasdaq and a lot 0:06:41.080 --> 0:06:41.919 of big tech names. 0:06:42.080 --> 0:06:43.720 So to bring it back to earning, Yeah, one thing 0:06:43.760 --> 0:06:45.840 that happened was really strong earnings growth. And I think 0:06:46.080 --> 0:06:49.400 among all the discussions of bubbles, what's underappreciated is just 0:06:49.440 --> 0:06:51.040 how strong corporate earnings growth has been. 0:06:51.200 --> 0:06:51.440 Yeah. 0:06:51.560 --> 0:06:53.640 Just wrapped up the third quarter season a few weeks ago, 0:06:53.960 --> 0:06:56.560 and S and P five hundred companies in aggregate reported 0:06:56.560 --> 0:06:59.040 earnings growth of twelve percent. Even if we strip out 0:06:59.040 --> 0:07:02.120 the megacaps, the median S and P stock reported earning's 0:07:02.120 --> 0:07:04.400 growth of about ten percent. That's very solid. 0:07:04.520 --> 0:07:07.960 This seems to be like an underappreciated point, which is that, look, 0:07:08.320 --> 0:07:11.280 the AI driven market, the tech heavy market, it is 0:07:11.720 --> 0:07:12.640 not just that, is it. 0:07:12.720 --> 0:07:14.880 We'll take an extension for this. We spend a lot 0:07:14.880 --> 0:07:17.480 of time, understandably talking about the largest stocks in the market. 0:07:17.520 --> 0:07:19.800 The top ten stocks are over forty percent of market cap. 0:07:19.840 --> 0:07:21.640 We should spend a lot of time talking about them. 0:07:21.960 --> 0:07:22.880 But if you look at the S. 0:07:22.880 --> 0:07:25.000 And P four hundred and ninety or four hundred ninety three, 0:07:26.040 --> 0:07:28.720 that market or that group of stocks has returned about 0:07:28.760 --> 0:07:31.600 fifteen percent this year. They were turned about fifteen percent 0:07:31.680 --> 0:07:34.320 last year. They were turned about fifteen percent the year prior. 0:07:34.760 --> 0:07:37.000 And so I understand why we're talking about the large stocks, 0:07:37.000 --> 0:07:40.160 but really the broad US equity market has performed quite well. 0:07:40.280 --> 0:07:40.520 Well. 0:07:40.920 --> 0:07:43.000 How do you account for I guess the weakness that 0:07:43.040 --> 0:07:45.200 we've seen in some of the mega tech stocks in 0:07:45.320 --> 0:07:46.920 recent weeks. What's going on there? 0:07:47.200 --> 0:07:50.000 For three years we've been obsessed with AI as a market, 0:07:50.640 --> 0:07:55.920 and for three years, really the story has been increased capex, 0:07:55.960 --> 0:08:00.840 extraordinarily growth in AI investment spending. And although we're discussing 0:08:00.880 --> 0:08:04.640 a lot the eventual productivity benefits. As Yon mentioned, really 0:08:04.720 --> 0:08:08.360 the trade in the equity market has been the companies 0:08:08.520 --> 0:08:12.000 with earnings that are benefiting from those capex dollars. And 0:08:12.120 --> 0:08:14.880 what's happened this year, especially in the last several months, 0:08:15.200 --> 0:08:18.640 is it's become increasingly clear that A probably that growth 0:08:18.640 --> 0:08:22.520 will decelerate next year, and b to continue that growth, 0:08:22.640 --> 0:08:24.840 it's going to require more debt, and both of those 0:08:24.880 --> 0:08:27.240 factors have made investors understandably uncomfortable. 0:08:27.760 --> 0:08:27.920 Yeah. 0:08:28.560 --> 0:08:30.920 One of the sort of the viral charts of the 0:08:31.000 --> 0:08:34.600 year various estimates of like how much the AI build 0:08:34.640 --> 0:08:38.640 out specifically is a driver of US economic growth? And 0:08:38.840 --> 0:08:41.640 twenty five and beyond, like how much you know, when 0:08:41.640 --> 0:08:44.560 you look at the GDP in twenty twenty five, how 0:08:44.640 --> 0:08:47.000 much of the growth can you attribute to what benj 0:08:47.000 --> 0:08:47.520 just talked about. 0:08:47.559 --> 0:08:48.960 Actually pretty close to zero. 0:08:49.400 --> 0:08:51.640 Really, this is because very different. 0:08:51.679 --> 0:08:55.200 This is a zero I love for two reasons. Number one, 0:08:56.080 --> 0:09:01.120 the goods that are being invested in in the AI 0:09:01.320 --> 0:09:05.120 sector are largely imported, so you can look at the 0:09:05.240 --> 0:09:09.440 contribution of investment spending to GDP growth, But if you 0:09:09.520 --> 0:09:14.080 don't net that out against the imports, then you're going 0:09:14.120 --> 0:09:15.080 to get the wrong answer. 0:09:15.160 --> 0:09:15.960 That's one reason. 0:09:16.280 --> 0:09:23.040 Second reason is that semiconductors are generally treated as intermediate inputs, 0:09:23.720 --> 0:09:28.560 not as investment, so they don't actually show up in 0:09:28.600 --> 0:09:32.760 the investment numbers. And so when we look at the 0:09:32.800 --> 0:09:37.360 impact of AI investment on measured GDP growth on the 0:09:37.440 --> 0:09:41.600 numbers that are actually being printed, we're getting only about 0:09:41.600 --> 0:09:46.040 twenty basis points of contribution over the last three or 0:09:46.040 --> 0:09:48.520 four years, and pretty close. 0:09:48.320 --> 0:09:49.560 To zero over the last year. 0:09:49.840 --> 0:09:52.240 So it struck to me is such an important point 0:09:52.280 --> 0:09:54.520 because you know, you have other people estimating how fifty 0:09:54.559 --> 0:09:56.920 percent of growth this year is related to the AI 0:09:56.960 --> 0:09:59.280 build up? Are you just always like banging your head 0:09:59.280 --> 0:10:01.760 against the wall because you must see these headlines every 0:10:01.800 --> 0:10:02.760 day like the rest of us. 0:10:03.080 --> 0:10:06.640 I do a bit because oftentimes it's just based on 0:10:07.280 --> 0:10:11.840 looking at some portion of investment spending. Sometimes there are 0:10:11.840 --> 0:10:16.000 also other things included in those calculations that aren't necessarily 0:10:16.080 --> 0:10:19.600 AI related. But the big point is that you really 0:10:19.679 --> 0:10:21.480 need to look at the imports as well. 0:10:22.080 --> 0:10:23.960 Ben I should just ask before we go any further, 0:10:24.080 --> 0:10:27.400 what actually is your twenty twenty six target for the 0:10:27.480 --> 0:10:29.160 S and P five hundred, Because we haven't seen the 0:10:29.360 --> 0:10:30.839 official outlook yet. 0:10:30.760 --> 0:10:33.240 We've published seventy six hundred seventy six ORed. 0:10:33.679 --> 0:10:36.080 Okay, so one thing I did want to ask this 0:10:36.320 --> 0:10:40.119 was in Yan's Economic outlook. But you talk about potentially 0:10:40.360 --> 0:10:44.800 credit underperforming, which seems a little bit strange if interest 0:10:44.880 --> 0:10:47.760 rates are going lower and you know, equities are doing 0:10:47.920 --> 0:10:49.960 pretty good. What's going on there? 0:10:50.200 --> 0:10:53.520 I mean, it's mainly really that the valuations are very high. 0:10:53.559 --> 0:10:57.920 The credit fundamentals we think are still pretty good, but 0:10:58.400 --> 0:11:02.640 the market is priced to i mean, not perfection perhaps, but. 0:11:02.720 --> 0:11:04.559 To a very politive scenario. 0:11:04.679 --> 0:11:08.880 And so in that kind of situation, my instinct would 0:11:08.880 --> 0:11:11.160 always be to build in a little bit of mean 0:11:11.240 --> 0:11:15.360 reversion and that would give you a modest amount of underperformance. 0:11:15.360 --> 0:11:19.000 But I wouldn't say that that's a major part of 0:11:19.400 --> 0:11:21.360 our overall views for the next year. 0:11:21.520 --> 0:11:23.320 I have a question, and it's one of these things. 0:11:23.320 --> 0:11:25.640 Maybe it doesn't fit right into this moment in the conversation, 0:11:25.720 --> 0:11:27.280 but I'm so worried that I'm going to forget it 0:11:27.320 --> 0:11:28.679 that I'm going to ask it now. So we are 0:11:28.679 --> 0:11:32.680 recording this December nineteenth. We got that CPI report yesterday 0:11:33.080 --> 0:11:35.560 came in two point six on Core. This is year 0:11:35.559 --> 0:11:38.160 over year because we didn't have October data, And then 0:11:38.200 --> 0:11:40.840 there were people like, wait, they imputed a zero present 0:11:41.320 --> 0:11:44.679 zero rent growth 's zero shelter inflation for October when 0:11:44.679 --> 0:11:47.920 they didn't collect the data, et cetera. But then I'm like, Okay, 0:11:47.960 --> 0:11:50.560 that doesn't sound particularly accurate or that doesn't sound like 0:11:50.800 --> 0:11:52.640 that sounds a little risky. But on the other hand, 0:11:52.640 --> 0:11:54.319 we're talking about a year over year number, so I'm 0:11:54.320 --> 0:11:56.600 not even sure why October really affects that. Can you, 0:11:56.679 --> 0:11:59.480 just before we go in further explain how I should 0:11:59.559 --> 0:12:01.079 understand yesterday's CPI report. 0:12:01.600 --> 0:12:05.400 Yeah, I mean they use a six month growth rate 0:12:05.520 --> 0:12:11.160 for rents, and they did assume a zero sequentially for October, 0:12:11.720 --> 0:12:14.600 and that does take away from the year on year 0:12:14.720 --> 0:12:18.000 growth rate as of the November number as well. So 0:12:18.080 --> 0:12:23.360 we do think that shelter inflation in yesterday's numbers was understated, 0:12:23.800 --> 0:12:27.600 and the numbers are not quite as good as the 0:12:27.640 --> 0:12:31.720 eight basis points for core CPI on average for October 0:12:31.760 --> 0:12:32.959 and November. 0:12:33.000 --> 0:12:34.000 Capture would suggest. 0:12:34.080 --> 0:12:37.000 So capturing rent is not like measuring bananas, where I 0:12:37.000 --> 0:12:39.000 could say, here's the price of a banana in November 0:12:39.000 --> 0:12:41.840 twenty twenty five, here's the price of a banana November 0:12:41.840 --> 0:12:44.360 twenty twenty four. Therefore, you could just do a year 0:12:44.360 --> 0:12:44.959 over year thing. 0:12:44.960 --> 0:12:47.120 You can't do that because they don't. They don't do 0:12:47.160 --> 0:12:49.400 it that way. They don't look at just one month. 0:12:49.600 --> 0:12:52.520 And it's also owners equivalent, right, Well. 0:12:52.440 --> 0:12:57.800 That's that's a separate point because this distortion affects both 0:12:58.360 --> 0:13:00.960 actual rent and own as a close brand. 0:13:01.320 --> 0:13:02.600 So it wasn't as good. 0:13:03.320 --> 0:13:06.520 And there probably also were some other distortions stemming from 0:13:06.559 --> 0:13:09.400 the fact that prices were collected in the second half 0:13:09.440 --> 0:13:13.240 of November pretty close to Thanksgiving, pretty close to the 0:13:13.280 --> 0:13:17.360 Black Friday deals that may have understated prices in the 0:13:17.360 --> 0:13:19.960 goods sector. But I think if you step back and 0:13:20.040 --> 0:13:24.599 look at the inflation news more big picture, it's pretty encouraging. 0:13:24.880 --> 0:13:30.439 We've seen twenty twenty five a meaningful amount of pass 0:13:30.559 --> 0:13:34.600 through from tariffs. We think about fifty basis points of 0:13:34.640 --> 0:13:39.240 contribution to core PC inflation. Core PC inflation in that 0:13:39.400 --> 0:13:43.480 environment has been going sideways. So if you take out 0:13:43.520 --> 0:13:45.760 the fifty basis points, if you think that that's really 0:13:45.800 --> 0:13:48.240 a price level effect, that's more like a value added 0:13:48.280 --> 0:13:50.880 tax increase and is going to come out of the 0:13:50.960 --> 0:13:55.319 numbers in twenty twenty six. Then we've seen ongoing disinflation 0:13:55.880 --> 0:13:59.079 to an underlying rate that's no longer that far away 0:13:59.200 --> 0:14:14.679 from two percent, and that's pretty good news. 0:14:17.360 --> 0:14:20.840 Can we talk about prices and tariffs? And I'm very 0:14:20.880 --> 0:14:25.080 curious casting your mind back to April this year, April second, 0:14:25.400 --> 0:14:27.840 when all the tariff announcements came out, what was your 0:14:27.920 --> 0:14:30.960 base case for the impact on inflation, because there seemed 0:14:30.960 --> 0:14:32.880 to be two schools of thought. There are people who 0:14:32.880 --> 0:14:35.520 think companies are going to use tariffs as an excuse 0:14:35.600 --> 0:14:37.720 to raise their prices, and then there are people who 0:14:37.760 --> 0:14:41.640 think that tariffs end up being disinflationary because they basically 0:14:41.680 --> 0:14:44.080 take money out of consumers pockets. 0:14:44.120 --> 0:14:48.160 Like attacks, we had probably more like one hundred basis 0:14:48.200 --> 0:14:51.280 points of pass through, and we ended up, I mean. 0:14:51.160 --> 0:14:53.600 So far, I think with about fifty basis points. 0:14:54.320 --> 0:14:57.280 And there's still a question of how much of this 0:14:58.120 --> 0:15:02.800 reflects just a smaller pact, greater absorption maybe by the 0:15:02.840 --> 0:15:07.160 business sector and perhaps to a small degree by foreign producers, 0:15:07.240 --> 0:15:11.320 although I actually think that number is relatively small versus 0:15:11.840 --> 0:15:14.840 just a different time profile and a longer lag. We 0:15:14.880 --> 0:15:18.280 don't know that yet, but it's probably some combination of 0:15:18.320 --> 0:15:22.160 the two the one thing that I think has been 0:15:22.240 --> 0:15:24.640 consistent in terms of how we think about it is 0:15:24.680 --> 0:15:27.280 that this is more of a price level effect. And 0:15:27.400 --> 0:15:31.560 I've seen a lot of VAT increases in European economies 0:15:31.560 --> 0:15:35.760 where vit rates often move usually upwards rather than downwards. 0:15:36.160 --> 0:15:40.160 And we've got many precedents that have shown, you know, 0:15:40.240 --> 0:15:42.760 a twelve month increase in inflation on the back of 0:15:42.760 --> 0:15:45.960 one of these tax increases, and then a decline when 0:15:45.960 --> 0:15:47.000 that gets cycled out. 0:15:47.400 --> 0:15:49.800 Ben let's talk about tariffs on the stock market, because 0:15:50.040 --> 0:15:52.280 if the stock games had just been driven by a 0:15:52.320 --> 0:15:54.560 bunch of big tech companies, we say, oh, of course 0:15:54.600 --> 0:15:56.920 the teriffs didn't matter, because you know, they're not as 0:15:57.080 --> 0:16:00.280 tariff sensitive, et cetera. But when we're talking about the 0:16:00.320 --> 0:16:02.800 fact that the S and P four ninety three also 0:16:02.920 --> 0:16:06.240 did very well, it's not intuitive to me. I would 0:16:06.240 --> 0:16:08.320 I guess crymp margins, I would I guess lower sales, 0:16:08.360 --> 0:16:10.840 all kinds of things. How did it all shake out? 0:16:10.920 --> 0:16:13.080 From the equity perspective, the impact of tariffs? 0:16:13.080 --> 0:16:16.440 This was our concern too. Most of earnings variability is 0:16:16.520 --> 0:16:18.760 driven by margin variability. When you have years with very 0:16:18.840 --> 0:16:21.560 large earnings growth or very poor earnings growth, it's usually 0:16:21.600 --> 0:16:24.560 because of margins, and earlier this year we were concerned that, 0:16:25.080 --> 0:16:27.400 in part because of tariffs, margins would get squeezed and 0:16:27.400 --> 0:16:28.280 that would weigh on earnings. 0:16:28.480 --> 0:16:30.240 Wasn't just you who is concerned. 0:16:30.320 --> 0:16:32.920 And it really didn't materialize. Now, thank Part of what 0:16:32.920 --> 0:16:34.920 we have to keep in mind is the counterfactual. Right, So, 0:16:34.960 --> 0:16:37.840 for the last couple quarters, SMB five hundred profit margins 0:16:37.880 --> 0:16:41.000 have basically been flat well in an environment of pretty 0:16:41.040 --> 0:16:44.160 healthy nominal GDP growth, Normally you would expect some operating 0:16:44.200 --> 0:16:46.560 leverage that would cause margins to expand, and so I 0:16:46.560 --> 0:16:48.640 think part of the story here is you didn't get 0:16:48.680 --> 0:16:52.000 that counterfactual. But we seen consistently over the last few 0:16:52.080 --> 0:16:56.600 quarters companies across earnings calls really point to three levers 0:16:56.640 --> 0:17:00.160 they've been pulling to offset these pressures. One is, of course, 0:17:00.200 --> 0:17:03.160 as Yihon mentioned, pushing through some in the form of prices. 0:17:03.640 --> 0:17:07.199 Second is both pushing back on suppliers to absorb some 0:17:07.240 --> 0:17:10.399 of the costs and restructuring supply chains were necessary. And 0:17:10.440 --> 0:17:14.199 the third is cutting costs improving efficiency within companies, and 0:17:14.240 --> 0:17:17.400 that ties back to the slightly better productivity story we've seen. 0:17:17.720 --> 0:17:21.200 So we talked about rising productivity early, and you think 0:17:21.240 --> 0:17:24.160 that the main boost from it is yet to come. 0:17:24.400 --> 0:17:28.720 Who actually captures that productivity acceleration when it comes to 0:17:28.720 --> 0:17:31.119 the equity market, Like you know, the big tech guys, 0:17:31.160 --> 0:17:33.879 they've risen quite a lot, and now we're seeing some 0:17:33.920 --> 0:17:36.560 of the non tech companies start to catch up. Who's 0:17:36.560 --> 0:17:37.720 going to benefit the most? 0:17:38.000 --> 0:17:39.760 This is, I guess to call it a trillion dollar 0:17:39.840 --> 0:17:42.600 question is to understate the value of this question. I 0:17:42.640 --> 0:17:44.720 think the general consensus, certainly that we have and that 0:17:44.760 --> 0:17:47.480 most of our clients have, is that AI eventually will 0:17:47.480 --> 0:17:50.040 create a very large productivity boost to the economy that 0:17:50.119 --> 0:17:53.119 will create value for someone. Who that someone is is 0:17:53.160 --> 0:17:55.560 hard to answer. And as I mentioned earlier, what the 0:17:55.600 --> 0:17:58.880 market has been doing given that uncertainty over the last 0:17:58.920 --> 0:18:02.119 couple of years is really focusing on near term earnings. 0:18:02.320 --> 0:18:05.119 It's been the semiconductors, obviously, It's been the hyperscalers to 0:18:05.119 --> 0:18:08.440 some extent, power companies, etc. I think that is actually 0:18:08.480 --> 0:18:10.840 one of the key differences between this market and what 0:18:10.960 --> 0:18:13.399 happened twenty five years ago during the dot com bubble, 0:18:13.800 --> 0:18:16.920 where we saw valuations expand quite dramatically as investors tried 0:18:16.920 --> 0:18:19.600 to look forward and guess at the productivity gains and 0:18:19.640 --> 0:18:23.280 the economic benefits. Today investors are saying, we saw what 0:18:23.280 --> 0:18:26.000 happened that time. It's too hard, and so what we're 0:18:26.000 --> 0:18:28.280 really going to focus on is the earnings today. 0:18:28.640 --> 0:18:30.639 This is really important. So your view is that, at 0:18:30.760 --> 0:18:35.000 least from the behavior of public equity investors, you do 0:18:35.200 --> 0:18:40.359 not see any particular element of people letting their imaginations 0:18:40.440 --> 0:18:40.919 run wild. 0:18:41.040 --> 0:18:43.080 Of course, there are exceptions at the stock level, sure, 0:18:43.160 --> 0:18:46.359 and to some extent, if a stock trades hand in 0:18:46.440 --> 0:18:49.760 hand with earnings that are growing dramatically because of AI 0:18:49.800 --> 0:18:53.639 capex investment, the implicit assumption is the earnings from that 0:18:53.720 --> 0:18:55.840 investment are sustained over a long period of time. So 0:18:55.840 --> 0:18:57.680 maybe one could argue, actually the prices should go up 0:18:57.760 --> 0:18:59.680 by less than earnings. So I won't say there's no 0:18:59.720 --> 0:19:02.520 opti in the market with valuations at the current level. 0:19:02.640 --> 0:19:05.280 There's clearly optimism, but it's a very different kind of 0:19:05.280 --> 0:19:08.440 optimism from frankly, what I expected a few years ago, 0:19:08.760 --> 0:19:11.280 which is, to tracy your question, investors will be asking 0:19:11.320 --> 0:19:13.600 who are the long term winners and trying to pay 0:19:13.640 --> 0:19:15.800 for those immediately. That has really not been the story. 0:19:16.000 --> 0:19:18.800 I would actually say That's the key pivot that's happened 0:19:19.040 --> 0:19:21.240 in our conversations with clients over the last few months, 0:19:21.359 --> 0:19:24.399 which is as this anxiety has built up about the 0:19:24.400 --> 0:19:28.040 AI infrastructure trade and as for the first time we've 0:19:28.080 --> 0:19:32.919 seen some public companies discreetly quantify the earnings boost of AI. 0:19:33.520 --> 0:19:37.080 The narrative is shifted from how much will the semiconductors 0:19:37.080 --> 0:19:40.320 and other infrastructure companies make next year? Two? How can 0:19:40.359 --> 0:19:42.959 we identify long term productivity winners? 0:19:43.040 --> 0:19:46.520 What would make you nervous when it comes to valuations 0:19:46.520 --> 0:19:50.639 in general? This maybe like indiscriminate investment in anything that 0:19:51.119 --> 0:19:52.600 has the word AI in it. 0:19:53.359 --> 0:19:55.240 That would do it? Yeah, okay, I think if you 0:19:55.280 --> 0:19:59.359 look historically, you know it's hard to quantify speculative activity 0:19:59.840 --> 0:20:02.520 or over EXUBERANTCE. But we try, and so a few 0:20:02.520 --> 0:20:04.639 months ago we actually built something we call it Speculative 0:20:04.680 --> 0:20:08.760 Activity Trade Indicator. It looks at trading volumes, for example, 0:20:08.760 --> 0:20:11.520 in stocks with no profits, trading volumes in stocks with 0:20:11.560 --> 0:20:15.239 extraordinarily high valuation multiples. As you might expect, that has 0:20:15.320 --> 0:20:17.919 risen this year, but it is comforting to me that 0:20:18.040 --> 0:20:20.760 is still well below levels that we saw twenty five 0:20:20.840 --> 0:20:23.040 years ago and even five years ago in the twenty 0:20:23.080 --> 0:20:23.960 twenty one experience. 0:20:24.320 --> 0:20:26.320 Yeah, there's a question. It's I had not even really 0:20:26.359 --> 0:20:29.040 a twenty twenty six question. But you know, one of 0:20:29.080 --> 0:20:31.560 the reasons we've always loved talking to you is beyond 0:20:31.640 --> 0:20:33.760 just the forecast, et cetera. Consider you gould be sort 0:20:33.800 --> 0:20:38.760