Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the aud Thoughts podcast.
Speaker 2: I'm Tracy Alloway and I'm Joe.
Speaker 3: Isn't thal Joe.
Speaker 2: We always start these the same with someone saying, it's
Speaker 2: that time of year, and.
Speaker 4: It's the most wonderful time of the year.
Speaker 2: That's right, never changed.
Speaker 4: Forecast season, it's.
Speaker 2: The outlook season. It is the moment when every investment
Speaker 2: bank on Wall Street releases they're forecasts for next year.
Speaker 4: Yeah, it is a great time, you know.
Speaker 3: We make New Year's resolutions.
Speaker 4: The time of year, we go back, we make our
Speaker 4: list of top ten things that happened, predictions, as we're
Speaker 4: supposed to. News gets a little quiet often around the holidays,
Speaker 4: so we make up for it by just looking back
Speaker 4: and looking forward.
Speaker 2: And then a year later we completely forget what everyone
Speaker 2: says about the current year and we just move on
Speaker 2: and do the next year. That's right, always forward looking.
Speaker 2: Although I do think, you know, twenty twenty six shaping
Speaker 2: up to be an interesting year for a variety of reasons.
Speaker 2: We just had a CPI number that came out surprisingly
Speaker 2: softer than a lot of people expected. Some people say,
Speaker 2: unrealistically softer with zero percent shelter costs increase, So that
Speaker 2: was interesting. We're going to have a new FED chairman. Yeah,
Speaker 2: there's still a question mark over the impact of tariffs,
Speaker 2: whether we're waiting to see those show up, and what's
Speaker 2: going to happen with unemployment as well, that's been ticking up.
Speaker 4: And then it's been this really incredible year obviously in
Speaker 4: the stock market. The US stock market just continues year
Speaker 4: after year, with a few exceptions here and there, but
Speaker 4: not many putting up massive numbers. And so the question
Speaker 4: is like how long is this realistic, especially given you know,
Speaker 4: all the concerns about concentration and a handful of names,
Speaker 4: some of which haven't really been doing so well lately,
Speaker 4: and so so many on both the real economy and
Speaker 4: the stock mark.
Speaker 2: Yeah, there's definitely been some dispersion creeping into some of
Speaker 2: the big AI names or the tech names. All right, well,
Speaker 2: I'm happy to say we do, in fact have the
Speaker 2: perfect guests plural. We've got two. So we're going to
Speaker 2: be speaking with Jan Hatzias. He's the chief economist and
Speaker 2: head of research at Goldman Sachs. He's been on the
Speaker 2: show a number of times before and we like talking
Speaker 2: to him at least once a year. And Ben Snyder,
Speaker 2: he is the chief US equity strategist, replacing David Costen.
Speaker 2: So thank you both for coming on all thoughts.
Speaker 3: Thanks so much for having us.
Speaker 5: Great to be here.
Speaker 2: Is research outlook time? Is that actually a quiet time
Speaker 2: for you guys?
Speaker 6: It's not a quiet time normally. We actually do it
Speaker 6: about six weeks earlier. Yeah, because actually November tends to
Speaker 6: be a little bit better than December. But because of
Speaker 6: the shutdown and the dearth of data, we decided to
Speaker 6: push it back. It's completely under all control when we
Speaker 6: do it, and why do it at a time when
Speaker 6: you actually have much less information normal? So we pushed
Speaker 6: out a number of reports yesterday, including the global economic
Speaker 6: and market's outlook.
Speaker 4: Can you talk to two of you maybe again? So
Speaker 4: obviously different roles, but on the same team. And obviously
Speaker 4: the stock market US secrety market is different from the economy,
Speaker 4: and you can have years where the economies find stocks
Speaker 4: are bad and vice versa. All different permutations and combinations.
Speaker 4: But how do you think about being in alignment cross
Speaker 4: team and so that roughly you're sort of working under
Speaker 4: a similar set of assumption.
Speaker 6: Yeah, I can talk about that, and not just with
Speaker 6: respect to the US or global economic outlook versus stock
Speaker 6: market outlook. But of course there's currencies, there's em economies,
Speaker 6: there's commodities. Certainly on the macro side, I would say
Speaker 6: we're on the coordinated side of the spectrum. Nobody is
Speaker 6: at one extreme or the other extreme. You can't have
Speaker 6: people that just work alongside one another without ever talking
Speaker 6: to one another. But you also shouldn't have just a
Speaker 6: machine where everything is exactly aligned and there's zero room
Speaker 6: for individual initiative. So we're towards the coordinator side for sure.
Speaker 4: Well, you mentioned yesterday a good time to note to
Speaker 4: listeners we are recording this December nineteenth, twenty twenty five. Ben,
Speaker 4: how do you think about sort of working with aligning
Speaker 4: your views of where markets are going or what the
Speaker 4: meaning of the rally has with the sort of with
Speaker 4: the macro thinking.
Speaker 5: There are a number of frameworks to think about the
Speaker 5: equity market, but a pretty common one and one we
Speaker 5: rely on a lot, is to think of the market
Speaker 5: like a stock, as a discounted stream of future cash flows.
Speaker 5: And from that perspective, the most important driver of stocks
Speaker 5: is that stream of cash flows is earnings, and if
Speaker 5: you break those apart, the most important driver of those
Speaker 5: cash flows is usually the US economy. So we rely
Speaker 5: very heavily on Yon's forecasts.
Speaker 2: So in terms of Yan's forecast, I noticed your forecasting
Speaker 2: strong growth as in GDP, but also rising unemployed. How
Speaker 2: do you square those two things.
Speaker 6: We have flat unemployment at four and a half percent,
Speaker 6: but it's not going down as you might think when
Speaker 6: you're printing let's say two point six percent for real
Speaker 6: GDP in two thousand and twenty six. And a small
Speaker 6: part of the answer is that that two point six
Speaker 6: probably overstates the underlying trend a bit because we had
Speaker 6: the shutdown that the pressed Q four it's going to
Speaker 6: add to Q one. But the more important part of
Speaker 6: the answer is accelerating productivity growth, and we've seen that
Speaker 6: over the last five years. The five years since the
Speaker 6: pandemic have shown about two percent underlying trend productivity growth.
Speaker 6: The prior cycle was at about one and a half percent.
Speaker 6: And I think there's reason to believe that that acceleration
Speaker 6: is still ongoing because it probably doesn't have a lot
Speaker 6: of AI in it. We expect more of a boost
Speaker 6: from AI going going forward in the next five years,
Speaker 6: then in the last five years, and I think that's
Speaker 6: got important implications for the relationship between GDP and unemployment.
Speaker 4: So obviously, like the distribution of growth matters. It seems
Speaker 4: to particularly matter when we're talking about the stock market,
Speaker 4: because you can have sectors that are like very quiet,
Speaker 4: but then you have these gigantic companies that make a
Speaker 4: ton of money and capture a lot of the growth
Speaker 4: that their stock's do incredibly well, maybe it would be
Speaker 4: helpful even before we get to the twenty six outlook
Speaker 4: for the economy, ben like what happened in twenty twenty five,
Speaker 4: What were the underlying conditions that allowed for such like
Speaker 4: another monster year, especially for the Nasdaq and a lot
Speaker 4: of big tech names.
Speaker 5: So to bring it back to earning, Yeah, one thing
Speaker 5: that happened was really strong earnings growth. And I think
Speaker 5: among all the discussions of bubbles, what's underappreciated is just
Speaker 5: how strong corporate earnings growth has been.
Speaker 3: Yeah.
Speaker 5: Just wrapped up the third quarter season a few weeks ago,
Speaker 5: and S and P five hundred companies in aggregate reported
Speaker 5: earnings growth of twelve percent. Even if we strip out
Speaker 5: the megacaps, the median S and P stock reported earning's
Speaker 5: growth of about ten percent. That's very solid.
Speaker 4: This seems to be like an underappreciated point, which is that, look,
Speaker 4: the AI driven market, the tech heavy market, it is
Speaker 4: not just that, is it.
Speaker 5: We'll take an extension for this. We spend a lot
Speaker 5: of time, understandably talking about the largest stocks in the market.
Speaker 5: The top ten stocks are over forty percent of market cap.
Speaker 5: We should spend a lot of time talking about them.
Speaker 3: But if you look at the S.
Speaker 5: And P four hundred and ninety or four hundred ninety three,
Speaker 5: that market or that group of stocks has returned about
Speaker 5: fifteen percent this year. They were turned about fifteen percent
Speaker 5: last year. They were turned about fifteen percent the year prior.
Speaker 5: And so I understand why we're talking about the large stocks,
Speaker 5: but really the broad US equity market has performed quite well.
Speaker 3: Well.
Speaker 2: How do you account for I guess the weakness that
Speaker 2: we've seen in some of the mega tech stocks in
Speaker 2: recent weeks. What's going on there?
Speaker 5: For three years we've been obsessed with AI as a market,
Speaker 5: and for three years, really the story has been increased capex,
Speaker 5: extraordinarily growth in AI investment spending. And although we're discussing
Speaker 5: a lot the eventual productivity benefits. As Yon mentioned, really
Speaker 5: the trade in the equity market has been the companies
Speaker 5: with earnings that are benefiting from those capex dollars. And
Speaker 5: what's happened this year, especially in the last several months,
Speaker 5: is it's become increasingly clear that A probably that growth
Speaker 5: will decelerate next year, and b to continue that growth,
Speaker 5: it's going to require more debt, and both of those
Speaker 5: factors have made investors understandably uncomfortable.
Speaker 3: Yeah.
Speaker 4: One of the sort of the viral charts of the
Speaker 4: year various estimates of like how much the AI build
Speaker 4: out specifically is a driver of US economic growth? And
Speaker 4: twenty five and beyond, like how much you know, when
Speaker 4: you look at the GDP in twenty twenty five, how
Speaker 4: much of the growth can you attribute to what benj
Speaker 4: just talked about.
Speaker 3: Actually pretty close to zero.
Speaker 4: Really, this is because very different.
Speaker 6: This is a zero I love for two reasons. Number one,
Speaker 6: the goods that are being invested in in the AI
Speaker 6: sector are largely imported, so you can look at the
Speaker 6: contribution of investment spending to GDP growth, But if you
Speaker 6: don't net that out against the imports, then you're going
Speaker 6: to get the wrong answer.
Speaker 3: That's one reason.
Speaker 6: Second reason is that semiconductors are generally treated as intermediate inputs,
Speaker 6: not as investment, so they don't actually show up in
Speaker 6: the investment numbers. And so when we look at the
Speaker 6: impact of AI investment on measured GDP growth on the
Speaker 6: numbers that are actually being printed, we're getting only about
Speaker 6: twenty basis points of contribution over the last three or
Speaker 6: four years, and pretty close.
Speaker 3: To zero over the last year.
Speaker 4: So it struck to me is such an important point
Speaker 4: because you know, you have other people estimating how fifty
Speaker 4: percent of growth this year is related to the AI
Speaker 4: build up? Are you just always like banging your head
Speaker 4: against the wall because you must see these headlines every
Speaker 4: day like the rest of us.
Speaker 6: I do a bit because oftentimes it's just based on
Speaker 6: looking at some portion of investment spending. Sometimes there are
Speaker 6: also other things included in those calculations that aren't necessarily
Speaker 6: AI related. But the big point is that you really
Speaker 6: need to look at the imports as well.
Speaker 2: Ben I should just ask before we go any further,
Speaker 2: what actually is your twenty twenty six target for the
Speaker 2: S and P five hundred, Because we haven't seen the
Speaker 2: official outlook yet.
Speaker 5: We've published seventy six hundred seventy six ORed.
Speaker 2: Okay, so one thing I did want to ask this
Speaker 2: was in Yan's Economic outlook. But you talk about potentially
Speaker 2: credit underperforming, which seems a little bit strange if interest
Speaker 2: rates are going lower and you know, equities are doing
Speaker 2: pretty good. What's going on there?
Speaker 6: I mean, it's mainly really that the valuations are very high.
Speaker 6: The credit fundamentals we think are still pretty good, but
Speaker 6: the market is priced to i mean, not perfection perhaps, but.
Speaker 3: To a very politive scenario.
Speaker 6: And so in that kind of situation, my instinct would
Speaker 6: always be to build in a little bit of mean
Speaker 6: reversion and that would give you a modest amount of underperformance.
Speaker 6: But I wouldn't say that that's a major part of
Speaker 6: our overall views for the next year.
Speaker 3: I have a question, and it's one of these things.
Speaker 4: Maybe it doesn't fit right into this moment in the conversation,
Speaker 4: but I'm so worried that I'm going to forget it
Speaker 4: that I'm going to ask it now. So we are
Speaker 4: recording this December nineteenth. We got that CPI report yesterday
Speaker 4: came in two point six on Core. This is year
Speaker 4: over year because we didn't have October data, And then
Speaker 4: there were people like, wait, they imputed a zero present
Speaker 4: zero rent growth 's zero shelter inflation for October when
Speaker 4: they didn't collect the data, et cetera. But then I'm like, Okay,
Speaker 4: that doesn't sound particularly accurate or that doesn't sound like
Speaker 4: that sounds a little risky. But on the other hand,
Speaker 4: we're talking about a year over year number, so I'm
Speaker 4: not even sure why October really affects that. Can you,
Speaker 4: just before we go in further explain how I should
Speaker 4: understand yesterday's CPI report.
Speaker 6: Yeah, I mean they use a six month growth rate
Speaker 6: for rents, and they did assume a zero sequentially for October,
Speaker 6: and that does take away from the year on year
Speaker 6: growth rate as of the November number as well. So
Speaker 6: we do think that shelter inflation in yesterday's numbers was understated,
Speaker 6: and the numbers are not quite as good as the
Speaker 6: eight basis points for core CPI on average for October
Speaker 6: and November.
Speaker 3: Capture would suggest.
Speaker 4: So capturing rent is not like measuring bananas, where I
Speaker 4: could say, here's the price of a banana in November
Speaker 4: twenty twenty five, here's the price of a banana November
Speaker 4: twenty twenty four. Therefore, you could just do a year
Speaker 4: over year thing.
Speaker 6: You can't do that because they don't. They don't do
Speaker 6: it that way. They don't look at just one month.
Speaker 2: And it's also owners equivalent, right, Well.
Speaker 6: That's that's a separate point because this distortion affects both
Speaker 6: actual rent and own as a close brand.
Speaker 3: So it wasn't as good.
Speaker 6: And there probably also were some other distortions stemming from
Speaker 6: the fact that prices were collected in the second half
Speaker 6: of November pretty close to Thanksgiving, pretty close to the
Speaker 6: Black Friday deals that may have understated prices in the
Speaker 6: goods sector. But I think if you step back and
Speaker 6: look at the inflation news more big picture, it's pretty encouraging.
Speaker 6: We've seen twenty twenty five a meaningful amount of pass
Speaker 6: through from tariffs. We think about fifty basis points of
Speaker 6: contribution to core PC inflation. Core PC inflation in that
Speaker 6: environment has been going sideways. So if you take out
Speaker 6: the fifty basis points, if you think that that's really
Speaker 6: a price level effect, that's more like a value added
Speaker 6: tax increase and is going to come out of the
Speaker 6: numbers in twenty twenty six. Then we've seen ongoing disinflation
Speaker 6: to an underlying rate that's no longer that far away
Speaker 6: from two percent, and that's pretty good news.
Speaker 2: Can we talk about prices and tariffs? And I'm very
Speaker 2: curious casting your mind back to April this year, April second,
Speaker 2: when all the tariff announcements came out, what was your
Speaker 2: base case for the impact on inflation, because there seemed
Speaker 2: to be two schools of thought. There are people who
Speaker 2: think companies are going to use tariffs as an excuse
Speaker 2: to raise their prices, and then there are people who
Speaker 2: think that tariffs end up being disinflationary because they basically
Speaker 2: take money out of consumers pockets.
Speaker 6: Like attacks, we had probably more like one hundred basis
Speaker 6: points of pass through, and we ended up, I mean.
Speaker 3: So far, I think with about fifty basis points.
Speaker 6: And there's still a question of how much of this
Speaker 6: reflects just a smaller pact, greater absorption maybe by the
Speaker 6: business sector and perhaps to a small degree by foreign producers,
Speaker 6: although I actually think that number is relatively small versus
Speaker 6: just a different time profile and a longer lag. We
Speaker 6: don't know that yet, but it's probably some combination of
Speaker 6: the two the one thing that I think has been
Speaker 6: consistent in terms of how we think about it is
Speaker 6: that this is more of a price level effect. And
Speaker 6: I've seen a lot of VAT increases in European economies
Speaker 6: where vit rates often move usually upwards rather than downwards.
Speaker 6: And we've got many precedents that have shown, you know,
Speaker 6: a twelve month increase in inflation on the back of
Speaker 6: one of these tax increases, and then a decline when
Speaker 6: that gets cycled out.
Speaker 4: Ben let's talk about tariffs on the stock market, because
Speaker 4: if the stock games had just been driven by a
Speaker 4: bunch of big tech companies, we say, oh, of course
Speaker 4: the teriffs didn't matter, because you know, they're not as
Speaker 4: tariff sensitive, et cetera. But when we're talking about the
Speaker 4: fact that the S and P four ninety three also
Speaker 4: did very well, it's not intuitive to me. I would
Speaker 4: I guess crymp margins, I would I guess lower sales,
Speaker 4: all kinds of things. How did it all shake out?
Speaker 4: From the equity perspective, the impact of tariffs?
Speaker 5: This was our concern too. Most of earnings variability is
Speaker 5: driven by margin variability. When you have years with very
Speaker 5: large earnings growth or very poor earnings growth, it's usually
Speaker 5: because of margins, and earlier this year we were concerned that,
Speaker 5: in part because of tariffs, margins would get squeezed and
Speaker 5: that would weigh on earnings.
Speaker 4: Wasn't just you who is concerned.
Speaker 5: And it really didn't materialize. Now, thank Part of what
Speaker 5: we have to keep in mind is the counterfactual. Right, So,
Speaker 5: for the last couple quarters, SMB five hundred profit margins
Speaker 5: have basically been flat well in an environment of pretty
Speaker 5: healthy nominal GDP growth, Normally you would expect some operating
Speaker 5: leverage that would cause margins to expand, and so I
Speaker 5: think part of the story here is you didn't get
Speaker 5: that counterfactual. But we seen consistently over the last few
Speaker 5: quarters companies across earnings calls really point to three levers
Speaker 5: they've been pulling to offset these pressures. One is, of course,
Speaker 5: as Yihon mentioned, pushing through some in the form of prices.
Speaker 5: Second is both pushing back on suppliers to absorb some
Speaker 5: of the costs and restructuring supply chains were necessary. And
Speaker 5: the third is cutting costs improving efficiency within companies, and
Speaker 5: that ties back to the slightly better productivity story we've seen.
Speaker 2: So we talked about rising productivity early, and you think
Speaker 2: that the main boost from it is yet to come.
Speaker 2: Who actually captures that productivity acceleration when it comes to
Speaker 2: the equity market, Like you know, the big tech guys,
Speaker 2: they've risen quite a lot, and now we're seeing some
Speaker 2: of the non tech companies start to catch up. Who's
Speaker 2: going to benefit the most?
Speaker 5: This is, I guess to call it a trillion dollar
Speaker 5: question is to understate the value of this question. I
Speaker 5: think the general consensus, certainly that we have and that
Speaker 5: most of our clients have, is that AI eventually will
Speaker 5: create a very large productivity boost to the economy that
Speaker 5: will create value for someone. Who that someone is is
Speaker 5: hard to answer. And as I mentioned earlier, what the
Speaker 5: market has been doing given that uncertainty over the last
Speaker 5: couple of years is really focusing on near term earnings.
Speaker 5: It's been the semiconductors, obviously, It's been the hyperscalers to
Speaker 5: some extent, power companies, etc. I think that is actually
Speaker 5: one of the key differences between this market and what
Speaker 5: happened twenty five years ago during the dot com bubble,
Speaker 5: where we saw valuations expand quite dramatically as investors tried
Speaker 5: to look forward and guess at the productivity gains and
Speaker 5: the economic benefits. Today investors are saying, we saw what
Speaker 5: happened that time. It's too hard, and so what we're
Speaker 5: really going to focus on is the earnings today.
Speaker 4: This is really important. So your view is that, at
Speaker 4: least from the behavior of public equity investors, you do
Speaker 4: not see any particular element of people letting their imaginations
Speaker 4: run wild.
Speaker 5: Of course, there are exceptions at the stock level, sure,
Speaker 5: and to some extent, if a stock trades hand in
Speaker 5: hand with earnings that are growing dramatically because of AI
Speaker 5: capex investment, the implicit assumption is the earnings from that
Speaker 5: investment are sustained over a long period of time. So
Speaker 5: maybe one could argue, actually the prices should go up
Speaker 5: by less than earnings. So I won't say there's no
Speaker 5: opti in the market with valuations at the current level.
Speaker 5: There's clearly optimism, but it's a very different kind of
Speaker 5: optimism from frankly, what I expected a few years ago,
Speaker 5: which is, to tracy your question, investors will be asking
Speaker 5: who are the long term winners and trying to pay
Speaker 5: for those immediately. That has really not been the story.
Speaker 5: I would actually say That's the key pivot that's happened
Speaker 5: in our conversations with clients over the last few months,
Speaker 5: which is as this anxiety has built up about the
Speaker 5: AI infrastructure trade and as for the first time we've
Speaker 5: seen some public companies discreetly quantify the earnings boost of AI.
Speaker 5: The narrative is shifted from how much will the semiconductors
Speaker 5: and other infrastructure companies make next year? Two? How can
Speaker 5: we identify long term productivity winners?
Speaker 2: What would make you nervous when it comes to valuations
Speaker 2: in general? This maybe like indiscriminate investment in anything that
Speaker 2: has the word AI in it.
Speaker 5: That would do it? Yeah, okay, I think if you
Speaker 5: look historically, you know it's hard to quantify speculative activity
Speaker 5: or over EXUBERANTCE. But we try, and so a few
Speaker 5: months ago we actually built something we call it Speculative
Speaker 5: Activity Trade Indicator. It looks at trading volumes, for example,
Speaker 5: in stocks with no profits, trading volumes in stocks with
Speaker 5: extraordinarily high valuation multiples. As you might expect, that has
Speaker 5: risen this year, but it is comforting to me that
Speaker 5: is still well below levels that we saw twenty five
Speaker 5: years ago and even five years ago in the twenty
Speaker 5: twenty one experience.
Speaker 4: Yeah, there's a question. It's I had not even really
Speaker 4: a twenty twenty six question. But you know, one of
Speaker 4: the reasons we've always loved talking to you is beyond
Speaker 4: just the forecast, et cetera. Consider you gould be sort
Speaker 4: of a deep macro thinker with a rooted in academic ideas.
Speaker 4: Economists seem, you know, fairly strict on the idea that like, yes,
Speaker 4: new technologies could put some people out of work, and
Speaker 4: that's obviously painful, but in the aggregate, tech doesn't destroy jobs.
Speaker 4: Is there any reason to think that AI would be
Speaker 4: any different? I mean, this is what scares people, right,
Speaker 4: that there's going to be ten people who have all
Speaker 4: the money and the rest of us are going to
Speaker 4: be living and universal basic income. AI may very well
Speaker 4: be a good podcast host at some time, and maybe
Speaker 4: podcasts will go away, But like in the broad thinking,
Speaker 4: is there any reason to think that somehow this time
Speaker 4: it's different with the relationship between tech and labor.
Speaker 6: I mean, history certainly doesn't support it. From the perspective
Speaker 6: of the long term outcomes. If you look at kind
Speaker 6: of intervals of you know, ten twenty years, you cannot
Speaker 6: find an adverse relationship between more productivity growth, even if
Speaker 6: it's more labor productivity growth that at the industry level
Speaker 6: puts people out of work and aggregate unemployment. What you
Speaker 6: can find is increases in frictional unemployment. When you see
Speaker 6: productivity acceleration. It takes a while for the new jobs
Speaker 6: to be created in other industries to compensate for the
Speaker 6: jobs that are being lost in the affected industries, and
Speaker 6: we do build in some of that into our forecast,
Speaker 6: and then it really becomes a question of how quickly
Speaker 6: the adoption really occurs. If it happens over say a decade,
Speaker 6: if you look at the entire economy, and you know,
Speaker 6: people think that's way too slow, But I actually don't
Speaker 6: think it's a crazy idea to think that this takes
Speaker 6: a while to diffuse through the economy, not just the
Speaker 6: most innovative companies, but all companies and at all levels.
Speaker 6: I do think it's going to take a number of
Speaker 6: years that would probably give the economy time to adapt
Speaker 6: and create jobs in other areas. But if it's much faster,
Speaker 6: then I'd be more worried about short term increases in
Speaker 6: frictional unemployment. So it's important to keep an open mind,
Speaker 6: even though I would say my underlying view is on
Speaker 6: the optimistic side that we will be able to cope
Speaker 6: with this structural change the way that the US and
Speaker 6: world economy has coped with technological advancement in the past.
Speaker 2: Can you talk a little bit about what's been going
Speaker 2: on with consumer spending because unemployment, you know, getting a
Speaker 2: little bit softer, but we haven't really seen a significant
Speaker 2: hit to consumer spending. And yet if you look at
Speaker 2: the sentiment surveys, everyone is miserable at the moment, but
Speaker 2: they keep buying stuff. What is going on there?
Speaker 6: I think the sentiment surveys have been getting less and
Speaker 6: less useful for predicting activity, and that's true for the
Speaker 6: consumer sentiment surveys, and the University of Michigan in particular
Speaker 6: has been quite far out of line with what we've seen.
Speaker 6: But it's actually true more broadly if you think back
Speaker 6: to ten years ago, twenty years ago, just the importance
Speaker 6: of the ism print for markets and the importance now
Speaker 6: it's just nowhere close.
Speaker 3: We still look at.
Speaker 6: The business service and the consumer surveys because they have
Speaker 6: interesting detail, they're very up to date, but they just
Speaker 6: don't work as well as the US, or certainly we're
Speaker 6: believed to. So I would really focus more on the
Speaker 6: heart data. The heart data would say that the consumer
Speaker 6: is doing okay. Consumer spending is certainly not super rapid.
Speaker 6: Maybe we'll get to two percent or so next year,
Speaker 6: but I think consumer spending in real charms is likely
Speaker 6: to lag the overall economy. There are obviously differences between
Speaker 6: the top end. I mean the levels obviously, but also
Speaker 6: the growth rates towards the top end versus the bottom end.
Speaker 6: That's a little bit hard to really assess in real
Speaker 6: time because the official consumer spending numbers are not broken
Speaker 6: down and at a very high frequency in the very
Speaker 6: up to date numbers. But it is a mixed picture
Speaker 6: out there. But I would expect under our forecast for
Speaker 6: the economy, I would expect the consumer to hang in there.
Speaker 2: What would be your desert island economic indicator for next year?
Speaker 2: You're stuck on an island. You can only look at
Speaker 2: one thing to gauge the direction of.
Speaker 3: The always be hard to beat the unemployment rate.
Speaker 2: Okay, So on the unemployment rate, we should talk about
Speaker 2: the FED right because this time next year we're going
Speaker 2: to have a new FED chair and almost like a
Speaker 2: year of performance already. When does he actually come in
Speaker 2: like April or something may Okay, well, a significant amount
Speaker 2: of performance in the role already. How much of a
Speaker 2: change is a new FED chair when it comes to
Speaker 2: your economic forecast.
Speaker 6: I mean it's probably not a lot. We're very unlikely
Speaker 6: to make a forecast change on the back of an appointment,
Speaker 6: and I don't know who it's going to be. It's
Speaker 6: a committee, so there is more continuity in the system
Speaker 6: than I think people sometimes believe when they talk about
Speaker 6: the different potential candidates. So at least in the say, six, twelve,
Speaker 6: eighteen month forward horizon, I wouldn't really expect a major
Speaker 6: change in terms.
Speaker 3: Of the policy outcomes.
Speaker 6: Obviously, the further out you goal, the more room there
Speaker 6: is for people to turn over on the committee, that's
Speaker 6: through on the Board of Governors. That's true among the
Speaker 6: Federal Reserve Bank presidents, and that could have more of
Speaker 6: an impact. But in the NIA charm I would not
Speaker 6: expect a massively different outcome because there's a new chair.
Speaker 4: Then, on this note, talk to us about multiples, and
Speaker 4: obviously you talk about the importance of earnings obviously, and
Speaker 4: then how frequently margin expansion is important, But then there's
Speaker 4: also the multiples question. Where are we now in terms
Speaker 4: of how you thinking about multiples, and then when you
Speaker 4: think where we're going and how much is that going
Speaker 4: to be tied sort of implicitly to perceptions of policy trajectory.
Speaker 5: Multiples high. There's no debating that, certainly, if you're comparing
Speaker 5: with history, is high in the last few decades. We've
Speaker 5: really only seen how higher multiple very briefly during the
Speaker 5: post COVID period, the reopening and of course in the
Speaker 5: late nineteen nineties.
Speaker 4: Done in that the post COVID is because no one
Speaker 4: had made any money for like two quarters.
Speaker 5: Well, I think that's a key point, which is one
Speaker 5: of the things that drives the multiple is expectations of
Speaker 5: accelerating or improving earnings. And from that perspective, if I
Speaker 5: listened to Yon's forecast for a healthy economy that's improving,
Speaker 5: it's not necessarily so strange to me that the multiple
Speaker 5: is pretty elevated. The other thing I'd point out is
Speaker 5: if we sat here a year ago, or frankly, if
Speaker 5: we sat here at the beginning of nineteen ninety nine,
Speaker 5: weren't many podcasts back then, but we'll use our imagination,
Speaker 5: the multiple was exactly where it is today, and that
Speaker 5: didn't really tell you anything about what to do with
Speaker 5: the market over the short term. So I view valuations
Speaker 5: through a physics lens as a measure of potential energy.
Speaker 5: They tell you a lot about how much the market
Speaker 5: can move if there's a catalyst, but they're not the
Speaker 5: catalyst themselves.
Speaker 2: I know you talked earlier about how you're not seeing
Speaker 2: people invest in the AI productivity story indiscriminately. But when
Speaker 2: it comes to an expected productivity boost from this new technology,
Speaker 2: what concrete evidence are you saying that this is actually
Speaker 2: happening versus people talking their books.
Speaker 5: Well, about sixty percent of S and B companies say
Speaker 5: AI every quarter on their earnings, true, and you can
Speaker 5: probably count on one hand how many are actually quantifying it.
Speaker 5: So I don't think you should expect to really see
Speaker 5: it in the numbers today. Actually, for the first time,
Speaker 5: we are modeling an AI productivity boost in our S
Speaker 5: and P five hundred earnings forecast for next year, and
Speaker 5: the magnitude of that boost is under half a percent,
Speaker 5: so we still think even next year it'll be quite small.
Speaker 5: But the important thing is it is growing over time.
Speaker 6: But that's the users of AI rather than the investment.
Speaker 5: Correct when you're spending hundreds of billions of dollars in capex,
Speaker 5: the AI boost in terms of those dollars has clearly
Speaker 5: been large for the last couple of years.
Speaker 4: So you're talking about the concentration of equities within the
Speaker 4: S and P five hundred, very top heavy. How does
Speaker 4: that compare with the concentration of earnings within the S
Speaker 4: and P five hundred.
Speaker 5: That is a key point that is I think often underappreciated,
Speaker 5: which is five years ago the top ten stocks in
Speaker 5: the market accounted for a third of market cap. This
Speaker 5: was a record at the time, although we look back
Speaker 5: and think wasn't so bad, and fast forward now they
Speaker 5: are a third of earnings. So one way to conceptualize
Speaker 5: this is the market was correctly looking forward back then
Speaker 5: and saying earnings are going to grow. And so today,
Speaker 5: if the top ten companies are forty percent of market
Speaker 5: cap and a third of earnings, the question is will
Speaker 5: they continue to outperform on an earnings basis over the
Speaker 5: next few years. Well, given the current run rate of
Speaker 5: earnings growth, it looks very likely that the answer will
Speaker 5: be yes, law perform although on our forecasts that gap
Speaker 5: will shrink a little.
Speaker 6: Bit and then markets might look forward further than that,
Speaker 6: and that I mean, that's been part of the issue
Speaker 6: for some of them.
Speaker 5: More recently, and that's how you create valuation problems.
Speaker 3: Tracy.
Speaker 4: When I hear that big tech companies only have about
Speaker 4: a third of the earnings of the S and P
Speaker 4: five hundred, my thought is, well, that's seventy percent of
Speaker 4: all corporate earnings that they have.
Speaker 3: Yet to swallow.
Speaker 4: Right, think of all of these earnings that are accruing
Speaker 4: to non tech companies. All of that is going to
Speaker 4: be Amazon's, Amazon and Alphabet's income in the future world.
Speaker 4: They're still upside Yeah, there's still seventy percent. They're still
Speaker 4: the majority of money is not being made by tech companies.
Speaker 2: Okay, wait, I got to ask though, Yes, tech companies
Speaker 2: have seen you very dominant in recent years, But what
Speaker 2: would it take to make you a little bit nervous
Speaker 2: about the outlook for next year, the broad market outlook,
Speaker 2: Like what would you need to see to think like, oh,
Speaker 2: wait a second, we're kind of getting ahead of ourselves,
Speaker 2: or I think maybe my target is a little more
Speaker 2: optimistic than I had expected.
Speaker 5: First I think an investors should always be a little nervous.
Speaker 5: That's the reflection of equity risk premium, which is how
Speaker 5: the market generates return over time, or at least part
Speaker 5: of how the market generates return over time. Well, first,
Speaker 5: you know Jan mentioned his Desert Island indicator being the
Speaker 5: unemployment rate. For me, every Thursday morning, I wake up
Speaker 5: excited to see jobless claims.
Speaker 4: This is I've said it many times. I'm a claims guy.
Speaker 4: When it comes to my Desert Island.
Speaker 5: We're on the same page of Bros. So you know,
Speaker 5: if a few thursdays in a row we start to
Speaker 5: see claims rise, I'll become a lot more nervous. If
Speaker 5: Yon walks down the hall one day and says, you know,
Speaker 5: we think the Fed's going to hike at the next meeting,
Speaker 5: I'll be nervous about that too. One consistent pattern at
Speaker 5: the top of almost every equity bull market in the
Speaker 5: past has been tightening FED policy instead of easing policy
Speaker 5: that we have today. And then, of course the third
Speaker 5: is you know, this is a very small and maybe
Speaker 5: silly example, but a couple of years ago, I remember
Speaker 5: when the gop one drugs were being rolled out, there
Speaker 5: was a very brief window where investors were talking about
Speaker 5: buying the airline stocks on the basis that fuel costs
Speaker 5: would be lower.
Speaker 3: Right.
Speaker 5: Yeah, When this narrative, this type of narrative starts to
Speaker 5: emerge in my conversations, that's the kind of time where
Speaker 5: I think you will be seeing prices run ahead of earnings, which,
Speaker 5: as I mentioned, has really not been the case. I'll
Speaker 5: be a lot more nervous.
Speaker 3: Then. That's interesting.
Speaker 4: So when you just start to see investors start to
Speaker 4: justify things on various bank shots, the narratives, Yeah, and
Speaker 4: that's just sort of like it's like a behavioral sign
Speaker 4: that maybe people are starting to get over their skates
Speaker 4: a bit.
Speaker 5: I think this has been one of the least enthusiastic
Speaker 5: markets that is often described as a bubble in recent history.
Speaker 4: You know what happened to housing? And when I say that,
Speaker 4: I mean I feel that we could go a whole
Speaker 4: conversation talking about the economy these days without talking about
Speaker 4: how a mediocre the housing market is doing, whether we're
Speaker 4: talking about prices, whether it starts basically every measure of
Speaker 4: housing not very good. And yet by and large, in
Speaker 4: conversations about the economy, you know, we used to there
Speaker 4: used to be the housing cycle is the business cycle,
Speaker 4: even setting aside the crisis of two thousand and eight
Speaker 4: two thousand and nine, housing is linked to the economy
Speaker 4: has always or for a long time, felt very robust.
Speaker 3: Has that changed?
Speaker 6: It's amazing how if I look back to well, certainly
Speaker 6: run up to eight and the couple of years after,
Speaker 6: how we rolled, I don't know, thirty percent, forty percent,
Speaker 6: fifty percent of what we were putting out on housing,
Speaker 6: and the spillovers from housing and mortgage equity withdrawal and
Speaker 6: leveraged losses because of mortgage credit exposures on bank balance sheets,
Speaker 6: and how it is now such a small part of
Speaker 6: the discussion because it's been kind of a tug of war,
Speaker 6: I think between you know, on the one hand, low
Speaker 6: vacancy rates and therefore a supportive supply picture for housing
Speaker 6: activity and house prices, and at the same time already
Speaker 6: high price levels, bad affordability, still reasonably high mortgage rates,
Speaker 6: and it just hasn't really moved very much now. Of course,
Speaker 6: we've also seen demographic changes that just result in less
Speaker 6: housing turnover, but it is not a major feature of
Speaker 6: our outlook for twenty twenty six. We have housing go
Speaker 6: you know, more or less sideways from here, low positive
Speaker 6: number for price appreciation, and you know, I think the
Speaker 6: action is really really elsewhere, more on the investment side,
Speaker 6: and obviously a lot of the technology issues that we've
Speaker 6: been discussing.
Speaker 2: We would be remiss if we didn't talk about the
Speaker 2: world's second biggest economy, which is China. So in your outlook,
Speaker 2: you say you expect China to hold up well, and
Speaker 2: I think this would be surprising to a lot of
Speaker 2: people who look out at I guess the global trading sphere,
Speaker 2: and it looks like everyone is a raid against China
Speaker 2: in various ways. The US has imposed tariffs, Europe seems
Speaker 2: to want to do something and possibly you know, form
Speaker 2: a coherent block I guess against China. Why haven't we
Speaker 2: seen more of a growth hit to China?
Speaker 6: The manufacturing sector and Chinese exports have just held up
Speaker 6: incredibly well despite a at times punitive level of tariffs
Speaker 6: from the US side. Exports to the US came down
Speaker 6: substantially in a twenty five thirty percent on a year
Speaker 6: on year basis, but exports to other places have held
Speaker 6: up very well.
Speaker 3: Overall, exports are still up five to ten percent.
Speaker 6: They're a little bit noisy, but very healthy growth rates,
Speaker 6: and our expectation is that that's going to continue, mainly
Speaker 6: because China keeps getting better and better at producing better
Speaker 6: and better goods at cheaper and cheaper prices, and it's
Speaker 6: going to be pretty difficult to really stem that for
Speaker 6: other economies. And they also control the supply of rare earths.
Speaker 6: They controlled about seventy percent of the mining, ninety percent
Speaker 6: of the refining. That's a pretty good way to deter
Speaker 6: trade action and tariffs, and I think we saw that
Speaker 6: in the negotiations with the US, but that could be
Speaker 6: relevant for other economies that try to impose tariffs on China.
Speaker 6: So I think the goods producing sector is still going
Speaker 6: to be strong. Now. The flip side is that the
Speaker 6: domestic economy is very weak, and that's a country where
Speaker 6: the housing story is much more central. Housing starts and
Speaker 6: sales are still going down, even though they're already down
Speaker 6: sixty to eighty percent, but they're still going down steeply.
Speaker 6: Prices are still falling steeply. Our China team estimates that
Speaker 6: if you take the direct and indirect effects of property
Speaker 6: on GDP growth, it's subtracted about two percentage points in
Speaker 6: twenty twenty five, and while the worst is probably behind us,
Speaker 6: they still have a one and a half percentage point
Speaker 6: drag next year. So in that sort of environment, you know,
Speaker 6: we think China will hold up okay, you know, slower
Speaker 6: growth over time, but probably still closer to five percent
Speaker 6: than to four percent.
Speaker 4: Then going back to US, doc I sort of joked that,
Speaker 4: you know, there's seventy percent of earnings out there that
Speaker 4: have yet to be captured by big tech companies. But
Speaker 4: I actually kind of don't really think that's a joke
Speaker 4: in the sense that that does seem to be the trend.
Speaker 4: There are a handful of companies that are cruing a
Speaker 4: lot of value when you think about the earnings growth
Speaker 4: that the big tech companies have, the realized earnings growth,
Speaker 4: and you gave the example about how the market sort
Speaker 4: of was correct five years ago that they would come
Speaker 4: to represent thirty percent of earnings. Is there any historical
Speaker 4: precedent for the largest companies in the world to be
Speaker 4: growing like this year after year, because I used to
Speaker 4: think mature companies don't grow like small companies do. Is
Speaker 4: this sort of like a novel phenomenon. When you think
Speaker 4: about the history of markets.
Speaker 5: Part of what's fun about markets is they're always changing.
Speaker 5: This seems to be one of those examples. You know,
Speaker 5: we did a study last year. We looked at one
Speaker 5: hundred years of market concentration in the US, and at
Speaker 5: least over the last century, we didn't find anything that
Speaker 5: quite matches up to today.
Speaker 7: Wow, what do you.
Speaker 2: Think would actually like put an end to that market dominance?
Speaker 2: I guess stronger antitrust laws or what.
Speaker 3: Yeah.
Speaker 5: I keep coming back to earnings, and one way that
Speaker 5: earning's dominance could end, of course, is regulatory policy. I
Speaker 5: think the top of mind question for investors is whether
Speaker 5: this revolutionary shift resulting from AI technology is going to
Speaker 5: change where the earnings end up accruing. But I think
Speaker 5: almost certainly when one day we look back. If one
Speaker 5: day we look back and they're no longer is dominant
Speaker 5: from a market cap perspective, it's going to be because
Speaker 5: their earnings aren't as dominant either.
Speaker 2: You know, we started this conversation talking about the CPI
Speaker 2: number that came out, and I would be curious to
Speaker 2: hear just how unusual this year has been in terms
Speaker 2: of tracking some of the data and dealing with, you know,
Speaker 2: things that you probably haven't had to deal with as
Speaker 2: an economist before, like tariffs on you know, some tiny
Speaker 2: Pacific island or something like that.
Speaker 6: I would echo what benj just said, this is what
Speaker 6: makes markets and economic forecasting fund that there's always something new.
Speaker 6: And of course the extent of the tariff increases that
Speaker 6: we saw on an around Liberation Day is if not unprecedented,
Speaker 6: then at least we haven't seen it in many, many decades.
Speaker 6: So that's a new set of challenges in terms of
Speaker 6: figuring out what the impacts are going to be. It's
Speaker 6: not as extreme as what we've seen at times in
Speaker 6: the prior twenty years or so, certainly compared with COVID.
Speaker 6: I mean, that's where you could effectively throw out a
Speaker 6: lot of the government data and had to look for
Speaker 6: other indicators like cell phone locations to figure out what
Speaker 6: was going on that if not that day, then at
Speaker 6: least that week, and you know, not a month, a
Speaker 6: month earlier.
Speaker 3: So that's been a challenge.
Speaker 6: The government shutdown, I would say, has been more challenging
Speaker 6: than past shutdowns.
Speaker 3: Will actually have holds.
Speaker 6: In the economic data that will probably be there for
Speaker 6: ever and you know, you look at some of the
Speaker 6: labor market numbers. We've had a consistent series for the
Speaker 6: US unemployment rate on a monthly basis since nineteen forty
Speaker 6: eight except for October two thousand and twenty five, and
Speaker 6: that's going to look pretty weird.
Speaker 5: That's kind of crazy.
Speaker 4: What is your outlook for twenty twenty six in terms
Speaker 4: of FED policy? Where do you see this rate cut
Speaker 4: cycle going and how deep.
Speaker 6: We still have a forecast that we've had for the
Speaker 6: last six months, which is after the seventy five bases
Speaker 6: points of insurance cuts in twenty twenty five, two more
Speaker 6: into twenty twenty six, that bring you down to what
Speaker 6: we think is roughly their neutral estimate three to three
Speaker 6: and a quarter percent. We're penciling that in for March
Speaker 6: and June. At the moment, haven't changed that. I would
Speaker 6: say there's a pretty sizable amount of uncertainty around that.
Speaker 6: It's certainly possible that if GDP growth does as well
Speaker 6: as we think and that actually gives a bit more
Speaker 6: of a lift to the labor market, that they would
Speaker 6: wait longer and push that perhaps into the second half.
Speaker 6: But I'm also pretty focused on January ninth, when we
Speaker 6: get the next employment report, because if that shows another
Speaker 6: increase in the unemployment rate, then I think it might
Speaker 6: be hard not to cut at the January meeting. We
Speaker 6: don't have that in the forecast at the moment, but
Speaker 6: I think it's a very real possibility.
Speaker 2: Something to look forward to after we come back for
Speaker 2: your holidays.
Speaker 4: Currently, I think according to work it's just a less
Speaker 4: than twenty percent chance of a cut in January, but
Speaker 4: it sounds and I know you don't expect one, but
Speaker 4: I guess it sounds like there's a condition in which
Speaker 4: that could jump.
Speaker 3: Yes, I think so.
Speaker 2: Yeah, and Ben, thank you so much for coming on
Speaker 2: all thoughts, and I guess we'll have you back on
Speaker 2: next year.
Speaker 4: Yeah, make an anual tradition.
Speaker 2: Yeah, check your forecast against reality.
Speaker 7: So thanks, thank you so much, Thank you so much, Joe,
Speaker 7: that's always fun.
Speaker 3: I love that.
Speaker 2: I do think the point about, you know, whether or
Speaker 2: not we're in a bubble. The one thing that like
Speaker 2: does give me some caution is this idea that like,
Speaker 2: actually everyone's kind of worried about it at the moment,
Speaker 2: and people are talking about the down potential downsides. But
Speaker 2: that said, I also think back to the Internet bubble,
Speaker 2: the dot com bubble, and I mean people were so
Speaker 2: worried about it. They were writing books about a dot
Speaker 2: com bubble, right so at the time before it actually bursts.
Speaker 2: So I don't you know, we've had bubbles before where
Speaker 2: people have been worried and they're still bubbles.
Speaker 4: Yeah, merely observing them does not obviate the existence of one.
Speaker 4: That's right, a couple things. So I love the Yan
Speaker 4: pushback on this very almost consensus meme that AI expenditure
Speaker 4: has been a huge driver of GDP expansion this year,
Speaker 4: and when you talk about I think, you know, it's
Speaker 4: interesting to hear him push back so hard on that,
Speaker 4: given how much of what gets put into the ground
Speaker 4: comes out on the other side via imports. I also,
Speaker 4: you know, look, I'm I love Ben's point about you
Speaker 4: say whatever you will about the big tech companies. They
Speaker 4: deliver monster earnings every year, and it's very interesting to
Speaker 4: hear how like over the last five years, you know,
Speaker 4: look at this crazy concentration and then they catch up
Speaker 4: there to earnings and it turns that the market was
Speaker 4: right again right.
Speaker 2: And it's also true, as he pointed out, that some
Speaker 2: non tech companies are seeing earnings growth too, so it's
Speaker 2: not even a market that's as dominated by big tech
Speaker 2: as it was just like two weeks ago.
Speaker 4: I'm sure that I have contributed it at various times
Speaker 4: to the sort of meme that it's just a tech
Speaker 4: driven you know, like we say that, right, this tech
Speaker 4: driven rally in twenty twenty five, And obviously, look, the
Speaker 4: NASDAK has outperformed the S and P five hundred this year,
Speaker 4: so we know that, like, yes, tech has outperformed, but
Speaker 4: you know, financials have done very well. I hadn't appreciated
Speaker 4: how consistently strong the earnings growth of the S and
Speaker 4: P four ninety three had been over the last three years.
Speaker 2: I also think this idea of productivity keeping on importsloyment
Speaker 2: stuck at like four point five percent is an interesting one.
Speaker 2: People I think tend to think of higher productivity as
Speaker 2: a good thing. Yeah, obvious reasons, but you know, there's
Speaker 2: so much political nervousness at the moment about jobs and
Speaker 2: economic security. If we have a massive productivity boost that
Speaker 2: ends with people not having as many good jobs, that'll
Speaker 2: be interesting.
Speaker 4: I mean, I still think it's a huge question mark obviously,
Speaker 4: like what AI ultimately means for the labor market. But
Speaker 4: this idea that like it could raise the frictional unemployment
Speaker 4: so not necessarily sustained change the number of people who
Speaker 4: have jobs, but the time it takes don't find a
Speaker 4: job in various other things because it's just so economy wide.
Speaker 4: Is like, maybe that's a useful I think that's a
Speaker 4: useful way to think about the question, at least in
Speaker 4: the short and medium term.
Speaker 2: Yeah, all right, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our producers Carmen Rodriguez at Carmen armand Dashil Bennett
Speaker 4: a Dashbot and kill.
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Speaker 4: More Odd Lots content, go to Bloomberg dot com slash
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