December 2, 2024 • 53 mins
It's trite to say that there is a high degree of uncertainty right now, for macro forecasters and investors. It also happens to be true. The new administration is promising major policy changes in areas like tariffs, immigration, and the size and scope of government. But even beyond that, there is near-term uncertainty over the outlook for the labor market and inflation. Furthermore, we're in an era of high stock valuations, high market concentration, and the AI wildcard. So in light of all this, we talked to Jan Hatzius, the Chief Economist and Head of Global Investment Research, and David Kostin, Goldman's top equity strategist, about what they're looking for in the year ahead.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal and.
Speaker 4 (00:23):
I'm Tracy Allaway.
Speaker 2 (00:24):
Tracy, it's my favorite time of year.
Speaker 4 (00:26):
Do you know what I was going to say, the
exact same thing. I was going to make, the exact
same comment.
Speaker 2 (00:32):
It's Outlook season, twenty twenty five Outlook season, and our
inboxes get flooded with various flavors of big picture outlooks,
micro picture outlooks. Fifteen things to watch for within the
industrial and trucking segments of the economy. Fifteen big questions
we have.
Speaker 4 (00:51):
For Here's a list of all the things Trump is
going to make great again.
Speaker 2 (00:54):
Yeah, all these things, and these are some of my
favorite cell side notes to read every year, but they
always make for a thoughtful something to do around this
time of year.
Speaker 4 (01:02):
Here's the big question. Do you go back and look
at the twenty twenty three outlooks?
Speaker 3 (01:07):
I never do.
Speaker 2 (01:07):
I people always in our industry joke about that, they like,
let's go back, and I've seen it happen twice.
Speaker 4 (01:13):
But on a serious note, I know the analysts who
produce these outlooks like it is their actual job to
try to forecast the future. But like I find it
so difficult, especially in the current context with so many
uncertainties and the new administration coming in. I just I
don't even know how you begin to, like try to
figure out what the level of the S and P
(01:34):
five hundred is going to be under those like very
uncertain conditions.
Speaker 2 (01:38):
Well, you know, most of the time stocks go up
and the economy grows.
Speaker 4 (01:43):
And that that would be your outlook is like, well,
stocks are probably going to go up.
Speaker 2 (01:47):
Stocks will go up with the economy will grow. In
two and a half, three and a half. Anyway, we
have much better guests.
Speaker 4 (01:53):
Yes, we have people who actually do.
Speaker 2 (01:55):
That and are really truly some of the best in
the industry. And it is a real treat. We actually
have them both together, which makes for an extraordinary opportunity.
So I'm very excited. We have two guests, two of
the perfect guests, I should say. We're gonna be speaking
with Jan Hatziis, chief economist and head of Global Investment
Research at Goldman Sachs, and David Coston, chief US equity
(02:18):
strategist at Goldman SACS. David and Jana, this is such
a thrill to have you on both at the same
time and just talk about what twenty twenty five is like,
because there's obviously a lot to talk about. I don't
know to start it with you Yan, like, actually, do
you accept the premise that it's a difficult time. It
feels difficult, it feels tricky, it feels like there's a
lot of questions and uncertainties. Do you accept the premise
(02:40):
that it's an unusually tricky time to be making a
short term or medium term forecast?
Speaker 5 (02:45):
I think it is a difficult time just because there's
more uncertainty than normal about the policy environment. So you
have all the usual uncertainties around whether the consumer is
going to continue to spend we think yes, where inflation
that's going to continue to trend down X, any new
shocks we think yes, Whether the Fed will still deliver
(03:08):
cuts just based on the underlying trend in the economy.
And then you have to think about the potential impulses,
both on the positive and the negative side, and obviously
we'll get into those, but that just adds to the
variability around the central forecast.
Speaker 4 (03:24):
I have a lot of procedural questions when it comes
to the outlooks. My first one is do you guys
like talk to each other before you do your respective outlooks,
because I imagine what the market does is obviously going
to depend a lot on what the economy does.
Speaker 6 (03:39):
There are I guess nearly a thousand people in the
research department at Goma. Yan is the head of the
research department, and within Macro probably one hundred people, and
we are pretty coordinated. Every week have a conversation about
what's happening in the different regions around the world economically,
in commodities, in strategy and rates. So we're pretty coordinated
at the macro level.
Speaker 4 (04:00):
Do you ever disagree we do?
Speaker 5 (04:02):
I do think that we spend a lot of time
trying to get to the bottom of what the disagreement
is about, and that often brings views more closely together.
I think in the end we do try to present
a coherent overall picture, but that doesn't mean that every
nuance is exactly the same. I mean, I think there
(04:23):
is sort of a spectrum between having just one view
of the world where there's zero room for individual kind
of creativity, and just having a bunch of people that
have independent views that are not coherent. You have to
find a place somewhere in the middle. I think we're
(04:45):
more towards the coherent side than what I see, you
know in many other research organizations where it's really more
individuals than a team effort.
Speaker 2 (04:54):
We're going to get into all the actual details, but
I kind of like asking some of these procedural questions. Okay,
so you make an S and P. Five hundred forecast
for the year twenty twenty five, you talk to clients,
et cetera. You know, I can't imagine there are that
many people in the investment industry. Maybe I'm wrong, And
tell me if I'm wrong, who's like David says, the
(05:15):
SMP is going to X, so that's what we're gonna
buy or we're gonna sell or et cetera. How do
you view, like, what is your goal when you're talking
to clients, when you're putting out a forecast for the
S and P five hundred, and when you think about
the value that you bring to clients from making these
forecasts that Tracy and I love getting in our inboxes
this time of year, Like, what are you hoping is
the end fruit of that?
Speaker 6 (05:37):
Well, there's a variety of customers or clients that we
think about, and I would say framing the issues is
probably the most important thing we do. Identifying investment strategies
inside of the market is a big area of focus.
We think about segmenting the clients of Goldman Sachs. We
have hedge funds, mutual funds, pension funds, insurance companies, endowments,
(05:59):
sovereign funds. Each of those constituencies are looking for something
a little bit different the mixed asset portfolio. On the
part of number of endowments and pension funds, sovereign wealth funds,
they're quite interested in the index level because they think
about the alternatives between equities and credit, private credit, public credit, commodities,
(06:19):
private equity, etc. And so those are issues for those
type of clients. If you're thinking about and when we
talk to and interact on a daily basis with hedge
funds and mutual funds, they're focused on oftentimes investment strategies
inside of the market, and those are some of the reasons.
But in terms of your specifics on how you think
about the index level, that is something people think about broadly.
(06:41):
Do they put more risk on or do they take
less risk? Is the market going to pay for excitement
or is it going.
Speaker 5 (06:46):
To pay for boredom?
Speaker 6 (06:47):
How do you think about shifting your portfolio to reflect
those Those are basically the variety of conversations that we
have on a daily basis.
Speaker 4 (06:55):
So this time last year, I think we were still
maybe not as much as earlier, but we were still
kind of in recession expectation mode. And you know that
obviously went on for like two years with the yield
curve inversion and the surveys showing that the vibes were down,
and everyone worried that consumer spending would eventually drop off
(07:16):
and that sort of thing. And yet here we are,
tail end of twenty twenty four. Recession hasn't emerged. The
Fed is now cutting rates, which presumably takes some of
the pressure off. Yeah, you were one of the economists
who I think got this right. You were in the
soft landing camp. From what I remember when we spoke
to you. What was it that you saw that kind
(07:37):
of played out effectively in twenty twenty four.
Speaker 5 (07:41):
I'd say the key to the soft landing call over
the last couple of years was, I think to recognize
that this is a very different business cycle that was
much more driven by the pandemic and the post pandemic
ambalanced US that emerged really in twenty twenty twenty one,
(08:03):
and climbing out of a hole that was really a
supply side hit is very different from squeezing down inflation
that had emerged because of an overheating. If you have
an overheated economy and the level of activity is just
too high and the level of demand is too high,
(08:25):
to bring that back to normal, you almost have to
have a decline in economic activity, which is almost the
definition of a recession. But if you're climbing out of
a hole on the supply side, and supply chains go
back to normal, libor force participation goes back to normal,
we get an additional boost to supply from immigrants coming
(08:47):
into the workforce, and you know, we'll get into some
of these things. All of that means you can see
declining inflation and increases in real output and employment at
the same time time, and that's basically what we've been
seeing over the last couple of years. So for me,
that's the most important difference. I think there was too
(09:08):
much extrapolation from past business cycles, and too many people
looked at when inflation is at five percent or six percent,
there's always been a recession because those were much more
demand driven cycles rather than supply driven cycles.
Speaker 2 (09:28):
So we're recording this, by the way, on November twenty sixth.
The S and P as of the moment I'm saying
this is that six four point seventy two extraordinary gains,
nearly twenty six percent gains from the start of the year.
Speaker 3 (09:41):
I guess I'm not surprised.
Speaker 2 (09:42):
David that, given this sort of easy mode disinflation that
we had in twenty twenty four, that we've had such
a great year for the stock marketing. You have a
call of sixty five hundred for your your in twenty
twenty five target, which is about a little over seven
seven percent from where we are.
Speaker 3 (10:01):
How come how much?
Speaker 2 (10:02):
So it's gonna be it's gains, And you know, I
think a lot of people would be happy with seven
percent gains.
Speaker 3 (10:07):
You do that for ten straight years of.
Speaker 4 (10:08):
Age Shoe's thesis that stocks go up.
Speaker 3 (10:10):
Yeah, Well, so how do you get there?
Speaker 6 (10:12):
All right, let's talk about some of the building blocks
for how we get there. Number one is earnings, and
earnings are expected to grow in our model around eleven
percent this year, meaning twenty twenty five looking ahead, and
about seven percent in calendar twenty twenty six. We've got
a couple of years of continued expansion in earnings. How
do we get the earnings, Well, we can think about
sales growing roughly five percent. Most companies over time grow
(10:35):
their sales and their revenues by roughly nominal GDP, so
we'll call that around five percent, a little bit of
a margin expansion, and that's going to lead to the
growth rate. Now, the growth rate of eleven percent is a
little higher than that. You have some issues around healthcare
in particular. We are not expecting the write off of
so much in process R and D, and so we
get very very specific about some things. But our models
(10:56):
would show around eleven percent earnings growth for the coming year,
and we are affecting that the multiple actually come down slightly. Currently,
the market multiples around twenty or nearly twenty three times
forward earnings market prices consensus as opposed to our earnings estimates,
which is a little bit below consensus, and the idea
of the multiple declining Joe of maybe twenty one and
a half times is our model. So the bottom line,
(11:18):
how do we get there? You're looking at eleven percent
earnings growth. By this time next year, the market will
be pricing off of the twenty twenty six earnings. That's
why we have to look out for two years. And
the idea of a market multiple or multiple of around
twenty one and a half times what is ultimately a
twenty twenty six estimate supports six five hundred is it target?
Speaker 4 (11:38):
So you're talking about earnings expansion. All of us presumably
woke up to headlines this morning about Trump imposing tariffs
on Some.
Speaker 3 (11:46):
Of us checked the news last night before that.
Speaker 4 (11:49):
Okay, well, I didn't I want to sleep early. I
was blissfully unaware of global politics and trade policy. But anyway,
presumably higher input costs would eventually feed into corporate earnings.
I guess is that on your radar at all?
Speaker 5 (12:05):
Well, it certainly should be. As far as China tariffs
are concerned, I mean, we do expect a significant increase
in China tariffs, and we're building in about a twenty
percentage point increase in the average rate on US imports
from China. I think it's also pretty likely that we'll
(12:27):
get some additional tariffs outside of China. We're thinking auto tariffs,
potentially on Europe and Mexico. And then of course there
were some announcements or threats of broader tariffs on both
Mexico and Canada. You know, we'll have to see whether
that ultimately happens. There is a renegotiation of the US
(12:50):
Mexico or Canada trade agreement that will have to occur
over the next couple of years. So I think there
still will be a number of rounds before this actually
gets finalize. But clearly tariffs are the in all of you,
the biggest risk to what otherwise is quite a positive outlook.
I mean, we're pretty optimistic on the US growth outlook
(13:13):
for twenty twenty five. We're you know, two and a
half percent again, half a percentage point or a little
more above the current Bloomberg consensus. But we're watching the
tariff situation closely, and I'm sure there's going to be
many twists and turns before all of this becomes totally clear.
Speaker 2 (13:46):
Our turiff's inflationary, because I could see it both ways. Right,
on the one hand, they throw sand into the gear,
so to speak, of the global economy, and that is
in a costly process. Right, there's a readjustment et cetera.
On the other hand, I think new Treasury Secretary nominee
Scott Best and made some quotes they don't have to
be per se inflationary, because yes, imports may cost more,
(14:07):
but then you know, sort of a kind of it
struck me as sort of a monitor's framework. There's less
money in households, and then that reduces demand elsewhere, and
that brings prices lower, and so the overall price level
or the rate of inflation doesn't change as much as
an economist. Someone asks you our terriff's inflationary. How do
you think through that question, I.
Speaker 5 (14:24):
Would say tariffs raised prices, and we can see that
very clearly from when they have been applied, including some
of the China tariffs in the first Trump administration. They
fed through to prices in the categories the relatively few
categories where they were applied, and.
Speaker 4 (14:40):
This is such achanical it's really good.
Speaker 5 (14:43):
So yes, I would say that's quite clear. Whether that
is ongoing inflation, that's much less clear because these are
really price level effects. They're sort of like value added
tax increases in various European countries. We've seen this time
and time again. There's a one time increase in the
(15:04):
price level, a one time increase in inflation, but the
inflation then drops out twelve months after. Assuming that there
are no major second round effects through inflation expectations, then
of course central banks would become a lot more concerned
if you did see a big increase in inflation expectations,
wages ongoing escalation, if there is a you know, tit
(15:28):
for tat trade war that keeps going, obviously that would
also have a longer tail, But initially it is a
price level impact.
Speaker 4 (15:38):
David, I'm going to ask what is possibly an unfair question,
but can you pretend to be the entire stock market
right now and tell me, like, what is happening today?
Stocks are up about point four to oh percent off
the back presumably of those tariff headlines we had, like
a drop in Asia stocks overnight, but US stocks recover
(16:00):
pretty quickly. What is it that investors see here?
Speaker 6 (16:04):
Well, the biggest discussion point that I'm in having with
portfolio managers has to do with the expectation that small
business confidence is likely to increase sharply. That was the
experience at the beginning of the first Trump administration. Actually,
it started to happen between the election, and actually the
inauguration that took place back in twenty sixteen early twenty seventeen,
(16:26):
it was a surge in small business optimism. And so
the discussions are and around the expectation that portfolio managers
have that this is going to be a repeat of
the last administration, and there's a lot of enthusiasm the
expectation that there's less sort of muscular antitrust environment, that
there is an idea of small businesses investing, and that
(16:48):
optimism is therefore likely to benefit a lot of companies
whose customers are small and medium sized businesses, and that's
one of the investment strategies we have for the current year.
We work with the individual analysts at Goldman and we've
identified a group of stocks where more than fifty percent
of their revenues are coming from small and medium sized businesses.
And so there's investment opportunities that we look at on
(17:09):
the back of the expectation of a more robust economic
or more positive business environment. And again it's about the expectations,
the perception of what is like could happen. And so
as back to your question, Tracy, that's the topic is
that not necessarily the topic of today, not necessarily, but
that broadly in the last couple of weeks has been
the central topic right now that the last NFIB survey
(17:33):
was around the thirteenth percentile versus history, so quite low,
and the expectation of many as it's going to surge
in the coming months.
Speaker 2 (17:41):
You mentioned the regulatory environment one of your other themes
for twenty twenty five, and this has come up a lot,
as expectations of more liberal m and a regulatory environment,
more deals being relighted. I think we can understand that
you also are still bullish on the really big megacap stocks,
and you said something in your twenty twenty five out
look that I kind of take an issue with. You said, like,
(18:02):
the primary question for mutual fund managers over the last
two years is whether they got the big megacap story right,
which is true, but it's also true for arguably like
fifteen years at this point, because really what we should
have all been doing for the last fifteen years is
just by Microsoft and Alphabet and Meta and really ignore
(18:22):
everything else. You're still bullish on them. What would have
to change, What conditions would have to change such that
the mag seven or whatever permutation is hot? Maybe one
pops in and one drops out. What would have to
change for these handful of stocks to not be the
big winners of the market going forward.
Speaker 6 (18:40):
So, Joe, the driver of these stocks over the past
decade has been superior earnest growth, saparitor sales growth, superior
earnest growth in terms of the comparison with the rest
of the market, and so that has been a terrific
investment strategy for for a long time. The largest companies
really driving the index well, our analysis would sugges just
that most of the market, including the largest stocks, are
(19:03):
trading around fair value right now, and that it is
earning's growth in the coming year that's likely to drive
the performance of the market. Well, the superior earnings growth
of these largest stocks is likely to diminish, in our opinion,
in the coming year. So let's put some numbers around that.
This year Counter twenty twenty four, the largest companies, the
(19:24):
Magnificent seven as they're called. Those companies had thirty three
percent expected. Well, now, Spectacles is the fourth quarter, but
let's use that as a full year number. Earnings growth
around thirty three percent, and that compares around three percent
for the four hundred and ninety three remaining companies in
the SMB five hundred. That's thirty percentage points excess growth rate.
And the coming year the expectations use consensus for a
(19:46):
moment is around eighteen percent versus twelve percent. That's a
six percentage point gap. So from thirty percentage points to
six percentage points, and you look into twenty twenty six
and that's going to narrow yet further until around four
percentage points. So relative earnings growth is going to be
the explanation in our view of a narrowing premium return.
(20:07):
And so if I put some numbers around that, very specifically,
you had sixty three percentage points of outperformance excess return
of the largest docks versus the market in twenty twenty three.
It's running around twenty two percentage points this year, and
our forecast next year is probably around seven percentage points.
So the largest cap stocks likely to continue to perform
in our view, but by a much much smaller margin
(20:29):
than has been last couple of years.
Speaker 4 (20:32):
I want to go back to what David was saying
about animal spirits and maybe bringing yan and my question
is going to sound very weird, but bear with me.
Do animal spirits actually matter for the economy. And the
reason I ask that is because you know, for the
past couple of years, the surveys have been coming in terrible.
You know, if you looked at the consumer sentiment surveys,
(20:52):
it was like the worst economic period ever or in many,
many years, but the economy kept.
Speaker 3 (20:58):
Growing spending consumers.
Speaker 5 (20:59):
Yeah, I mean, I agree you have to take a
lot of these survey results with a large grain of salt.
There is also evidence that even relative to the pre
pandemic period, where it was already a mistake to extrapolate
one to one from surveys into activity, that that relationship
(21:20):
has gotten even looser. And I think you have to
be particularly careful with surveys that ask how are you feeling,
as opposed to what are you doing? If you take
them somewhat more objective surveys that ask about production and
orders and inventories and employment, you can put a bit
more weight on that, But if it's really pure confidence surveys,
(21:42):
you do have to be pretty careful. I mean, I
agree that the small business survey is likely to show
very large increase over the next couple of months, but
I would only feed a relatively small portion of that
into our expectations on actual capital spending. We do expect
some lift up in terms of cap X in an
(22:03):
environment that is viewed as friendlier from a regulatory perspective,
where we'll probably also get a bit of additional tax cuts.
I mean, it's mostly about extending the twenty seventeen tax cuts,
but we do think there will probably be some additional
fresh tax cuts. I think all of that is going
to be supportive, but more at the margin. I don't
(22:25):
think it's going to be a massive pickup, you know. Overall,
my basic view is the economy has been recovering at
a generally better than expected pace, and I think that's
going to continue. If we're looking at consensus service going
into twenty twenty.
Speaker 6 (22:41):
Five, and that's largely priced into the market, which is
now trading around twenty three times forward earnings, which are
historically a very high multiple, and that is reflective in
our interpretation of the backdrop that Yan has described.
Speaker 2 (22:54):
There's obviously a lot of policy uncertainty, and we'll talk
more about it with the new Trump administ and its
visions and how seriously it's going to take tariffs and
deportations and rebuilding American manufacturing all these questions, there is
a short term uncertainty, however, which is that there's still
some ambiguity about the trajectory of inflation itself. And at
(23:15):
one point it looked like a December rate cut was
going to be a total lock, and actually right now
it looks like, according to the market, it's like a
sixty forty scenario, So it's not guaranteed. There are still
some lingering questions about the inflation trajectory. Question to both
of you, which is a y sort of like where
do you see this sort of short term push and
(23:37):
pull in terms of the rate trajectory? And then to David,
how much when you think about valuation specifically, is it
contingent on some of these questions about what's going on
with the further cutting cycle and.
Speaker 5 (23:48):
So forth on inflation. I think the underlying trends are
looking quite favorable, and I base that not just on
the actual price number, okay, but also on the rebalancing
that we've seen in the labor market. And we're basically
back to where we were in twenty nineteen in terms
of the supply demand balance in the labor market, if
(24:11):
not a little bit looser We've seen, for example, declines
in the quit rate and in some of the surveys
of labor shortages to levels that are a little bit
below where they were in twenty nineteen. We've seen deceleration
in wage growth. All of that, to me says that
(24:33):
this inflation process is on track. There is an upside
risk again maybe more price level effect, but an upside
risk from the terriffs. But X that, I think we're
on a path back to around two percent by the
end of next year, which then because of our terraff assumptions,
becomes two point four percent in terms of our actual forecast.
But X that around two percent, and I think in
(24:55):
that kind of environment, the Fed's going to say, you know,
four and a half to four and three quarter, that's
still a very high nominal funds rate, which will become
a higher real funds rate as you go through next year.
So I think they're still going to want to deliver
several cuts. A December cut is all forecast, it's certainly
not a foregone conclusion. We'll get some important data before then,
(25:17):
and then we have ongoing cuts as we go through
next year, and we think ultimately will land in the
low to mid threes for the funds rate, which is
a bit below what markets are pricing now. But I
would remind you that if you go back a couple
of months, markets who are priced for terminal fed funds
rate in the two point seven percent range, So that
(25:37):
was clearly very low relative to you know, certainly what
we expected. Now. I think the market's price may be
a little bit higher than is appropriate in our view.
Speaker 6 (25:48):
So there's a lot of things happening on the back
of your question and the idea of investment strategies around inflation.
What's the source of the inflation that may occur, And
we can think of US companies that are selling abroad
compared with US companies that are selling domestically. If you're
concerned about tariffs and what that might be from a
price level point of view, the risk of retaliatory tariffs
(26:11):
is certainly there, and so owning companies whose customer base
is in the United States, while of course long the
supply chain, they may have increased the prices the idea
of those type of stocks generally doing better. As part
of our view, you can think about wage inflation as well.
We have companies where labor costs are relatively low. And
when I talk about labor costs, I think of the wage,
(26:32):
not just wages, salaries and bonuses and stock based compensation
and healthcare benefits, which of course in the US are
born by the corporate sector. And there are companies where
that's quite low, relatively low labor intensive companies is compared
with high labor cost companies. And think that's a area
again we're looking for strategies, investment strategies around these different
macro themes that Yan has described and we talk about
(26:56):
in our teams at Gobenzachs.
Speaker 4 (27:14):
One thing I'm wondering as we enter another Trump administration.
You know, Joe and I and other journalists, we have
it kind of easy where we either see the headlines
at night before we go to bed, or if we're
saying people, we see them in the morning when we
wake up, and all we have to do is write
them up. Basically what Trump is saying. When you wake
(27:34):
up and see the headlines in the morning, how like
reactive is your work to some of the stuff coming
out of Donald Trump's mouth? And I guess the count
true social account yeah, And I guess the consensus right
now is you should take Trump seriously, but perhaps not literally.
And I guess my question is like when does that change.
Speaker 5 (27:55):
Well, it certainly changes once you have actual government policy
that can be implemented. During the transition. Of course, that's
not the case. So in terms of changing our forecast,
you know, the hurdle now would be quite a bit
higher than once we actually were back in the second
Trump administration. In terms of providing a comment on some
(28:19):
of these announcements or tariff threats, yeah, there's a lot
of demand for that, and so we did write a
comment on yesterday's announcements around the Canada, China, Mexico tariffs,
but ultimately said, some of this is very consistent with
what we had been assuming, namely the China tariffs, and
(28:39):
maybe even a little bit lower than what ultimately is
likely to materialize. But then on Mexico and Canada, we
would take this with more of a grain of salt
because there will be a whole process around that renegotiation.
And ultimately we did have some similar tariff threats in
the first Trump administration on Canada and Mexico, which ultimately
(29:01):
didn't materialize because NAFTA effectively just became USMCA, but not
with a huge number of changes.
Speaker 6 (29:09):
Think about it in terms of horizon arbitrage. There is
lots of price noise that happens every day. And then
there's investment themes that may be less connected with the administration,
whether it's Donald Trump, Joe Biden, what have you. The
idea of artificial intelligence AI that everyone talks about, well,
that's really less affected by some of the government policies.
(29:32):
It may be depending on the policies that get implemented,
but the idea of more productivity growth, or idea of
more efficiency, or the infrastructure build out relating to AI,
those are some of the themes that are probably independent
of the administration. These are the things that are having
in the technology world. And that's a discussion point that
I look at with portfolio managers who may have an
(29:54):
investment horizon that may be three to five years out.
What stocks should they own, how should they position their
portfolio as compared with maybe some more focusing on the
day to day announcements of tariffs, which may be implemented,
may not be Maybe that may be variable.
Speaker 5 (30:07):
One thing I would just say is that on tariffs,
this is to a large extent up to the president
and up to the White House. So it does deserve
more attention than some other policy pronouncements, which require Congress
to hash out a reconciliation bill and ultimate tax legislation.
(30:29):
So it is important to focus on the things when
there are announcements that are effectively under the control of
the White House.
Speaker 2 (30:38):
The Treasury Secretary nominee has, according to report, been pitching
Trump on this idea three three threes, improved growth via deregulation,
smaller deficits, and more barrels of oil. Let's set aside
the oil for a second. Do you see any prospect
of a meaningful change in the spending trajectory? And do
(31:01):
you see any meaningful opportunity for further pickup in trend
growth from more favorable regulatory environment.
Speaker 5 (31:07):
So I think these are aspirational goals. They're both pretty ambitious.
I mean both a three percent of GDP federal deficit.
That's not what we're expecting. That's not what the Congressional
Budget Office is expecting. I mean, we think it's going
to be closer to six percent. Probably maybe we can
(31:28):
bring that down. Bringing it down to three percent would
be certainly very desirable. I think we will ultimately need
to bring it back down to something like three percent,
and to bring the primary deficit, the x interest federal
budget deficit back down to somewhere around zero, depending on
where growth and real interest rates ultimately balance out. But
(31:51):
that's going to be a process that's going to require
an enormous amount of effort, and.
Speaker 2 (31:56):
That would take real political effort to cut into very sensitive,
veryos spending.
Speaker 4 (32:00):
Right.
Speaker 5 (32:00):
That's right, because such a large chunk of government spending
is basically entitlement programs, defense, and debt service. That doesn't
leave a lot of discretionary non defense spending that's maybe
a little bit easier to cut than some of those
other categories. You know, fifteen percent or so of total
(32:23):
federal spending is you know, non defense discretionary, so a
relatively small share. And that then leaves the tax side,
and you know, obviously there's no desire to deliver a
sizeable tax cut, certainly not with this administration. So it's
going to be very difficult. On the growth side. We're
on the optimistic side of at least the economist consensus
(32:44):
if you take the federal reserve, the media, and longer
term GDP growth rate is one point eight percent. We're
at two point one percent. You know, maybe that can
be lifted somewhat. Getting to three again would be very
difficult urely, given the demographics. If you have the labor
force grow at only a pretty slow pace, you know,
(33:07):
not a lot of natural population growth because of low
birth rates, and probably much lawer immigration. So even if
you're a productivity optimist, and I would say I'm on
the more optimistic side as far as productivity is concerned,
getting to three will be difficult.
Speaker 4 (33:24):
Let's talk about immigration, because, as you pointed out, you know,
tariffs are largely under the purview of the president. Maybe
immigration is a little bit different. What's been the impact
of immigration on the economy from the past, you know,
three or four years or so, and how do you
see that unfolding going forward, given that we don't really
know what's coming. We could have mass deportations, or we
(33:46):
could have something you know, around the edges, or maybe
nothing happens.
Speaker 5 (33:51):
So it's been very important in boosting growth and nevertheless
bringing down inflation. So it's obviously a very controversial topic
from a political perspective, But if you just look at
the economics, if you bring more people into the workforce,
especially at a time of very serious labor supply constraints,
(34:13):
and in particular, very serious labor supply constraints at the
bottom end of skill distribution in twenty twenty one twenty
two in areas like bars and restaurants, you know, in
other areas like that construction, having that large influx of
people has boosted growth and probably at the margin also
helped to bring down inflation. At least has helped to
(34:36):
bring down wage inflation in some of these areas to
levels that are more sustainable. Now there is already a
deceleration in the immigrant inflow if you look at it
on a you know, month on month kind of annual
rate perspective. In late twenty twenty three, we were running
(34:57):
above three million at an annual rate. Are now probably
a little bit between one and a half and two million,
and that is likely to you know, come down further,
even before you see an additional tightening of restrictions on
people coming in and increased deportations. You know, we'll see
(35:17):
how large the deportations are ultimately going to be. If
you go back to say the Obama administration, we were
averaging something like four hundred thousand per year. You know,
I think it's probably going to be higher than that,
but whether it's going to be dramatically higher than that
that I think is still less clear. Yes, it is
up to the executive branch, it's up to the president.
(35:39):
But unlike with tariffs, there are going to be a
lot more logistical issues around deportations and moving immigration to
much lower levels or into negative territory than with tariffs.
With tariffs, it's administratively relatively easy. So if I'm thinking about,
you know, supply the sort of growth negative tariffs on
(36:01):
the one side, and then immigration on the other, I'm
more worried about tariffs than I am about immigration.
Speaker 2 (36:06):
David, you mentioned you know we're talking, you talk to clients,
and one of the dominant conversations Scott Bessant gets named
Treasury Secretary nominee. Maybe his three percent deficit to GDP
goal is very aspirational. Maybe some of his growth ambitions
are aspirational, But it strikes me that, like, ultimately he
(36:27):
does not strike me as some sort of like major
shake up, We're going to totally rethink how the economy works.
Speaker 3 (36:34):
Guy.
Speaker 2 (36:34):
He sort of has a traditional macro background, seems to
have very good understanding when you talk to clients. How
far does that go, you know, in terms of thinking,
being able to think long term and avoiding the noise
of the day to day headlines. The fact that Scott
Bessont is likely going to be the Treasury secretary, the
fact that, according to reports that just hit the headlines,
someone fairly mainstream like Kevin Hassett is going to be
(36:57):
running a ne EC. Is this the kind of thing
that just makes investors? Do they get comfortable when they
hear these headlines?
Speaker 3 (37:03):
What are those chats like?
Speaker 6 (37:04):
I would say that is a pretty good characterization of
how portfolio managers are thinking about it right now. Based
on his background. Number of people myself included known him
for some period of time as a portfolio manager, and
he's viewed again perception as sort of more mainstream. Of course,
a lot of the policies will depend on the president,
and so it'd be up to the treasure Secretary and
(37:26):
the other cabinet members to carry out those policies, and
that remains asion indicated that some uncertainty around what those
ultimately will be.
Speaker 4 (37:35):
So one of the reasons we'd like to talk to
you is because you go out and talk to other
people too. Your clients, portfolio managers. As you just mentioned,
what are some of the more interesting questions that you
are getting this year and what's maybe different to this
time in twenty twenty three.
Speaker 5 (37:53):
Well, it's much more around policy and much less around
the underlying path of the economy. I mean, I think
where again, going through beyond the policies which we've discussed
a little bit of the concern around higher inflation. It's
certainly true that the last couple of prints have been
a little bit higher. We talked about it earlier. I'm
(38:14):
not super concerned about it, but it wouldn't be shocking
if we saw the next few months a little bit
of upward pressure. First quarter has been a sort of
seasonally higher sequential inflation period, I think partly because seasonal
adjustment is difficult, especially post pandemic, and there is some
(38:36):
residual seasonality which we may see again. So there are
definitely questions around inflation. There are questions around, you know,
the longer term neutral funds rate. Our star know to
what extent has it risen relative to the pre pandemic period.
You know, our view is that it probably never was
(38:58):
quite as low as many people thought in twenty eighteen
twenty nineteen. We were never that sold on the secular
stagnation story, and you know, it might not be quite
as high as many observers now think. I mean, we're
still in the low to mid threes and nominal terms,
low to mid ones in real terms, but there's certainly
(39:19):
a lot of discussion around that. There's a lot of
discussion around Europe and the impact potentially of higher tariffs
or maybe just the trade policy uncertainty. You know, in
advance of any actual tariff increases on Europe, what is
that doing to an economy that's already pretty soft. And
(39:39):
it's an area where we're actually well below consensus. We
have a zero point eight percent forecast for EU area
growth in twenty twenty five, which is four or five
tenths below the Bloomberg consensus or the ECB and and
a lot of that is around trade policy uncertainty, which
seems to have a particularly negative impact in Europe. So
(40:01):
definitely another big topic of conversation.
Speaker 3 (40:04):
David, and take a stab at the same question.
Speaker 6 (40:06):
Sure, there's a variety of things that portfolio managers are
focused on right now, and the first is something you
reference earlier, Joe, which is the idea of the largest
stocks in the market are now representing more than a
third of the S and P five hundred equity capitalization.
So the question is, you know, how does one position
in that. You look at the mutual fund community, for example,
seventy five percent of mutual funds are lagging their benchmark.
(40:29):
It's not a criticism, it's just the data so far
and those companies. What's been consistent about those funds has
been they have been underweight these positions in the largest stocks,
and so the idea of perhaps having an index weight
for the largest companies and then choosing to generate alpha
or seek alpha in the rest of the market is
probably the better strategy. That's number one. That was something
(40:52):
that the twenty five percent of the mutual funds that
are outperforming have tended to tended to do. That's number one.
Number two, relating to Yon's observe as, it's a perpetual
question of well, what about these global markets Europe, Asia, China, Japan,
Is this their opportunity to outperform the US. The relevant
evaluation metrics are really really eye catching, which is that
(41:13):
the multiple forward pe multiple for the US equity markets
now roughly twenty three times, and it's about thirteen times
for Europe and Japan and China is even lower than that.
And so that question is well for a decade, it's
still been the US. Is this the time? Is the
valuation gap so significant that the opportunity set at the
(41:35):
lower end of the valuation scale? Does that represent good opportunities?
So I'd say those are two major questions. The third
question that is highly debated is on AI and the
idea is of the huge capital investments that some of
the hyperscalers and other companies making these investments, what will
the ROI turn on investment be of the AI that
(41:56):
they're making, And so that is a question that's and
flowed over the course of the year. A lot of
the companies who are involved in the infrastructure build out
have done particularly well. Those pe multiples have expanded and
the share prices have done better than the growth rate
in the underlying growth of earnings, and so our focus
has been on companies in the third phase. As we
(42:17):
think about it, the third phase of AI infrastructure build out.
First phase is Navidia's own kind of unique story. The
second phase is the infrastructure and the third phase is
the companies we think of whose revenues will be enhanced
by AI, and a lot of the software companies and
their price return this year have basically matched the earnings
growth trajectory, and so the opportunity does exist there in
(42:40):
some cases for a multiple expansion, So that would be
an area of focus. So those are some of the
topics that are debated with fund manager right now.
Speaker 3 (42:48):
Tracy.
Speaker 2 (42:48):
First of all, it feels like international out performance is
always one year away.
Speaker 4 (42:52):
Or oh, I know, we're always waiting for EM.
Speaker 2 (42:54):
We're always waiting for EM and Japan and Europe. One
day they're going to have their day. But also to
refor it's another shops performers. But I always love looking
at the via AML hedge fund survey and one of
the things they ask is what's the most crowded trade?
And it's always big tech, and it's always big tech
that wins. And I think about how glad I am
that I'm not a portfolio manager, and how sick to
my stomach of it have to be did the big
(43:16):
source of l F I just have to ride the
most crowded trade? Anyway, I'm glad I don't have that
job where I have to just do the same trade
as everyone else to outperform.
Speaker 4 (43:24):
We're all glad to Yeah. Well, actually, speaking of jobs,
Joe and I came up with a contrarian trade idea
based on AI, which is by Europe as a beneficiary
of productivity enhancing technology hormachical because their productivity is really low.
Would that work? You guys should see the expression on
David's face.
Speaker 3 (43:44):
Right, he looks like he did bit into a lemon.
Speaker 4 (43:50):
No one likes our contrarian ideas.
Speaker 5 (43:52):
It could work.
Speaker 6 (43:53):
I think maybe you used to think about it in
terms of M and A activity. The idea of the
companies in the stays much higher profit margins, and the idea,
I guess Tracy your hypothesis is perhaps their margin expansion
would be potentially enhanced by the adoption of AI. That
(44:14):
one question is on the source of the potential margin enhancement.
Is that labor driven and you have more efficiency therefore
fewer jobs. Is that sort of a orthogonal to what
the objective are? Has seem a lot of the European governments,
and so I think there's some debate around that. Could
it be a trade?
Speaker 4 (44:33):
I'm not a buyer Goleman isn't going to set up
that index.
Speaker 2 (44:36):
Just do you have ai macro thoughts? And to my
mind there's potentially two ways it could go down. One
is just the macro impact of all the capital spending.
Does it move the dial at all in any sort
of categories that are important on the top level. But
I guess more importantly, you know, looking a few years
out when you think about productivity, when you think about
labor growth, are we at the stage yet where you
(44:57):
can make interesting predictions about the impact of this stuff.
Speaker 5 (45:01):
So on the near charm impact, we generally have not
viewed that as all that large. I mean, these are
huge numbers in a very small part of the economy,
but in terms of boosting you know, near term growth,
it's very difficult to get anything more than you know,
a very small sort of tenth of a percentage point
(45:21):
or something like that. And in terms of the broader
impact on potential growth, I think we're also still probably
several years away. But then we're actually pretty optimistic when
it comes to sort of late twenty twenties, early two
thousand and thirties, and a little over a year ago
we raised our long term potential growth estimate for the
(45:45):
US by four tenths of a percentage point. We were
at one point eight percent for the sort of years
around two thousand and thirty. We're now two point two percent,
which is no, that's a pretty sizable boost, and it's
really driven by the fact that AI can replace a
lot of the tasks, not necessarily the jobs, but the
(46:07):
tasks within certain jobs that are being done, you know,
at sort of low and mid levels of white collar
work at the moment, and that is ultimately going to
be productivity enhancing. Of course, it does mean some labor
market upheaval, although we would emphasize that the labor market
impact is going to occur over a period of time
(46:31):
and there will also be new jobs that will be created.
So historically, when you go back, it's actually not that
easy to find instances of technological unemployment that were visible,
you know, in the overall economy. Typically when you have
large increases in productivity growth, those are actually typically low
(46:51):
unemployment periods rather than high unemployment periods, even though at
the individual job level or industry level you might see
quite a lot of job destruction. But overall we're optimistic
over the longer term, but in the short term it's
probably still going to be more limited.
Speaker 4 (47:08):
I can't wait to be a prompt engineer, generating AI
written podcasts. That's our future.
Speaker 3 (47:15):
We can already are. Yeah, we're already data providers.
Speaker 4 (47:18):
Yeah, that's true, David. I just have one more question,
which is whose ideal was it to write the Equity
Outlook through the lens of lessons learned from the Art
of the Deal.
Speaker 6 (47:28):
Well, last year we referenced Taylor Swift. We said the
subtitle of the report was all you need to do
is stay invested, and that was the strategy for calendar
twenty twenty four. And a reference to your first question
of this podcast, you asked, do anyone look back and
see what we wrote in you do here? We certainly
do and think about it as a report card. What
(47:50):
was the impetus for the Art of the Deal and
why we titled that or subtitled that for our twenty
twenty five outlook. Part of it is the M and
A environment and the idea that our forecast is for
a twenty five percent increase in M and A in
calendar year twenty twenty five. That's part driven by our
forecast of the use of cash of corporate America S
(48:11):
and P five hundred companies will spend about four trillion
dollars of cash next year, and a good portion of
that we have a twenty percent gain or increase in
the cash devoted to M and A activity. So that
was one of the impetuses that thought about the Art
of the Deal. And then it is remarkable and for
all the listeners of the Outloud's podcast, I would suggest
you go back and read the report. Read the book.
(48:33):
The Art of the Deal was written or co ghost
written perhaps by Donald Trump thirty seven years ago, and
many of the characterizations of the transactions in his whole
thought process was pretty interesting. So we went back revisited
that in my first edition copy for when I was
way back in the day, and that was the impetus
for why we thought about that as an organizing structure
(48:54):
for our Outlook report.
Speaker 4 (48:56):
Do you have a first edition?
Speaker 6 (48:57):
Are you used to nineteen eighty seven?
Speaker 3 (48:59):
Wow? Oh wow, I'm gonna have to go read it.
I should read it. I will read it.
Speaker 4 (49:02):
Yeah, I haven't read it either. Isn't there a sequel
as well? Oh?
Speaker 6 (49:05):
There's many many books.
Speaker 5 (49:07):
Yeah, we did references.
Speaker 6 (49:09):
There's the art of the comeback that he wrote ten
years later nineteen ninety seven, and a whole sequence of
books that he's written.
Speaker 4 (49:17):
Oh my gosh.
Speaker 2 (49:17):
Okay, David and Jon, thank you so much for coming
on out launch. This is a true treat to have
you both and maybe I don't know, let's make it
an annual tradition.
Speaker 3 (49:26):
We'll do it again next year.
Speaker 5 (49:28):
Thank you, Thank you exciting us.
Speaker 3 (49:29):
Thank you so much. That was Thank you, Tracy. That
was a real treat. That was really fun having David
and On together.
Speaker 4 (49:49):
I know, I wonder if they've ever done an external
appearance together, like.
Speaker 3 (49:53):
An external media appearance.
Speaker 4 (49:55):
Yeah, that's what I mean.
Speaker 3 (49:55):
I guess we could have asked them.
Speaker 4 (49:57):
I'm sure they have spoken to clients.
Speaker 3 (49:59):
Yeah.
Speaker 2 (49:59):
But there was, you know, just one random thing that
stuck out from me that I hadn't realized, like I
knew it or I had a good idea in my
mind that the reason big tech companies have done so
well is because they're earnings juggernauts. Right. There's other things
that go on flows and there, but like, they make
so much money and they're so large, and yet they
(50:19):
still put up like thirty percent numbers.
Speaker 3 (50:21):
It's insane. But I had not realized like.
Speaker 2 (50:23):
A quite how wide that gap has been and over
the last two years between their earnings growth and everyone
the other four hundred ninety three stocks, and b that
the consensus is for a major shrinking in that gap
going into twenty twenty five.
Speaker 4 (50:37):
Yeah, that's right. Well. The other thing I was thinking
was the differentiation between different Trump policies as well, and
like maybe dividing them up by how much is under
the purview of the president versus like what things need
congressional approvement and where there are those sort of political
limits and guideposts in place. I guess like that seems
(50:59):
a reasonable way to view some of these risks. I
still think there's a lot of stuff up in the air.
Speaker 2 (51:05):
Yeah, And you know, it seems to me and we
sort of joked in the beginning that like the GDP
usually grows like two and a half three percent and
stocks usually go up, And that's true. And it seems
like even with the sort of some of the unorthodox
or heterodox economic views of the incoming Trump administration, the
impacts right now expected to be marginal. Right, so even
(51:27):
tariffs aren't expected if they go through as expected, aren't
expected to have a radical change to say the inflation
trajectory or whatever. And you know, it seems like what
people are anxious about, what you're talking about, maybe some
clients are talking about, is the idea of like genuine
policy uncertainty. And that means not a debate about ten
percent versus twenty percent tariffs, which is, you know, you
(51:51):
shave some percents off GDP, you shave some earnings off,
and life goes on, versus like the seeming potential for
some gen andly radical rethink of how we do business
with the rest of the world.
Speaker 4 (52:02):
Yeah, totally. And I think that's like that's a.
Speaker 3 (52:05):
Po's the big one, right, it seems plausible. Yeah.
Speaker 4 (52:08):
Yeah, Well, in the meantime, sign up for our twenty
twenty five investment outlook titled GDP normally increases two to
three percent and stocks normally go up.
Speaker 2 (52:18):
This way, we're gonna title our newsletter on Mondays.
Speaker 3 (52:21):
Out Let's do it all?
Speaker 1 (52:22):
Right?
Speaker 4 (52:22):
Shall we leave it there?
Speaker 3 (52:23):
Let's leave it there.
Speaker 4 (52:24):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (52:30):
I'm Joe Wisenthal. You can follow me at The Stalwart
follow our producers Carmen Rodriguez at Carman Ermann Dash, Ol
Bennett at dashbod and Cal Brooks at cal Brooks. Thank
you to our producer Moses Ondem More odd lags content,
go to Bloomberg dot com slash odd lots, where have transcripts,
a blog and a daily newsletter and you can chat
about all of these topics, including macro including markets twenty
(52:52):
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Speaker 4 (52:56):
If you enjoy all thoughts. If you like it when
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(53:18):
Apple Podcasts and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:22):
I'm Joe Wisenthal and.
Speaker 4 (00:23):
I'm Tracy Allaway.
Speaker 2 (00:24):
Tracy, it's my favorite time of year.
Speaker 4 (00:26):
Do you know what I was going to say, the
exact same thing. I was going to make, the exact
same comment.
Speaker 2 (00:32):
It's Outlook season, twenty twenty five Outlook season, and our
inboxes get flooded with various flavors of big picture outlooks,
micro picture outlooks. Fifteen things to watch for within the
industrial and trucking segments of the economy. Fifteen big questions
we have.
Speaker 4 (00:51):
For Here's a list of all the things Trump is
going to make great again.
Speaker 2 (00:54):
Yeah, all these things, and these are some of my
favorite cell side notes to read every year, but they
always make for a thoughtful something to do around this
time of year.
Speaker 4 (01:02):
Here's the big question. Do you go back and look
at the twenty twenty three outlooks?
Speaker 3 (01:07):
I never do.
Speaker 2 (01:07):
I people always in our industry joke about that, they like,
let's go back, and I've seen it happen twice.
Speaker 4 (01:13):
But on a serious note, I know the analysts who
produce these outlooks like it is their actual job to
try to forecast the future. But like I find it
so difficult, especially in the current context with so many
uncertainties and the new administration coming in. I just I
don't even know how you begin to, like try to
figure out what the level of the S and P
(01:34):
five hundred is going to be under those like very
uncertain conditions.
Speaker 2 (01:38):
Well, you know, most of the time stocks go up
and the economy grows.
Speaker 4 (01:43):
And that that would be your outlook is like, well,
stocks are probably going to go up.
Speaker 2 (01:47):
Stocks will go up with the economy will grow. In
two and a half, three and a half. Anyway, we
have much better guests.
Speaker 4 (01:53):
Yes, we have people who actually do.
Speaker 2 (01:55):
That and are really truly some of the best in
the industry. And it is a real treat. We actually
have them both together, which makes for an extraordinary opportunity.
So I'm very excited. We have two guests, two of
the perfect guests, I should say. We're gonna be speaking
with Jan Hatziis, chief economist and head of Global Investment
Research at Goldman Sachs, and David Coston, chief US equity
(02:18):
strategist at Goldman SACS. David and Jana, this is such
a thrill to have you on both at the same
time and just talk about what twenty twenty five is like,
because there's obviously a lot to talk about. I don't
know to start it with you Yan, like, actually, do
you accept the premise that it's a difficult time. It
feels difficult, it feels tricky, it feels like there's a
lot of questions and uncertainties. Do you accept the premise
(02:40):
that it's an unusually tricky time to be making a
short term or medium term forecast?
Speaker 5 (02:45):
I think it is a difficult time just because there's
more uncertainty than normal about the policy environment. So you
have all the usual uncertainties around whether the consumer is
going to continue to spend we think yes, where inflation
that's going to continue to trend down X, any new
shocks we think yes, Whether the Fed will still deliver
(03:08):
cuts just based on the underlying trend in the economy.
And then you have to think about the potential impulses,
both on the positive and the negative side, and obviously
we'll get into those, but that just adds to the
variability around the central forecast.
Speaker 4 (03:24):
I have a lot of procedural questions when it comes
to the outlooks. My first one is do you guys
like talk to each other before you do your respective outlooks,
because I imagine what the market does is obviously going
to depend a lot on what the economy does.
Speaker 6 (03:39):
There are I guess nearly a thousand people in the
research department at Goma. Yan is the head of the
research department, and within Macro probably one hundred people, and
we are pretty coordinated. Every week have a conversation about
what's happening in the different regions around the world economically,
in commodities, in strategy and rates. So we're pretty coordinated
at the macro level.
Speaker 4 (04:00):
Do you ever disagree we do?
Speaker 5 (04:02):
I do think that we spend a lot of time
trying to get to the bottom of what the disagreement
is about, and that often brings views more closely together.
I think in the end we do try to present
a coherent overall picture, but that doesn't mean that every
nuance is exactly the same. I mean, I think there
(04:23):
is sort of a spectrum between having just one view
of the world where there's zero room for individual kind
of creativity, and just having a bunch of people that
have independent views that are not coherent. You have to
find a place somewhere in the middle. I think we're
(04:45):
more towards the coherent side than what I see, you
know in many other research organizations where it's really more
individuals than a team effort.
Speaker 2 (04:54):
We're going to get into all the actual details, but
I kind of like asking some of these procedural questions. Okay,
so you make an S and P. Five hundred forecast
for the year twenty twenty five, you talk to clients,
et cetera. You know, I can't imagine there are that
many people in the investment industry. Maybe I'm wrong, And
tell me if I'm wrong, who's like David says, the
(05:15):
SMP is going to X, so that's what we're gonna
buy or we're gonna sell or et cetera. How do
you view, like, what is your goal when you're talking
to clients, when you're putting out a forecast for the
S and P five hundred, and when you think about
the value that you bring to clients from making these
forecasts that Tracy and I love getting in our inboxes
this time of year, Like, what are you hoping is
the end fruit of that?
Speaker 6 (05:37):
Well, there's a variety of customers or clients that we
think about, and I would say framing the issues is
probably the most important thing we do. Identifying investment strategies
inside of the market is a big area of focus.
We think about segmenting the clients of Goldman Sachs. We
have hedge funds, mutual funds, pension funds, insurance companies, endowments,
(05:59):
sovereign funds. Each of those constituencies are looking for something
a little bit different the mixed asset portfolio. On the
part of number of endowments and pension funds, sovereign wealth funds,
they're quite interested in the index level because they think
about the alternatives between equities and credit, private credit, public credit, commodities,
(06:19):
private equity, etc. And so those are issues for those
type of clients. If you're thinking about and when we
talk to and interact on a daily basis with hedge
funds and mutual funds, they're focused on oftentimes investment strategies
inside of the market, and those are some of the reasons.
But in terms of your specifics on how you think
about the index level, that is something people think about broadly.
(06:41):
Do they put more risk on or do they take
less risk? Is the market going to pay for excitement
or is it going.
Speaker 5 (06:46):
To pay for boredom?
Speaker 6 (06:47):
How do you think about shifting your portfolio to reflect
those Those are basically the variety of conversations that we
have on a daily basis.
Speaker 4 (06:55):
So this time last year, I think we were still
maybe not as much as earlier, but we were still
kind of in recession expectation mode. And you know that
obviously went on for like two years with the yield
curve inversion and the surveys showing that the vibes were down,
and everyone worried that consumer spending would eventually drop off
(07:16):
and that sort of thing. And yet here we are,
tail end of twenty twenty four. Recession hasn't emerged. The
Fed is now cutting rates, which presumably takes some of
the pressure off. Yeah, you were one of the economists
who I think got this right. You were in the
soft landing camp. From what I remember when we spoke
to you. What was it that you saw that kind
(07:37):
of played out effectively in twenty twenty four.
Speaker 5 (07:41):
I'd say the key to the soft landing call over
the last couple of years was, I think to recognize
that this is a very different business cycle that was
much more driven by the pandemic and the post pandemic
ambalanced US that emerged really in twenty twenty twenty one,
(08:03):
and climbing out of a hole that was really a
supply side hit is very different from squeezing down inflation
that had emerged because of an overheating. If you have
an overheated economy and the level of activity is just
too high and the level of demand is too high,
(08:25):
to bring that back to normal, you almost have to
have a decline in economic activity, which is almost the
definition of a recession. But if you're climbing out of
a hole on the supply side, and supply chains go
back to normal, libor force participation goes back to normal,
we get an additional boost to supply from immigrants coming
(08:47):
into the workforce, and you know, we'll get into some
of these things. All of that means you can see
declining inflation and increases in real output and employment at
the same time time, and that's basically what we've been
seeing over the last couple of years. So for me,
that's the most important difference. I think there was too
(09:08):
much extrapolation from past business cycles, and too many people
looked at when inflation is at five percent or six percent,
there's always been a recession because those were much more
demand driven cycles rather than supply driven cycles.
Speaker 2 (09:28):
So we're recording this, by the way, on November twenty sixth.
The S and P as of the moment I'm saying
this is that six four point seventy two extraordinary gains,
nearly twenty six percent gains from the start of the year.
Speaker 3 (09:41):
I guess I'm not surprised.
Speaker 2 (09:42):
David that, given this sort of easy mode disinflation that
we had in twenty twenty four, that we've had such
a great year for the stock marketing. You have a
call of sixty five hundred for your your in twenty
twenty five target, which is about a little over seven
seven percent from where we are.
Speaker 3 (10:01):
How come how much?
Speaker 2 (10:02):
So it's gonna be it's gains, And you know, I
think a lot of people would be happy with seven
percent gains.
Speaker 3 (10:07):
You do that for ten straight years of.
Speaker 4 (10:08):
Age Shoe's thesis that stocks go up.
Speaker 3 (10:10):
Yeah, Well, so how do you get there?
Speaker 6 (10:12):
All right, let's talk about some of the building blocks
for how we get there. Number one is earnings, and
earnings are expected to grow in our model around eleven
percent this year, meaning twenty twenty five looking ahead, and
about seven percent in calendar twenty twenty six. We've got
a couple of years of continued expansion in earnings. How
do we get the earnings, Well, we can think about
sales growing roughly five percent. Most companies over time grow
(10:35):
their sales and their revenues by roughly nominal GDP, so
we'll call that around five percent, a little bit of
a margin expansion, and that's going to lead to the
growth rate. Now, the growth rate of eleven percent is a
little higher than that. You have some issues around healthcare
in particular. We are not expecting the write off of
so much in process R and D, and so we
get very very specific about some things. But our models
(10:56):
would show around eleven percent earnings growth for the coming year,
and we are affecting that the multiple actually come down slightly. Currently,
the market multiples around twenty or nearly twenty three times
forward earnings market prices consensus as opposed to our earnings estimates,
which is a little bit below consensus, and the idea
of the multiple declining Joe of maybe twenty one and
a half times is our model. So the bottom line,
(11:18):
how do we get there? You're looking at eleven percent
earnings growth. By this time next year, the market will
be pricing off of the twenty twenty six earnings. That's
why we have to look out for two years. And
the idea of a market multiple or multiple of around
twenty one and a half times what is ultimately a
twenty twenty six estimate supports six five hundred is it target?
Speaker 4 (11:38):
So you're talking about earnings expansion. All of us presumably
woke up to headlines this morning about Trump imposing tariffs
on Some.
Speaker 3 (11:46):
Of us checked the news last night before that.
Speaker 4 (11:49):
Okay, well, I didn't I want to sleep early. I
was blissfully unaware of global politics and trade policy. But anyway,
presumably higher input costs would eventually feed into corporate earnings.
I guess is that on your radar at all?
Speaker 5 (12:05):
Well, it certainly should be. As far as China tariffs
are concerned, I mean, we do expect a significant increase
in China tariffs, and we're building in about a twenty
percentage point increase in the average rate on US imports
from China. I think it's also pretty likely that we'll
(12:27):
get some additional tariffs outside of China. We're thinking auto tariffs,
potentially on Europe and Mexico. And then of course there
were some announcements or threats of broader tariffs on both
Mexico and Canada. You know, we'll have to see whether
that ultimately happens. There is a renegotiation of the US
(12:50):
Mexico or Canada trade agreement that will have to occur
over the next couple of years. So I think there
still will be a number of rounds before this actually
gets finalize. But clearly tariffs are the in all of you,
the biggest risk to what otherwise is quite a positive outlook.
I mean, we're pretty optimistic on the US growth outlook
(13:13):
for twenty twenty five. We're you know, two and a
half percent again, half a percentage point or a little
more above the current Bloomberg consensus. But we're watching the
tariff situation closely, and I'm sure there's going to be
many twists and turns before all of this becomes totally clear.
Speaker 2 (13:46):
Our turiff's inflationary, because I could see it both ways. Right,
on the one hand, they throw sand into the gear,
so to speak, of the global economy, and that is
in a costly process. Right, there's a readjustment et cetera.
On the other hand, I think new Treasury Secretary nominee
Scott Best and made some quotes they don't have to
be per se inflationary, because yes, imports may cost more,
(14:07):
but then you know, sort of a kind of it
struck me as sort of a monitor's framework. There's less
money in households, and then that reduces demand elsewhere, and
that brings prices lower, and so the overall price level
or the rate of inflation doesn't change as much as
an economist. Someone asks you our terriff's inflationary. How do
you think through that question, I.
Speaker 5 (14:24):
Would say tariffs raised prices, and we can see that
very clearly from when they have been applied, including some
of the China tariffs in the first Trump administration. They
fed through to prices in the categories the relatively few
categories where they were applied, and.
Speaker 4 (14:40):
This is such achanical it's really good.
Speaker 5 (14:43):
So yes, I would say that's quite clear. Whether that
is ongoing inflation, that's much less clear because these are
really price level effects. They're sort of like value added
tax increases in various European countries. We've seen this time
and time again. There's a one time increase in the
(15:04):
price level, a one time increase in inflation, but the
inflation then drops out twelve months after. Assuming that there
are no major second round effects through inflation expectations, then
of course central banks would become a lot more concerned
if you did see a big increase in inflation expectations,
wages ongoing escalation, if there is a you know, tit
(15:28):
for tat trade war that keeps going, obviously that would
also have a longer tail, But initially it is a
price level impact.
Speaker 4 (15:38):
David, I'm going to ask what is possibly an unfair question,
but can you pretend to be the entire stock market
right now and tell me, like, what is happening today?
Stocks are up about point four to oh percent off
the back presumably of those tariff headlines we had, like
a drop in Asia stocks overnight, but US stocks recover
(16:00):
pretty quickly. What is it that investors see here?
Speaker 6 (16:04):
Well, the biggest discussion point that I'm in having with
portfolio managers has to do with the expectation that small
business confidence is likely to increase sharply. That was the
experience at the beginning of the first Trump administration. Actually,
it started to happen between the election, and actually the
inauguration that took place back in twenty sixteen early twenty seventeen,
(16:26):
it was a surge in small business optimism. And so
the discussions are and around the expectation that portfolio managers
have that this is going to be a repeat of
the last administration, and there's a lot of enthusiasm the
expectation that there's less sort of muscular antitrust environment, that
there is an idea of small businesses investing, and that
(16:48):
optimism is therefore likely to benefit a lot of companies
whose customers are small and medium sized businesses, and that's
one of the investment strategies we have for the current year.
We work with the individual analysts at Goldman and we've
identified a group of stocks where more than fifty percent
of their revenues are coming from small and medium sized businesses.
And so there's investment opportunities that we look at on
(17:09):
the back of the expectation of a more robust economic
or more positive business environment. And again it's about the expectations,
the perception of what is like could happen. And so
as back to your question, Tracy, that's the topic is
that not necessarily the topic of today, not necessarily, but
that broadly in the last couple of weeks has been
the central topic right now that the last NFIB survey
(17:33):
was around the thirteenth percentile versus history, so quite low,
and the expectation of many as it's going to surge
in the coming months.
Speaker 2 (17:41):
You mentioned the regulatory environment one of your other themes
for twenty twenty five, and this has come up a lot,
as expectations of more liberal m and a regulatory environment,
more deals being relighted. I think we can understand that
you also are still bullish on the really big megacap stocks,
and you said something in your twenty twenty five out
look that I kind of take an issue with. You said, like,
(18:02):
the primary question for mutual fund managers over the last
two years is whether they got the big megacap story right,
which is true, but it's also true for arguably like
fifteen years at this point, because really what we should
have all been doing for the last fifteen years is
just by Microsoft and Alphabet and Meta and really ignore
(18:22):
everything else. You're still bullish on them. What would have
to change, What conditions would have to change such that
the mag seven or whatever permutation is hot? Maybe one
pops in and one drops out. What would have to
change for these handful of stocks to not be the
big winners of the market going forward.
Speaker 6 (18:40):
So, Joe, the driver of these stocks over the past
decade has been superior earnest growth, saparitor sales growth, superior
earnest growth in terms of the comparison with the rest
of the market, and so that has been a terrific
investment strategy for for a long time. The largest companies
really driving the index well, our analysis would sugges just
that most of the market, including the largest stocks, are
(19:03):
trading around fair value right now, and that it is
earning's growth in the coming year that's likely to drive
the performance of the market. Well, the superior earnings growth
of these largest stocks is likely to diminish, in our opinion,
in the coming year. So let's put some numbers around that.
This year Counter twenty twenty four, the largest companies, the
(19:24):
Magnificent seven as they're called. Those companies had thirty three
percent expected. Well, now, Spectacles is the fourth quarter, but
let's use that as a full year number. Earnings growth
around thirty three percent, and that compares around three percent
for the four hundred and ninety three remaining companies in
the SMB five hundred. That's thirty percentage points excess growth rate.
And the coming year the expectations use consensus for a
(19:46):
moment is around eighteen percent versus twelve percent. That's a
six percentage point gap. So from thirty percentage points to
six percentage points, and you look into twenty twenty six
and that's going to narrow yet further until around four
percentage points. So relative earnings growth is going to be
the explanation in our view of a narrowing premium return.
(20:07):
And so if I put some numbers around that, very specifically,
you had sixty three percentage points of outperformance excess return
of the largest docks versus the market in twenty twenty three.
It's running around twenty two percentage points this year, and
our forecast next year is probably around seven percentage points.
So the largest cap stocks likely to continue to perform
in our view, but by a much much smaller margin
(20:29):
than has been last couple of years.
Speaker 4 (20:32):
I want to go back to what David was saying
about animal spirits and maybe bringing yan and my question
is going to sound very weird, but bear with me.
Do animal spirits actually matter for the economy. And the
reason I ask that is because you know, for the
past couple of years, the surveys have been coming in terrible.
You know, if you looked at the consumer sentiment surveys,
(20:52):
it was like the worst economic period ever or in many,
many years, but the economy kept.
Speaker 3 (20:58):
Growing spending consumers.
Speaker 5 (20:59):
Yeah, I mean, I agree you have to take a
lot of these survey results with a large grain of salt.
There is also evidence that even relative to the pre
pandemic period, where it was already a mistake to extrapolate
one to one from surveys into activity, that that relationship
(21:20):
has gotten even looser. And I think you have to
be particularly careful with surveys that ask how are you feeling,
as opposed to what are you doing? If you take
them somewhat more objective surveys that ask about production and
orders and inventories and employment, you can put a bit
more weight on that, But if it's really pure confidence surveys,
(21:42):
you do have to be pretty careful. I mean, I
agree that the small business survey is likely to show
very large increase over the next couple of months, but
I would only feed a relatively small portion of that
into our expectations on actual capital spending. We do expect
some lift up in terms of cap X in an
(22:03):
environment that is viewed as friendlier from a regulatory perspective,
where we'll probably also get a bit of additional tax cuts.
I mean, it's mostly about extending the twenty seventeen tax cuts,
but we do think there will probably be some additional
fresh tax cuts. I think all of that is going
to be supportive, but more at the margin. I don't
(22:25):
think it's going to be a massive pickup, you know. Overall,
my basic view is the economy has been recovering at
a generally better than expected pace, and I think that's
going to continue. If we're looking at consensus service going
into twenty twenty.
Speaker 6 (22:41):
Five, and that's largely priced into the market, which is
now trading around twenty three times forward earnings, which are
historically a very high multiple, and that is reflective in
our interpretation of the backdrop that Yan has described.
Speaker 2 (22:54):
There's obviously a lot of policy uncertainty, and we'll talk
more about it with the new Trump administ and its
visions and how seriously it's going to take tariffs and
deportations and rebuilding American manufacturing all these questions, there is
a short term uncertainty, however, which is that there's still
some ambiguity about the trajectory of inflation itself. And at
(23:15):
one point it looked like a December rate cut was
going to be a total lock, and actually right now
it looks like, according to the market, it's like a
sixty forty scenario, So it's not guaranteed. There are still
some lingering questions about the inflation trajectory. Question to both
of you, which is a y sort of like where
do you see this sort of short term push and
(23:37):
pull in terms of the rate trajectory? And then to David,
how much when you think about valuation specifically, is it
contingent on some of these questions about what's going on
with the further cutting cycle and.
Speaker 5 (23:48):
So forth on inflation. I think the underlying trends are
looking quite favorable, and I base that not just on
the actual price number, okay, but also on the rebalancing
that we've seen in the labor market. And we're basically
back to where we were in twenty nineteen in terms
of the supply demand balance in the labor market, if
(24:11):
not a little bit looser We've seen, for example, declines
in the quit rate and in some of the surveys
of labor shortages to levels that are a little bit
below where they were in twenty nineteen. We've seen deceleration
in wage growth. All of that, to me says that
(24:33):
this inflation process is on track. There is an upside
risk again maybe more price level effect, but an upside
risk from the terriffs. But X that, I think we're
on a path back to around two percent by the
end of next year, which then because of our terraff assumptions,
becomes two point four percent in terms of our actual forecast.
But X that around two percent, and I think in
(24:55):
that kind of environment, the Fed's going to say, you know,
four and a half to four and three quarter, that's
still a very high nominal funds rate, which will become
a higher real funds rate as you go through next year.
So I think they're still going to want to deliver
several cuts. A December cut is all forecast, it's certainly
not a foregone conclusion. We'll get some important data before then,
(25:17):
and then we have ongoing cuts as we go through
next year, and we think ultimately will land in the
low to mid threes for the funds rate, which is
a bit below what markets are pricing now. But I
would remind you that if you go back a couple
of months, markets who are priced for terminal fed funds
rate in the two point seven percent range, So that
(25:37):
was clearly very low relative to you know, certainly what
we expected. Now. I think the market's price may be
a little bit higher than is appropriate in our view.
Speaker 6 (25:48):
So there's a lot of things happening on the back
of your question and the idea of investment strategies around inflation.
What's the source of the inflation that may occur, And
we can think of US companies that are selling abroad
compared with US companies that are selling domestically. If you're
concerned about tariffs and what that might be from a
price level point of view, the risk of retaliatory tariffs
(26:11):
is certainly there, and so owning companies whose customer base
is in the United States, while of course long the
supply chain, they may have increased the prices the idea
of those type of stocks generally doing better. As part
of our view, you can think about wage inflation as well.
We have companies where labor costs are relatively low. And
when I talk about labor costs, I think of the wage,
(26:32):
not just wages, salaries and bonuses and stock based compensation
and healthcare benefits, which of course in the US are
born by the corporate sector. And there are companies where
that's quite low, relatively low labor intensive companies is compared
with high labor cost companies. And think that's a area
again we're looking for strategies, investment strategies around these different
macro themes that Yan has described and we talk about
(26:56):
in our teams at Gobenzachs.
Speaker 4 (27:14):
One thing I'm wondering as we enter another Trump administration.
You know, Joe and I and other journalists, we have
it kind of easy where we either see the headlines
at night before we go to bed, or if we're
saying people, we see them in the morning when we
wake up, and all we have to do is write
them up. Basically what Trump is saying. When you wake
(27:34):
up and see the headlines in the morning, how like
reactive is your work to some of the stuff coming
out of Donald Trump's mouth? And I guess the count
true social account yeah, And I guess the consensus right
now is you should take Trump seriously, but perhaps not literally.
And I guess my question is like when does that change.
Speaker 5 (27:55):
Well, it certainly changes once you have actual government policy
that can be implemented. During the transition. Of course, that's
not the case. So in terms of changing our forecast,
you know, the hurdle now would be quite a bit
higher than once we actually were back in the second
Trump administration. In terms of providing a comment on some
(28:19):
of these announcements or tariff threats, yeah, there's a lot
of demand for that, and so we did write a
comment on yesterday's announcements around the Canada, China, Mexico tariffs,
but ultimately said, some of this is very consistent with
what we had been assuming, namely the China tariffs, and
(28:39):
maybe even a little bit lower than what ultimately is
likely to materialize. But then on Mexico and Canada, we
would take this with more of a grain of salt
because there will be a whole process around that renegotiation.
And ultimately we did have some similar tariff threats in
the first Trump administration on Canada and Mexico, which ultimately
(29:01):
didn't materialize because NAFTA effectively just became USMCA, but not
with a huge number of changes.
Speaker 6 (29:09):
Think about it in terms of horizon arbitrage. There is
lots of price noise that happens every day. And then
there's investment themes that may be less connected with the administration,
whether it's Donald Trump, Joe Biden, what have you. The
idea of artificial intelligence AI that everyone talks about, well,
that's really less affected by some of the government policies.
(29:32):
It may be depending on the policies that get implemented,
but the idea of more productivity growth, or idea of
more efficiency, or the infrastructure build out relating to AI,
those are some of the themes that are probably independent
of the administration. These are the things that are having
in the technology world. And that's a discussion point that
I look at with portfolio managers who may have an
(29:54):
investment horizon that may be three to five years out.
What stocks should they own, how should they position their
portfolio as compared with maybe some more focusing on the
day to day announcements of tariffs, which may be implemented,
may not be Maybe that may be variable.
Speaker 5 (30:07):
One thing I would just say is that on tariffs,
this is to a large extent up to the president
and up to the White House. So it does deserve
more attention than some other policy pronouncements, which require Congress
to hash out a reconciliation bill and ultimate tax legislation.
(30:29):
So it is important to focus on the things when
there are announcements that are effectively under the control of
the White House.
Speaker 2 (30:38):
The Treasury Secretary nominee has, according to report, been pitching
Trump on this idea three three threes, improved growth via deregulation,
smaller deficits, and more barrels of oil. Let's set aside
the oil for a second. Do you see any prospect
of a meaningful change in the spending trajectory? And do
(31:01):
you see any meaningful opportunity for further pickup in trend
growth from more favorable regulatory environment.
Speaker 5 (31:07):
So I think these are aspirational goals. They're both pretty ambitious.
I mean both a three percent of GDP federal deficit.
That's not what we're expecting. That's not what the Congressional
Budget Office is expecting. I mean, we think it's going
to be closer to six percent. Probably maybe we can
(31:28):
bring that down. Bringing it down to three percent would
be certainly very desirable. I think we will ultimately need
to bring it back down to something like three percent,
and to bring the primary deficit, the x interest federal
budget deficit back down to somewhere around zero, depending on
where growth and real interest rates ultimately balance out. But
(31:51):
that's going to be a process that's going to require
an enormous amount of effort, and.
Speaker 2 (31:56):
That would take real political effort to cut into very sensitive,
veryos spending.
Speaker 4 (32:00):
Right.
Speaker 5 (32:00):
That's right, because such a large chunk of government spending
is basically entitlement programs, defense, and debt service. That doesn't
leave a lot of discretionary non defense spending that's maybe
a little bit easier to cut than some of those
other categories. You know, fifteen percent or so of total
(32:23):
federal spending is you know, non defense discretionary, so a
relatively small share. And that then leaves the tax side,
and you know, obviously there's no desire to deliver a
sizeable tax cut, certainly not with this administration. So it's
going to be very difficult. On the growth side. We're
on the optimistic side of at least the economist consensus
(32:44):
if you take the federal reserve, the media, and longer
term GDP growth rate is one point eight percent. We're
at two point one percent. You know, maybe that can
be lifted somewhat. Getting to three again would be very
difficult urely, given the demographics. If you have the labor
force grow at only a pretty slow pace, you know,
(33:07):
not a lot of natural population growth because of low
birth rates, and probably much lawer immigration. So even if
you're a productivity optimist, and I would say I'm on
the more optimistic side as far as productivity is concerned,
getting to three will be difficult.
Speaker 4 (33:24):
Let's talk about immigration, because, as you pointed out, you know,
tariffs are largely under the purview of the president. Maybe
immigration is a little bit different. What's been the impact
of immigration on the economy from the past, you know,
three or four years or so, and how do you
see that unfolding going forward, given that we don't really
know what's coming. We could have mass deportations, or we
(33:46):
could have something you know, around the edges, or maybe
nothing happens.
Speaker 5 (33:51):
So it's been very important in boosting growth and nevertheless
bringing down inflation. So it's obviously a very controversial topic
from a political perspective, But if you just look at
the economics, if you bring more people into the workforce,
especially at a time of very serious labor supply constraints,
(34:13):
and in particular, very serious labor supply constraints at the
bottom end of skill distribution in twenty twenty one twenty
two in areas like bars and restaurants, you know, in
other areas like that construction, having that large influx of
people has boosted growth and probably at the margin also
helped to bring down inflation. At least has helped to
(34:36):
bring down wage inflation in some of these areas to
levels that are more sustainable. Now there is already a
deceleration in the immigrant inflow if you look at it
on a you know, month on month kind of annual
rate perspective. In late twenty twenty three, we were running
(34:57):
above three million at an annual rate. Are now probably
a little bit between one and a half and two million,
and that is likely to you know, come down further,
even before you see an additional tightening of restrictions on
people coming in and increased deportations. You know, we'll see
(35:17):
how large the deportations are ultimately going to be. If
you go back to say the Obama administration, we were
averaging something like four hundred thousand per year. You know,
I think it's probably going to be higher than that,
but whether it's going to be dramatically higher than that
that I think is still less clear. Yes, it is
up to the executive branch, it's up to the president.
(35:39):
But unlike with tariffs, there are going to be a
lot more logistical issues around deportations and moving immigration to
much lower levels or into negative territory than with tariffs.
With tariffs, it's administratively relatively easy. So if I'm thinking about,
you know, supply the sort of growth negative tariffs on
(36:01):
the one side, and then immigration on the other, I'm
more worried about tariffs than I am about immigration.
Speaker 2 (36:06):
David, you mentioned you know we're talking, you talk to clients,
and one of the dominant conversations Scott Bessant gets named
Treasury Secretary nominee. Maybe his three percent deficit to GDP
goal is very aspirational. Maybe some of his growth ambitions
are aspirational, But it strikes me that, like, ultimately he
(36:27):
does not strike me as some sort of like major
shake up, We're going to totally rethink how the economy works.
Speaker 3 (36:34):
Guy.
Speaker 2 (36:34):
He sort of has a traditional macro background, seems to
have very good understanding when you talk to clients. How
far does that go, you know, in terms of thinking,
being able to think long term and avoiding the noise
of the day to day headlines. The fact that Scott
Bessont is likely going to be the Treasury secretary, the
fact that, according to reports that just hit the headlines,
someone fairly mainstream like Kevin Hassett is going to be
(36:57):
running a ne EC. Is this the kind of thing
that just makes investors? Do they get comfortable when they
hear these headlines?
Speaker 3 (37:03):
What are those chats like?
Speaker 6 (37:04):
I would say that is a pretty good characterization of
how portfolio managers are thinking about it right now. Based
on his background. Number of people myself included known him
for some period of time as a portfolio manager, and
he's viewed again perception as sort of more mainstream. Of course,
a lot of the policies will depend on the president,
and so it'd be up to the treasure Secretary and
(37:26):
the other cabinet members to carry out those policies, and
that remains asion indicated that some uncertainty around what those
ultimately will be.
Speaker 4 (37:35):
So one of the reasons we'd like to talk to
you is because you go out and talk to other
people too. Your clients, portfolio managers. As you just mentioned,
what are some of the more interesting questions that you
are getting this year and what's maybe different to this
time in twenty twenty three.
Speaker 5 (37:53):
Well, it's much more around policy and much less around
the underlying path of the economy. I mean, I think
where again, going through beyond the policies which we've discussed
a little bit of the concern around higher inflation. It's
certainly true that the last couple of prints have been
a little bit higher. We talked about it earlier. I'm
(38:14):
not super concerned about it, but it wouldn't be shocking
if we saw the next few months a little bit
of upward pressure. First quarter has been a sort of
seasonally higher sequential inflation period, I think partly because seasonal
adjustment is difficult, especially post pandemic, and there is some
(38:36):
residual seasonality which we may see again. So there are
definitely questions around inflation. There are questions around, you know,
the longer term neutral funds rate. Our star know to
what extent has it risen relative to the pre pandemic period.
You know, our view is that it probably never was
(38:58):
quite as low as many people thought in twenty eighteen
twenty nineteen. We were never that sold on the secular
stagnation story, and you know, it might not be quite
as high as many observers now think. I mean, we're
still in the low to mid threes and nominal terms,
low to mid ones in real terms, but there's certainly
(39:19):
a lot of discussion around that. There's a lot of
discussion around Europe and the impact potentially of higher tariffs
or maybe just the trade policy uncertainty. You know, in
advance of any actual tariff increases on Europe, what is
that doing to an economy that's already pretty soft. And
(39:39):
it's an area where we're actually well below consensus. We
have a zero point eight percent forecast for EU area
growth in twenty twenty five, which is four or five
tenths below the Bloomberg consensus or the ECB and and
a lot of that is around trade policy uncertainty, which
seems to have a particularly negative impact in Europe. So
(40:01):
definitely another big topic of conversation.
Speaker 3 (40:04):
David, and take a stab at the same question.
Speaker 6 (40:06):
Sure, there's a variety of things that portfolio managers are
focused on right now, and the first is something you
reference earlier, Joe, which is the idea of the largest
stocks in the market are now representing more than a
third of the S and P five hundred equity capitalization.
So the question is, you know, how does one position
in that. You look at the mutual fund community, for example,
seventy five percent of mutual funds are lagging their benchmark.
(40:29):
It's not a criticism, it's just the data so far
and those companies. What's been consistent about those funds has
been they have been underweight these positions in the largest stocks,
and so the idea of perhaps having an index weight
for the largest companies and then choosing to generate alpha
or seek alpha in the rest of the market is
probably the better strategy. That's number one. That was something
(40:52):
that the twenty five percent of the mutual funds that
are outperforming have tended to tended to do. That's number one.
Number two, relating to Yon's observe as, it's a perpetual
question of well, what about these global markets Europe, Asia, China, Japan,
Is this their opportunity to outperform the US. The relevant
evaluation metrics are really really eye catching, which is that
(41:13):
the multiple forward pe multiple for the US equity markets
now roughly twenty three times, and it's about thirteen times
for Europe and Japan and China is even lower than that.
And so that question is well for a decade, it's
still been the US. Is this the time? Is the
valuation gap so significant that the opportunity set at the
(41:35):
lower end of the valuation scale? Does that represent good opportunities?
So I'd say those are two major questions. The third
question that is highly debated is on AI and the
idea is of the huge capital investments that some of
the hyperscalers and other companies making these investments, what will
the ROI turn on investment be of the AI that
(41:56):
they're making, And so that is a question that's and
flowed over the course of the year. A lot of
the companies who are involved in the infrastructure build out
have done particularly well. Those pe multiples have expanded and
the share prices have done better than the growth rate
in the underlying growth of earnings, and so our focus
has been on companies in the third phase. As we
(42:17):
think about it, the third phase of AI infrastructure build out.
First phase is Navidia's own kind of unique story. The
second phase is the infrastructure and the third phase is
the companies we think of whose revenues will be enhanced
by AI, and a lot of the software companies and
their price return this year have basically matched the earnings
growth trajectory, and so the opportunity does exist there in
(42:40):
some cases for a multiple expansion, So that would be
an area of focus. So those are some of the
topics that are debated with fund manager right now.
Speaker 3 (42:48):
Tracy.
Speaker 2 (42:48):
First of all, it feels like international out performance is
always one year away.
Speaker 4 (42:52):
Or oh, I know, we're always waiting for EM.
Speaker 2 (42:54):
We're always waiting for EM and Japan and Europe. One
day they're going to have their day. But also to
refor it's another shops performers. But I always love looking
at the via AML hedge fund survey and one of
the things they ask is what's the most crowded trade?
And it's always big tech, and it's always big tech
that wins. And I think about how glad I am
that I'm not a portfolio manager, and how sick to
my stomach of it have to be did the big
(43:16):
source of l F I just have to ride the
most crowded trade? Anyway, I'm glad I don't have that
job where I have to just do the same trade
as everyone else to outperform.
Speaker 4 (43:24):
We're all glad to Yeah. Well, actually, speaking of jobs,
Joe and I came up with a contrarian trade idea
based on AI, which is by Europe as a beneficiary
of productivity enhancing technology hormachical because their productivity is really low.
Would that work? You guys should see the expression on
David's face.
Speaker 3 (43:44):
Right, he looks like he did bit into a lemon.
Speaker 4 (43:50):
No one likes our contrarian ideas.
Speaker 5 (43:52):
It could work.
Speaker 6 (43:53):
I think maybe you used to think about it in
terms of M and A activity. The idea of the
companies in the stays much higher profit margins, and the idea,
I guess Tracy your hypothesis is perhaps their margin expansion
would be potentially enhanced by the adoption of AI. That
(44:14):
one question is on the source of the potential margin enhancement.
Is that labor driven and you have more efficiency therefore
fewer jobs. Is that sort of a orthogonal to what
the objective are? Has seem a lot of the European governments,
and so I think there's some debate around that. Could
it be a trade?
Speaker 4 (44:33):
I'm not a buyer Goleman isn't going to set up
that index.
Speaker 2 (44:36):
Just do you have ai macro thoughts? And to my
mind there's potentially two ways it could go down. One
is just the macro impact of all the capital spending.
Does it move the dial at all in any sort
of categories that are important on the top level. But
I guess more importantly, you know, looking a few years
out when you think about productivity, when you think about
labor growth, are we at the stage yet where you
(44:57):
can make interesting predictions about the impact of this stuff.
Speaker 5 (45:01):
So on the near charm impact, we generally have not
viewed that as all that large. I mean, these are
huge numbers in a very small part of the economy,
but in terms of boosting you know, near term growth,
it's very difficult to get anything more than you know,
a very small sort of tenth of a percentage point
(45:21):
or something like that. And in terms of the broader
impact on potential growth, I think we're also still probably
several years away. But then we're actually pretty optimistic when
it comes to sort of late twenty twenties, early two
thousand and thirties, and a little over a year ago
we raised our long term potential growth estimate for the
(45:45):
US by four tenths of a percentage point. We were
at one point eight percent for the sort of years
around two thousand and thirty. We're now two point two percent,
which is no, that's a pretty sizable boost, and it's
really driven by the fact that AI can replace a
lot of the tasks, not necessarily the jobs, but the
(46:07):
tasks within certain jobs that are being done, you know,
at sort of low and mid levels of white collar
work at the moment, and that is ultimately going to
be productivity enhancing. Of course, it does mean some labor
market upheaval, although we would emphasize that the labor market
impact is going to occur over a period of time
(46:31):
and there will also be new jobs that will be created.
So historically, when you go back, it's actually not that
easy to find instances of technological unemployment that were visible,
you know, in the overall economy. Typically when you have
large increases in productivity growth, those are actually typically low
(46:51):
unemployment periods rather than high unemployment periods, even though at
the individual job level or industry level you might see
quite a lot of job destruction. But overall we're optimistic
over the longer term, but in the short term it's
probably still going to be more limited.
Speaker 4 (47:08):
I can't wait to be a prompt engineer, generating AI
written podcasts. That's our future.
Speaker 3 (47:15):
We can already are. Yeah, we're already data providers.
Speaker 4 (47:18):
Yeah, that's true, David. I just have one more question,
which is whose ideal was it to write the Equity
Outlook through the lens of lessons learned from the Art
of the Deal.
Speaker 6 (47:28):
Well, last year we referenced Taylor Swift. We said the
subtitle of the report was all you need to do
is stay invested, and that was the strategy for calendar
twenty twenty four. And a reference to your first question
of this podcast, you asked, do anyone look back and
see what we wrote in you do here? We certainly
do and think about it as a report card. What
(47:50):
was the impetus for the Art of the Deal and
why we titled that or subtitled that for our twenty
twenty five outlook. Part of it is the M and
A environment and the idea that our forecast is for
a twenty five percent increase in M and A in
calendar year twenty twenty five. That's part driven by our
forecast of the use of cash of corporate America S
(48:11):
and P five hundred companies will spend about four trillion
dollars of cash next year, and a good portion of
that we have a twenty percent gain or increase in
the cash devoted to M and A activity. So that
was one of the impetuses that thought about the Art
of the Deal. And then it is remarkable and for
all the listeners of the Outloud's podcast, I would suggest
you go back and read the report. Read the book.
(48:33):
The Art of the Deal was written or co ghost
written perhaps by Donald Trump thirty seven years ago, and
many of the characterizations of the transactions in his whole
thought process was pretty interesting. So we went back revisited
that in my first edition copy for when I was
way back in the day, and that was the impetus
for why we thought about that as an organizing structure
(48:54):
for our Outlook report.
Speaker 4 (48:56):
Do you have a first edition?
Speaker 6 (48:57):
Are you used to nineteen eighty seven?
Speaker 3 (48:59):
Wow? Oh wow, I'm gonna have to go read it.
I should read it. I will read it.
Speaker 4 (49:02):
Yeah, I haven't read it either. Isn't there a sequel
as well? Oh?
Speaker 6 (49:05):
There's many many books.
Speaker 5 (49:07):
Yeah, we did references.
Speaker 6 (49:09):
There's the art of the comeback that he wrote ten
years later nineteen ninety seven, and a whole sequence of
books that he's written.
Speaker 4 (49:17):
Oh my gosh.
Speaker 2 (49:17):
Okay, David and Jon, thank you so much for coming
on out launch. This is a true treat to have
you both and maybe I don't know, let's make it
an annual tradition.
Speaker 3 (49:26):
We'll do it again next year.
Speaker 5 (49:28):
Thank you, Thank you exciting us.
Speaker 3 (49:29):
Thank you so much. That was Thank you, Tracy. That
was a real treat. That was really fun having David
and On together.
Speaker 4 (49:49):
I know, I wonder if they've ever done an external
appearance together, like.
Speaker 3 (49:53):
An external media appearance.
Speaker 4 (49:55):
Yeah, that's what I mean.
Speaker 3 (49:55):
I guess we could have asked them.
Speaker 4 (49:57):
I'm sure they have spoken to clients.
Speaker 3 (49:59):
Yeah.
Speaker 2 (49:59):
But there was, you know, just one random thing that
stuck out from me that I hadn't realized, like I
knew it or I had a good idea in my
mind that the reason big tech companies have done so
well is because they're earnings juggernauts. Right. There's other things
that go on flows and there, but like, they make
so much money and they're so large, and yet they
(50:19):
still put up like thirty percent numbers.
Speaker 3 (50:21):
It's insane. But I had not realized like.
Speaker 2 (50:23):
A quite how wide that gap has been and over
the last two years between their earnings growth and everyone
the other four hundred ninety three stocks, and b that
the consensus is for a major shrinking in that gap
going into twenty twenty five.
Speaker 4 (50:37):
Yeah, that's right. Well. The other thing I was thinking
was the differentiation between different Trump policies as well, and
like maybe dividing them up by how much is under
the purview of the president versus like what things need
congressional approvement and where there are those sort of political
limits and guideposts in place. I guess like that seems
(50:59):
a reasonable way to view some of these risks. I
still think there's a lot of stuff up in the air.
Speaker 2 (51:05):
Yeah, And you know, it seems to me and we
sort of joked in the beginning that like the GDP
usually grows like two and a half three percent and
stocks usually go up, And that's true. And it seems
like even with the sort of some of the unorthodox
or heterodox economic views of the incoming Trump administration, the
impacts right now expected to be marginal. Right, so even
(51:27):
tariffs aren't expected if they go through as expected, aren't
expected to have a radical change to say the inflation
trajectory or whatever. And you know, it seems like what
people are anxious about, what you're talking about, maybe some
clients are talking about, is the idea of like genuine
policy uncertainty. And that means not a debate about ten
percent versus twenty percent tariffs, which is, you know, you
(51:51):
shave some percents off GDP, you shave some earnings off,
and life goes on, versus like the seeming potential for
some gen andly radical rethink of how we do business
with the rest of the world.
Speaker 4 (52:02):
Yeah, totally. And I think that's like that's a.
Speaker 3 (52:05):
Po's the big one, right, it seems plausible. Yeah.
Speaker 4 (52:08):
Yeah, Well, in the meantime, sign up for our twenty
twenty five investment outlook titled GDP normally increases two to
three percent and stocks normally go up.
Speaker 2 (52:18):
This way, we're gonna title our newsletter on Mondays.
Speaker 3 (52:21):
Out Let's do it all?
Speaker 1 (52:22):
Right?
Speaker 4 (52:22):
Shall we leave it there?
Speaker 3 (52:23):
Let's leave it there.
Speaker 4 (52:24):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (52:30):
I'm Joe Wisenthal. You can follow me at The Stalwart
follow our producers Carmen Rodriguez at Carman Ermann Dash, Ol
Bennett at dashbod and Cal Brooks at cal Brooks. Thank
you to our producer Moses Ondem More odd lags content,
go to Bloomberg dot com slash odd lots, where have transcripts,
a blog and a daily newsletter and you can chat
about all of these topics, including macro including markets twenty
(52:52):
four to seven in our discord discord gg slash odlocks and.
Speaker 4 (52:56):
If you enjoy all thoughts. If you like it when
we bring you not just one but two Goldman Strategists,
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(53:18):
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Hosts And Creators
Joe Weisenthal
Tracy Alloway
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