One consistent pattern at the top of almost every equity bull market in the past has been tightening Fed policy instead of easing policy that we have today. And then, of course, this is a very small and maybe silly example. But a couple of years ago, I remember when the GLP one drugs were being rolled out, there was a very brief window where investors were talking about buying the airline stocks on the basis that fuel costs would be lower. Right. Yeah. When this narrative, this type of narrative starts to emerge in my conversations, that's the kind of time where I think you will be seeing prices run ahead of earnings, which, as I mentioned, is really not been the case. I'll be a lot more nervous that that's interesting. So when you just start to see investors start to justify things on various banks shots, I trust the narrative. Yeah. And that's that's just sort of like it's like a behavioral sign that maybe people are starting to get over their skis a bit. I think this has been one of the least enthusiast markets. That is often described as a bubble. In recent history. Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway and I'm Joe Weisenthal. We always start these the same with someone saying it's that time of year. It's the most wonderful time of the year. That's right. Never, never change 2026 forecast season. It's the outlook season and it is the moment when every investment bank, on Wall Street releases their forecasts for next year. Yeah, it is a great time. You know, we make New Year's resolutions this time of year. We go back, we make our list of top ten things that happen a prediction. That's what you're supposed to. It's a quiet time of the year. Often news gets a little quiet, often around the holidays. So we make up for it by just looking back and looking forward. And then a year later, we completely forget what everyone said about the current year, and we just move on and do the next year. That's right. Always forward looking. Although I do think, you know, 2026 shaping up to be an interesting year for a variety of reasons. We just had a CPI number that came out surprisingly softer than a lot of people expected. Some people say unrealistically softer with 0% shelter costs increase. So that was interesting. We're going to have a new Fed chairman. Yeah. There's still a question mark over the impact of tariffs, whether we're waiting to see those show up. And, what's going to happen with unemployment as well, that's been ticking up. And then it's been this really incredible year, obviously in the stock market. I and the US, stock market just continues year after year after year, with a few exceptions here and there, but not many putting up massive numbers. And so the question is like can we expect how long is this realistic, especially given, you know, all the concerns about concentration and a handful of names, some of which haven't really been doing so well lately. And so, yes, what so many questions on both the real economy and the stock market. Yeah, there's definitely been some dispersion creeping into some of the big AI names or the tech names.

All right. Well, I'm happy to say we do, in fact, have the perfect guests, plural. We've got two. So we're going to be speaking with Jan Hatzius He’s the Chief Economist and head of research at Goldman Sachs. He's been on the show a number of times before. We like talking to him at least once a year. And Ben Snider, he is the chief U.S. equity strategist to replacing David Kostin. So thank you both for coming on Odd Lots. Thanks so much for having us. Great to be here. Is research outlook time. Is that actually a quiet time for you guys? It's not a quiet time. Normally we actually do it about six weeks earlier. Yeah because actually November tends to be a little bit better than December. But because of the shutdown and the dearth of data, we decided to push it back. It's completely under our control when we do it. And why do it at a time when you actually have much less information that makes it more so? We pushed out, a number of reports yesterday, including the Global Economic and Markets Outlook. Can you talk the two of you maybe again. So obviously different roles, but on the same team. And obviously the stock market, the U.S. equity market is different from the economy. And you can have years where the economy is fine, stocks are bad and vice versa, all different permutations and combinations. But how do you think about being an alignment cross team. And so that roughly, you're sort of working under a similar set of assumptions? Yeah, I can talk about that. And not just with respect to the U.S. or global economic outlook versus stock market outlook, but of course there's currencies, there's m economies, there's commodities. Certainly on the macro side, I would say we're on the coordinated side of the spectrum. We're not nobody is at one extreme or the other extreme. You can't have people that just work alongside one another without ever talking to one another. But you also shouldn't have just a machine where everything is exactly aligned. And there's zero room for individual initiative. So but we're towards the coordinator side for sure. Good time to note to, listeners, we are recording this December 19th, 2025. Ben, how do you think about sort of working with, you know, aligning your views of where markets are going or what the meaning of the rally has with the sort of with the macro thinking? There are a number of frameworks to think about the equity market, but a pretty common one, and one we rely on a lot, is to think of the market like a stock as a discount stream of future cash flows. And from that perspective, the most important driver of stocks is that stream of cash flows is earnings. And if you break those apart, the most important driver of those cash flows is usually the US economy. So we rely very heavily on John's forecast. So in terms of yarns forecast, I notice you're forecasting strong growth as in GDP but also rising unemployment. How do you square those two things. We have flat unemployment at 4.5%. But it's not going down as you might think when you're printing let's say 2.6% for real GDP in 2020 26. And a small part of the answer is that that 2.6 probably overstates the underlying trend a bit, because we have the down that depressed Q4. It's going to add to Q1, but the more important part of the answer is accelerate ING productivity growth. And we've seen that over the last five years. The five years since the pandemic have shown about 2% underlying trend. Productivity growth. The prior cycle was at about 1.5%. And I think there's reason to believe that that acceleration is still ongoing, because it probably doesn't have a lot of AI in it. We expect more of a boost from AI going forward in the next five years than in the last five years, and I think that's got important implications for the relationship between GDP and unemployment.

So so obviously, like the distribution of growth matters, it seems to particular matter when we're talking about the stock market, because you can have sectors that are like very quiet, but then you have these gigantic companies that make a ton of money and capture a lot of the growth that their stocks do incredibly well. Maybe it would be helpful even before we get to the 2026 outlook for the economy, then, like what happened in 2025, what were the underlying conditions that allowed for such like another monster year? Especially for the Nasdaq and a lot of the big tech names. So to bring it back to earnings, yeah, one thing that happened was really strong earnings growth. And I think among all the discussions of bubbles, what's underappreciated is just how strong corporate earnings growth has been. Yeah. Just wrapped up the third quarter season a few weeks ago. And S&P 500 companies in aggregate reported earnings growth of 12%. Even if we strip out the mega caps, the median S&P stock reported earnings growth of about 10%. That's very solid. This is seems to be like an underappreciated point, which is that look. Yeah, AI driven market the tech heavy market. It is not just that is it. Take an extension for this. We spend a lot of time understandably talking about the largest stocks in the market. The top ten stocks or over 40% of market cap. We should spend a lot of time talking about them. But if you look at the S&P 500 or excuse me, S&P 490 or 493, that market or that group of stocks has returned about 15% this year. They returned about 15% last year. They returned about 15% the year prior. And so I understand why we're talking about the large stocks. But really the broad US equity market has performed quite well.

Well, how do you account for, I guess, the weakness that we've seen in some of the mega tech stocks in recent weeks, what's going on there? For three years we've been obsessed with AI as a as a market. And for three years, really, the story has been increased CapEx, extraordinarily growth in AI investment spending. And although we're discussing a lot the eventual productivity benefits, as Yann mentioned, really the trade in the equity market has been the companies with earnings that are benefiting from those CapEx dollars. And what's happened this year, especially in the last several months, is it's become increasingly clear that a probably that growth will decelerate next year and be to continue that growth, it's going to require more debt. And both of those factors have made investors understandably uncomfortable. Jan one of the sort of the sort of the viral charts of the year or various estimates of like, how much the AI build out specifically is a driver of U.S. economic growth in 2025 and beyond. Like how much like, you know, when you look at the, yeah, GDP in 2025, how much of the growth can you attribute to what Ben just talked about? Actually pretty close to zero, really. This is a different story. I love to for two reasons. Number one, the goods that are being invested, in the AI sector are largely imported. So you can look at the contribution of investment spending to GDP growth. But if you don't net that out, yeah, against the imports then you're going to get the wrong answer. That's that's one reason. The second reason is that semiconductors, semiconductors are generally treated as intermediate inputs okay. Not as investment. So they don't actually show up in the in, in the, in the investment numbers. And so when we look at the impact of AI investment on measured GDP growth, the numbers that are actually being presented, we're getting only about 20 basis points of contribution over the last 3 or 4 years, and pretty close to zero over the last year. It strikes me as such an important point, because, you know, you have other people estimating, oh, 50% of growth this year is related to the AI buildout. Are you just always like banging your head against the wall? Because you must see these headlines every day like the rest of us? I do a bit because it oftentimes is just based on looking at some portion of investment spending. Sometimes there are also other things included in in those calculations that aren't necessarily AI related. But the the big point is that you really need to look at the imports as well. Then I should just ask before we go any further, what actually is your 2026 target for the S&P 500? Because we haven't seen the official outlook yet. We've published 7676. Okay, okay. So one thing I did want to ask this was in Jan's, economic outlook. But you talk about potentially credit underperform ING, which seems a little bit strange if interest rates are going lower and, you know, equities are doing pretty good. What's going on there? I mean, it's mainly really the, that the valuations are very high. The credit fundamentals we think are still, you know pretty good. But the market is priced to I mean not perfection perhaps, but to a very close to our EO. And so in that kind of situation my instinct would always be to build in a little bit of mean reversion. And that would give you, a modest amount of underperformance. But I wouldn't say that that's a major part of our, our overall view for, for the next year.

I have a question. And it's one of these things, maybe it doesn't fit right into this moment in the conversation, but I'm so worried that I'm going to forget it. But I'm going to ask it now. So we are recording this December 19th. We got that CPI report yesterday, came in 2.6 on core, this is year over year because we didn't have October data. And then there were people like, wait, they imputed a 0% zero rent growth or zero shelter inflation for October when they didn't collect the data, etc.. And but then I'm like, okay, that doesn't sound that doesn't sound particularly accurate or that doesn't sound like that sounds a little risky. But on the other hand, we're talking about a year over year number, so I'm not really sure why October really affects that. Can you just before we go any further, explain how I should understand yesterday's CPI report? Yeah, I mean, they use a six month, you know, growth rate for, for rents and they, they did assume, zero sequentially for October. And that does take away from the year on year growth rate as of the November number as well. So we do think that shelter inflation in yesterday's numbers were was was understated. And the numbers are not quite as good as the eight basis points for core CPI on average for October and November. So I would suggest so capturing rent is not like measuring bananas, where I could say here's the price of a banana in November 2025. Here's the price of a banana in November of 2024. Therefore, you could just do a year over year thing. You can't do that because they don't. They don't do it that way. They don't look at just one month, okay. That and and it's also, you know, is equivalent rent. Well that's that's a separate point that because this distortion affects both actual rent and owners of cars. Correct. Yeah. So it wasn't as good. And they're probably also were some other distortions stemming from the fact that prices were collected in the second half of November, pretty close to Thanksgiving, pretty close to the Black Friday deals that may have understated, okay, prices in the goods sector. But I think if you step back and look at the inflation news more big picture, it's pretty encouraging. We've seen 2025, meaningful amount of pass through from tariffs. We think about 50 basis points of contribution to core PC inflation. Core PC inflation in that environment has been going sideways. So if you take out the 50 basis points, if you think that that's really a price level effect, that's more like a value out of tax increase and is going to come out of the numbers in 2026, then we've seen ongoing disinflation to an underlying rate that's no longer that far away from 2%. And that's pretty good news. Good. Can we talk about prices and tariffs. And I'm very curious casting your mind back to April this year, April 2nd, when all the tariff announcements came out. What was your base case for the impact on inflation? Because there seem to be two schools of thought. There are people who think companies are going to use tariffs as an excuse to raise their prices. And then there are people who think that tariffs end up being disinflationary because they basically take money out of consumer's pockets, like a tax. We had probably more like 100 basis points of of pass through. And we ended up I mean so far I think with about 50 basis points. And there's still a question of how much of this reflects just a smaller impact, greater absorption maybe by the businesses sector. And perhaps to a small degree by foreign producers, although I actually think that that number is relatively small versus just a different time profile and a longer lag. We don't know that yet, but it's probably some combination of of the two. The one thing that I think has been consistent in terms of how we think about it, is that this is more of a price level effect, and I've seen a lot of VAT increases in European economies, where VAT rates often move usually upwards rather than downwards. And we've got many precedents that have shown, you know, 12 month increase in inflation on the back of one of these tax increases and then a decline when that when that gets cycled out.

Ben, let's talk about tariffs on the stock market. Because if the stock gains had just been driven by a bunch of big tech companies, we say, oh, of course the tariffs didn't matter because you know, there's they're not as tariff sensitive, etc.. But when we're talking about the fact that the S&P for 93 also did very well, talk to us like it's not intuitive to me, I would've guessed margins. I would have guessed lower sales, all kinds of things. What did we what did how did it all shake out for from the equity perspective, the impact of tariffs. This is our concern to most of earnings. Variability is driven by margin variability. When you have years with very large earnings growth or very poor earnings growth it's usually because of margins. Yeah. And earlier this year we were concerned that in part because of tariffs margins would get squeezed and that would weigh on earnings. It wasn't just you who was concerned and it really didn't materialize. Now, I think that's part of what we have to keep in mind is the counterfactual. Right. So for the last couple quarters, S&P 500 profit margins have basically been flat. Well, in an environment of pretty healthy nominal GDP growth, normally you would expect some operating leverage that would cause margins to expand. And so I think part of the story here is you didn't get that counterfactual. But we've seen consistently over the last few quarters companies across earnings calls really point to three levers they've been pulling to offset these pressures. One is, of course, as John mentioned, pushing through some in the form of prices. Second is both pushing back on suppliers to absorb some of the costs and restructuring supply chains where necessary. And the third is cutting costs, improving efficiency within companies. And that ties back to the slightly better productivity story. We've seen.

So we talked about rising productivity early. And you think that the the main boost from it is yet to come. Who actually captures that productivity acceleration when it comes to the equity market. Like, you know, the big tech guys, they have risen quite a lot. And now we're seeing some of the non tech companies start to catch up. Who's going to benefit the most. This is I guess to call it $1 trillion question is to understate the value of this this question I think the general consensus certainly that we have and that most of our clients have, is that I eventually will create a very large productivity boost to the economy that will create value for someone who that someone is, is hard to answer. And as I mentioned earlier with the market has been doing, given that uncertainty over the last couple of years is really focusing on near-term earnings. It's been the semiconductors. Obviously, it's been the hyperscalers to some extent, power companies, etc. I think that is actually one of the key differences between this market and what happened 25 years ago during the dotcom bubble, where we saw valuations expand quite dramatically as investors tried to look forward and guess at the productivity gains and the economic benefits. Today, investors are saying we saw what happened that time. It's too hard. And so what we're really going to focus on is the earnings today. This will be important. So your view is that at least from the behavior of public equity investors, you do not see any particular element of people letting their imaginations run wild. Of course, there are exceptions at the stock level. And to some extent, if a stock trades hand in hand with earnings that are growing dramatically because of a high CapEx investment, the implicit assumption is the earnings from that investment are sustained over a long period of time. So maybe one could argue, actually the prices should go up by less than earnings. So I won't say there's no optimism in the market with valuations at the current level. There's clearly optimism. But it's a very different kind of optimism from frankly what I expected a few years ago, which is to trace to your question, investors will be asking who are the long term winners and trying to pay for those immediately. That is really not been the story. I would actually say that's the key pivot. That's happened in our conversations with clients over the last few months, which is as this anxiety has built up about the AI infrastructure trade. And as for the first time, we've seen some public companies discretely quantify the earnings boost of AI. The narrative has shifted from how much will the semiconductors and other infrastructure companies make next year to how can we identify long term productivity winners?

What would make you nervous when it comes to valuations in general? This may be like indiscriminate investment in anything that has the word AI in it. That would do it. Yeah, okay. I think if you look historically, you know, it's hard to quantify speculative activity or over exuberance. But we try and so a few months ago we actually built something we call a speculative activity trade indicator. It looks at trading volumes, for example, in stocks with no profits, trading volumes and stocks with extraordinarily high valuation multiples, as you might expect, that is risen this year. But it is comforting to me that it is still well below levels that we saw 25 years ago and even five years ago. In the 2021 experience. Jan there's a question I did not even really a 2026 question. But, you know, one of the reasons we've always loved talking to you is I beyond just the forecast, etc., I consider you to be sort of a deep macro thinker with a rooted in academic ideas. Economists seem, you know, fairly strict on the idea that, like tech, yes, new technologies could put some people out of work, but and that's obviously painful. But in the aggregate, tech doesn't destroy jobs. Is there any reason to think that I would be any different? I mean, this is what scares people, right? That there's going to be ten people who have all the money, and the rest of us are going to be living on universal basic income. I may very well be a good podcast host at some time. Like, and maybe podcasts will go away. But like in the broad thinking, is there any reason to think that somehow this time it's different with the relationship between tech and labor? I mean, history certainly doesn't support it from the perspective of the long term outcomes. If you look at kind of intervals of, you know, 1020 years, you cannot find a an adverse relationship between more productivity growth, even if it's more labor productivity growth, that at the industry level puts people out of work and aggregate unemployment. What you can find is increases in frictional unemployment. When you see, productivity acceleration, it takes a while for the new jobs to be created in other industries. The to compensate for the jobs that are being lost in, in the, in the affected industries. And we do build in some of that into into all forecasts. And then it really becomes a question of how quickly the other the adoption really occurs. If it happens over, say, a decade, if you look at the entire economy and, you know, people think that's that's way too slow. But I actually don't think it's a it's a crazy idea to think that this takes a while to diffuse through the economy, not just the most innovative companies, but all companies and at all levels. I do think it's going to take a number of years. That would probably give the economy time to adapt and create jobs in, in other areas. But if it's if it's much faster, then I'd be more worried about short term increases in frictional unemployment. So it's important to keep an open mind, even though I would say my underlying view is on the optimistic side, that we will be able to cope with this structural change the way that the US and world economy has, has coped with technological advancement in the past.

Can you talk a little bit about what's been going on with consumer spending? Because unemployment, you know, getting a little bit softer, but we haven't really seen a significant hit to consumer spending. And yet if you look at the sentiment surveys, everyone is miserable at the moment. But they keep buying stuff. What is going on there? I think the sentiment surveys have been getting less and less useful for predicting activity and that's true for the consumer sentiment surveys. The University of Michigan in particular has been quite far out of line with what we've seen. But it's actually true more broadly, if you think back to, you know, ten years ago or 20 years ago, just the importance of the ISM print for markets and the importance now it's just nowhere close. We still look at the business surveys and the consumer surveys because they have interesting detail. They're very up to date, but they just don't work as well as they as they used to. I certainly where, where I believe to. So I would really focus more on the hard data, the hard data, I would say that the consumers doing okay. It's not the sort of consumer spending, certainly not super rapid. Maybe we'll get to, you know, 2% or so next year, but I think consumer spending in real terms is likely to lag the overall economy. There are obviously differences between the top end. I mean, the levels obviously, but also the growth rates towards the top end versus the bottom end. That's a little bit hard to really assess in real time, because the official consumer spending, the numbers are not broken down, right. They're at a very high frequency in the very up to date numbers. But it it is a mixed picture up there. But I would expect under our forecasts for the economy, I would expect the consumer to hang in there. What would be your desert island economic indicator for next year? You're stuck on an island. You can only look at one thing to gauge the direction of. It's always hard to beat the unemployment rate. Okay. All right. So on the unemployment rate we should talk about the fed. Right. Because this time next year we're going to have a new fed chair. And almost like a year of performance already. When does he actually come in? Like April or some May. Okay. Well, a significant amount of performance in the role already. How much of a change is a new fed chair when it comes to your economic forecast? I mean, it's probably not a lot. We're, you know, very unlikely to make, make a forecast change on the back of an appointment and, I mean, I don't know who it's going to be. It's a committee. So there is more continuity in the, in the system than I think people sometimes believe when they talk about the different potential candidates. So at least in the, say, six, 12, 18 month forward horizon, I wouldn't really expect a major change in terms of the policy outcomes. Obviously, the further out you go, the more room there is for people to turn over on the committee. That's true on the board of governors, it's true among the Federal Reserve Bank presidents. And that could have more of an impact. But in the in the near term, I would not expect a massively different outcome because there's a new chair, Ben.

And there's no talk to us about multiples. And obviously you talking about the importance of earnings, obviously. And then how frequently margin expansion is important. But then there's also the multiples question where are we now in terms of how you think about multiples. And then when you think where are we going and how much is that going to be tied sort of implicitly to perceptions of, policy trajectory multiples high? There's no debating that. Certainly if you're comparing with history, it's high. In in the last few decades, we've really only seen a higher multiple very briefly during the post Covid period, the reopening. And of course, in the late 1990s, the in that the the post Covid because no one had made any money for like two quarters. Well I think that's a key point, which is one of the things that drives the multiple higher is expectations of accelerating or improving earnings. Yeah. And from that perspective, if I listen to John's forecasts for a healthy economy that's improving, it's not necessarily so strange to me that the multiple is pretty elevated. The only thing I would point out is if we sat here a year ago, or frankly, if we sat here at the beginning of 1999. Weren't many podcast back then, but we'll use our imagination. The multiple was exactly where it is today, and that didn't really tell you anything about what to do with the market over the short term. So I view valuations through a physics lens as a measure of potential energy. They tell you a lot about how much the market can move if there's a catalyst, but they're not the catalysts themselves. I know you talked earlier about how you're not seeing people, invest in the AI productivity story indiscriminately. But when it comes to an expected productivity boost from this new technology, what concrete evidence are you seeing that this is actually happening versus, you know, people talking their books? Well, about 60% of S&P companies say AI every quarter on their earnings. True. And you can probably count on one hand how many are actually quantifying it. So I don't think you should expect to really see it in the numbers today. Actually, for the first time, we are modeling an AI productivity boost in our S&P 500 earnings forecast for next year. And the magnitude of that boost is under half a percent. So we still think even next year it'll be quite small. But the important thing is it is growing over time. But that's the uses of, users of AI rather than the, the investment. Correct. When you're spending hundreds of billions of dollars in CapEx, the AI boost in terms of those dollars has clearly been large for the last couple of years. So you're talking about the the concentration of, equities within the S&P 500, very top heavy. How does that compare with the concentration of earnings within the S&P 500? That is a key point. That is I think often underappreciated, which is five years ago the top ten stocks in the market accounted for a third of market cap. This was a record at the time. Although we look back and think it wasn't so bad. And fast forward now, they are a third of earnings. So one way to conceptualize this is the market was correctly looking forward back then and saying earnings are going to grow. And so today if the top ten companies are 40% of market cap and a third of earnings, the question is will they continue to outperform on an earnings basis over the next few years? Well, given the current run rate of earnings growth, it looks very likely that the answer will be yes will outperform, although on our forecasts that gap will shrink a little bit. And then markets might look forward further than that. And I mean that's been part of the issue for some of them more recently. And that's how you create valuation problems. Tracy, when I hear that big tech companies only have about a third of the earnings of the S&P 500, my thought is, well, that's 70% of all corporate earnings that they have yet to swallow. Let's think of all of these earnings that are accruing to non-tech companies. All of that is going to be Amazon's, Amazon and Alphabet's income. And there's there's still upside. Yeah there's still 70%. There's still the majority of money is not being made by tech companies.

Okay, I got to ask though. Yes, tech companies have seen, you know, very dominant in recent years. But what would it take to make you a little bit nervous about the outlook for next year? The broad market outlook, like what would you need to see to think like, oh, wait a second, we're kind of getting ahead of ourselves, or I think maybe my target is a little more optimistic than I had expected. First, I think an investor should always be a little nervous. That's a reflection of equity risk premium, which is how the market generates return over time, or at least part of how the market generates return over time. Well, first, you know, you mentioned his desert island indicator being the unemployment rate for me. Every Thursday morning I wake up excited to see jobless claims. This is I've said it many times. I'm a claims guy when it comes to my desert island. We're on the same page, Ambrose. So you know, if a few Thursdays in a row we start to see claims rise, I'll become a lot more nervous. If John walks down the hall one day and says, you know, we think the Fed is going to hike at the next meeting, I'll be nervous about that, too. One consistent pattern at the top of almost every equity bull market in the past has been tightening Fed policy, instead of easing policy that we have today. And then, of course, the third is, you know, this is a very small and maybe silly example. But a couple of years ago, I remember when the GLP one drugs were being rolled out there was a very brief window where investors were talking about buying the airline stocks on the basis that fuel costs would be lower. Right? Yeah. When this narrative, this type of narrative starts to emerge in my conversations, that's the kind of time where I think you will be seeing prices run ahead of earnings, which, as I mentioned, is really not been the case. I'll be a lot more nervous that that's interesting. So when you just start to see investors start to justify things on various bank shots, I trust the narrative. Yeah. And that's that's just sort of like it's like a behavioral sign that maybe people are starting to get over their skis a bit. I think this has been one of the least enthusiastic markets that is often described as a bubble. In recent history. Jan, what happened to housing? And when I say that, I mean, I feel that we could go a whole conversation talking about the economy these days without talk about how mediocre the housing market is doing, whether we're talking about prices, whether I would start basically every measure of housing. I'm not very good. And yet, by and large, in conversation about the economy, you know, we used to there used to be the housing cycle is the business cycle. Even setting aside the crisis of 2008 2009, housing is linked to the economy, has always for a long time felt very robust. Has that changed? It's amazing how if I look back to the well, certainly run up to oh eight and the the couple years after how we rolled, I don't know, 30%, 40%, 50% of what we were putting out on housing and the spillovers from housing and mortgage equity withdrawal and leveraged losses because of mortgage credit exposures on bank balance sheets and how it is now such, small part of the discussion, because it's been kind of a tug of war, I think, between, you know, on the one hand, low vacancy rates and therefore a supportive supply picture for housing activity and house prices. And at the same time, already high price levels, bad affordability to so reasonably high mortgage rates. And it just hasn't really moved very much. Now, of course, we've also seen demographic changes that just result in less housing turnover. But you know, it is not a major feature of our outlook for 2026. We have housing go, you know, more or less sideways from here. Low positive numbers for price appreciation. And and you know, I think the action is really, really elsewhere. More on the investment side. And obviously a lot of the technical technology issues that we've been discussing. We would be remiss if we didn't talk about the world's second biggest economy, which is China. So in your outlook, it looks like you say you expect China to hold up. Well, and I think this would be surprising to a lot of people who look out at, I guess, the global trading sphere. And it looks like everyone is arrayed against China in various ways. The U.S has imposed tariffs. Europe seems to want to do something, and possibly, you know, form a coherent bloc, I guess, against China. Why haven't we seen more of a growth hit to China? The manufacturing sector and Chinese exports have just held up incredibly well despite a at times punitive level of tariffs from the US side. You know, exports to the US came down substantially in all 25, 30%, on a year on year basis. But exports to other places have held up very well. Overall, exports are still up 5 to 10%. They're a little bit noisy but very healthy growth rates. And our expectation is that that's that's going to continue mainly because China keeps getting better and better at producing better and better goods, a cheaper and cheaper prices. And it's going to be pretty difficult to really stem that for other economies. And they also control the supply of rare earths. They can control about 70% of the mining, 90% of the refining. That's a pretty good way to deter, trade action and tariffs. And I think we saw that in the negotiations with the US. But that could be relevant for other economies that try to impose tariffs on China. So I think the goods producing sector is still going to be strong. Now the flip side is that the domestic economy is very weak. And that's a that's a country where the housing story is much more central. Housing starts and sales are still going down, even though they're already down 60 to 80%, but they're still going down steeply. Prices are still falling steeply. Our China team estimates that if you take the direct and indirect effects of property on GDP growth, it's subtracted about two percentage points in 2025. And while the worst is probably behind us, they still have a one and a half percentage point drag next year. So in that sort of environment, we you know, we think China will hold up okay. You know, slower growth over time but probably still closer to 5% then to 4%.

Then going back to US stocks, I sort of joke that, you know, there's 70% of earnings out there that have yet to be captured by big tech companies, but actually kind of don't really think that's a joke in the sense that that does seem to be the trend. There are a handful of companies that are accruing a lot of value. When you think about the earnings growth that the big tech companies have, the realized earnings growth, and you gave the example about how, you know, the market sort of was correct five years ago that they would come to represent 30% of earnings. Is there any historical precedent for the largest companies in the world to be growing like this year after year? Because I used to think mature companies don't grow like small companies do. Is this sort of like a novel phenomenon? When you think about the history of markets, part of what's fun about markets is they're always changing. This seems to be one of those examples. You know, we did a study last year. We looked at 100 years of market concentration in the US. And at least over the last century, we didn't find anything that quite matches up to today. Well, what do you think would actually like put an end to that market dominance, I guess stronger antitrust laws or or what? Yeah, I keep coming back to earnings. And one way that earnings dominance could end of course, is regulatory policy. I think the the top of mind question for investors is whether this revolutionary shift resulting from AI technology is going to change where the earnings end up accruing. But I think almost certainly when one day we look back, if one day we look back and they were no longer as dominant from a from a market cap perspective, it's going to be because their earnings aren't as dominant either. You know, we started this conversation talking about the CPI number that came out and I would be curious to hear just how unusual this year has been in terms of tracking some of the data and dealing with, you know, things that you probably haven't had to deal with as an economist before, like tariffs on, you know, some tiny Pacific Island or something like that. I would echo what Ben, just say said it's this is what makes markets and economic forecasting fun that there's always something new. And of course, the extent of the tariff increases that we saw on and around Liberation Day is, if not unprecedented, then at least, we haven't seen that in many, many decades. So that's that that's a new set of challenges in terms of figuring out what the impacts are going to be. It's not as extreme as what we've seen at times in the prior 20 years or so, certainly compared with Covid. I mean, that's where you could effectively throw out a lot of the government data and have to look for other indicators, like cell phone locations to figure out what was going on. That if not that day, then at least that week. And, you know, not, not a month a month earlier. So that that's been a challenge the government shutdown, I would say, has been more challenging than past strategies, will actually have holes in the economic data that will probably be there for ever. And, you know, you look at some of the labor market numbers, we've had a consistent series for the U.S unemployment rate on a monthly basis since 1948, except for October 2025. And that's going to look pretty weird. That's kind of crazy. I don't think we've yet. What is your outlook for 2026 in terms of Fed policy? Where do you see this rate cut cycle going and how deep we still have, forecast that we've had for the last six months, which is, after the 75 basis points of insurance cuts in 2025 to more into 2026, that bring you down to what we think is roughly the neutral estimate, 3 to 3.25%. We're penciling that in for March and June at the moment. Haven't changed that. I would say there's a pretty sizable amount of uncertainty around that. It's certainly possible that if, you know, GDP growth does as well as we we think, and that actually gives a bit more of a lift to the labor market, that they would wait longer and push that perhaps into the second half. But I'm also pretty focused on January 9th when we get the next employment report, because if that shows another increase in the unemployment rate, then I think it might be hard not to cut at the January meeting. We don't have that in the forecast at the moment, but I think it's a very real possibility, something to look forward to after we come back. Yeah, holidays currently, I think according to work it's just a less than 20% chance of a cut in January. But it's and I know you don't expect one, but I guess it sounds like there's a condition in which that could jump. Yes, I think so.

jan and Ben, thank you so much for coming on Odd Lots And, I guess we'll have you back on next year, right? Yeah. Make it an annual tradition. Yeah. Check your forecasts against reality. So thanks. Thank you so much. Thank you very much. It was really great. Well, Joe, that's always fun I love that. I do think the point about, you know, whether or not we're in a bubble, the one thing that like, does give me some caution is this idea that, like, actually everyone's kind of worried about it at the moment and people are talking about the downside, potential downsides. But that said, I also think back to the internet bubble, the dotcom bubble. And I mean, people were so worried about it. They were writing books about a dotcom bubble right at the time. At the time, yeah. Before it actually burst. So I don't, you know, we've had bubbles before where people have been worried and they're still bubbles. Yeah. Merely observing that does not obviate the existence of one. That's right. A couple things. So I, I love that, Jan pushed back on this, very, almost consensus meme that AI expenditure has been a huge driver of GDP expansion this year. And when you talk about, I think, you know, I think it's a it's interesting to hear him push back so hard on that, given how much of what gets put into the ground comes out on the other side. Via imports. I also, you know, look, I'm, I love Ben's point about, you know, you say whatever you will about the big tech companies. They deliver monster earnings every year. And it's very interesting to hear how, like, over the last five years, you know, look at this crazy concentration. And then they catch up there to earnings. And it turns out the market was right again. Right. And it's also true as you pointed out, that some non-tech companies are seeing earnings growth too. So it's not even a market that's as dominated by big tech as it was just like two weeks ago. I'm sure that I have contributed in various times to the sort of meme that it's just a tech driven, you know, you're like, we say that, right? This tech driven rally in 2025 and obviously, look, the Nasdaq has outperformed the S&P 500 this year. So we know that like yes tech has outperformed. But you know financials have done very well. It is I I hadn't appreciated how consistently strong the earnings growth of the S&P for 93 had been over the last three years. I also think this idea of productivity keeping unemployment stuck at like 4.5% is an interesting one. People, I think, tend to think of higher productivity as a good thing. Yeah, obvious reasons. But, you know, there's so much political, nervousness at the moment about jobs and economic security. If we have a massive productivity boost that ends with people not having as many. Good job. Yeah. That'll be interesting. I still think there's a huge question mark, obviously, like what I ultimately means for the labor market. But this idea that, like, it could raise the frictional unemployment so not necessarily sustained change the number of people who have jobs, but the time it takes to find a job and various other things because it just so economy wide is like maybe that's a useful. I think that's a useful way to think about the question, at least in the short and medium term. Yeah. All right. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me @TracyAlloway and I'm Joe Weisenthal. You can follow me @thestalwart. Follow our producers Carmen Rodriguez @CarmenArmen Dash Bennett, @dashbot and Cale Brooks @CaleBrooks. And if you want more odd lots content then check out our daily newsletter. You can find that @bloomberg.com/oddlots and you can chat with fellow listeners 24-7 in our discord, discord.gg/oddlots. And if you enjoyed this video, then please leave us a comment or like or better yet, subscribe! Thanks for watching.