Goldman's Hatzius and Kostin on Markets and Macro in 2025
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Hello and welcome to another episode of the odd ds podcast. I'm geo wasn't though .

and i'm Tracy all way.

Tracy. It's my favorite time with, you know what?

I was going to say the exact same thing. I was going to make the exact same comment. It's an outlook .

season in twenty twenty five outlook season. And um our in boxes get flooded with various flavors of big picture outlooks, micro picture outlooks, fifteen things to watch for within the industrial world and trucking .

elements. Economic questions is all these things .

and these are some of my favorite ite cell side note to read every year, but they always make a thoughtful something to do around .

this time of year. Here's the big question. Do you go back and look at the twenty.

twenty three out? I never do people always in our industry joke. Let's go back. I N T happened on a serious.

Now I know the analysts who produce these outlooks like IT is their actual job to try to forecast yeah 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 with the level of the S M P. Five hundred is gonna be under those like very uncertain conditions.

Well, you know, emotion, the time stocks go up and the convey grows.

that would be your outlook is .

like stocks are probably anyway, we have much Better guests.

Yes, we have people who who actually .

do and are really, truly some of the best in the industry and 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 going to be speaking with Young hot as chief economist and ahead of global investment research at goldman. Sex and David cost, chief U.

S. Equity strategic golden sex. David yan, 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 started with you Young like, actually do accept the premise that is 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 that is a unusually tRicky time to be making a short term or medium term forecast?

I think IT is a difficult time just because there is 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. Whether inflation is going to continue to turn down x, any new shocks, we think yes.

Whether the fed will still deliver 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 will get into those. Yeah, but that just adds to the variability around the center forecast.

I have a lot of procedural questions. What 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.

There are, I guess, nearly a thousand people in the research department and go on a yang is the head of the research department, and within macro, probably a hundred people. And we are pretty coordinated every week, have a conversation about what's happening in the different regions around the world, economically and commodities in strategy and rates. So prety coordinated at .

the macro o level.

Do you ever disagree? We do. 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 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 more towards the coherent side than what I see you know, in many other research organizations, where is really more individuals than a team effort.

We're going to get IT into all of the actual details, but I kind of like asking some of these procedural questions. okay. So if you make an S D P. Five hundred forecast for the year twenty twenty five, you talk to clients and set up.

You know I can't imagine there that many people in the investment industry, maybe i'm wrong until me if i'm wrong, who's like David says, the S, P is going to x. So that's what we're we're going to buy. We're going to sell. How do you feel like what is your goal when you're talking to clients, when you're putting out a forecast for the S P five hundred and when you think about the value that you bring to clients from making these forecasts that tracing, I love getting in our in boxes this time a year. Like what are you hoping is the end fruit of that?

Well, there's a variety of customers or clients. So we think about and I would say framing the issues, I was probably the most important thing we do identifying investment strategies inside of the market is a big area focus. We think about segmenting the clients of common tax.

We have hetch funds, mutual funds, pension funds, insurance companies and of funds. Each of those constituencies are looking for something a little bit different. The mixed asset portfolio on the part of number of downs and pension funds, south wealth funds, they are quite interested in the index level because they think about the alternatives between equity and credit, private credit, public credit commodities, private equity sea.

And so those are issues for those type of clients. If you're thinking about and we talk to and interact on a daily basis with hedge funds and mutual funds, they are focused on often times investment strategies inside of the market, and those are some of the reasons. But in terms of your specifics on you think about the index level, that is something people think about broadly.

Do they put more risk on or do they take less risk? Is the market gna pay for excitement or is going to pay for boredom? 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.

So this time last year, I think we were still maybe not as much as earlier, but we are still kind of in recession expectation mode. And you know that obviously went on for like two years with the yellow curve inversion and the surveys showing that the vibes were down and everyone worried that consumer spending would eventually drop off 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 cap from what I remember when we spoke to you. What was that, that you saw that kind of played out effectively in twenty twenty four.

I'd say the key to be a 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 analyses that emerged really in two thousand and twenty twenty one. And climbing out of a hole that was really a supply side hit is very different from freezing down inflation that has emerged because of an overheating.

If you have an overheated economy and the level of activity just too high and the level of demand is too high, 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 are climbing out of a hole on the supply side and supply chains go back to Normal, labor force participation goes back to Normal, we get an additional boost to supply from immigrants coming into the workforce will get into 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.

And that's basically what we've been seeing over the the last couple of years. So for me, that's the most important difference. I think there was too much extra pulag 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 are much more demand driven cycles rather than supply driven cycles.

So were recording this, by the way, on november twenty six, the S N. P. As of the moment, i'm saying this is that six thousand and four point seven, two extraordinary gains, nearly twenty six percent gains from the start of the year.

I guess i'm not surprised, David, that given the sort of easy mode disinflation that we had in twenty twenty four that we've had such a great year for the stock market, you have a call of sixty five hundred for your year in twenty twenty five target, which is about all over seven point seven percent from where we are. How come how much? So it's give me its gains. And you know, I think a lot of people would .

be happy with seven.

How do you I 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 calender twenty twenty six.

We ve got a couple of years of continued expansion in earnings. How do we get the earnings while we can think about sales growing roughly five percent, most companies over time grow their sales and revenues by roughly namal GDP. So call them around five percent.

Little bit of margin expansion, and that's going to lead to the growth rate now growth rate of seven percent little higher than that. You have some issues around health care in particular. We are not expecting the right off of so much impresses R N D get very, very specific about some things.

But our models would show around seven percent earnings growth for the coming year. And we are expecting that the multiple actually come down slightly. Currently, the market multiple les around twenty on nearly twenty three times forward earnings.

Market Prices consensus suppose to our earnings estimates, which to live up below consensus. And the idea of the multiple the company jode maybe twenty one and a half times is our model. So the bottom line, how do we get there? You're looking at eleven percent on this 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, multiple around twenty one and a half times, what is ultimately a twenty twenty estate supports six thousand. Five hundred is a target.

So you're talking about earnings expansion. All of us presumedly woke up to headlines this morning about .

trump imposing tariff songs.

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 cost would eventually feed into corporate earnings. I I guess, is that on your radar at all?

Well, certainly should be as far as china arabs are concerned. I mean, we do expect a significant increase in tariff s, and we're building in about a twenty percentage point increase in the average rate on U. S.

Imports from china. I think it's also pretty likely that will get some additional tabs outside of china worth thinking, auto tabs potentially on europe and mexico. And then of course, there were some announcements of threats of broader eros on both mexico and canada.

You will have to see whether that ultimately happens. There is a renegotiation of the U. S mexico accounted a 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 finalized. But clearly, tariff s 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 U.

S. Growth of outlook for twenty twenty five, where you know two and a half percent again, half a percent tage point are a little more above the current bloomer consensus. But where we're watching the time of situation closely, and i'm sure there is going to be many terms before all of become clear.

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Residents trading in the U. S. Markets to mom u finial.

s. Change Price and rates. See mu are to inflationary .

because I could see that was right. On the one hand, they throw sand into the girls, so to speak, of the global economy. And that is in a closely process, right?

There's a read, Justine eeta. On the other hand, I think new treasury secretary nominees got best and made some quotes. They don't have to be pursued inflationary because, yes, imports may cost more, but then no sort of a kind instrument, sort of a monitor framework.

There's less money in households and then that reduces demand elsewhere and that brings Price lower. And so the all Price level or the rate of inflation doesn't change as much as an economist, someone else you are a terrorist inflationary. How do you think through that question?

I would say terrorists raise Prices, and we can see that very clearly from when they have been applied, including some of the china arms in the first trumpet administration, they fed through the Prices in the categories, the relatively few categories where they .

were applied in the chart in your out really good.

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 are 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 Price level at one time increase in inflation, but the inflation then drops out to eight 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 and inflation expectations, wages, ongoing escalation. If there is a in tit for tat trade war that keeps going, obviously, that would also have a longer tale. But initially, IT is a Price level impact. 嗯。

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 o percent off the back, presumably of those terror headlines. We have like a drop in asia stocks overnight, but U.

S. Stocks recovered pretty quickly. What is IT that investors see here?

Well, the biggest discussion point that i'm in having with but fully maters, has to do with the expectation that small business confidence is like to 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 two thousand and sixteen, really two thousand and seventeen.

There 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 and I trusted environment, that there is a idea of small businesses investing. And that optimism is therefore, I could have benefit a lot of companies whose customers are small and medium size businesses.

And that's one of investment strategies we have for the current year. We work with the individual analysts at golden, and we identified a group of stocks where more than fifty percent of their revenues are coming from small and medium size businesses. And so there is investment opportunities that we look at on the back of the expectation of more robust economic or more positive business environment.

And again, it's about the expectations is the perception of what is like to happen. And so respect to your question, Tracy, that's the topic. Is that the necessary the topic two day nessy? But that broadly in the last couple of weeks has been the central topic right now. The the last until Y B survey was around the thirteen th percent time for story. So you know quite low and the expectation of many as it's gonna arch in the coming months.

you mention the regulatory environment, one of your other themes for twenty twenty five. And this has come up a lot as expectations of more liberal and in a regulatory environment, more deals being relighted. I think we can understand that you also are still bullish on the really big mega cap stocks.

And you said something in your twenty, twenty five outlook. But I kind of take issue with you said like the primary question for mutual fund managers over the last two years is whether they got the big mega cap 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 everything else.

You're still bullsh 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 to one drop s out? What would have to change for these handful of stocks to not be the big winners of the market going forward?

So to the driver of these stocks over the past decade has been superior earnings growth, sales growth. Superior is growth in terms of the comparison with the rest of the market. And so that has been a terrific investment ratee for for a long time.

The largest companies really driving the index. Well, our analysis would suggest that most of the market Green largest stocks are trading around fair value right now. And IT is earnings growth in the coming year that's likely to drive the performance the market.

Well, the superior earnings growth of these largest stocks is likely to diminish in opinion in the coming years. So let's puts of numbers around that this year. Counter twenty twenty four, the largest companies, the magnificent seven, as they are called, those companies had thirty three percent x expected.

While now expect is is the forth quarter. But let's use that as a full year number. We only growth s around thirty three percent, and that compares around three percent for the four hundred and ninety three remaining companies in the S M.

P. Five hundred. That thirty percentage points access growth rate. And the coming year the expectations views consensus for a moment is around eighteen percent versus two percent. That's a six percent tage point gap.

So from thirty percentage points, two six percent tage points and you look into twenty, twenty six, and that's going narrow yet further until around four percent tage points. So relative earnings growth is going to be the explanation, in our view, of a narrowing premium. So if he puts some numbers around that very specifically, you had sixty three percentage points of outperformance, excess return of the largest dox first of the market in twenty twenty three. It's running around twenty two percentage points this year in our forecasts, next year is probably around seven percent tage points. So the largest cap stocks like to continue up form in our view, but by a much, much smaller margin then has been last couple of years.

I want to go back to what David was saying about animal spirits and maybe bringing in and and my question is going to sound a very weird, but bear with me, do animal spirits actually matter for the economy? And the reason I asked 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, IT was like the worst economic period or in many, many years.

but the economy kept growing. Spending cut summer. 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, but even relative to the free pandemic period, where IT was already a mistake to extract one to one from service into activity, that that relationship has gotten even loser.

And I think you have to be particularly careful with service that ask, how are you feeling as opposed to what are you doing? If you take the somewhat more objective services 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 services, you do have to be pretty careful.

I mean, I agree that the small business service 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, you know, some lift up in terms of capex in an environment that is viewed as friendly from a regulatory perspective, where we will probably also get a bit of additional tax cuts. I mean, it's mostly about extending the two thousand and 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 think it's going to be a massive ve pick up. You know overall my views, the economy has been recovering at a generally Better than expected pace, and I think that's going to continue IT. We're looking at consensus service going into two thousand and five.

and that's large Price into the market is now trading around twenty three times forward earnings to historical very high multiple. And that is a reflective in an art interpretation of the backdrop that you described.

There's obviously a lot of policy uncertainty and will tell more about IT with the new trumpet administration and its visions and how seriously is going to a take terrifying and deportations and rebuilding american manufacturer 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 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. It's not guaranteed. There is still some lingering questions about the. Lation trajectory questions to both of you, which is a yon sort of like where do you see this sort of short term pushed poll in terms of the retrained ctr? And 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 on inflation? I think the underlying trends are looking quite favorable. And I based that not just on the actual Price number OK, but also on the rebalancing that we've seen in the labor markets.

And we're basically back to where we were in two thousand and nine in terms of the supply demand baLance in the labor market, if not a little bit loser. We've seen, for example, declines in the quitter rate and in some of the series of labor shortages to levels that are a little bit below where where they were in two thousand and nineteen. And we've seen declaration in wage growth.

All of that, to me, says that the disinflation process is on track. There is an upside risk, again, maybe more a Price level effect, but an opposite risk from the terrorist. But I think we're on a path back to around two percent by the end of next year, which then because of our Terry assumptions, becomes two point four percent in terms of our actual forecast.

But x that around two percent. And I think in that kind of environment, the feds going to say, you know four and and a half to four and three quarter percent. 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. Uh, a december cut is all forecast is certainly not a foregone conclusion, will get some important data before then. And then we have ongoing cuts as we go through next year, and we think ultimately will land in the little meat trees for the funds rate, which is a bit below what markets.

surprising? no. But I would remind you that if you go back a couple of months, markets to a Price for terminal head funds rate in the two point seven percent range. So that was clearly very low relative to, you know what certain ly, what we expected. Now I think the markets Price may be a little bit higher than as appropriate in our view.

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 make her? And we can think about U.

S. Companies that are selling abroad compared with U. S. Companies that are selling domestically to concern about terrace and uh what that might be for from a Price level point of view, the risk of retinal tiffs are certain ly there.

And so owning companies whose customer base is in the united states, well, of course, along the supply chain, they may have uh, increased the Prices. The idea of those types 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's cost, I think of the wage, not just the wages, salaries and bonuses and stockpile compensation and health care benefits, which, of course, in the U. S. Are borne by the corporate sector. And there are companies where that's quite low, relatively low labor intensive companies is compare with high labor costs companies. And think that's a area, again, we're looking for strategies, investment strategies around these different macropha that yan, as described in we talk about in our in our teams, couple sex.

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One thing i'm wondering, as we enter another trump administration, you know, join out in other journalists, we have a 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 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 ouse and I guess the 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?

Well, IT certainly changes once you have actual government policies that can be implemented during the transition. Of course, that's not the case. So in terms of changing our forecast, know the hurle now would be quite a bit higher than once. We actually were back in the second prompt ministration in drums of providing a comment on some of these announcements or terror threats. Yeah, there's a lot of demand for that.

And so we did write a comment on yesterday's announcements around the china mexico terms, but ultimately said some of this is very consistent with what we have been assuming, namely the china tariff and 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 trumpet administration on canada, mexico, which ultimately didn't materialize because after effectively just became U S M. C. A, but not with a huge number of changes.

Think about IT in terms of horizon arbitrary h. There is lots of Price noise that happens every day. And then there is investment themes that may be less connected with the administration, whether is down trump, ed abiden, what have you, the idea of artificial intelligence, A I that everyone talks about, well, that's really less affected by some of the government policies and maybe depending on the policies implemented, but the idea of more productivity growth or idea of more efficiency or the infrastructure without relating to AI, those are some of the themes that are probably independent of the administration. These are the things are having in the technology world. And that's a discussion point that I look at with portfolio agers who may have a investment rise and that maybe three to five years out, what's actually they own? How should they see their compared with maybe someone were focusing on the data day announcements of tarra fs, which may be implemented, may not be maybe that may be variable.

One thing I would just says that on tariff s, 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 pronounced month, which require congress to hash out, you know, every conciliation bill and alternate tax legislation. So IT is important to focus on the things when they are announce months that are effectively under the control of the White house.

The treasury secretary nominee has, according to reports, been pitching trump on this idea. Three, three trees improve 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 you see any meaningful opportunity for further pick up in train growth from more favorable regulatory environment?

So I think these are aspirational goals. They are 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 gonna closer to six percent. Probably maybe we can bring that down. Bringing you down to three percent would be certainly very desirable. I think we will ultimately need to bring you 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 that's going to be a process that's going to require an enormous amount of effort.

and they would take real political effort to cut IT to very to the .

various of spending, right? That's right. Because such a large chunk of government spending is basically entitlement programs, defense and that service that doesn't leave a lot of discretionary nondefense spending that maybe a little bit easier to cut than some of those other category.

You know fifteen percent also of total federal spending is nondefense directionally. So a relatively small share. And that then leaves the tax side.

And you know obviously, there is no desire to deliver a sizable tax cut, certainly not with this administration. So it's going to be very difficult on the world side. We're on the optimistic side of at least the economist consensus.

If you take the the federal reserve, the media longer term, GDP grow rate is one point eight percent were at two point one percent, you know, maybe that can be lifted somewhat. Getting to three again would be very difficult, especially given the demographics. If you have the labor force grow at only a pretty slow pace, not a lot of natural population growth because of low birthrates and probably much law immigration. So even if your productivity optimists, and I would say i'm on the more optimistic side, as far as productivity is concerned, getting to three will be difficult.

Lets talk about immigration because as you point IT out, you know, terf s are largely under the preview of the president. Maybe immigration is a little bit different.

What's been the impact of immigration on the economy from the past now 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 could have something you know around the edges or maybe nothing happens.

So it's been very important in boosting growth and nevertheless bringing down inflation or 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 the time of very serious labor supply on strains and in particular, very serious labor supply on strength at the bottom end of skilled distribution, two thousand and twenty one, twenty two in areas like bars and restaurants, you know, other other areas like that construction, having that large influx of of people has boosted growth and probably at the margin also helped to bring down inflation. At this has helped to bring down wage inflation in some of these areas to levels that are more sustainable. Now there is already a declaration in the immigrant in floor.

If you look at IT on a you know months on month kind of annual rate perspective, in late two thousand and twenty three, we were running above three million at an annual rate when 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. We'll see how large the deportations are ultimately going to be.

If you go back to, say, the obama administration, we are 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, that is up to the executive branch, is up to the president. But unlike the tariff, there are going to be a lot more logistical issues around deportations and moving immigration to much lower levels. So into negative territory than with terrace with terabits administrative vely relatively easy. So if i'm thinking about, you know supply the sort of growth negatives of tariff s on the one side and and then immigration on the other, and more worried about terrifying than I about immigration.

David, you mentioned, know you talk to lights and what are the dominant conversation? Scot person gets named treasury secretary nominee, maybe his three percent deficit to GDP a goal is very aspirational. Maybe some of his growth ambitions are aspirational.

But IT strikes me that like ultimately, he does not strike me as some sort of like major shakeup. We're going to totally rethink how the economy works. Guy is sort of has a traditional macro background. He was to have very good understanding when you talk to clients half or does that go, you know, in terms of thinking, being able to think long term and avoiding the noise of the data day headlines, the fact that sa bastion is likely going to be the treasury secretary, the fact that according to reports, that just the headlines, someone fairly mainstream, like Kevin has IT, is going to be running A C is this the kind of thing that just makes investors do? They get comfortable and they hear these headlines.

What are those chats like I would say that is a pretty good character zone of how perform matters. Are thinking about that right now based on his background number, people, myself included, known him for some fear time and as a part volume 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 i'd be up to the treasures secretary and other cabinet members to Carry out those policies. And that remains as the unindicted that some some uncertainty around what are those ultimately will be.

So one of the reasons we'd like to talk to you is because you go out and talk to other people, to your clients, portfolio managers, as you just mention. What are some of the more interesting questions that you are getting this year? And what's may be different to you know, this time in twenty twenty three?

Well, it's much more around policy and much less around the underlying path of the economy. I mean, I were again going through beyond the policies which we've discussed a little bit of the concern around higher inflation is certainly, drew, that the last couple of prints have been a little that higher we talked about earlier and 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 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, uh, our star to what extent has a risen relative to the endemic period? You know, our view is that IT probably never was quite as low as many people thought in two thousand and eight and two thousand and nineteen. We were never that sold on the secular stagnation story.

And IT might not be quite as high as many observers not think. I mean, we're is still in the law amid three and nominal terms low amid ones in real drums. But there's certainly a lot of discussion around that.

There is a lot of discussion around europe and the impact potentially of higher tariff s or maybe just the trade policy uncertainty, you know in advance of any actual terf ff increases on europe. What is that doing to an economy that's already pretty, pretty soft? And it's an area where we are actually well below constant sus.

We have a zero point eight percent forecast for euro area growth in two thousand and twenty five, which is four or five tens below the bloomberg consensus or the or the E C. B. And and and a lot of that is the wrong trade policy uncertainty, which seems to have a particularly negative impact in europe. So definitely another big topic of conversation video and take a step.

The same question.

sure variety thinks that put fully managers are focused on right now. And the first is of the u reference earlier too, which is the idea of the largest talks to the market are now representing more than a third of the S M P five hundred a equity capitalization.

So the question is how does one position and that you look at the mutual fund community, for example, seventy five percent of mutual funds are lagging their benchmark, not a criticism just of the data so far. And those companies, what's been consistent about those funds has been there, been under weight 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, seek alpha in the rest of the market is probably the Better strategy.

That number one, that was something that the twenty five percent of the mutual funds that our performing have tended to attended to do. That's number one. Number two, relating to observation is a perpetual question of, well, what about these global markets? A europe, asia, china, japan? Is this the opportunity to output m, the U S, the relevant valuation meat rics are really, really I catching, which is that the multiple forward p, multiple for the A, U. S.

Actually markets now roughly twenty three times and is about thirteen times for europe and japan and in china is even more than that. And so that question is, well, for decades, stop in the us. Is this the time? Is the valuation gap so significant that the opportunity said at the lower end of the valuation scale? Does that represent good opportunity? Lets say those are two major questions.

Are the third question that is highly debated is on A I. And the idea is of the huge capital investments that some of the height scales and other companies making these investments, what will the R O I return on investment b of the ai that they're making. And so that is A A question that a your bed and float over the course of the year.

Lot of the companies who are involved in the infrastructure built out have done particularly well. Those P E multiples of ve expanded and the share Prices have done Better than the growth rate in uh and underlying growth earnings on. And so our focus has been on companies in the the third phase is we think about the third phase of A I infrastructure built out.

First phase is in the video, so kind of unique story. And the second phase is the infrastructure and the third phase is the companies we think of whose revenues will be in hands by A I. A lot of the software companies and their Price return this year have basically matched the earnings trowth trajectory. And so the opportunity does exist there in some cases, for a multiple expansion that would be an area focus. So are some of the topics are debated with my managers right now.

Tracy, first of all, IT feels like international. Our performance .

is always one year away.

I know we're always waiting for em or for japan day day. So none to reference to another show's performance, but I always love looking at the B A, L hedged fun survey. And one of things they ask is watch 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 would have to be that the big source of alpha just have to ride the most crowded trade. Anyway, i'm glad I don't have that job. I have to just do the same trade as everyone .

else to outperform. glad. Well, actually, speaking of jobs, john, I came up with a great idea based on A I, which is by europe as a beneficiary of productivity enhancing technology, because their productivity is really low. With that work, you guys should see the expression on David's face, right?

He looks like he didn't .

get into a lemon. No one likes our contrarian idea.

yeah. IT could work, I think maybe used to think about IT in terms of m na activity, the idea of the companies in the united states much higher profit margins. And the idea I can state your hypothesis is perhaps their margin expansion would be potentially enhanced by the adoption of the I.

That one question is on the source of the potential margin enhancement is that labor driven and they have more efficiency, therefore fewer jobs. Is that so of the fog onal to what objective are seem like to european governments. And so I think there's some debate around that could IT be a trade isn't .

going to set up that index?

yes. Do you have a man? To my mind, there's potentially two ways that could go on. One is just the macro impact of all the capital spending doesn't move the dial at on any sort of categories ies that are important on the top level. But I guess more importantly, you looking a few years out, when you think about productivity and do you think about labor growth, are we at this stage yet where you can make interesting predictions about the impact of this stuff?

So on the neutral 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 a drum growth, it's very difficult to get anything more than you know a very small sort of ten of a person point 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 were actually pretty optimistic when IT comes to out of late two thousand twenty early two thousand and thirties. And a little over a year ago, we raised our long term potential growth estimate for the us. By four tens of a percent tage point.

We worked one point eight percent for the sort of years around two thousand and thirty or not, two point two percent, which is no, that's a pretty sizable boost. And it's really driven by the fact that A I can replace a lot of the tasks, not necessarily the jobs, but the tasks within certain jobs that are being done, you know at sort of law and and middle levels of White collar work at the at the moment. And that is ultimately going to be productive, ity and enhancing.

Of course, IT does mean some labor market behavior, although we would emphasize that the labour market impact is going to be occur over a period of time and there will also be new jobs that will be created. So history, ally, 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 unemployment periods rather than high unemployment periods. Even though at the individual job level or industry level, you might see quite a lot of in our job destruction. But overall, we're optimistic over the longer term. But in the short term is probably is still going to be more limited.

I can't wait to be a prompt engineer .

generating A I written podcasts.

That's that's our future. David. I just have one more question, which is whose idea was IT to write the equity outlook through the lens of lessons learned from the art of the deal?

Well, last year we reference Taylor swift and we said the subside. The report was all you need do is stay invested and that was the strategy for calendar twins, one for, uh, and a reference to your first question of the podcast, U. S.

Does anyone look back and see what we wrote here? We only do and think about as a report card, what was the impetus for the art of the deal and why we titled that, or self titled that for twenty twenty five? I look, part of IT is the M.

A. Environment and the I D that forecast is for a twenty five percent increase in M A in counter year twenty twenty five. Uh, that's part driven by our forecasts of the use of cash of corporate america.

S P five hundred complaints will spend about four trillion dollars of cash next year. And uh a good personal that we have a twenty percent gain or increase in the cash devoted to an activity. So that was one of the impetus is that thought about the art of deal and then IT is uh is remarkable.

And for all the listeners of the outlaws podcast, I would would suggest you go back and read the report or read a book. The art of the deal was written, or coasts written perhaps by downtown, thirty seven years ago. And many of the character says that the transactions in his whole thought process was pretty interesting. So we want back visited that my first edition coffee when I was way back in the day, and that was the impetus for why we thought about that is a organizing structure for our outlook port.

You have a first edition.

Are you used to seven? Wow, a wow.

I'm going to have to go read. I should do. Yeah.

I haven't read IT either. Isn't there c qual as well?

There's many.

many options we did reference.

There's the art of the come back that he wrote ten years later in nineteen ninety seven, and a whole sequence of of, of books cyd read.

oh my gosh.

Okay, David and Young, thank you so much for coming on. I like this is a true treat to have you both. And I don't know. Let's make an annual tradition.

I'll do IT again next year. Thank you.

thanks. Thank you so much. Thank you.

Tracy, that was a real treat. That was a .

really fun having gave in yang on together. I know I wonder .

if theyve ever like done an external APP.

I'm sure they are broken to clients.

Yeah, but that was good. You know, just one random thing that stuck out from me that I hadn't realized like I knew or I had a good idea in my mind that the recent big tech company is have done to well because they're earnings. Is jogger not right? There is the other things that go on flows but like they make so much money and they're so large and yet they still put up like thirty percent numbers. But I hadn't not realized like a quite how wide that gap has been in over the last two years between their earnings growth and everyone. The other four hundred and ninety three stocks b that the consensus is for a major shrinking in that gap going into twenty twenty five.

Yeah, that's right. Well, the other thing I was thinking was the different tie between different uh, trump policy as well and like maybe dividing them up by how much is under the preview of the president verses like what things need congressional approve ment and where there are those sort of political limits and guide posts in place. I guess like that seems a reasonable way to view some of these risks. I still think there's a lot of stuff up in the air.

Yeah and you know IT seems to me and we sort of joke in the beginning that like the GDP user grows like two and half three percent and stocks usually go and that's true. And IT seems like even with the sort of some of antha or heterodox economic views of the incoming trop administration, the impacts right now expected to be marginal right to even tariff s aren't expected if they go through as expected, aren't expected.

Every radical change to, say, the inflation projector, whatever. And IT, you know, IT seems like what people are anxious about, what your talking about, what maybe some clients are try about is the idea like genuine policy uncertainty. And that means not a debate about ten percent versus twenty percent time of which is, you know, you shave some percent of GDP, you shave some mornings often life goes on verses like the seeming potential for some genuinely radical rethink of how we do business .

with the rest of the world. No, totally.

And I think that's a IT m possible.

Well, in the meantime, sign up for our uh twenty twenty five investment outlook titled GDP Normally increases two to three percent. Stocks Normally go up.

This newly on monday .

will leave IT there. Leave there. This has been another episode of the all thoughts podcast. I am Tracy away. You can follow me at Tracy away.

Why though? You can follow me at the stalwart, follow our producers, common rud rides at common arman dash o. Bennet, a dash pot and kill Brooks at kw.

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