Animal Spirits Podcast – Episode 444: "The Biggest Risk in 2026"

Date: December 24, 2025
Hosts: Michael Batnick & Ben Carlson
Podcast: Animal Spirits by The Compound

Episode Overview

In this end-of-year episode, Michael and Ben reflect on the wild ride that was 2025 in markets and investing, and look ahead to the "biggest risks" facing investors in 2026. They explore survey data about what market participants fear most, discuss the surging (and sometimes paradoxical) optimism around AI, dig into trends in stock valuations, ETF inflows, and the fate of different market segments like mid and small caps. The conversation swings from serious to personal, touching on charitable giving, financial nihilism among Gen Z, various market risks, the role of cash and wage growth, and even ends with pop culture, movies, and some touching personal stories.

Key Discussion Points & Insights

1. How 2025 Looked in Hindsight

• Despite drama, another "normal" year:

  • 2025 felt bizarre with high volatility, but zooming out, the annual return and drawdowns looked similar to many recent years.
    • Michael: "We had a 19% drawdown. We have a 17% return. Looks pretty much in line with every other year." [04:09]

• Market events during holidays:

  • Holidays rarely matter in markets, except for rare events like the "Mnuchin bottom" of Christmas Eve/Boxing Day 2018.

2. AI’s Impact & The “Biggest Risk” in 2026

• Fears about tech and AI a dominant theme:
  • Deutsche Bank survey: 57% picked "tech valuations plunge, AI enthusiasm wanes" as the biggest threat to 2026's market stability.
  • Michael pushes back on fears: "If everybody's worried about it, it probably won't happen." [06:57]
  • Ben: "Usually the big risk is something that we don’t see coming." [07:24]
• Oracle drawdown vs. AI boom:
  • Discussion of how Oracle's stock reacted worse to the OpenAI partnership instability than to the 2008 financial crisis, sparking debate over whether AI is still in a bubble or if that's already deflated.

3. Market Structure: Concentration, Drawdowns, and Valuations

• S&P 500 concentration:

  • Debate on whether the S&P’s top 10 stocks will reach 50% of the index, but both doubt that will occur imminently. [08:21]

• Drawdown context:

  • A 30% crash from here would merely erase 2025 gains, returning markets to January 2024 levels.
    • Ben: "If we had a 30% crash... it would bring us back to January 2024. And it doesn't seem to me like people were that unhappy in 2024." [09:20]

• Mid caps, small caps, and valuation gaps:

  • Bank of America data: US midcaps at lowest price/earnings ratio relative to S&P 500 in decades.
  • Michael: "There needs to be a catalyst, like people souring on the AI trade even further." [10:57]
  • Ben: "Don’t you think the catalyst is lower rates though? ...This seems almost too obvious to me." [11:01]

4. Outperformance & Market Internals

• Stock doubling trends:
  • Michael quizzes Ben: More S&P 500 stocks doubled in 2025 (13) than any year since 2013. Surprisingly, only three doubled in 2017’s steady bull market, compared to 12 in the manic 2021. [11:50]

5. Charitable Giving & Billionaire Philanthropy

• Public giving and social pressure:
  • Michael reflects on the pros and cons of public charitable donations and FOMO in philanthropy.
• Movement in billionaire giving:
  • Michael and Ben highlight Ray Dalio’s $75 million gift seeding educational investment accounts for Connecticut children, echoing Buffett’s philanthropy moves.
    • Ben: "Even if people go, oh, $250 per kid, what is that going to do? So what? It's something. It's better than nothing." [16:08]

6. Stocks vs. Real Estate & Cash Hoarding

• More household wealth in stocks than real estate:
  • Has historic precedent but the hosts wonder if this gap will only widen as property prices lag and equity investing becomes more accessible.
• Record ETF inflows & cash balances:
  • Nearly $1 trillion poured into equity-only ETFs in 2025.
  • Households are holding cash at near-record levels as a percent of assets, even within a long bull market.
    • Ben: "In a bull market, would you have assumed that we'd have record amounts of cash? ...This can't be true. This is crazy." [24:21]

7. Small Cap Resurgence

• Small cap rally since April:
  • Russell 2000 up 46% since April 8th, 2025, yet with little attention or inflows.
    • Ben: "Small caps have been on fire since April... and no one cares." [20:22, 20:36]

8. Financial Nihilism & Gen Z Investing Behavior

• Gambling, hopelessness, and risk-taking:
  • The hosts discuss Kyla Scanlon’s piece on Gen Z "financial nihilism," where easy access enables risk-taking and gambling, but much boils down to lowered barriers rather than true nihilism alone.
  • Ben: "It's easier to invest in the stock market now. Good thing. It's easier to gamble, probably bad thing." [34:54]

9. Trust in Economic Numbers & “Most Hated Expansion”

• Disbelief in economic data:

  • The hosts lament that a robust 4.3% GDP growth in Q3 is met with disbelief, and many don’t trust official inflation numbers.
    • Ben: "How many people would believe you if you said, yeah, the economy grew at 4.3% real in the third quarter?... Most people probably tell you it shrunk." [25:57]

• Wages vs. inflation:

  • Wages outpacing inflation for over a year, countering some of the gloom.

10. AI as Deflationary Force

• Debate on whether concerns about runaway inflation are overblown, given the powerful disinflationary effect of technology and productivity, particularly through AI.
  • Ben: “In 10 years we're going to go like, really? You thought inflation was going to stay high when the most deflationary technology in history was being adopted?” [42:57]

11. Financial Products & Market Trends

• Explosive growth in exotic ETFs:
  • 750 new ETFs launched, half involving single stocks, derivatives, or digital assets—driven by investor appetite for novelty and leverage. [22:24]
• Prediction markets, sports betting, and arbitrage:
  • Michael delves into "recreational prediction markets," betting against unlikely events for outsized but slow returns:
    • Michael: “So, for example, on Poly Market... betting that the Seahawks won't win the Super bowl... is only 86 cents. I feel like that should be 97 cents, 98 cents. The Seahawks aren't winning the super bowl.” [29:36–30:36]

12. Private, Alternative, & Real Estate Markets

• Liquidity issues in alternative funds:
  • Discussion of the Blue Rock private real estate fund, locked redemptions, forced conversions, and deep discounts upon listing.
  • Hosts warn that as more capital enters alternatives, these issues may be more common, requiring changes in fund structure.
    • Ben: “The Wealth Channel is going to push back against these structures when it happens.” [51:49]
    • Michael: "Advisors definitely should know better. I mean, come on." [52:14]

Notable Quotes and Memorable Moments

"If you zoom out and you just look at the annual return for the year and you look at the maximum drawdown... this year we had a 19% drawdown. We have a 17% return. Looks pretty much in line with every other year."
— Michael Batnick [04:09]

"Usually the big risk is something that we don’t see coming."
— Ben Carlson [07:24]

"A 30% crash from here for the US stock market... would bring us back to January 2024. And it doesn't seem to me like people were that unhappy in 2024."
— Ben Carlson [09:20]

"If you’re an equity investor, you gotta be able to live with [a 30% decline]."
— Michael Batnick [09:59]

"This is the most hated economic expansion ever. It's not a close second."
— Ben Carlson [25:57]

"In 10 years we're going to go like, really? You thought inflation was going to stay high when the most deflationary technology in history was being adopted?"
— Ben Carlson [42:57]

"People are going to blow themselves up doing this stuff. The volatility is crazy. You're putting three times leverage on a single stock. And guess what? This is what people want and the companies are going to give it to them."
— Ben Carlson [23:14]

"It is an event. It is spectacular. There's nothing like it. If he stops making them, I'd be perfectly thrilled. I definitely don't need to see another one."
— Michael Batnick (on Avatar movies) [61:50]

"I feel like my personal VIX was at an all-time high this year. That meant higher highs and lower lows... but that kind of stuff—those messages from listeners—really helped."
— Ben Carlson (on personal grief and support) [56:03–58:24]

Timestamps for Key Segments

• 2025 Market Recap and "Weird" Year: 03:41–04:36
• AI Enthusiasm & Market Risk Survey: 06:25–07:57
• Concentration in S&P 500: 08:21–09:00
• Drawdown Context and Investors’ Emotional Resilience: 09:27–10:11
• Valuation Gaps: Mid/Small Caps vs. S&P: 10:57–11:27
• Charitable Giving and Billionaires’ Matching Gifts: 13:08–16:18
• Stock Market vs. Real Estate Wealth: 17:09–18:06
• Household Cash as “Dry Powder”: 24:21–25:00
• Disbelief in Economic Growth & Most-Hated Expansion: 25:57–27:18
• Financial Nihilism & Gambling Apps: 32:54–34:54, 45:18–46:39
• Prediction Markets and Sports Betting: 29:22–31:00
• Private Real Estate Fund Liquidity Crisis (Blue Rock): 48:36–51:49
• Wages vs Inflation: 40:45–41:46
• AI Deflationary Bias: 41:48–42:57
• Recommendation/Pop Culture Segment (Avatar, Cameron Crow memoir): 60:10–63:48
• Closing Reflection/Personal Grief and Listener Support: 56:03–58:31

Final Thoughts & Tone

The hosts blend data-driven insight, historical perspective, and personal anecdotes, offering both levity and gravity. Their banter—often self-deprecating, sometimes sentimental—carries across market analysis, personal finance advice, and cultural commentary. This episode is an encapsulation of their approach: skeptical of hype and groupthink, comfortable airing doubts, and always rooting for investors to take a long-term, rational, and humane approach.

Contact: animalspreads@thecompoundnews.com
Full disclosures: https://ritholtzwealth.com/podcast-youtube-disclosures/