Animal Spirits Podcast: "Why Retail is Outperforming" (EP. 432)

Date: October 1, 2025
Hosts: Michael Batnick and Ben Carlson

Main Theme

This episode centers on the surprising outperformance of retail stocks and the broader U.S. market dynamics in late 2025, exploring the drivers behind robust retail earnings, the "AI boom" powering the market, changing investor behaviors, and housing market trends. Michael and Ben reflect on macroeconomic data, the nature of market bubbles (especially in AI and quantum computing), inequality, and the role retail investors now play in shaping the financial landscape.

Key Discussion Points & Insights

1. Market Leadership & The "AI Boom"

• AI as Market Driver: The hosts repeatedly stress that the artificial intelligence (AI) sector is powering overall market returns, with "AI-related stocks accounting for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since November 2022" ([07:42]).
  • Ben: "It wouldn't have mattered what Biden did or what Trump did. This AI boom is the only thing that has mattered for the past... since November of 2022" ([06:16]).
  • Michael: "'The reason that we've been in such a strong bull market is because earnings have been so strong. Yeah, that's it. Right? I think that's all you need to know.'" ([07:28])
• Is AI a Bubble?
  • Ben posits: "The excess spending levels and the actions taken by the tech companies are a bubble. I don't know how you could define it any other way based on market history" ([08:08]).
  • Michael cautions: "To me, a bubble is like, there's no world in which this doesn't burst... But with like Nvidia... it's trading at, I don't know...35 times forward earnings...I hesitate to say that this is a bubble because it's being supported by fundamentals" ([09:27], [13:02]).
  • The hosts debate whether the "bubble" thesis is either too "obvious" or still has room to play out similar to past cycles (e.g. top heavy markets in the '50s/'60s versus the dot-com bust).

2. Fundamentals vs. Speculation

• Staggering Earnings Growth: S&P 500 and especially MAG7 stocks are backed by real earnings power, unlike previous speculative bubbles ([13:02], [13:40]).
• Leverage: Discussion about rising corporate debt, especially among tech giants - Oracle, Apple ([14:03]), and strong demand for corporate bonds ([14:53]).
• Speculation in Quantum Stocks:
  • Michael: "Bespoke tweeted the four biggest speculative quantum stocks...came into today up an average of 2,750% year over year... They have a combined market cap of 46 billion. That's 371 times revenue for the group. Now this, to me feels like a bubble" ([20:02]).
  • Ben: "Just being up 3,000% in a year. Yeah, that seems like a lot" ([20:48]).

3. Retail & Institutional Flows

• Retail Investors Are (Still) Cautious: Despite the bull market, retail, institutional, and hedge fund investors are net sellers ([21:37]).
• Rise of ETF Speculation: Number of leveraged ETFs and assets under management have doubled/tripled in past few years ([21:50]).
  • Ben: "Howard Lindsay calls this...the degenerate economy now, people who have taken the sports betting, event betting thing to the stock market" ([22:09]).
• Behavioral Change:
  • Investors today are far more sophisticated and cost-sensitive than in prior decades, with index funds and ETFs dominating inflows ([23:59]).
  • Ben: "In today's investing landscape... it seems incredible that investors used to be told index funds are for losers." ([23:59])
  • Michael: "This is the era of retail investors' dominance and it's not gonna last forever, but so long as their favorite names keep going up, party well." ([24:10])

4. Retail Outperformance & Company Examples

• Walmart & Costco Valuations: Have seen dramatic multiple expansion (P/Es up to 50-60x), raising questions about shifting fundamentals or investor narratives ([15:16]).
• Target’s Divergence: Target lags far behind both in stock and execution, noted as possibly more about "management execution" than macro conditions ([17:13]).
• Market Breadth: US market is strong, but other countries (emerging markets) are outperforming this year, contrary to AI bubble expectations ([18:43]).

5. Wealth, Inequality & Housing

• Stock Ownership & Sentiment: The top 10% own 87% of stocks; rising asset prices benefit the wealthy while stagnant housing markets affect the broader middle class ([29:10]).
• Wealth Inequality: The system perpetuates greater gains for the already-wealthy; this is a "feature, not a bug" ([30:24]):
  • Ben: "The fact that it's so much more important now just means the rich will continue to get richer because they have a greater share of the stock market." ([31:17])
• First-time Homebuyers & Loans: A surprising decrease in the share of homebuyers receiving family help with down payments, reflecting that buyers now are those who can truly afford it ([41:09]).
• Adjustable Rate Mortgages: Explanation of why wealthy buyers (and banks) favor ARMs ([32:43]).

6. "Retail Revolution" Reflection

• Robinhood’s Legacy: While there was criticism of Robinhood "gamifying" trading, the hosts agree that increased market participation is a net positive ("more people in the market, the more the better" [30:59]).
• Investing for "Average Returns": The most popular ETFs are low-cost, broadly diversified products—Vanguard’s VOO ETF leads all inflows, suggesting most retail money is boring (but effective) ([24:43]).

7. Broader Economic & International Context

• U.S. Consumers & Resilience: Latest GDP prints and consumer spending figures continue to surprise to the upside ([27:05]).
• International Wealth Comparison: Americans are far wealthier in disposable income than counterparts in the UK (and other developed countries), even after adjusting for healthcare and student loans ([45:51]).
• Private Equity Take: Industry faces slow distributions but is cushioned by dry powder; unlikely to be a "crisis," more a story of lower returns ([43:21], [44:56]).

Notable Quotes & Memorable Moments

• On Bubbles and AI:
  Ben: “The excess spending levels and the actions taken by the tech companies are a bubble. I don't know how you could define it any other way based on market history… But if so, let's say this is a bubble and I'm right. The fact that the companies who are doing it are having such high fundamental earnings growth, I don't… It's almost like, okay, well, it makes sense.” ([08:08])

• On Wealth Inequality:
  Ben: “The fact that it's so much more important now just means the rich will continue to get richer because they have a greater share of the stock market. We're literally never going to solve wealth inequality. Let's be honest with ourselves.” ([31:17])

• On The Index Fund Revolution:
  Ben: "In today's investing landscape where you can own the entire stock market for 3 basis points in total annual costs, it seems incredible that investors used to be told index funds are for losers." ([23:59])

• On Recent Housing Transactions:
  Michael: "Nobody actually makes money on a house when you say, oh, I bought it for...125 and they sold it for 800. Okay, well how much did they actually pay? Because it's not the sticker price, right?" ([39:40])

• On U.S. Wealth Compared Abroad:
  Ben: "Four in 10 U.S. households had leftover earnings after tax of at least £70,000. In the UK, just 10% of households have that much… The average earner in the poorest state in America, which is Mississippi, is now substantially better off than their British counterpart. It's wild." ([45:53], [46:39])

Timestamps of Important Segments

• AI Boom, Market Fundamentals: [06:16] – [09:59]
• Valuations & Bubble Debate: [09:59] – [13:40]
• Corporate Leverage/Bond Issuance: [14:03] – [15:54]
• Retail Outperformance, Walmart/Costco vs Target: [15:54] – [17:44]
• Market Breadth & Emerging Markets: [18:26] – [19:00]
• Quantum Stocks Speculation: [20:02] – [20:53]
• Investor Flows, ETF Mania, Retail Behavior: [21:37] – [24:43]
• Stock/Housing Wealth and Sentiment: [29:10] – [31:31]
• Homebuying Trends and Mortgages: [32:43] – [41:26]
• Private Equity Outlook: [43:01] – [44:56]
• U.S. vs UK Wealth Comparison: [45:09] – [46:53]
• Personal Stories, Humor, and Travel Chat: [33:29] – [35:53], [47:02] – [48:35]
• Podcast Announcements & Recommendations: [48:35] – [52:45]

Tone and Character

Conversational, candid, and occasionally self-deprecating, Michael and Ben weave in anecdotes and humor alongside market analysis. They question mainstream narratives, emphasize nuance, and balance optimism and skepticism—expressing humility in what can and can't be "known" in markets. Episodes like this provide both actionable insights for investors and a sense of camaraderie for listeners navigating the ever-shifting investing landscape.

Conclusion

This episode dissects why retail is outperforming, linking the conversation to seismic macro trends, bubbles, and the specifics of today’s market leadership. Ultimately, Michael and Ben urge listeners to maintain perspective—questioning easy narratives, acknowledging the era of retail investor strength, and reminding all that “the markets are never that easy.”