Odd Lots Podcast Episode Summary: "Goldman's Hatzius and Kostin on Markets and Macro in 2025"

Release Date: December 2, 2024

In this engaging episode of Bloomberg’s "Odd Lots" podcast, hosts Joe Weisenthal and Tracy Alloway delve deep into the economic and market outlook for 2025 with two esteemed Goldman Sachs strategists, Jan Hatzius, Chief Economist and Head of Global Investment Research, and David Kostin, Chief U.S. Equity Strategist. The conversation navigates through complex terrains of macroeconomic forecasts, policy uncertainties under the incoming Trump administration, the evolving stock market dynamics, and the transformative impact of artificial intelligence (AI).

1. Setting the Stage: The Challenge of Forecasting in Uncertain Times

Joe Weisenthal ([03:45]) initiates the discussion by acknowledging the heightened uncertainty in the current policy environment, questioning whether it's an unusually tricky period for making short to medium-term forecasts.

Jan Hatzius ([03:45]) concurs, highlighting uncertainties surrounding consumer spending, inflation trends, and potential Federal Reserve (Fed) rate cuts. She emphasizes that these variables introduce significant variability into central forecasts.

Tracy Alloway ([04:24]) probes into the coordination between Goldman’s economists, questioning if Hatzius and Kostin align their outlooks before presenting them to clients.

David Kostin ([04:39]) explains that with nearly a thousand people in Goldman’s research department, coordination is essential. Weekly discussions ensure a coherent macroeconomic perspective, though individual views may differ, striving for a balanced team consensus.

2. The 2025 Economic Forecast: GDP Growth and Stock Market Projections

Joe Weisenthal ([05:55]) shifts focus to the core of the episode: the 2025 outlook. He introduces the ambitious forecast where the S&P 500 is projected to reach 6,500, marking a nearly 26% gain since the start of the year and a 7.7% increase from current levels.

David Kostin ([06:37]) elaborates on this forecast, attributing it to robust earnings growth—expected at 11% for the coming year—and a slight reduction in price-to-earnings (P/E) multiples from 23 to approximately 21.5. He explains that sustained earnings expansion, driven by sales growth and margin improvements, underpins the optimistic market projection.

Tracy Alloway ([07:55]) references past recession expectations, noting that the anticipated recession for 2024 hasn't materialized. Jan Hatzius ([08:41]) attributes this resilience to the unique business cycle recovery post-pandemic, contrasting it with traditional demand-driven cycles that typically require economic contractions to curb inflation.

3. Tariffs and Trade Policy: Navigating New Challenges

The conversation delves into recent policy shifts, specifically tariffs introduced by the Trump administration.

Joe Weisenthal ([12:38]) brings up the recent imposition of tariffs, questioning their inflationary impact.

Jan Hatzius ([13:05]) addresses this by affirming that tariffs do raise prices, citing historical evidence from previous administrations. However, she posits that such price increases are often one-time effects unless accompanied by broader inflationary pressures or retaliatory trade wars.

The hosts and guests discuss the potential ramifications of these tariffs on global supply chains and the U.S. economy, with Jan Hatzius ([13:05]) noting that while current tariff impacts are integrated into their positive growth outlook, prolonged or additional tariffs could pose significant risks.

4. Inflation Trajectory and Federal Reserve Policies

Tracy Alloway ([22:55]) raises a thought-provoking question about the relevance of "animal spirits" in economic activity, given the disconnect between low consumer sentiment and ongoing economic growth.

Jan Hatzius ([22:57]) responds by cautioning against overreliance on pure confidence surveys, advocating for a focus on objective economic indicators like production, orders, inventories, and employment statistics. She maintains that the economy's recovery pace remains strong despite wavering consumer sentiments.

Jan Hatzius ([25:46]) further elucidates on the inflation outlook, asserting that underlying trends are favorable with declining wage growth and easing labor market pressures. She anticipates that inflation will trend towards the Fed’s 2% target by the end of the following year, accompanied by a series of interest rate cuts from their current stance of 4.5%-4.75%.

David Kostin ([27:45]) adds that the market's pricing reflects a higher terminal Fed funds rate than Goldman Sachs anticipates, suggesting that the market may have overestimated the persistence of restrictive monetary policies.

5. The Role of Mega Cap Stocks and Market Valuation

A significant portion of the discussion centers on the dominance of mega cap stocks in driving market performance and the sustainability of their growth.

Joe Weisenthal ([10:28]) comments on the S&P 500’s strong performance and David Kostin ([11:08]) projects that while large-cap stocks (the “Magnificent Seven”) will continue to outperform, the margin of their earnings growth compared to smaller companies is set to narrow in the coming years.

David Kostin ([21:36]) presents data showing a substantial decrease in the earnings growth premium that large-cap stocks hold over the broader market, forecasting a convergence that could temper their outperformance.

This shift suggests a more balanced market where smaller companies may begin to contribute more significantly to overall market gains, altering investment strategies that have heavily favored mega caps in recent years.

6. Artificial Intelligence: Short-Term Impacts and Long-Term Potential

The impact of AI on economic growth is another focal point.

Joe Weisenthal ([47:00]) inquires about AI’s macroeconomic implications, wondering if AI-driven productivity gains are sufficient for making long-term predictions about labor growth and economic output.

Jan Hatzius ([48:20]) responds optimistically about AI's long-term potential, estimating that AI could boost U.S. GDP growth by 0.4 percentage points by 2030. She differentiates between the near-term and long-term effects, asserting that while immediate impacts are modest, AI's transformative potential on productivity is substantial over the next decade.

David Kostin ([43:25]) adds that investment opportunities related to AI lie in companies enhancing their revenues through AI technologies rather than just those building AI infrastructure, suggesting a strategic focus on sectors poised to leverage AI for revenue growth.

7. Policy Uncertainty Under the Trump Administration

The incoming Trump administration introduces fresh layers of policy uncertainty, particularly regarding tariffs and immigration.

Tracy Alloway ([31:15]) questions how the new administration's rhetoric and policy directions influence economic forecasts and investment strategies.

Jan Hatzius ([35:15]) expresses skepticism about the feasibility of significant deficit reduction goals proposed by Treasury Secretary nominee Scott Besant, citing entrenched entitlement spending and political challenges. She underscores that while policy aspirations like reducing the federal deficit to 3% of GDP are laudable, achieving them would require profound political commitment and structural changes.

David Kostin ([40:24]) discusses portfolio managers’ perceptions, noting that despite policy rhetoric, practical implementations hinge on the collective actions of the administration and Congress, maintaining a cautious outlook on substantial economic overhauls.

8. Investment Strategies Amidst Uncertainty

Navigating the current economic landscape requires nuanced investment strategies.

David Kostin ([12:38]) outlines various client-focused approaches, emphasizing the importance of framing economic issues and identifying investment strategies tailored to different client segments, including hedge funds, mutual funds, pension funds, and sovereign wealth funds.

He highlights strategies like focusing on companies with significant revenues from small and medium-sized businesses and considering the impact of tariffs and labor costs on corporate earnings.

David Kostin ([43:25]) further advises on portfolio positioning, suggesting that mutual funds outperforming their benchmarks often maintain index weights on large-cap stocks while seeking alpha in smaller, undervalued companies. He also points to global markets, noting significant valuation gaps where Europe and Asia present potential investment opportunities due to lower P/E ratios compared to the U.S.

9. Conclusion: Balancing Optimism with Caution

As the episode wraps up, the discussion underscores a balanced perspective—optimistic about economic recovery and long-term growth driven by earnings and innovation, yet cautious about policy-induced uncertainties and their potential ripple effects.

Jan Hatzius ([55:27]) reiterates that while tariffs pose a notable risk, their impact is manageable within the broader positive economic outlook, provided there are no severe retaliatory measures.

David Kostin ([55:38]) and Jan Hatzius ([55:44]) emphasize the importance of staying informed and adaptable, as the economic landscape continues to evolve under new policy directives and global dynamics.

The hosts conclude by encouraging listeners to engage with their comprehensive investment outlook reports and remain attuned to ongoing economic analyses to navigate the complexities of 2025’s financial environment.

Notable Quotes:

• Jan Hatzius ([03:45]): "I think it's a difficult time just because there's more uncertainty than normal about the policy environment."

• David Kostin ([06:37]): "Identifying investment strategies inside of the market is a big area of focus."

• Jan Hatzius ([08:41]): "Climbing out of a hole on the supply side and supply chains go back to normal... means you can see declining inflation and increases in real output and employment at the same time."

• Jan Hatzius ([13:05]): "Tariffs are the biggest risk to what otherwise is quite a positive outlook."

• Jan Hatzius ([22:57]): "You have to be particularly careful with surveys that ask how are you feeling? As opposed to what are you doing?"

• Jan Hatzius ([25:46]): "I think the Fed's going to say 4.5 to 4.75%. That's still a very high nominal funds rate."

• David Kostin ([43:25]): "What stock should they own, how should they position their portfolio?"

• Jan Hatzius ([48:20]): "AI can replace a lot of the tasks... that are being done at sort of low and mid levels of white collar work at the moment."

Final Thoughts:

This episode provides a comprehensive exploration of the 2025 economic landscape, blending expert insights with strategic investment advice. Hosts Weisenthal and Alloway skillfully navigate through complex topics, making the conversation accessible and informative for both seasoned investors and those new to financial markets. The nuanced discussion on policy uncertainties, particularly under a new presidential administration, alongside optimistic projections fueled by earnings growth and technological advancements, offers listeners a well-rounded perspective on what to expect in the coming year.