Goldman's Hatzius and Snider on the Outlook for 2026

Summary

Odd Lots Podcast Summary: "Goldman's Hatzius and Snyder on the Outlook for 2026"

Date: December 29, 2025
Hosts: Joe Weisenthal, Tracy Alloway
Guests: Jan Hatzius (Chief Economist & Head of Research, Goldman Sachs), Ben Snyder (Chief US Equity Strategist, Goldman Sachs)

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Overview

In this episode, Tracy Alloway and Joe Weisenthal bring together Jan Hatzius and Ben Snyder from Goldman Sachs to explore the economic and market outlook for 2026. The conversation dives into the current state of the US economy, the drivers of recent stock market performance, the impact and reality of AI investments, persistent myths around productivity and job loss, the rising importance (and limitations) of productivity gains, and what could make the next year surprising. There's also discussion of tariffs, the underwhelming housing market, shifts in consumer sentiment, China’s resilience, and how investors are (or aren’t) overexuberant about AI.

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Key Discussion Points & Insights

The State of Forecasting and 2026 Economic Themes

• Annual Forecast Season: Every major bank publishes outlooks and predictions; this is a tradition during a quieter news cycle (03:38).
• Notable for 2026:
  • Recently softer-than-expected CPI
  • Anticipated new Fed chair mid-year
  • Rising unemployment despite strong GDP
  • Market concentration in a handful of tech/AI companies (04:14–04:48)
• Coordination at Goldman: Economic, equity, and other teams share insights but maintain independent perspectives (05:43–06:27).

Economic Growth, Productivity, and Unemployment

• Strong GDP, Higher Unemployment:
  • Jan Hatzius projects flat unemployment (~4.5%) with robust GDP growth (2.6%) in 2026.
  • This decoupling is largely due to accelerated productivity, not yet fully realized from AI (07:14–08:21).
  • “We expect more of a boost from AI going forward in the next five years than in the last five.” — Jan Hatzius [07:53]

Drivers of Stock Market Performance

• 2025 Review:
  • Strong earnings growth: S&P 500 companies reported 12% earnings growth, with non-megacap stocks at ~10% (08:53–09:15).
• Not Just AI or Big Tech:
  • S&P 493 (excluding largest 7–10 stocks) have delivered ~15% annual returns over three years (09:24–09:51).
  • Recent weakness in AI/tech stocks due to the expectation of slower capex growth and greater debt needs in 2026 (09:58–10:39).
  • "The broad US equity market has performed quite well." — Ben Snyder [09:24]

AI: Myths versus Measured Reality

• AI’s GDP Contribution Overstated:
  • Hatzius strongly disputes the narrative that AI investment has been a major GDP driver to date, attributing the impact to near zero, due to imports and accounting conventions for semiconductors (10:58–12:01).
  • “When we look at the impact of AI investment on measured GDP growth…we’re getting only about 20 basis points… and pretty close to zero over the last year.” — Jan Hatzius [11:45]
• Market Not Running Wild on AI Hype:
  • Unlike the dot-com bubble, investors are focusing on near-term earnings over speculative future potentials (23:22–24:37).
  • “What the market has been doing, given that uncertainty… is really focusing on near term earnings.” — Ben Snyder [22:32]

Productivity: Who Wins?

• Productivity Acceleration Has Begun, Broadly Shared Gains Likely Coming:
  • Most AI-related equity gains so far have gone to hardware and infrastructure (semis, hyperscalers); speculation about longer-term productivity beneficiaries is still subdued (22:32–24:37).
  • “About 60% of S&P companies say AI every quarter… you can probably count on one hand how many are actually quantifying it.” — Ben Snyder [36:04]
  • “We are modeling an AI productivity boost in our S&P 500 earnings forecast for next year. …under half a percent.” — Ben Snyder [36:27]

Tariffs and Inflation

• Tariff Pass-through Lower Than Expected:
  • Expected ~100bps pass-through to inflation, but only about 50bps seen, possibly due to delayed effects or business absorption (19:39–20:41).
  • Tariffs are treated like VAT in Europe: a one-time boost to inflation which fades, not a sustained driver (19:39–20:41).
  • Companies offset tariffs via price hikes, cost-cutting, and supply-chain adjustments (21:07–22:12).

Key Risks and Signs of Overexuberance

• Valuations as "Potential Energy":
  • High P/E multiples are not an actionable sell signal, but heighten risk if a catalyst emerges (31:12–32:48).
  • Signs of speculative excess (e.g., indiscriminate AI stock buying) remain well below prior bubbles (24:47–25:18).
  • “I think this has been one of the least enthusiastic markets that is often described as a bubble in recent history.” — Ben Snyder [39:59]

The Labor Market and AI’s Long-term Impact

• Technological Change and Employment:
  • Historical evidence doesn’t support lasting negative effects from productivity booms on aggregate employment, but frictional unemployment could rise during transitional adoption periods (26:08–27:52).
  • “History certainly doesn’t support it from the perspective of the long term outcomes… You cannot find an adverse relationship…between productivity growth… and aggregate unemployment.” — Jan Hatzius [26:08]

Consumer Spending and Sentiment

• Divergence Between Sentiment and Hard Data:
  • Sentiment surveys have become less reliable for predicting consumer behavior; hard data remain solid, though some slowing at the lower end (27:52–29:43).

Housing Market: No Longer a Centerpiece

• Muted Role in Current Cycle:
  • Weak housing metrics but no broader economic drag (40:06–42:03).
  • “It is not a major feature of our outlook for 2026. We have housing go more or less sideways from here.” — Jan Hatzius [41:35]

China’s Resilience

• Exports Holding Up Despite Tariffs:
  • China’s export sector is robust, compensating for weak domestic property; rare earth control limits West’s options (42:03–44:44).
  • “China keeps getting better and better at producing better and better goods at cheaper and cheaper prices.” — Jan Hatzius [43:06]

Fed Policy & Expectations

• Rate Cuts Into 2026:
  • Expect two more cuts to ~3–3.25% in 2026, but data dependence is high, especially regarding unemployment (48:05–49:24).

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Notable Quotes & Memorable Moments

• On AI's Impact on GDP:
  • “Actually, pretty close to zero.” — Jan Hatzius [10:58]
  • “That's not a popular answer!” — Joe Weisenthal [11:00]
• On market optimism and speculation:
  • “If you look historically… speculative activity… is still well below levels that we saw 25 years ago.” — Ben Snyder [24:47]
• On labor market disruption fears:
  • “History certainly doesn't support it… if you look at intervals of 10, 20 years, you cannot find an adverse relationship between more productivity growth…and aggregate unemployment.” — Jan Hatzius [26:08]
• On market concentration and big tech:
  • “Five years ago…the top 10 stocks in the market accounted for a third of market cap…they are a third of earnings.” — Ben Snyder [36:54]

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Timestamps for Important Segments

• 2026 Preview & Market Context – 02:30–04:43
• Team Coordination at Goldman – 05:18–06:27
• GDP, Unemployment, Productivity – 07:03–08:21
• What Drove 2025’s Market Gains? – 08:21–09:51
• Recent Weakness in AI/Tech Names – 09:51–10:39
• Debunking AI as GDP Driver – 10:39–12:33
• Valuations, Bubbles, and Market Risks – 24:37–25:18, 31:12–32:48
• AI, Productivity, and S&P Earnings – 35:45–37:34
• Fears of Tech-driven Job Loss – 25:18–27:52
• China’s Resilience Despite Tariffs – 42:03–44:44
• Fed Outlook for 2026 – 48:05–49:24

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Summary Table: Jan Hatzius & Ben Snyder’s 2026 Outlook

| Indicator/Theme | 2026 Outlook Summary | |-------------------------|--------------------------------------------------------| | US GDP Growth | Robust (2.6%) | | Unemployment Rate | Flat at ~4.5% | | S&P 500 Target | 7,600 (Goldman Sachs forecast) | | AI Impact on GDP | Minimal-to-zero in direct contribution | | Productivity Growth | Accelerating, major boost from AI still to come | | Consumer Spending | Solid but not spectacular, sentiment surveys noisy | | Housing | Sideways, little broader economic impact | | Tariffs/Inflation | ~50bps pass-through, one-time rather than persistent | | Fed Policy | Two more cuts in 2026, to neutral (~3–3.25%) | | China | Strong exports, weak domestic; growth >4% |

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Closing Insight

The hosts note that while concerns about an AI bubble and tech concentration are valid, the data suggest a story of real, broad-based earnings growth and measured optimism. Both Hatzius and Snyder urge focusing on hard data—earnings, unemployment, productivity—rather than speculative hype or sentiment swings.

“If you step back and look at the inflation news more big picture, it’s pretty encouraging… underlying rate that’s no longer that far away from 2%. And that’s pretty good.”
— Jan Hatzius [15:29]

“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.”
— Ben Snyder [38:36]

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This episode delivers a nuanced take on where Wall Street’s most influential voices see risk and opportunity next year. The narrative warns against overhyping AI’s direct economic contribution while underscoring a healthy, if uneven, tide of productivity and corporate profit growth.

Transcript

[Jan Hatzius]

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[Joe Weisenthal]

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[Jan Hatzius]

That vision is wrong.

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[Tracy Alloway]

Bloomberg Audio Studios.

[Joe Weisenthal]

Podcasts, Radio News.

[Tracy Alloway]

Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Joe, we always start these the same with someone saying it's that time of.

[Joe Weisenthal]

Year and then it's the most wonderful time of year.

[Tracy Alloway]

That's right. Never change.

[Joe Weisenthal]

2026 forecast season.

[Tracy Alloway]

It's the outlook season. It is the moment when every investment bank on Wall street releases their forecasts for next year.

[Joe Weisenthal]

Yeah, and it's a great time. You know, we. We make New Year's resolutions this time of year. We go back, we give, we make our list of top 10 things that happen predictions. That's what you're supposed to. News gets a little quiet often around the holidays, so we make up for it by just looking back and looking forward.

[Tracy Alloway]

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.

[Joe Weisenthal]

That's right.

[Tracy Alloway]

Always forward looking. Although I do think, you know, 2026 shaping up to be an interesting year for, 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 cost increase. So that was interesting. We're going to have a new Fed chairman.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

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.

[Joe Weisenthal]

Been this really incredible year, obviously in the stock market. The US Stock market just continues year after year after year with a few exceptions here and there, but not many of putting up massive numbers. And so the question is like, 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, so many questions on both the real economy and the stock market.

[Tracy Alloway]

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 Hatzias. 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 Snyder, he is the chief US Equity strategist replacing David Costin. Sneaker. So thank you both for coming on. All thoughts.

[Jan Hatzius]

Thanks so much for having us.

[Ben Snyder]

Great to be here.

[Tracy Alloway]

Is Research Outlook time? Is that actually a quiet time for you guys?

[Jan Hatzius]

It's not a quiet time. Normally we actually do it about six weeks earlier 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 inflammation than normal? So we pushed out a number of reports yesterday, including the Global Economic and Markets Outlook.

[Joe Weisenthal]

Can you talk, the two of you maybe again, so obviously different roles but on the same team and obviously the Stock market, US equity market is different from the economy and you can have years where the economy is fine, the stocks are bad and vice versa, all different permutations and combinations. But how do you think about being in alignment, cross team and so that roughly you're sort of working under a similar set of assumptions.

[Jan Hatzius]

Yeah, I can talk about that. And not just with respect to the US or global economic outlook versus stock market outlook. But of course there's currencies, there's EM economies, there's commodities. Certainly on the macro side, I would say we're on the coordinated side of the spectrum and 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.

[Joe Weisenthal]

Well, you mentioned yesterday a good time to note to listeners. We are recording this December 19, 2025. Ben, how do you think about sort of working with aligning your views of where markets are going or what the meaning of the rally has with the sort of, with the macro thinking?

[Ben Snyder]

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 discounted 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 Jan's forecasts.

[Tracy Alloway]

So in terms of Jan's forecast, I noticed you're forecasting strong growth as in GDP, but also rising unemployment. How do you square those two things?

[Jan Hatzius]

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, and a small part of the answer is that that 2.6 probably overstates the underlying trend a bit because we had the shutdown that depressed Q4. It's going to add to Q1. But the more important part of the answer is accelerating 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 one and a half percent. 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.

[Joe Weisenthal]

So obviously, like the distribution of growth matters. It seems to particularly 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 and their stocks do incredibly well. Maybe it would be helpful even before we get to the 2026 outlook for the economy. Ben, like what happened in 2025? What were the underlying conditions that allowed for such, like another monster year, especially for the NASD of the big tech names.

[Ben Snyder]

So to bring it back to earnings, 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 and P500 companies in aggregate reported earnings growth of 12%. Even if we strip out the mega caps, the median S and P stock reported earnings growth of about 10%. That's very solid.

[Joe Weisenthal]

This seems to be like an underappreciated point which is that look. Yeah, the AI driven market, the tech heavy market. It is not just that, is it?

[Ben Snyder]

I'll take an extension for this. We spend a lot of time understandably talking about the largest stocks in the market. The top 10 stocks are over 40% of market cap. We should spend a lot of time talking about them. But if you look at the 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 to. And so I understand why we're talking about the large stocks, but really the broad US equity market has performed quite well.

[Tracy Alloway]

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?

[Ben Snyder]

For three years we've been obsessed with AI as a market and for three years, really the story has been increased capex extraordinary growth in AI investment spending and although we're discussing a lot, the eventual productivity benefits, as Jan 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 B, to continue that growth, it's going to require more debt. And both of those factors have made investors understandably uncomfortable.

[Joe Weisenthal]

Jan, one of the sort of the viral charts of the year, various estimates of, like, how much the AI buildout specifically is a driver of US economic growth in 2025 and beyond. Like, how much, like, you know, when you look at the GDP in 2025, how much of the growth can you attribute to what Ben just talked about?

[Jan Hatzius]

Actually, pretty close to zero.

[Joe Weisenthal]

Really.

[Tracy Alloway]

This is very different.

[Jan Hatzius]

I love this for two reasons. Number one, the goods that are being invested in 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 against the imports, then you're going to get the wrong answer. That's one reason. Second reason is that semiconductors are generally treated as intermediate inputs, not as investment. So they don't actually show up in the investment numbers. And so when we look at the impact of AI investment on measured GDP growth, on the numbers that are actually being printed, we're getting only about 20 basis points of contribution over the last three or four years and pretty close to zero over the last year.

[Joe Weisenthal]

So 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 build out. Are you just always like banging your head against the wall because you must see these headlines every day like the rest of us.

[Jan Hatzius]

I do bet, because oftentimes it's just based on looking at some portion of investment spending. Sometimes there are also other things included in those calculations that aren't necessarily AI related. But the big point is that you really need to look at the imports as well.

[Tracy Alloway]

Ben, 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.

[Ben Snyder]

We've published 7,600.

[Tracy Alloway]

Okay, so one thing I did want to ask this was in Yan's economic outlook, but you talk about potentially credit underperforming, 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?

[Jan Hatzius]

I mean, it's mainly really that the valuations are very high. The credit fundamentals, we think are still pretty good, but the market is priced to. I mean, not perfection perhaps, but to a very positive scenario. 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 overall views for the next year.

[Joe Weisenthal]

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, that I'm going to now. So we are recording this December 19th. We got that CPI report yesterday, came in 2.6 encore over. This is year over year because we didn't have October data. And then there were people like wait, they imputed a zero percent, zero rent growth, there's zero shelter inflation for October when they didn't collect the data, et cetera. But then I'm like okay, 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 even sure why October really affects that. Can you just, before we go any further, explain how I should understand yesterday's CPI report?

[Jan Hatzius]

Yeah, I mean they use a six month growth rate for rents and 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 was understated and the numbers are not quite as good as the 8 basis points for core CPI on average for October and November.

[Joe Weisenthal]

So capture 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 2024. Therefore you could just do a year over year thing.

[Jan Hatzius]

You can't do that because they don't, they don't do it that way. They don't look at just one month.

[Tracy Alloway]

And, and it's also owner's equivalent rent.

[Jan Hatzius]

Well that's, that's a separate point because this distortion affects both actual rent and owners equivalent rent. So it wasn't as good. And there 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 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 PCE inflation. Core PCE 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 added 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. Silicon Valley is selling you a future.

[Joe Weisenthal]

Where you're obsolete or worse, identical.

[Jan Hatzius]

At Palantir, they're witnessing something different and revolutionary. From re industrializing the nation's defense base to shipyard workers building faster and frontline workers boosting productivity, AI is transforming work across the nation. AI is not replacing American workers or flattening them into conformity. It's unleashing what makes each one their.

[Joe Weisenthal]

Judgment, their craft, their creativity.

[Jan Hatzius]

When American workers become more powerfully themselves, they own the future. Palantir Making Americans Irreplaceable Running a business.

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[Ben Snyder]

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[Tracy Alloway]

Can we talk about prices and tariffs? And I'm very curious, casting your mind back to April this year, April 2, 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 consumers pockets like a tax.

[Jan Hatzius]

We had probably more like 100 basis points 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 business sector and perhaps to a small degree by foreign producers. Although I actually think 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 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 gets cycled out.

[Joe Weisenthal]

Ben, let's talk about tariffs in the stock market. Because if the stock gains had just been driven by a bunch of big tech companies, we'd say oh, of course the tariffs didn't matter because you know, they're not as tariff sensitive, etc. But when we're talking about the fact that The S&P493 also did very well, it's not intuitive to me. I would have guessed crimped margins, I would have guessed lower sales, all kinds of things. How did it all shake out from the equity perspective? The impact of tariffs?

[Ben Snyder]

This was our concern too. 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.

[Joe Weisenthal]

It wasn't just you who is concerned.

[Ben Snyder]

And it really didn't materialize. Now I think part of what we have to keep in mind is the counterfactual. Right. So for the last couple of 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 Jan 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.

[Tracy Alloway]

So we talked about rising productivity early and you think that the main boost from it is yet to come. Who actually captures that productivity acceleration when it comes to the equity market? Market like, you know, the big tech guys, they've 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?

[Ben Snyder]

Well, this is, I guess to call it a trillion dollar 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 AI 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, what the market has been doing, given that uncertainty over the last couple years is really focusing on near term earnings. It's been the semiconductors obviously, it's been the hyperscalers to some extent, power companies, et cetera. I think that is actually one of the key differences between this market and what happened 25 years ago during the dot com 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.

[Joe Weisenthal]

This is really 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.

[Ben Snyder]

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 AI 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 your question. Investors will be asking who are the long term winners? And trying to pay for those immediately. That has 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 discreetly 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?

[Tracy Alloway]

What would make you nervous when it comes to valuations in general? This maybe like indiscriminate investment in anything that has the word AI in it.

[Ben Snyder]

That would do it.

[Tracy Alloway]

Yeah.

[Ben Snyder]

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 in stocks with extraordinarily high valuation multiples. As you might expect, that has 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.

[Joe Weisenthal]

Yeah, there's a question. It's not Even really a 2026 question, but, you know, one of the reasons we've always loved talking to you is beyond just the forecast, etc. I consider you to be sort of a deep macro thinker with a rooted academic ideas. Economists seem, you know, fairly strict on the idea that like, yes, new technologies could put some people out of work, and that's obviously painful, but in the aggregate, tech doesn't destroy jobs. Is there any reason to think that AI would be any different? I mean, this is what scares people, right? That there's going to be 10 people who have all the money and the rest of us are going to be living on universal Basic income AI 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?

[Jan Hatzius]

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, 10, 20 years, you cannot find 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 to compensate for the jobs that are being lost in the affected industries. And we do build in some of that into our forecasts. And then it really becomes a question of how quickly the adoption really occurs. If it happens over say, a decade. If you look at the entire economy and people think that's way too slow, but I actually don't think 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 other areas. But 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 coped with technological advancement in the past.

[Tracy Alloway]

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?

[Jan Hatzius]

I think the sentiment surveys have been getting less and less useful for predicting activity. And that's true for the consumer sentiment surveys. And 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 10 years ago, 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 service and the consumer service because they have interesting detail. They're very up to date, but they just don't work as well as they used to or certainly were believed to. So I would really focus more on the hard data. The hard data would say that the consumer is doing okay. Consumer spending is certainly not super rapid. Maybe we'll get to 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 numbers are not broken down at a very high frequency in the very up to date numbers. But it is a mixed picture out there. But I would expect under our forecast for the economy, I would expect the consumer to hang in there.

[Tracy Alloway]

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 the it's.

[Jan Hatzius]

Always hard to beat the unemployment rate.

[Tracy Alloway]

Okay, 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 something? Maybe 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?

[Jan Hatzius]

I mean, it's probably not a lot. We're very unlikely to make a forecast change on the back of an appointment and I don't know who it's going to be. It's a committee. So there is more continuity in the system than I think people sometimes believe when they talk about the different potential candidates. So at least in the say 6 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 near term I would not expect a massively different outcome because there's a new chair.

[Joe Weisenthal]

Ben, on this note, talk to us about multiples. And obviously you talked 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're thinking 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.

[Ben Snyder]

Multiple is high. There's no debating that. Certainly if you're comparing with history, it's high. 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.

[Joe Weisenthal]

In that the post Covid, because no one made any money for like two quarters.

[Ben Snyder]

Well, I think that's the key point, which is one of the things that drives the multiple higher is expectations of accelerating or improving earnings.

[Joe Weisenthal]

Yeah.

[Ben Snyder]

And from that perspective, if I listen to Jan's forecast for a healthy economy that's improving, it's not necessarily so strange to me that the multiple is pretty elevated. The other thing I'd point out is if we sat here a year ago, or frankly if we sat here at the beginning of 1999. Weren't many podcasts 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 catalyst themselves.

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[Tracy Alloway]

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 saying that this is actually happening versus people talking their books?

[Ben Snyder]

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.

[Jan Hatzius]

But that's the users of AI rather than the the investment.

[Ben Snyder]

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 years.

[Joe Weisenthal]

So you're talking about 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?

[Ben Snyder]

That is the key point that is, I think, often Underappreciated, which is five years ago, the top 10 stocks in the market accounted for a third of market cap. This was a record at the time, although we look back and think 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 10 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, they'll outperform. Although on our forecasts, that gap will shrink a little bit.

[Jan Hatzius]

And then markets might look forward further than that. And that, I mean, that's been part of the issue for some of them more recently.

[Ben Snyder]

And that's how you create valuation problems.

[Joe Weisenthal]

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. Right. 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 in the future.

[Tracy Alloway]

There's still upside.

[Joe Weisenthal]

Yeah, there's still 70%. There's still the majority of money is not being made by tech companies.

[Tracy Alloway]

Okay, wait, I got to ask though. Yes, tech companies have seemed, 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.

[Ben Snyder]

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, Jan mentioned his desert island indicator being the unemployment rate. For me, every Thursday morning I wake up excited to see jobless claims.

[Joe Weisenthal]

This is, I've said it many times. I'm a claims guy when it comes to my desert island.

[Ben Snyder]

We're on the same page Bros. So, you know, if a few Thursdays in a row, we start to See claims rise. I'll become a lot more nervous if Jan walks down the hall one day and says, you know, we think the Fed's 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 GLP1 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.

[Joe Weisenthal]

Right? Yeah.

[Ben Snyder]

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, has really not been the case. I'll be a lot more nervous then.

[Joe Weisenthal]

That's interesting. So when you just start to see investors start to justify things on various bank shots.

[Tracy Alloway]

Stretch the narrative.

[Joe Weisenthal]

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.

[Ben Snyder]

I think this has been one of the least enthusiastic markets that is often described as a bubble in recent history.

[Joe Weisenthal]

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 talking about how mediocre the housing market is doing, whether we're talking about prices, whether toilet starts, basically every measure of housing not very good. And yet, by and large, in conversations 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's link to the economy has always, for a long time, felt very robust. Has that changed?

[Jan Hatzius]

It's amazing how if I look back to, well, certainly run up to.08 and the couple years after how we wrote, 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 a small part of the discussion because it's been kind of a tug of war, I think, between, 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, still 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 it is not a major feature of our outlook for 2026. We have housing go more or less sideways from here. Low positive numbers for price appreciation. And I think the action is really elsewhere more on the investment side. And obviously a lot of the technology issues that we've been discussing.

[Tracy Alloway]

We would be remiss if we didn't talk about the world's second biggest economy, which is China. So in your outlook, 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 US has imposed tariffs. Europe seems to want to do something and possibly, you know, form a coherent bloc, I guess, against China. Or why haven't we seen more of a growth hit to China?

[Jan Hatzius]

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, you know, 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 going to continue mainly because China keeps getting better and better at producing better and better goods at 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 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 U.S. 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 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 subtracted about 2 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 think China will hold up okay. Slower growth over time, but probably still closer to 5% than to 4%.

[Joe Weisenthal]

Ben, going back to U.S. stocks, I sort of joked that, you know, there's 70% of earnings out there that have yet to be captured by big tech companies. But I 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 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?

[Ben Snyder]

Part of what's fun about markets is they're always changing. This seems to be one of those examples. 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.

[Joe Weisenthal]

Wow.

[Tracy Alloway]

What do you think would actually, like, put an end to that market dominance? I guess stronger antitrust laws or. Or what?

[Ben Snyder]

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're no longer as dominant from a, from a market cap perspective, it's going to be because their earnings aren't as dominant either.

[Tracy Alloway]

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.

[Jan Hatzius]

I would echo what Ben just said. This is what makes markets and economic forecasting fun, that there is 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 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 had 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 a month, a month earlier. So that's been a challenge. The government shutdown, I would say, has been more challenging than past shutdowns. We'll actually have holes in the economic data that will probably be there forever.

[Tracy Alloway]

Forever.

[Jan Hatzius]

And you look at some of the labor market numbers, we've had a consistent series for the US unemployment rate on a monthly basis since 1948, except for October 2025, and that's going to look pretty weird.

[Joe Weisenthal]

That's kind of crazy. What is your outlook for 2026 in terms of Fed policy? Where do you see this rate cut cycle going and how deep?

[Jan Hatzius]

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, two more into 2026 that bring you down to what we think is roughly their neutral estimate, three to three and a quarter percent. 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 GDP growth does as well as 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.

[Tracy Alloway]

Something to look forward to after we come back from the holidays.

[Joe Weisenthal]

Currently, I think, according to Werp, it's just a less than 20% chance of a cut in January. But it sound. And I know you don't expect one, but I guess it sounds like there's a condition in which that could jump.

[Jan Hatzius]

Yes, I think so.

[Tracy Alloway]

Yeah. And Ben, thank you so much for coming on odd lots and I guess we'll have you back on next year.

[Joe Weisenthal]

Yeah. Make it an annual tradition.

[Tracy Alloway]

Yeah. Check your forecasts against reality. So thanks.

[Jan Hatzius]

Thank you so much.

[Joe Weisenthal]

We'd love that. Thank you very much.

[Tracy Alloway]

Joe. That's Always fun.

[Joe Weisenthal]

I love that.

[Tracy Alloway]

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 downs, potential downsides. But that said, I also think back to the Internet bubble, the dot com bubble and I mean people were so worried about it, they were writing books about a dot com bubble right at the time, at the time 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.

[Joe Weisenthal]

Totally. Yeah. Merely observing them does not obviate the existence of one.

[Tracy Alloway]

That's right.

[Joe Weisenthal]

A couple things. So 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, 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.

[Tracy Alloway]

Right. And it's also true, as he 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.

[Joe Weisenthal]

I'm sure that I have contributed at various times to the sort of meme that is just a tech driven, you know, you 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. I hadn't appreciated how consistently strong the earnings growth of the S&P493 had been over the last three years.

[Tracy Alloway]

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 good thing for 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 jobs that'll be interesting.

[Joe Weisenthal]

I mean, I still think it's a huge question mark, obviously, like what AI ultimately means for the labor market. But this idea that like it could raise the frictional unemployment, so not necessarily sustained change in the number of people who have jobs, but the time it takes to find a job and various other things because it's 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.

[Tracy Alloway]

Yeah. All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway.

[Joe Weisenthal]

And I'm Jill Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at CarmenArman, Dash O' Bennett at DashBot, and Kell Brooks at Kell Brooks. For more Odd Lots content, go to bloomberg.com oddlots we have a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord GG oddlots.

[Tracy Alloway]

And if you enjoy Oddlots, if you want us to have Yan and Ben in next year to check on their 2026 forecast, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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