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- [00:00]
A
Foreign.
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Markets are still like, eh, whatever when it comes to Venezuela. And whatever it is that Donald Trump is up to in his sphere of influence, it's really something. And the lack of a market freak out is giving him a pass to push the limits further and further along. So today on the show, we're taking another look at the outlook for 2026 and asking whether lovely shiny stock market are here to stay. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at the FT in London, feeling very sorry for myself after I fell on an icy path yesterday and forked my neck. And I'm joined down the line from New York City by the big fella, the Very Reverend Robert Armstrong, off of the Unhedged newsletter. Now, Rob, I know there's generally very little danger of this, but please don't make me laugh because I can't move my head, please, properly and everything hurts.
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A
Well, it's good that you acknowledged my status as a reverend, but today it's going to be hard for me to suppress the desire to give a sermon, but I'm not going to give it. Everybody in America has very strong opinions about what the president is doing geopolitically, but I'm not qualified to share mine. So I'm just going to try to keep my mouth shut about it and stick to markets.
- [01:30]
B
Yeah, stick to markets. This is our safe place. We're all good here. So I think the two really big themes for the markets this year, like again, geopolitics isn't really leaving much of a mark at the moment. It's all about AI and big tech writ large and whether there's a bubble there and whether there's a broader market bubble going on. And, and, and what could, what could pierce that? Like where, you know, show me what the catalyst is for this to all turn around.
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A
But can we just pause a second first, Katie, I want to pause on the first thing you said, which I think is really important that markets don't care about the geopolitics stuff. And I think it's important to remember that's not a failure on markets part. Right. Markets are focused on, in the case of the stock market, future cash flows of corporations. In the case of the bond market, they're focused on the solvency of companies and of countries. And there's a very strong temptation to think why isn't the stock or bond markets telling Donald Trump he's being naughty and it's just not stock or bonds Markets job. So with that, let's turn to what.
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B
Is market's job, which is, you know exactly as you say it's, it's figuring out the financial health of the nation and of the companies inside it. So you cannot get away from talking about whether there's a bubble going on in AI stocks and in tech stocks. The problem with this kind of is that there's no real sort of dictionary definition. There's nothing in a little handbook anywhere that can tell you what a bubble really is. But you know what it is when it goes pop. And much as I hate to say nice things about things that you've written, you did put this well in your newsletter this week saying, yes, we are in a bubble, and no, that doesn't mean it's necessarily going to burst. Like explain to people how that makes sense because it does make sense.
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A
Well, first of all, you have to sort of make a decision when you're a thinker about markets, about whether you think it matters how expensive stock markets are. And if you're like me, you think how expensive the thing you're buying is matters. And once you've bought that simple proclamation, you look at the price of stocks right now. And by the way, not just tech and AI stocks, but stocks broadly in the United States. And we are up among the cloudy heights that you know in terms of how much you're paying for each dollar of earnings of anything we've ever seen in the United States. And in the past that has been an extremely good predictor of, of poor long term returns, returns over 7, 10, whatever years. That correlation just holds.
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B
But it's a crappy indication of what stocks are going to do this year or next year. That's the problem, isn't it? It's timing.
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A
So, timing. So think of it like this, Katie. I'm pretty confident there's going to be a nasty drop in the stock market in the next five years. Because when stock markets are expensive as they are now in the past, that's what they've done, right. I'm driving in the rear view mirror, which is the only way you can drive in markets, right? So now it's like, is it this year, is it next year, is it the third year, the fourth, the fifth? And if I just sell because I'm so confident in my bubble thesis, I could sit out, I don't know, returns of 30%. And then when the crash does come and stocks fall 30%, what have you done for yourself? Right? Yeah, you may have lost out. In other words, there's this old Peter lynch line that says more money has been lost not participating in markets because they're in a bubble than has been lost in bubbles. And that is the situation we're in. Like it makes sense to take a measured diversified approach with some bond or cash buffers right now. But does it make sense given the fact that we know we're in a bubble to get out of the market altogether? No, it does not. The math just doesn't work that way.
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B
And as you were saying again in your, in your newsletter, I think there is a kind of misconception that there's a few tech stocks that, that are in a bubble. The fact is everything is expensive. So you know, Microsoft, that stock is trading at 28 times its forward earnings. That's, you know, quite a lot sporty, you know, quite spicy. But Walmart is trading at 40 times earnings and Costco is trading at 42. And these are not like whiz bang, look at us, we're very exciting tech stocks.
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They're, they're great companies.
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Supermarkets, they're great companies.
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They're great companies.
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No argument for me.
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But they're not growing as fast as Microsoft and they're more expensive.
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B
Yeah.
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And you start just kind of casting your eye down stocks in the S&P 500 looking for cheap ones. And all the cheap ones you find are companies that are in big trouble.
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Yeah, they're cheap for a reason. I think the way to frame it though is that there is some stupid stuff going on in relation to the tech sector. There's clearly some excess there. Even executives inside the tech sector are saying, you know, absolutely candidly, yes, money is being misallocated here. Yes, stupid stuff is happening. Yes, people are getting overexcited. So my expectation, and I think yours as well is that some of that like frothy euphoria is getting well past its sell by date and that will kind of start melting away. You know, I think there are some like private equity or venture capital backed projects that will blow up at some point in 2026. But does that necessarily mean that the stock market crashes? No, I mean, I struggle to see any reason for a stock market crash as such.
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A
Well, something very good is happening right now, which is that the euphoria around AI is clearly cooling a bit in a sort of orderly way. So for example, Nvidia stock has been going sideways for four months. People aren't bidding it up anymore. It's still up at a very high level and expensive and. But it's not screaming higher every day anymore. The market has punished companies like Oracle and Metta that have gotten a bit over their skis, spending, borrowing and spending on AI. So there is the market happily is sending a message that's kind of like, whoa, whoa, whoa, whoa, let's all relax a little bit here. And that's good. And the positive scenario is one in which that continues to happen by sort of small steps rather than we wake up one morning and say Microsoft has announced it's cutting its spending on AI and and all of a sudden it's cats and dogs living together and world is ending. So I mean, I think the case of Nvidia is interesting. It actually doesn't look that expensive at its current level of revenue. But what happens on the day the revenue starts to decline or slow or whatever. So, you know, I'll tell you a.
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Little interesting nugget in relation to all this because I'm a very boring person. I read bulletins from the bank for International Settlements. I I'm cool like that, boys and girls. And there was one that came out this week from Inaki Aldesoro and some colleagues talking about the borrowing that tech companies are doing to fund their AI expansions. As we've talked about on the show before, they're not just doing it with free cash flow anymore, they're going to the bond market and they're borrowing money to spend on data centers and all this sort of thing. He makes a really good point with his colleagues in this piece. He was saying that when lenders give loans to AI companies, they price those loans at pretty much the same level as they do to like any other private credit borrower. So the, so the credit markets are treating these companies like any other company, whereas the stock market is saying these companies are very, very special boys and these stocks must be priced at eleventy bazillion times earnings. And so there's a bit of a mismatch here between lending markets and stock markets. And it feels like someone has to be wrong. Either either credit markets are being too mean to these companies and making them borrow at overly expensive rates, or the stock market is just giving them way too much leeway here, which I think is an interesting point.
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A
It is. I hadn't thought of that. But it is a compelling point. And of course, I'll put it this way. You know, credit is an advantageous position in the capital stack of a company, right? Those are contractually obligated cash flows rather than equities that, you know, are first in line when the bullets start to fly. So it's sort of odd that the credit guys are, are the ones who are being a bit more cautious. Except there's of course a long tradition of credit investors being a lot more paranoid than equity investors.
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Yes, they are as a tribe, a much more grumpy, miserable bunch.
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Yes.
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And that, and that's not, that's not a shade. They revel in that they know that they are grumpy and miserable.
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So granting Katie, the thesis that we are generally at a point where stocks are very expensive and looking bubbly and a lot of the other bubble stuff is going on, by the way, like there's a great story about how we're going to have incredible growth forever, namely the AI story. There's a lot of speculative retail involvement in investing which is very characteristic of bubbles throughout history. So all this stuff is saying bubble, bubble. But on the reassuring side, in terms of the bubble not bursting yet or perhaps deflating gently and in a non terrible way, the macro backdrop looks pretty good. At least in the United States we have an economy that's producing real growth at perhaps 2%. We have good corporate profits, we have fiscal stimulus on the way. We may get a rate cut or two before the middle of the year. All of this stuff is supportive.
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And now the thing that can make that all go wrong, however, as we all well know is the scariest thing in markets is definitely not Venezuela, none of that stuff. It's inflation.
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It is indeed.
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Now how scary is that looking?
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Not that scary on the numbers. So when you look at US inflation, it's still above target. You know, there's a million ways to cut inflation. You know, this is something that is inflation's great because it lets boring people have endless arguments about how to cut the numbers without getting into that. You know, the fed target is 2% inflation. We're above 2. We know this. But by, you know, by fits and starts, we are heading in the right direction, slowly in the right direction. There are still some parts of inflation, services, ex housing, for example, that are looking pretty stubborn. Some measures of what they call sticky inflation are, are a little alarming. But in general where you know, we're heading towards two very gently. So that is good. What's scary though is that we just had a massive incident a few years ago that prove to us that we don't understand inflation very well.
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No, we're rubbish at this, absolute rubbish at it.
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And we have an economic setup that is trim would be tremendously sensitive to a spike in inflation, mainly because risk assets are so expensive and inflation is just the kind of thing that can pierce that. So, you know, and I think I've said this on the show before, I would describe a jump in inflation as a low probability, high damage kind of risk.
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Right.
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Probably won't happen. It'll be really bad if it does.
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Speaking of low probability, high damage events, your president has been terribly busy this week. So we're going to set aside the geopolitical stuff because we're both very willing to admit that this is not our area of specialism. But also this week, President Donald Trump has said that he wants to ban big investors from buying single family homes, which is a problem for private equity companies that do a lot of this stuff. He, he wants to block Raytheon, which is a defense company, from paying dividends to shareholders or doing share buyers.
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Not just Raytheon, all defense stocks, all defense contracts.
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Oh, is it all of them?
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All of them, yes.
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And this is unless they essentially do what Secretary of Defense Pete Hegseth wants them to do. Why is like Trump seems to be reaching, like he's in a new phase. Right. He's assuming his ultimate form. He's unleashed at this point point, he's getting involved in bits of what companies do that are normally considered to be none of the president's business. Like, is that not alarming to stock markets?
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A
Katie? I would, I would kind of reach back a few days earlier in the news cycle to talk about what Trump is doing here and say the comments about institutional ownership of single family homes, the comments about defense contractors returning capital to their shareholders, they're kind of of a piece with what we have seen in Venezuela where a huge part of the rhetoric around the extraction of Maduro involved US Oil companies and the president saying what oil companies would do apparently without consulting with those oil companies companies. Right. And by the way, just to start the litany of stocks Trump has sent into a tailspin this week, Chevron, the only US Oil operator in Venezuela, spiked up massively immediately after the, as we talked about on the last show, immediately after the extraction of Maduro, it's now back to the level it was before the whole thing happened. So there's, so there's this sort of moment of excitement, like, oh, the president is doing this thing and he says it's about the oil companies. The stock goes up and then people realize what's really going on, which is that oil is hard to get out of the ground in Venezuela and we're an oil glut anyway, and the stock goes back down. Similarly, we have a situation where he Said he knows there's an affordability crisis on in America. It's a very live issue for voters. He says we're going to stop these big institutions from owning single family homes, which is a kind of a hot button issue with people. And stocks of companies like Invitation Homes, which owns and rents houses out to people, goes down. Blackstone, which is invested in this business, goes down. You know, now those stocks are wavering. Is it really happening? Is it really happening? We don't know. Trump comes out and says we're not going to let defense contractors pay dividends. Those stocks crash. Then he comes out a few hours later and says, we're going to have a military budget that's 1.5 trillion versus 1,1 trillion. And the stocks go back up again.
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B
So this feels like, you know, Soviet five year plans, except they're like American five minute plans and they just sort of are all over the place.
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I think of it as Donald Trump with Elizabeth Warren characteristics. How about that?
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Because Elizabeth Warren, a lefty politician, if you like, in the States, she's been calling for institutional investors to be booted out of single family home market. So, so like what again? Like, you know, what is this? What's the guiding force behind Trumpism? I don't get it.
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Well, it's not economic logic. Let's just say that if you want to increase investment in a given area, in this case housing, one thing you don't do is throw a huge class of investors out of it. Call me crazy, right. You're not going to increase housing supply by decreasing the number of investors in housing. You know, they taught us back in school, that's how they taught us how this sort of thing works. Right? And you're, by the way, you're not going to increase investment in the defense industry by telling them they can't pay dividends either. That doesn't exactly thrill, get, make people say, let's put more money to work in the defense industry. As best I can imagine. I, you know, you're, you're sort of left searching for explanations, but this is just a wild grab for domestic popularity without any regard for economics or how the market works. And you know, that's the best I can do with it because this stuff makes no sense whatsoever. You know, and the question is, I can, I know I'm on a ramble here, Katie, and you're trying to stop me and I respect that. But one question is, one question I have is, so he's, he's doing all this stuff that sends stocks going left, right and forward. And what are the long term implications for that for markets? One can ask, is this the kind of thing that deflates a market bubble? It's a fair question, right?
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It's a fair question. And I do think it's reasonable to imagine that investors who are not based in the States are going to think, I'm just not sure about this whole thing. There's too much, there's too much volatility around individual stocks. It makes it really hard to be a stock picker. There's too much policy uncertainty. And again, going back to Venezuela, not from a geopolitical point of view, but from the point of view of the oil companies. We've got a very nice story on our site today from what the US Oil companies are thinking about doing more business in Venezuela. And the message that we're getting from them is why on earth would we want to do that? Because policy in Venezuela can change at the drop of a hat. At the drop of a tweet.
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A
You know what happened, Katie? What happened, Katie, is they listened, listened to Jamie Smith talking about this on our podcast and they're like, that's a clever young man. We're getting. We're gonna get the heck out of here.
- [19:42]
B
I told you he was a pointy head. Listeners, if you missed it, he was on the last podcast that we did and he was talking about the oil situation in Venezuela. But the point is there's just a lot of what you can quite euphemistically call policy uncertainty here, which it does really feel like no one really has a clue what is coming next. So this sort of period of calm in markets does feel a bit weird to me. Not necessarily for geopolitical reasons, but because quite aside from the macro, right. We don't know what's going to happen with inflation. No one can know. This is a very unstable period. I think it's more unstable than it looks.
- [20:20]
A
I think that's probably right. But I do urge you and our listeners to turn the clock back once again to April, when we had the mother of all.
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B
It was terrible.
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A
We had the mother of all policy uncertainty events in April.
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B
Yes.
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Which was the parody known as Liberation Day in the Rose Garden, with tariffs. And there was a global conniption in not only the US Stock market, but in other markets around the world. Are we de dollarizing? Are these tariffs going to destroy everything? Trade's going to fall off a cliff. And just a few months later, market volatility was basically zero. Treasury market, stock market volatility was there. Everything was Fine. So I would just emphasize, I think your point is right. We have a very powerful man having a bit of a screw around with the corporate economy, which should be bad.
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B
For markets and could be bad at any minute.
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A
But we should remember how incredibly forgiving these markets turned out to be in a historical experience that was just eight months ago.
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B
Rob, as you say, resilience is the name of the game. You have unexpectedly here made an excellent point. So on that win, let's come back in just one second with Longshot. Okie dokie. It is time for Long Short. That part of the show where we go, long a thing we love or short a thing we hate. Rob, what you got?
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I am short US bank consolidation, which is an 180 degree turn for me. There's no industry in America that needs to consolidate more than banks. We have a zillion banks. It's a business where being bigger is better. And there's every point of industrial and financial logic for this industry to consolidate. And I spent the last day or two trying to figure out how this can happen, and it just made me want to avoid the banking business altogether. It's so complicated getting these companies together, getting the CEOs to agree, working out the merger, accounting. The whole thing is a hairball like you wouldn't believe. So I just think so you think?
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B
Just stick with zillions of banks.
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We're stuck with zillions of banks, even though we need less. So that's a point. A little knowledge is a dangerous thing, I guess, is what I've learned.
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Well, I am very, very, very short. All this nudify idiocy that's all over Grok and therefore all over X. I.
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A
Don'T even know what that is, Katie.
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So there's. Here's a picture of a woman on the Internet and then you can just ask AI to make it look like she's wearing a bikini. And it's everywhere and it's gross and I hate it. All of this stuff is just bad. Kill it all with fire and raise your.
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A
We're gonna get a lot of emails from perverts now, Katie. I'm gonna make you answer all of them.
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Do already. So that's all good. That endeth the feminist sermon from me today, listeners, we will be back in all your usual feeds on Tuesday. And genuinely, God alone knows what the world will look like by then. So hold onto your hats and listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.