Full Transcript: Breaking Down 2026 Market Forecasts
We Look at the Biggest Lessons from 22 2026 Market Forecasts
Jack: So Matt, it’s forecast season.
Matt:I love a good forecast season. I’m so, I’m so happy to be wrong that what’s not to love about ruthlessly predicting the future.
Jack: I was thinking about wedding crashes with that scene at the beginning where they’re like, it’s wedding season. And I’m like, that’s you and me for forecast season.
Basically, although we don’t listen to any of these things, we still we’re, we’re still all pumped up to put ‘em together.
Matt: I love putting ‘em together and I love putting ‘em together. In part, we’ve talked about this a lot of times, I view my view on forecasts is you wanna read all the yearend forecasts. So that’s what we’re doing here today.
We read how many of Yearend forecasts did we compiled? I believe
Jack: there were 22 yearend forecasts
Matt: we’ve read for this. So we went through 22 forecasts. We’re putting this together. The reason I love this exercise personally is I love the idea is of this is how you find out what the vanilla ice cream is for the year ahead.
This is what everybody tells you. This is what we’re expecting. And you can kind of do this and say, here’s where everybody is kind of feeling the same thing and it’s gonna tell you where the surprises are. You might like some of the surprises, you might not like some of the others, but it’s a really useful exercise to sort of level set what a bunch of also very smart people, like not idiots making these forecasts.
What are a bunch of really smart people thinking? So happy to do this exercise today with you. Love doing. Yeah. To your point, these,
Jack: these things get a bad rap, which is deserved to some degree and not deserved to some degree. It’s deserved from the perspective of like, nobody has any idea what the s and p is gonna close at and these numbers that they throw out, like they know even the people making these forecasts know the, those numbers really don’t mean that much.
So for, if you look at ‘em from that perspective, like tell me what the s and p’s gonna close at. They’re not that valuable. But there’s so much interesting data and to your point, like these are some of the most thoughtful market strategists in the world that are thinking about what’s going on, analyzing data and so they can be a good learning exercise.
Even if you don’t necessarily, conclude, oh, here’s what the s and p’s gonna be at the end of the year.
Matt: Yeah. And you have to look at them from the cynical. It’s definitely skeptical, I dunno if it’s cynical, but the skeptical phrasing of what is this person? And look, we’re gonna look at a bunch of people who advise on like, wirehouse advisors or broker dealers or, sell side, buy side.
You look at all these things and you take into the context of where are they paid. Like, not to be wrong or not to take a stance in a certain direction. There’s a reason there’s not a bunch of these forecasts that are also betting on declines this year. You have to weigh that into it. Two people come into this with a bias.
There’s a business behind almost every, all, well literally every single one of these forecasts and be, be skeptical. That’s part of the exercise and part of getting this on the table too.
Jack: Yeah, to your point, this is why you see a lot of the eight to 12% return forecasts., people aren’t gonna, people don’t wanna lose their jobs over this.
And, and if you, if you, if you predict a 20% decline in the market, that doesn’t come that you’re probably hearing from the CEO, the next year. And there’s a new market forecaster in there. So you also don’t see like the 40% increase either. Like we know from the distribution of returns in the market that they’re almost never between eight and 12% like the average might be in there, but the actual returns are never in there.
So that’s another reason these forecasts are usually not right, is like the distribution is very wide, but there’s no incentive for anybody to predict something major on the up or the downside.
Matt: So what you’re saying is I’m not gonna
Jack: lose my job for my predictions today. That’s probably not, yeah. No, I don’t, I don’t even, I mean, you’re unpaid anyway, so I don’t even know what unpaid podcast job.
Yeah, yeah, exactly. If I fired you, I don’t know. I don’t know who would agree to talk to me about this. So, I think we’re
Matt: pretty much stuck with this. I think we’re pretty safe. The only other thing that I have to say going into this is the, the great, Elroy Dimson quote, risk means more things, more things can happen than will happen.
And that’s the other beautiful part about this exercise. We get a bunch of the variables on the table. Fast forward 12 months or if we were to pull up all the, all these outlooks from last year, a lot of things did happen, but way more of things were projected to happen and there were surprises still in the mix.
So it’s understanding that idea, that risk, meaning more things can happen, then will happen as part of it. It’s one spaghetti noodle from the pot at the end of the year. And the idea that it was described perfectly along the way, it’s a fantasy.
Jack: To, and to your point, like tariffs this year, like yeah, we thought, I mean, people thought tariffs could happen and Trump was talking about tariffs, but I don’t think anybody thought tariffs were gonna happen in the way that they did happen.
And so these things, there’s gonna be something that’s gonna surprise everybody. I remember when, you guys interviewed Liz Ann Saunders and you asked her like, the one thing she would disagree with her peers on this was her answer, that these forecasts are useful. But she was also talking about this idea that if you had done this, like in 1987, I dunno if you remember this, but like she said, like if you had made a forecast in 1987, you could have been pretty right about the forecast, but you were probably pretty wrong about like, how, how you got to the forecast.
You probably didn’t, weren’t calling for like black Monday in, in the middle of the whole thing. So I, these aren’t valuable from that perspective, but we can get some great information. And so we’re gonna try to bring them all together today and, and talk about the range of outcomes. These people are talking about the most important things they think might drive the economy and the market.
And then you and I can maybe share some, uninformed opinions, as macro tourists on this.
Matt: Let’s get some uninformed opinions on the table. So why don’t we start with, you wanna start with just kind of the variables that were common across these.
Jack: Yeah, yeah, let’s do that. And I also wanna just give a hat tip to, the Idea Farm, because that is where I got all these, this was not Jack combining the internet forever.
Like they had 20 plus forecasts on there. That’s a great site. It’s free. The Med Favors got, like, it was, I was able to pull like all these forecasts from there. Plus a few that we supplemented on our own, like in terms of just what people like Warren Pies, who we respect a lot have been saying, although their forecasts aren’t public.
So just a hat tip to the Idea Farm, definitely subscribe to that.
Matt: Yeah, God bless Meb Faber and the Idea Farm this holiday season for compiling all these research reports and making it so damn handy to be able to pull these up.
Jack: So I guess we’ll start with the economy and then we’ll get into the market.
We’ll talk about the targets and stuff like that. So yeah, the economy’s been, been really interesting. I mean, obviously when you talk about the economy, the, the first thing everybody’s talking about is ai. and what, what the impact of AI is gonna be. And I think in terms of what’s gonna happen in the next year, what a lot of these people think about the impact of ai.
Is driving a lot of what they think in terms of what’s gonna happen for the market. So for instance, we had, the CIO of Russell Investments on, or the chief strategist of Russell Investments, Paul Eidelman, on recently. And their whole theme for the year was re-acceleration. and they think AI is a big driver of that.
And the broadening of ai, like to your average company, the benefits was a big driver that, and I think for a lot of people who do think we’re gonna get some stronger, acceleration in the economy, they’re thinking about AI a lot.
Matt: There’s this whole thing, and I know we’re just, this is gonna be, it’s kind of funny actually in one of the recap things that I saw of podcasts from this year, it was like, what word did you love?
And it was ai and it was like, me and 18 people all saying ai, ai, ai, ai. And I was like, that’s a little bit creepy. But I think that’s indicative of what you’re seeing right here. There was, and I’m, I’m probably gonna hit this a couple of times in this conversation because I think it’s huge for the economy this year and where we are, if this is true.
Late cycle strain, it’s probably a result of the amount of spending going into ai. And that’s gonna determine whether this economy like slows down, gets hollowed out, crashes into a wall or whatever else, because these dollars we’re talking about are absolutely massive. Now within Russell, do you remember what he said in that interview about the broadening specifically?
Jack: Yeah, well they expected the market to broaden out in general, which, which a lot of people have been calling, including me, have been calling for, for a long time. But they, they thought there was some strong evidence that might happen this year. And also the idea, like I said before, that they thought the benefits of AI were gonna carry down to your average company more so than just the hyperscalers.
And so that, that would be a reason, if those companies actually start seeing economic benefit, if they start seeing earnings growth, that would be at least a reason to say this might broaden out some.
Matt: Yeah, and I think what’s important about that is within the AI theme is if that flows from the Mag seven to the other 4 93 and we actually start to see.
Profit margin expansion, might not even accelerate revenue, but just might expand profits or earnings, then that’s a pretty compelling argument for why you would see a broadening, because if prices are going to follow earnings, we haven’t seen that expansion across many of those 493 companies. That’s a big theme for next year that I could, I could see the optimism here.
Who else do we have in this camp for this example?
Jack: Yeah, so we also have, I mean, we have Warren Pies too. You know, he, he’s been talking about this idea of, of Goldilocks with respect to the economy. And I think he actually, when we get down to the end, is probably the most optimistic on the market too.
But he’s all
Matt: bull up on this idea.
Jack: Yeah. Yeah. And Warren is not one of these guys to be, Warren is someone who will switch back and forth. Like he, he is not the permeable guy by any stretch. So, and he also, I think of anybody like we listen to in this space, I, I, I think he does some of the most accurate work.
like it’s, it’s incredibly data driven. It’s incredibly deep. Like he, he does a really good job. And so he’s probably the most optimistic this year. and he thinks about this idea of Goldilocks, which is that, inflation is not. Inflation is maybe a little above target, but it’s, it’s fine. It’s, it’s under control.
Like there’s some weakness in the labor market, but it’s not, that bad. And we’re kind of going down the middle here. The Fed is cutting to some degree. We’re kind of in an ideal situation. And he thinks at least, like for the first, I think two, half, two thirds of the year, that’s where we’re looking at.
And so he has a pretty strong target on the s and p because of it.
Matt: How do you understand that as far as the, so that’s basically a reacceleration inside of the economy and a broadening of the rest of the market?
Jack: Yeah. Well, I don’t think, Warren has not been a huge, as, as big of a proponent of the broadening, like as we get into the market.
Like he’s, he’s talked a little bit about maybe broadening within the s and p 500, but he has, he’s been pretty negative on small caps, and correctly so relative to large caps. So he has not been one. And we, when we get down lower, we’ll talk about the broadening stuff with other people, but I think he’s, he’s been less about the broadening than maybe some other people have been.
Matt: Yeah. Which to me makes a lot of sense. And I think this, I’m sure we’ll touch on this too. This goes into the whole small cap valuation argument. You know, we’ve seen this, I saw Mike Green making this the other day. I’ve seen a bunch of people make this point. Small caps are cheap relative to expensive by historical standard, large caps, but they’re not that cheap relative to themselves.
And so it’s a weird place to see, unless you’re gonna see top line and bottom line growth or margin expansion with small caps, like what’s really gonna get ‘em started. That’s a harder pass through of this AI trend that we’re probably a ways away from still.
Jack: Yeah. And part of it is like, where are we in the economic cycle?
Like Bob, Bob Elliots talked a lot about late cycle dynamics. Like we’re kind of late cycle and some of these other people are thinking we’re not as late cycle, like we’re, we’re gonna see an accelerating economy here. And, and AI is probably the big variable in that and we just don’t know. like, I dunno if you listened to or read Howard Mark’s latest memo, but he, he was trying to figure out like AI relative to bubbles.
And a lot of what he got into with that is just, we just don’t know. we can look at past, cycles. We can look at past innovation cycles. We can look at railroads and airlines and, the airplane and whatever else we can look at. But we don’t really know what the impact of these things is in real time.
And I think what happens with ai, because as we know, AI has been driving a lot of this. And by the way, an interesting data point I was listening to, Jan Hatzius from, Goldman was talking about is, I guess, there’s this idea that, what did it come from? the, the idea that like everything has been AI in the market.
Like the economy has been ai, that all the returns have been ai, I forget the, I forget the guy’s name who, who came up with it, but, but the idea is the, the Goldman people were pushing back on at least the economy part of that, and that they were saying that it, it really came, came down to like a lot of the stuff involved in AI is like intermediate goods or is imported.
And so what they were saying is like GDP growth, at least specifically, has really not been that impacted so far by ai. So I, I had kind of been listening to other people thought, maybe AI’s been driving like our, ‘cause we had reason, we’ve had reasonable GDP. but it turns out, I guess from what they’ve said in the data, like the GDP growth is really at this, at this point, largely not driven by ai.
Although I think they thought coming into this year, it might start to see some impact.
Matt: Yeah, I, I think, and granted I haven’t heard the ya hot stuff yet, but what I, what I am aware of is the analysis. Ben Hunt put a lot of this in that project or, world War AI piece. We’ve seen, copies, been writing about this in all sorts of ways too, where you basically have, from this project Genesis thing from the White House, we’ve got a lot of money that’s potentially being directed at the economy that will flow through and show up in GDP potentially starting this year.
And we’re not talking small amounts of money. we’re talking about something like $4 trillion over the, for course of the next four years, potentially in this U-S-G-D-P, around, I think it’s around like $30 trillion, something like that right now. So, if we’re gonna take 30 trillion USP, we’re, we’re basically adding a trillion and change a year.
That’s a big change from what we experienced in 2025 and what’s coming in 2026. I don’t think that comes without effects on earnings. I don’t think that comes without effects on inflation. Time will tell, but that those are big dollars we’re talking about here.
Jack: Yeah. So if we talk about some of the negative things, and we’ll talk about a bunch of risks later in the podcast, but just thinking about some of these, economic outlooks that are a little less optimistic.
Torsten Slack at Apollo, he, he kinda talked about the idea of brief stagflation at the beginning of the year, but he was also talking about an AI field recovery later. So that, that was sort of mildly pessimistic. Pessimistic at the beginning. man group talked about the idea that we might have a mild recession.
so o obviously that wouldn’t be that positive for the market if we did. And the recession thing has been ob as, like a challenging thing because. So many forecasters have been calling for recession. So many indicators of indicated we might have recession and we just haven’t had recession.
But across the board, most of these people are not calling for recession in this year, which probably is when we’ll get it right. Yeah, I would assume that’s a lot
Matt: real optimistic, but I think, this is a common trend inside of it too. Credit to Peter Atwater and coining this khap economy turn. I think that’s what we’re seeing as well.
It’s, it’s not unthinkable that we could have all this AI investment, we could have all these other things going on. And because of this khap experience of where some people aren’t feeling economic pain and other people, especially in certain service and consumer sectors are feeling it. Like we could have a lot of really violent rotation in markets and we could have recessions that exist in pockets under the s under the surface of our different sectors or different consumer groups have different experiences.
That wouldn’t surprise me and that would probably just continue to drive this really weird social feeling We have. Coming out of 2025 into 2026.
Jack: That’s such an interesting thing though, because like large swaths of people, and this is kind of what Ben was getting in and the thing we did with Adam Butler, like large swaths of people are not doing that well relative to the economy.
And also there’s not a great feeling of what you just got into, like the vibe session thing. There’s not a, a great feeling about the economy and, and, part of that is a lot of people aren’t doing well. Part of that is politically we all hate each other right now, so that makes us feel negative.
But it’s just interesting to think about how that actually relates to the economy, that people don’t feel good about it, although the overall economic numbers have been really good. Yeah, because it
Matt: ties back to consumption and at the end of the day in the US where 70 to 80% of, this is all driven by consumption.
If a portion of the consumer base isn’t feeling well or doesn’t have money to spend or is basically spending it all on things like rising electricity costs. That changes the experience. And it wouldn’t surprise me if we start to see some arguments that we have recessions going on under the surface, all over these pockets of the lower side of the K.
And that there’s a reason that Peter Atwater coined this a while ago and that it’s being adopted as widely as it’s being adopted right now.
Jack: And we’ve talked to Jim Paulson about this too, ‘cause he’s kind of sees this as fuel. Like in terms of things getting better in the future, is this idea that if this would change, if we start to see signs and, and I think he thinks like the fed cutting and some other things that are changing might increase this to some degree.
But like if people start feeling more positive about what’s going on, and again, some of the things we’ve talked about just aren’t gonna change in the short term, but that is potentially, more fuel if people start feeling better about what’s going on in the world.
Matt: Oh yeah. That definitely pushes things forward if people start to feel better.
It also pushes things forward. If we see, like I brought up the Genesis mission already. If we see other big policy initiatives. basically in this case, counter policy initiatives that, that help support that base. They could also be stimulative in different ways. It’s impossible to figure out which one of these is exactly going to play out, but it is important to put them all on the table because we could have a counter AI policy that’s actually stimulative in an entirely different way to that swath of the economy.
And that would still be good for net, net for markets and GDP.
Jack: Yeah, and I guess policy around AI is another thing. We didn’t, we didn’t have an agenda, but it’s certainly something that’s gonna matter. I mean, you’ve got Bernie Sanders now talking about banning data centers. I don’t think that’s gonna happen, but none nonetheless, like there’s, there how people feel because AI is, in terms of how people feel already, AI is a potential problem.
AI is something that potentially could increase wealth inequality. It could make a lot of these things worse. And so you’re gonna see a lot of things politically that were like the, the view of AI, I think is getting more and more negative over time. Politically, people, the average person is starting to like it less and less because of the things they’re being told it could mean.
And so how that plays out and how that affects policy. I mean, all that could change, could impact ai, which then could impact the economy.
Matt: Yeah, right now we haven’t seen it turn into a political punching bag yet. We have Great, there are some absolutely fantastic storyboards on this. If you go to the Pan Optica site, or certainly if you’re signed up for Persian Pro, where you can see literally tracking the sentiment data around this, people still think it’s being written about, it’s being discuss.
That AI is this existential threat that we have to win. We have to dominate at, we have to invest in almost at all costs. But the reality is when we see a swing of that intensity in a story, we know that that means there’s a counter story that’s just waiting to crop up its head. ‘cause these things aren’t just gonna go to the moon forever, just like anything else.
Not to say they’re mean reverting, but they do come back down and it does open the door for a counter narrative. One thing that I think is gonna happen in 2026 is this is the year where we see a non Bernie Sanders type take on the AI complex for policy. And whether that comes in the form of it might be inflation starts to run really hot because of electricity and it impacts that lower leg of the K and the K shaped consumer because they’re the most susceptible to those costs.
That’s what Mike Green, that’s what Adam Butler, that’s what all these people are writing about. If that’s the thing that happens, some politician comes out and says, let’s do. Let’s do caps on data center. On data center power. I think Ben Hunt already said, put a 10% cap on electricity consumption by the data centers in states or, smaller territories.
You could do something like that. We’ll see policy like that hit the table at some point if these problems arise, because right now the policy leaning is so heavy in that direction that I wouldn’t be surprised to see it tilt back.
Jack: Well, I really just wanted to get you into the US China thing because my most successful thumbnail ever was like half the US flag, half the China flag.
So I just, I wanted to come up with some reason I could use that here. So now I’ve gotten you to get that in there for me. Call Lou Vincent G let’s get it back on the line. Yeah, exactly. Gotta like, Popin is a third person right now so that I can do that. get him on the thumbnail and the flag and we’d be doing really well.
But it’s another,
Matt: it’s another crazy thing and it’s another driver of all this stuff. Like China is living in a completely different world than we’re operating in in the US right now. We’re telling completely different stories and it’s a, it’s, it’s a really interesting to think because. A, a lot of these surveys and a lot of this data is like really thinking about the US almost like on an island economically in many of these areas.
Really fascinating that you bring that up.
Jack: Yeah, and I would, I would recommend that conversation you and I had with Louis Vincent, if anybody’s never, hasn’t listened to it because it’s just so good. Like I learned so much stuff about China and, regardless of what your opinion is, I just learned so much stuff about what’s actually happening there that I had no idea about.
Yeah,
Matt: let, let me know when we’re going over to China to test drive some electric vehicles. They’re pretty cool, I guess stories. Yeah. I want a drone to fly in front of me. Like the drone?
Jack: Yeah, no, I want a drone in front of me, like telling me what’s coming or something like that. Sounds pretty. I’m been thinking about that
Matt: ever since.
Yeah. Where’s that? I was
Jack: thinking about that more like mass at scale though, that becomes a problem, right? ‘cause aren’t our drones like running into each other or something? I
Speaker 3: know,
Jack: yeah. I’m not sure if it works out. I don’t know if it works out at scale or, but We’ll, we’ll, we’ll get, we’re not getting a drone anytime soon, Matt, so we don’t have to worry about it.
Alright,
Speaker 3: fair enough.
Jack: so let’s go into inflation. yeah and in inflation there’s not too much to say. I mean, I think a lot of these forecasts are right in the same place., some people are a little more worried inflation than others, but a lot of ‘em expect, we’re kind of in that three-ish percent inflation range.
They expect us to stay there and, and across the, across all the forecasts, it doesn’t seem like there’s too much deviation there in terms of, I think there’s some more concern later in the year. Like for instance, Warren Pies, who’s very optimistic. He thinks that eventually is gonna be the side of the equation we need to worry about more.
So he thinks as we get into the back end of the year, into the, the following year. Like inflation concerns could rise again and that could be a problem. But it seems like for this year there aren’t too many concerns about like inflation getting too much higher or, too much lower than where it is.
Matt: Inflation’s a problem if unemployment’s a problem. Unemployment’s always a problem because the way we’re measuring it or not measuring it for many, many cases right now, like there’s a lot of questionable, do we have good data on the inflation numbers, is a question somebody push Eric PackMan to make sure he dives into that statistic.
So I feel like we have something we can actually understand. I’m in the inflation as a problem camp later in the year, and pot, perhaps a meaningful one because of this. Project Genesis stuff gets off the ground. If the policy push is we are going to be pushing in the economy as a combination of government stimulus and private sector spending something like 10 to 15% of GDP into these areas, we’re gonna get some inflation.
We’re not, it’s not gonna be a 3% number If we have that quantity of stimulus hitting the system, that doesn’t mean we’re gonna have double digit inflation starting to annualize by the end of the year. But it does mean that number’s probably higher than 3%. And if you have unemployment starting to crop up and you have inflation as a problem that has no policy initiative because the AI data centers aren’t, helping out proverbial Joe six pack or whatever else, that’s a positive crap storm waiting to happen.
Jack: Yeah, and AI is another big variable with inflation. Maybe not necessarily this year, but long term because, some people think it’s gonna be like the most deflationary force we’ve ever seen. and, and some people disagree. So I don’t know the answer to that. But obviously as, as we get more and more into this AI boom, like its impact on and inflation will probably be a bigger, bigger issue.
Matt: Yeah. We gotta check in with Kevin Weir on this and in prior years, he’s, he’s had some great ideas on, where inflation breakevens were pricing this stuff and how much they may or may not be underpricing the risk I want an update on in the next six to 12 months where inflation breakevens are and, and if they’re underpricing the volatility relative to where they could be.
Jack: Yeah. And I know you’re gonna bring him on and talk to him in excess returns I think sometime early next year. So we we’re gonna get him on out where he is now.
Matt: This is going on
Jack: my list. So, and I guess the next thing with inflation that leads into that is, is the cuts and the fed. and, there weren’t, I mean I think the consensus probably across these is we may get less.
Cuts than we think. I mean, Schwab was talking about this, and this is, you’re gonna have Lizanne, you’re gonna talk to Lizanne Saunders pretty soon, but, this was the fixed income side of Schwab was talking about two to three cuts in 2026. but a lot of the others were saying, what, the Fed is probably, and it seems like the, I think the chances of a cut are like 20% in January right now.
So that, that’s kind of backed down. So I think a lot of people think we’re probably in for a pause here and maybe less cuts than, many of us think next year.
Matt: Where, where are you on this? What’s the jack forehand gut say?
Jack: Jack four has no idea about the guts., yeah, it’s, it’s just hard to say and I, I don’t know that it has, it, it’s hard to even predict, even if what the cuts are gonna be, it’s hard to predict what’s gonna happen.
Like I remember what that Liz Ann Saunders last interview you did, I used this idea that like, the fact that we haven’t had cuts is a good thing. ‘cause she had said that at that time last year. So it’s not necessarily like the cuts are a good thing. Like it depends on what the cuts are being caused by.
If the cuts are being caused by like, significant economic weakness, maybe it’s not a good thing. So I, I just think it’s a variable. Like even if I told you what the, the number of cuts was gonna be, I don’t know that you could tell me too much about like what’s gonna happen with the economy and what’s gonna happen with the market.
Yeah.
Matt: I am also in that camp of what does it even mean if we’re cutting? I do think, and I’ll, I’ll go with Schwab on this one and just what my instinct is, is that there’s only so many cuts you can do, so long as you still have some baseline inflation and you don’t have a growing unemployment. If the Fed’s mandate is still to look at inflation and the unemployment situation, then maybe they can do a few more cuts to get into the year.
We obviously see what the data says at that point, but it’s, I’m hard pressed to see a scenario where they’re cutting like five times in the next few months unless there’s a crisis. Right.
Jack: Well, the the other thing you gotta think about is the independence thing. And, and that’s, that’s gonna be the interesting thing this year.
We’re getting a new Fed chair, obviously that’s gonna be installed by Trump. We had more, dissension in the Fed in the last meeting than we’ve had in the past. Just thinking about it is just really interesting to me. I don’t have a strong opinion on it, but thinking about how that’s gonna play out, like, I, I was actually asking Chad Bt about this.
I’m like, has a fed chair ever dissented before? And the answer was, I guess, in the modern era since 1951. No, it, like, may might have happened in like 1931 or something, but could you see a situation here where if, if a Trump appointee wants to cut and the board doesn’t, like, could the, could the chairman dissent?
I don’t know. I mean, I obviously know nothing about this stuff, but it is interesting. We’re getting more descent. You know, the more of the Trump appointed people are gonna want cuts. There’s some other Fed governors who are feeling stronger and stronger against them. So I think we’re probably gonna get more dissent this year than we’ve seen in a while.
Matt: I would bet on dissent too. And I would bet on dissent because I think data integrity, the way they’re asking these questions and what even the questions are that they’re going to pose to ask all get called into under more and more pressure. And that’s, I don’t know if that changes the way we read these fed meeting minutes or not, or what the dot plot looks like or how this plays out.
But that’s a concerning, that’s a concerning trend because that probably actually contributes a different type of noise to markets than we’ve historically experienced. To your point, this isn’t a normal type of thing we usually see with, with increasing descent amongst the, the Fed and the board. Okay.
Jack: So the last thing on the, on the macro stuff is fiscal policy.
You know, what’s gonna be the impact there? When we were talking to, Paul Iman from Russell, like they think the big beautiful bill will be somewhat stimulative this year. They had a nice chart of like all the different factors, which I, I can put in the podcast of like all the different factors and what they mean, like immigration and, fiscal stimulus and all that stuff.
And fiscal was something they thought would be slightly positive, for this year. So that could, and Schwab talked about that too, in their outlook, that it could add meaningful boosts to growth this year. So that’s definitely something. And then the other thing you’ve got sitting in the background on government policy is the deficit.
and, and that’s one that’s just so hard. Like we’ve talked to so many people and so many people call for debt crises. And it’s just, it’s something that certainly is gonna have negative implications at some point. But the degree to those and the timing of those, I, I think even the smartest economists in the world just have no idea.
Matt: I think post, post GFC, post COVID, OVI like fiscal as the new monetary is a known thing. We’ve now moved beyond. Response to crisis with both fiscal and monetary stimulus. We’ve realized the power of fiscal policymakers know the power of fiscal. And now we’ve moved into an era of trying to look at other ways to do fiscal that feels, that feels different than necessarily like direct.
I mean, I know we’re paying dividends to veterans and things like that right now, but they’re pushing the parameters of what fiscal stimulus can look like. And it’s hard for me to imagine we don’t see more of that next year, including in the AI build out, including into push into some of these areas. And stimulus makes things go up.
Stimulus doesn’t hurt too much. Stimulus eventually gets us into trouble. That gets us into AI or into bubble concerns and bubble territories. But if we have stimulus, and I think this is one of the things Warren Pies is probably looking at when he’s coming up with his numbers, if you have a bunch of stimulus measures, it’s hard to bet against that stuff.
Jack: Yeah. And as we switch to, I just wanna cover AI a little bit more at the end here, because a lot of the ai, we’ve talked about sort of the AI and the economy, but then you’ve also got just the nuts and bolts of what’s going on. And that was a theme across these is like the idea of what does this CapEx build out mean and the idea of the limitations of power.
Can the power grid handle this, like BlackRock talked about, the physical constraints of the AI build out due to energy. So a lot of those nuts and bolts of AI are, are something these market strategists are thinking a lot about this year. I don’t know if it’s very hard for anybody to necessarily figure out how it’s all gonna play out, but we definitely are, are dealing with, it’s interesting, like this started as coming from the cash.
Of these companies. Now we’re starting to get debt mixed in. Now we’re starting to get power constraints mixed in. So we’re kind of in a new stage of this in terms of how it’ll look going forward.
Matt: Yeah. If you haven’t, for people who haven’t looked at like the IEA reports on this, it’s, it’s very valuable to look at the various energy consumption outlooks on what they see here because these numbers are pretty staggering.
I’m trying to look, I have it, so IEA energy, they basically said we will have more than a double in energy consumption by data centers by 2030. We move from a few hundred terawatt hours to around a thousand, and depending on who you look at, it’s a client from 2% of electricity in the US to 10 to 12%. By 2030 and zero at the global level are just over zero, up to about 3% of total electricity consumption.
So when you tie that back to consumer, when you start to look at this, if, if we don’t have a cap on this data center, electricity consumption, we are going to see massive price increases in these places. And if we don’t see direct investment into bringing new power sources online, those price increases are coming as fast as they build these data centers out.
That is a very, very real concern and risk. Who knows what that’s, that’s going to do. Oh, and actually I got one other crazy thing on ai besides the data center thing. The, the argument of revenue versus depreciation. Do what I’m talking about? This is another one that I think copy nailed months ago.
Do you remember this argument? Did you run into this one? I’ve,
Jack: I’ve heard a little bit about it, but you’ll, you’ll definitely know more than me.
Matt: So it’s basically like you have. you’re hyperscalers are gonna spend a trillion dollars. So for $400 billion a year in data, spend over 15 to $20 billion in revenue.
So there’s basically no business model here yet. Surprise, surprise. Especially when you factor in, you’ve got $40 billion. That’s two times revenue in depreciation charged every year. So it’s like you got this massive p and l problem that’s building an AI where basically depreciation is running at two times revenue.
And there’s some point in this future where the rubber meets the road here, where we’ve either depreciated everything to zero and there’s nothing more we can do ‘cause we don’t have the revenue to do it or we’ve reversed course. There’s almost no sustainable path for this to work out unless we see a giant S-curve in adoption revenues and everything else, and that’s running in the face of this electricity problem.
Jack: Yeah, there’s, there’s like so much in the accounting on this stuff too. It’s like beyond my pay grade. But Jim Chanos has been out talking about a lot of this stuff, and it is just, it is very interesting to think about. It’s just such a massive thing and there’s just so many different implications and depreciation.
There’s just so much going on. It, it, it’ll be interesting to see how it plays out. I mean, I, I don’t think any, even these market strategists we read, like a lot of them did not have definitive takes on this. I think a lot of people recognize this is such a tough thing to forecast based on where we are.
Matt: Yeah. You can’t have a definitive take when you’re talking about a, a level of spend. Again, that’s relative to the size of the spend in World War II and in COVID. These are giant numbers that you couldn’t predict the outcomes coming out of, of how this reallocation of capital inside the economy was going to impact the economy, let alone earnings.
So it’s humbling to see people flagging this stuff and going, this math makes my brain hurt. If Chinos and copier’s making their ear lobes itch, I’m at least interested in what’s going on.
Jack: But before we get outta this too, Matt, data centers in space, I think the people want the definitive answer from you.
When are we getting those?
Matt: We don’t already have them. I think, I think the, the chemtrails are a sign of the, the data center. I, I don’t know, are, are we gonna push for stuff like that? Absolutely. But that’s just one step closer than Mars, I guess. I don’t know.
Jack: It’s so cool. It’s so cool to think about like, ‘cause first of all, like being the value investor that I am, I’m like data, there’s not gonna be data centers in space.
That’s ridiculous. But like, you listen to people like Gavin Baker, like there are gonna be data centers in space. There’s gonna be data centers
Matt: in space. SpaceX is gonna launch ‘em, and it’s coming, it’s coming in some form or another.
Jack: And when you think about it from first principles, I mean, the sun is there and there’s like lots of power from the sun.
And then you think about it. Although there’s this problem of like, I think transmitting cold in a vacuum, it’s very cold there. And the data centers need to be cooled. So that’s a thing. And like we know through SpaceX we can get the loads up there. So obviously whether it can be done economically is, is a different question.
But I, I saw something the other day that they did train like an LLM. Like in space, that, that’s like already been done. So I think clearly we can have data centers in space. The question is, can we do it economically? And also can we do it at the scale that it needs to be done to actually impact like our, our energy problem here on the ground?
Matt: And if people are trying to solve problems by putting things in space with economic proof, potentially at some point on how this actually fixes a problem here, that just tells you the range of potential outcomes that we have in front of us right now.
Jack: Yeah. And for anybody who hasn’t listened to it, like Gavin Baker’s interview with Patrick O’Shaughnessy, which was what, a few weeks back or something like that.
Just out outstanding on this. Like for, for someone like me who’s trying to learn about what’s going on here with, with the whole thing with ai, but the data centers in space was covered as well. Like it is just, it’s an outstanding interview.
Matt: Yeah. And Matt Russell’s the, the episode that they did on SpaceX, like, and like just.
Some of the things that people with a value bias were, were default inclined to be skeptical of. But it’s really interesting to hear what these business models are and how they’re actually thinking through these things. Agreed.
Jack: Yeah. And you need that stuff like when you’re like, one of the things I’ve learned over my career is like, I’m like, oh, this, this valuation, this PE ratio and stuff you like, for people like me, I need to be listening to more of that than I need to be listening to people who agree with me that like value will have its day again.
Like it’s, it’s much more important that I listen to that and even if I get a little bit too far with my data centers in space or whatever, it, it’s still, it’s still beneficial for me to understand this stuff.
Matt: Hey, if nothing else, that kind of stuff got us Star Wars and that ultimately got us space balls.
So I look forward to the comedy franchises 30 years down the road ridiculing all this.
Jack: And, and so another common thing about this was this idea of AI diffusion, which is, we talked about it a little bit earlier, but this idea of when will the benefit come down to these, like when will the economic benefits start carrying down to a lot of different companies?
And, you and I use AI a ton, but it’s hard to take. Our use of AI and, and translate that to like what it means for economic growth. So it’s a challenging thing, but a lot of these forecasts, like I know Russell was talking about it, a lot of these forecasts do think we’re gonna see this diffusion now and we’re gonna start to see this economic benefit carry down beyond the hyperscalers.
Matt: Yeah. And it’s How many, how many ais are you paying for at this point? Five. You’re on five right now? I
Jack: don’t have the $200 a month plan. Like I have the, the cheaper plan, but like, yeah, yeah, yeah, yeah. I use five of ‘em, all of them.
Matt: Okay. I think I’m, I’m either three or four paid right now, and I’ll probably be at five by the end of the year.
Like within hours of us recording this, I’ll probably lock down one or two others. And inside of that, I think the crazy reality, because what we’re looking for, back to the argument of how. These, the, the AI companies are effectively, like, their revenue is really short, so we’re doing our part to have to help push the revenue up.
But the other thing is, it’s like I don’t have a job at Google and Microsoft where I wrote two chat bots to like do both of my jobs so I can sit on the beach or play video games all day. I know you have the same experience as I as I do, where it’s like, oh no. It’s like AI has enabled me to work six jobs at once, like a crazy person.
And I, I don’t know what the impacts of that is. I don’t think there’s a way for us to measure that, but I do think the diffusion will start to happen. It’s just gonna take some time. Yet if we’re early on the earlier side of this curve for adopting this for not tech programming uses for ways that we improve our experience with our day-to-day work and our day jobs, it’s really interesting to think of.
how does that spread through the adoption life cycle? How do more people start figuring it out and how does the contractor is doing a roof go, this is what improves my process and unlocks some profitability. That’s gonna take some time for us to get there.
Jack: And it’s interesting to see the balance between like the tech optimists and sort of the economic realists.
So like I was listening to this, do the Duar Kesh podcast?
Matt: Oh yeah, yeah. He’s great. Yeah,
Jack: he had that and Dredge Carpathy, who was like a very early guy in this, I think he also ran self-driving for Tesla for a long time. And like they were having a debate about this. And there are two tech guys, but Duar Kesh was talking about it, and I won’t, I won’t explain it as well as he did, but like this idea, if you think about, I’ve got Matt right now, but as AI gets better and better, let’s say Mat has an additional 20 mats that operate at like 90% of the capacity of Mat.
Like, doesn’t that, as you carry that across an economy, lead to maybe levels of economic growth we haven’t thought about before? Because you, you, you think about it as like labor supply and productivity being the two things here. Well, if I’m like creating this extra labor supply of these things, like I’m probably gonna, I’m probably gonna boost productivity, I’m probably gonna boost economic growth.
And then on dredge who’s like deep in this was kind of like saying like, we always end back in this 2% and change economic growth thing. Like we’re probably with all these other innovations we, we got there, we’re probably gonna get back there. But it, it, it’s just interesting to think about that, like that separation.
I don’t have any answers. I mean, I know the people that are predicting like 20% GDP growth are, are likely to be wrong. But that doesn’t mean that somewhere in between the, the 2% and the 20%, there’s not like a level of growth that you or I might not think is possible that maybe gets unlocked by this.
Matt: Sure. Why not? Right? I don’t really know. I mean, it’s, it’s so hard to figure it out. Right? That’s how it feels. And I think part of the question there though becomes, can you have. Because, like otherwise, the only way you get to this historically is you have population growth to increase consumption. When I have 20, Jack Gpt running around, running at 90% of JAK forehand, those 20 Jack gpt are not consumers in the economy.
So are they, are they pure profit and pure growth? Is there any consumption thing where there’s the give and take back and forth to the economy? Because like we make goods and services and put them out into the real economy, but then we also consume goods and services and that’s how this thing levels out.
And that’s part of why we always revert back down to that like 2% growth. If you invent a bunch of, it’s, it’s, it’s like a, a kid with an Instagram profile with like, 200,000 bots and Bangladesh as followers. It’s like these just inflated, meaningless numbers. Are we con consuming or creating anything from this?
Or is it just a big technical. I’m outta my league. Shut me up. Take me to the next
Jack: question. Yeah, no, I am too. But, I, I remember like when we had Bob Elliott on, I, I used the thumbnail something about like, unemployed people don’t spend money. And like, that was his whole point is like, if you’re gonna argue what, we’re gonna have all this efficiency and it’s gonna get rid of all these jobs, well what about the money those people like, right, that don’t have jobs.
Now we’re spending like, where’s that coming from? So it, yeah, there’s no answer to it. I mean, but it’s just interesting to think about it. And I can see arguments on both sides. And, and I think when you see these forecasts we all read, you see that too. you see probably optimism, like leaning towards optimism, but you also see both sides of this, that these people really don’t know, what’s gonna happen.
Matt: Yeah, I mean, we’ll have more blogs than podcasts. I think that’s one thing we can vet on.
Jack: So we’ll shift to the part that people like the most, but as we, as we mentioned earlier, is probably not the greatest, the most valuable part, which is the actual price targets for the s and p. And sort of the outlooks for the market.
And they, they ranged anywhere from 7,100 to, I think, close to 8,000 or I think, I think Warren Pies was the highest in the 7,800 range., his, his actual forecast is behind the paywall, but he talked about this on a podcast. So Tom Lee, as you can expect, is up there near Warren Pies. being optimistic as well.
But like, I’ll ask you how you think about this. Well, first of all, let me ask you, like, you did work at one of these big banks a long time ago. Like what happens with these things? Like you’ve got the person at the top of a big bank writing this outlook, like when you’re an advisor there, like, what do you do?
Do you do anything with this?
Matt: No, I mean, they inform your capital market assumptions. That’s the most important and the most valuable part of this is, and granted there’s a million frameworks for deciding on these things, but what you’re really doing is driving your, deriving your capital market assumptions from these types of exercises.
And ideally, what you’re doing to get your capital market assumptions is you’re looking at like, okay, what’s the best way that our. Analysis can show what we should expect for GDP growth, where interest rates likely are the ranges. They could move in, where valuations likely are, where earnings and revenue and profit margins likely are the ranges they could move in.
What should we expect for not just the year ahead, but then also sometime of dynamic assumption over the next handful of years, and then some type of strategic assumption over the next 10 or 15 or 20 years. All that together inside of a correlation matrix, you start to do the math and crunch the numbers and go, this backs up why we think it is prudent to have an asset allocation and invest in a way that rhymes with these models.
That’s the ultimate actual point of the exercise. Now, to go on CNBC and talk up your firm and try to drum up new business and get clients in the door, that’s another part of it that we can’t ignore. The storytelling of this is really important. What’s fascinating to me this year is that we see a lot of targets that are basically calling for low teens earning growth, and basically the market’s gonna go up in a low teens amount.
Now, if the historical average is 10 and an above average return would be 20, I am rounding numbers very generically. Then a lot of ‘em are basically just splitting the difference, which is really, really common here. We don’t wanna bet on average, and we don’t wanna bet on a standard deviation above average.
So we’ll split the difference. We’ll land in the middle. It is that technical, I assure you. What’s interesting about this one though, is we see price appreciation tracking with basically earnings growth, and what that is, assuming, or presuming, I guess I should say in this case, is that the markets are gonna go up as much as earnings.
The valuation multiple is gonna stay about the same and the concerning thread in all of these that. You start to dig deeper on is revenue growth almost across the board is coming in around half of what earnings growth is, which means these analysts are basically saying the profit margin is going to increase.
Again, to preserve the multiple where it is feels a little weird. But again, to the beginning, this is what vanilla ice cream is right now. More profit margin expansion, presumably ai, presumably other things, helping to drive that and that’s gonna carry markets through the year end as we continue to get that profit margin expansion.
And we don’t doubt those multiples. I don’t know if I did a good job of answering your question about You did, but
Jack: it is interesting too because like profit margins are traditionally a mean reverting series. also valuations over time, eventually, typically over time have like reverted around some sort of average, but neither one of those has been happening.
And that’s interesting. Like we, we talked about this on our podcast with Jim Paulson, like the average valuation of the market. Like, you’ve got the range like before 1980 and you’ve got the range after 1980. But one of the important points he made is even within that range after 1980, the average keeps going up.
Yeah. Like, so are there reasons that we continue because of, technology and everything that’s improving to expect, like, Val, at least the, that doesn’t mean we can’t be expensive now, but it means like, are there reasons to believe that average will keep going up? And it’s the same thing with margins.
Like are there reasons to believe, ‘cause people like me are constantly, like, these margins have to mean revert. Like this is valuation, like this has to like value investor in me, but like they haven’t been, and so that, that’s just an interesting question. It’s an interesting question. How does AI. Play into that ‘cause a could ai, at least for the the foreseeable future, continue that margin expansion.
Matt: To me, that’s the biggest concern in these is that we have another year. ‘cause same thing is, looks like is gonna be the case in 2025. We don’t have the last quarters of earnings yet here, but it basically looks like we’re getting margin expansion off of revenue coming in around half ballpark, around half of earnings growth.
And to say that we’re gonna do the same thing again, not that it can’t happen, but there’s only so many times you can expand those margins and preserve that multiple. What this calls into question is that eventually when we get some type of a reset in these numbers, some type of mean reversion, however you wanna frame it, you have that double risk of contracting margins and contracting multiples at the same time.
And that that actually genuinely concerns me for some time in the next handful of years. Could we have a really sharp and steep. Contraction that that hurts really maybe worse than normal, especially depending if we have an economic event tied to it or not. I, I don’t know, but I’m really going to be watching for that rotation theme inside of markets this year to see if we start to see profit margins and valuations start to correlate a little bit more, where when those profit margins disappoint, those valuations get the air sucked out of ‘em real fast.
Jack: Yeah. One of the interesting things on margins too, and, I interviewed Graham, Graham Forster from Orbis on the podcast and, and he made this point, and, and I think it’s a really interesting point is like whenever you think about this trend, alright, margins are gonna grow forever or whatever trend it is, it’s great to carry it far out in the future and then say like, what does that actually mean?
Yes. So like they carried forward the margin expansion and they’re like, this is what margins would look like in 15 years. And you’re like, holy crap. Like that’s not happening. No. Like margins aren’t gonna be that. So at some point this is gonna slow down and I think that’s an interesting way to like look at it, to say, alright, I think it might continue, but I’ve also gotta think about if that act, what that actually means going forward.
Matt: Yeah. And what does that do? And I will say this, Savita at Bank of America Merrill Lynch is at the low end of the estimates this year. They have a really interesting quantitative model that they’ve built out that measures all these things, and that’s part of the assumptions. They have these dynamic capital market assumptions in particular that weight all these things and go, what if each of these is mean reverting over the next three to five year period and how should we think about that?
Tempers a lot of optimism against the strategic longer term assumptions, and at least they have a framework for putting that into scope. My guess is that’s why she’s on the lower end of the estimates this year because of how stretched in so many categories they are to the high ends of those averages and going, we’re not gonna bet against them.
We’re still gonna say we’re optimistic on what happens going forward, but this does constrain the amount of potential growth we should be expecting. That’s a valuable part of this analysis.
Jack: And that gets to one of the best ways I like to use these. So I always like to find the lowest estimate and the highest one for the s and p.
And then I look to look in behind the scenes as to how they’re getting there. And so, to your point, most people are saying earnings are gonna go up this amount. The s and p is gonna go up the same amount as the s as that there’s, there’s not that much to learn in that. But her, she’s calling for earnings to actually grow up, go up just as much as people expect, but significant multiple contraction in there.
And Warren Pies on the other end I think is talking about some degree, like a, a Goldilocks economic standpoint, scenario, but also multiple expansion. So it’s good to go into the depth on those and figure out, like if I want to think about the different cases and the range, look at the low one, look at the high one and say, what are the differences there?
And that, that kind of gives me some ideas of maybe some of the significant things to think about as we head into the year.
Matt: Yeah. I think it’s massively important because you wanna look at top line and bottom line and then the profit margin in between. And then you also want to ask the questions. And I think this is an interesting part of the dialogue going into this year, is the changing of the balance sheet at so many of these companies and the changing of the balance sheet as we look at the s and p 500 writ large, as we’re seeing a shift of more capital light in industries to more capital intensive industries in various ways, and the different types of financing that get them to that point.
These all have an impact on the profit margin in between that top and the bottom line. It’s worth spending some time to understand what a good scenario looks like, what a medium scenario looks like, and maybe even what a bad scenario looks like. Not that you’ll see that in one of these year ahead projections.
Jack: Yeah, I mean eventually we’re gonna see a scenario, we’re gonna see a bad scenario or unfortunately, yes,
Matt: and it will
Jack: one of these years. I mean, I’m certainly not predicting it for this year, and if I was, you shouldn’t listen to me anyway, but. It is possible. But the, the next thought I thing I thought was interesting is this idea of earnings with the Mag seven versus the 4 93.
and there were some divergent opinions on this. I know Goldman noted that the, I think the top seven companies in the s and p are 36% of market cap and 26% of earnings. So yes, they, they are overvalued relative to their earnings, but they also are producing a huge portion of the earnings. And like when you look back over the past three to five years and you look at earnings growth of the MAG seven or, or the top 10, or however you look at it against everyone else, like it’s amazing the difference, like that earnings growth has just been massively higher in the bigger companies.
And the question is, is that going to continue? And I think you’ve got a lot of divergence among these companies or among these different people who issued forecasts in thinking about that. We are seeing some improvement in the smaller companies, but whether that will happen and how AI plays into it, I think that’s an important thing as we look into the new year.
Matt: Absolutely. And the reality is the types of margins that have been afforded to the Mag seven names. Certainly in the past decade, perhaps even more concentrated in the last few years, those types of margins are not replicable at scale across the other 4 93 companies. They’re just not gonna have 70, 80, 90% margins.
It’s not gonna happen for your oil and gas company per se, or for your utility or your bank or your consumer staples company. So, which in what’s interesting is if we are going to see more earnings growth picked up by other sectors of the economy, it has to definitionally be at a much lower margin and that’s gonna rely on something else happening in the economy.
Probably a strengthening, probably a healthy consumer, probably less inflation in some way, shape or form. If we can get there that says we can start to spread this out, very disappointing for returns probably for those Mag seven stocks if we’re in that scenario too.
Jack: Yeah, and one of the things people like value investors like me have to be careful about asking about is this idea that we all want 2000 again and we’re like, alright, our value companies will rise again and the mag seven will tank, but.
That’s not good for the market. given the size of the Mag seven, like our value companies aren’t gonna go up enough to offset the decline. I mean, we might do well, well, relatively, but you’re, you’re in a bad, if these companies tank these, these mag seven type companies, you’re in for a bad market.
Matt: Yeah. There was a great, actually Kevin Weir, and this is one of the ones I flagged for when I talked to him early next year about this, he actually looked at rotations and market declines and he looked at the 99 bubble and like what you were just talking about coming outta the tech bubble, how basically your value, your small cap value outperforms you could actually do pretty well.
Avoiding the indexes, avoiding the dominant sectors, and being in these, counter sectors where the rotation wins. That worked relatively well in the early two thousands in that cycle. That did not happen in the great financial crisis. In the global financial crisis. Like there wasn’t anywhere to hide in the global financial crisis.
You might’ve been down 10 or 20 instead of down 40 or 50, but you still got your. You know, you still got your butt handed to you and there is something very, very real. And looking at this, what are the rotation opportunities? Where are you gonna be able to hide? And also what are the risks about betting against some of this stuff?
‘cause you might still continue to be wrong for a continued period of time. Part of what makes it so hard, part of what makes it about having exposure and having the things you believe in for the long term as a key factor, literal, quantitative factor or otherwise, that you tilt back to over and over again and go, I’m at least comfortable with this risk I’m taking.
Jack: And just to get at the divergence I was talking about before, like Goldman does expect the s and p 4 93 to experience accelerated earnings, but places like Apollo were talking about, they expect margins to keep going up for the leaders and down for everybody else., and HSBC talked about expecting mega cap earnings acceleration.
So this is really, this is one of the ones that there was more disagreement I think. Than anywhere else. But this, that’s not to, I mean, that’s been a disagreement for a long time here. I mean, a lot of people have been talking about broadening of earnings growth for a long time and it hasn’t happened. And so who knows?
I mean, at some point it’s going to happen. These companies just can’t keep growing, I don’t think, relative to everyone else for that much. And also their business has changed this year. it’s, it’s an important point to keep in mind. I mean, these are not the capital light businesses they always were. they’re, they’re spending a bunch of money now.
And that money may be worth it, it may not, but you have to at least argue that their, their businesses have changed going forward. And that changes how you analyze ‘em,
Matt: changes what you call earnings, all these things. It’s a very, very messy piece of calculus at all times. But it feels like now more than ever.
Jack: And so there was disagreement too on the broadening of the actual rally, which you would expect tied to the earnings growth as well. like Goldman did talk about the idea that they’re expecting a broadening bull market. And obviously someone like me who’s investing more in your average stock than the Mag seven would love that.
But I mean, we all have to take into account the fact that, that, we’ve been talking about that for a long time. And also people were talking about international, I mean, we. We haven’t covered it yet, but international’s had a great bounce back year this year. There were a lot of reasons for that. is it the start of the international run All of us have been hoping for?
Or is it just a blip? We don’t know, but there’s certainly tailwinds to international now that weren’t there for a long time.
Matt: Do you feel like with, so I’m in the camp, we’re in the camp that a, an international allocation is important. We’re not betting on continued above average growth or anything super exciting or or whatnot there.
But it feels like this has been a reminder of why you have the international allocation. But it doesn’t feel, don’t feel great about international. And I am still in the, despite Louis Vincent Gav making me feel very good about places like China. I don’t feel great about being an investor in China just the same way.
I don’t feel like being good about being an investor in a lot of places. At least now with other people’s money where we have to answer that question of, Hey, there’s a chance this could just get turned off here. So. Where do you come down on, I guess, the international outlook looking at this stuff?
Jack: This comes down to, if you think about it long term, at least it comes down to the math versus the way people actually act in the real world.
And so there you go. People like me have been talking about the math for a very, very long time. I mean, the math is irrefutable that if, if you wanna have a long term portfolio, you wanna be diversified in international stocks, it’s just that you can’t refute the math. But you also can’t refute the 20 year period where it didn’t work.
And, if you’re going back to your investors every year and saying you need to have this because it works long term, you need to have this ‘cause it works long term. Just eventually they just tune you out. So I mean, I think it was good that we gotta bounce back international. And it’s interesting to me, like if you look at, one of the things I’ve learned on the Jim Paulson show is like if you just look at what the dollar’s doing, that will tell you a lot about the US versus international performance.
And like he thinks a lot of that is just the dollars weakened this year. So international stocks are doing better. So maybe you need to know what, if you’re thinking about it shorter term, maybe you need to know more about what’s gonna happen with the dollar. Before you think about it, but I think long term there’s definitely a very strong case for it.
But we also have to live in the real world that people, if if something’s just not working and not working and not working, people aren’t gonna keep doing it.
Matt: Agreed. Big Munger stamp on. Yes. Nothing more to add to that.
Jack: So yeah, there’s not too much in the factors and styles we’re gonna cover this quickly.
Like as a factor investor, I had to, I mean obviously this, what was interesting about this year is that how bad factor investing was in general. like value didn’t have a great year. It had a amazing year internationally, but in the US value didn’t have a great year. I think quality had one of its worst years on record quality was terrible.
It
Matt: hurt to be something I can emotionally go back to and feel like I can talk to clients about and feel like I can tell myself is a belief in quality. And just like the durability of profits in companies as, as compounding machines. ‘cause we wanna own ‘em for a long time. We want that built the, that ability to compound.
This year owning anything with quality tied to it, whether it’s literally through a factor focus strategy or just as a core belief. It sucked to be a quality investor. This year.
Jack: It was really like momentum was the, the one factor that was decent this year. Like out outside of that, if you were using factors like it, it didn’t go that well for you.
So that is what it is. But we know as factor investors, that’s just part of the deal. Like they’re gonna have their off years. You’ve gotta have a long term term timeframe if you’re gonna use them. So we understand that. but it’s, and also why
Matt: you balance, like I know of my quality bias much like, of your value bias and what do we both pair that with?
Wherever we can, we pair it with momentum for a reason. ‘cause it makes no logical sense in the way that, it’s not tied to our DNA and our normal behavior. But that’s why it’s complimentary. Yeah, it’s why
Jack: when you are a factor investor, you become a multi-factor investor very, very quickly. Exactly. In your career, because you’re just like, you think I could bet on this one, or I could bet on that one, or this one’s about to come back.
And you just quickly realize that’s not gonna happen. Like, and you also realize like your clients are not gonna stick with it during its 10 year underperforming periods. So if you’re gonna, and you still have your struggling periods, no matter how many factors you use, but at least if you minimize it and you use multiple factors, you end up in a better situation.
so, so yeah. As we wrap up here, I just wanted to maybe cover some of the risks, because we, we’ve talked about a pretty, I mean, people are pretty optimistic. There’s nobody who had a savita was, had a four to 5% increase in the market, but nobody had a, a negative return in the market. So it’s good to at least think about like, what are the risks?
And when, when I was writing these down, the first thing I thought about was ai because that was the main theme across this, like obviously how AI plays out. It is gonna have a big impact on the market. And if it doesn’t play out the way people expect, if we start to see more and more when we’ve seen some signs that maybe this CapEx spending wasn’t worth it, we had some bad periods in the market.
So if we see that again, we’re probably that. That’s probably gonna drive the market lower.
Matt: I’m with you. I think AI is the dominant story in markets right now. I think AI will spill over into how we talk about inflation. I think AI will spill over in how we talk about revenue, profit margins, and earnings across the rest of the market because the Mag seven are still such a dominant portion, and I think if we see anything that pushes back on policy in any of these ways, ways and shifts, basically the landscape for how money is flowing and how earnings are happening, that’s the biggest risk of this market.
If inflation rears its head and we get a policy that goes against AI data centers, it’s gonna hit earnings. There’s too many levels of this to say. If everybody’s talking about this story, the risk to blow this up is buried somewhere in here. We might not be able to guess it right now, but that’s the thing to watch because the risk is going to emerge from the thing we’re most optimistic about.
It always does. It sucks every time, but it’s in there somewhere.
Jack: And one of the things Savita had pointed out in hers is deteriorating liquidity. So that, that, that’s certainly a risk as well. We could think about, some of her metrics behind the scenes are seeing deteriorating liquidity, so that, that’s definitely a risk.
We have to think about fewer fed cuts. We talked about that before. although it’s, we don’t know for sure if fed cuts actually what, what the actual impact on the market is, but that, that’s certainly a risk. So there’s definitely things, and then obviously you get into things like. Geopolitical risk that we just can’t, we can’t gauge.
I mean obviously we’re in a, regardless of how you feel about the current administration or the current administrations across the world, you have to admit it’s probably more volatile situation than it’s been in the past. So you certainly could have something on those fronts. I mean, it’s tough to do anything about that, but that’s certainly something to think about going forward.
Matt: Yeah, at least Louis Vincent gov made me feel better about the China Taiwan scenario. Everybody’s favorite, black Swan. And he was at least like, that’s not a black swan. And for a moment I was like, okay, good. I feel like I don’t have to worry about that one. The way that I always sort of in the back of my head, worry about that at two o’clock in the morning.
Jack: And, and the last one, which I would push back on a little bit that you, you heard in these is this idea of concentration risk. And that’s something I’ve talked about a lot about in my career, but I think I’ve been proven wrong too many times to think that the concentration in and of itself is necessarily.
A risk to the market. the, these companies are doing very, very well. They have lots of earnings. It, it, it can be a risk to the market, but it also cannot be a risk to the market. And so this idea that this, this concentrated rally can’t continue, I mean, how many years have we been saying like this concentrated rally can’t continue and it’s continued.
So I, I do think it’s a risk out there, but we also also have to account for the fact that this is not 1999. Like we, we don’t have like bubble level stocks driving the index. We have good quality companies.
Matt: Yeah, this is risk in terms of variance. And variance means risk cuts in both directions. Back to the beginning, Elroy Jensen.
Risk means more things can happen than will happen. And this is one of those scenarios where concentration might very well be the thing that carries us higher. Yet again, defying odds. And I would happily sit here a year from now and go, holy crap. Can’t believe that happened again. But not all that surprised.
In hindsight, given these starting conditions.
Jack: So I don’t think, Matt, you and I are gonna do our own targets here as we wrap up, but, ‘cause I think we’ve been proven wrong. We, we actually did a separate show where we’ve done those in previous years just to prove that we don’t know how to do it. and I don’t even know who won last year between me, you, and Justin, but, so I don’t think we’ll do that.
But I, I will say that like I, I am in the optimistic camp. I, I don’t do anything with our portfolios based on what I think about the market, but I still remain like Warren Pies is probably the person I trust most in markets. And I still remain, at least in the short term, in the optimistic camp.
Matt: I am short term in the optimistic camp, and I am just perpetually skeptical of all things that people are excited about because I have learned well in life and otherwise, and I am an optimist, but it’s the hope that kills you, right?
Like, I’m just gonna keep, like that’s, that’s embedded in my head that it is the hope that kills you with these things. And if everybody’s all excited, I’m gonna be the skeptical little person who’s like, yeah, but, but what if.
Jack: What if? Well, as, as the value investor, I’m gonna be right there with you, in my skepticism of everything.
And, that’s part of why I’ve been trying to learn more and more about these innovative technologies and trying to maybe look at the other side of this, but, but hopefully, yeah, people found this valuable. This, I, I think it’s really interesting just to go through all of these and, we, we read these, AI helped us.
We listen to podcast. We just have so much technology now that allows us to go through all these things and look at ‘em. So hopefully this is a good summary and maybe gives people at least the landscape as we head into the new year.
Matt: I like the way this is shaping up. Thanks again, MEB Faber, for putting all this stuff together.
It’s really, really cool to have somebody gathering all these reports in one place for us to go through and scrub. This is fun. Yeah. Thank you to
Jack: Meb. Check out the Idea Farm. Thank you everybody for joining us. We’ll see you next time.