Goldman's Hatzius and Kostin on Markets and Macro in 2025

Episode Summary

Executive Summary: Odd Lots hosts Joe Weisenthal and Tracy Alloway interview Goldman Sachs’ Jan Hatzius and David Kostin about their 2025 outlooks. The discussion centers on a soft-landing economy, continued but slowing S&P 500 gains driven by earnings, higher tariff and policy uncertainty under a new Trump administration, and the possibility that big-cap tech keeps outperforming, though by a narrower margin.

Main Topics: 2025 macro outlook and uncertainty (Priority: 5/5): Jan Hatzius argues forecasting is unusually difficult because of elevated policy uncertainty around tariffs, immigration, and fiscal policy, even though the base case remains continued growth, disinflation, and Fed easing. S&P 500 earnings-driven upside (Priority: 5/5): David Kostin’s 6,500 year-end 2025 target is built on expected earnings growth and only slight multiple compression, implying more moderate gains after a huge 2024 rally. Tariffs and inflation (Priority: 5/5): The guests discuss tariffs as the biggest downside risk: they should raise prices and likely create one-time price-level effects, with potential longer-run inflation only if second-round effects emerge. Magnificent Seven vs. the rest of the market (Priority: 4/5): Goldman expects mega-cap leaders to keep outperforming, but the earnings-growth gap versus the other 493 S&P 500 names should narrow sharply in 2025 and 2026. Animal spirits, business confidence, and policy sentiment (Priority: 4/5): The conversation explores whether higher confidence from a pro-business Trump administration will translate into much stronger capex or growth; the view is that sentiment matters, but only at the margin. AI, productivity, and longer-term growth (Priority: 4/5): Goldman sees AI as a limited near-term macro booster, but potentially a meaningful productivity driver later in the 2020s and early 2030s, raising long-term U.S. potential growth. M&A, regulation, and portfolio strategy (Priority: 3/5): A more permissive regulatory backdrop is expected to lift M&A activity and influence portfolio positioning, alongside themes like domestically oriented companies, low labor-cost firms, and select non-U.S. opportunities.

Key Arguments: The soft landing call was correct because the post-pandemic cycle was supply-driven, allowing inflation to fall while output and employment rose. Tariffs are expected to be the biggest risk to the optimistic U.S. growth and equity outlook, especially with large potential hikes on China and possible tariffs on autos and North America. The S&P 500’s 2025 return should still be positive, but driven mainly by earnings growth rather than multiple expansion. Mega-cap stocks likely remain winners, but their relative earnings advantage should shrink materially, reducing the extent of outperformance. Confidence surveys may improve sharply after the election, but that does not necessarily translate into a large capex surge or real economic acceleration. AI’s near-term macro impact is small, but over the longer run it could lift productivity and U.S. potential growth. Market participants should distinguish between policies directly controlled by the White House, like tariffs, and those requiring Congress, like tax legislation, when assessing risk. Immigration has been an important supply-side support for growth and disinflation, but deportations or tighter inflows would mainly matter through labor supply rather than immediate macro collapse.

Data Points: S&P 500 level at recording: 6,004.72 - Joe notes the market level as of November 26 during the interview. 2024 S&P 500 year-to-date gain: nearly 26% - Used to frame the strong market backdrop going into 2025. 2025 S&P 500 target: 6,500 - David Kostin’s year-end 2025 target. Implied upside from current level: about 7.7% - Difference between 6,004.72 and 6,500. Expected 2025 EPS growth: about 11% - Goldman’s model for S&P 500 earnings growth in 2025. Expected 2026 EPS growth: about 7% - Goldman’s model for S&P 500 earnings growth in 2026. Sales growth assumption: roughly 5% - Basis for earnings growth, tied to nominal GDP. Forward P/E multiple: around 23x - Current market valuation discussed by Kostin. Implied 2025 forward multiple assumption: about 21.5x - Goldman’s model assumes slight multiple compression. China tariff increase assumption: about 20 percentage points - Goldman’s forecast for higher average tariff rates on U.S. imports from China. U.S. growth forecast for 2025: 2.5% - Goldman’s optimistic U.S. GDP growth view, above Bloomberg consensus. Consensus gap on U.S. growth: about 0.5 percentage points higher than consensus - Goldman is above the Bloomberg consensus on U.S. growth. Fed funds rate path: low to mid 3s by end-2025 - Goldman’s expected terminal range after continued rate cuts. Expected near-term inflation: around 2.4% actual forecast; about 2% ex-tariff effects - Jan Hatzius’s inflation outlook. Largest stocks’ 2024 earnings growth: 33% - Magnificent Seven expected earnings growth in 2024. Remaining 493 stocks’ 2024 earnings growth: 3% - Earnings growth for the rest of the S&P 500 in 2024. Largest stocks’ 2025 earnings growth gap vs rest of market: 6 percentage points - Consensus gap projected for 2025, down from 30 points. Largest stocks’ excess return in 2023: 63 percentage points - Outperformance of the largest stocks versus the market. Largest stocks’ excess return in 2024: 22 percentage points - Running outperformance cited during the discussion. Largest stocks’ forecast excess return in 2025: around 7 percentage points - Goldman expects continued but smaller outperformance. Europe growth forecast for 2025: 0.8% - Goldman’s view, below Bloomberg consensus and ECB expectations. Long-term U.S. potential growth estimate: 2.2% - Raised from 1.8% on AI-driven productivity optimism. Previous long-term U.S. potential growth estimate: 1.8% - Older Goldman estimate before AI-driven revision. Federal deficit goal discussed: 3% of GDP - Referenced as an aspirational target under the new Treasury team. Goldman’s expected federal deficit: closer to 6% of GDP - Hatzius says this is more realistic near term. Non-defense discretionary spending share: about 15% of total federal spending - Illustrates limited room for meaningful fiscal cuts. Immigrant inflow annual rate in late 2023: above 3 million - Used to show the scale of immigration support to labor supply. Current immigrant inflow annual rate: between 1.5 million and 2 million - Indicates recent deceleration in inflows. Historical deportation pace under Obama: around 400,000 per year - Used as a reference point for possible future deportation levels. M&A growth expectation for 2025: 25% increase - David Kostin says Goldman expects a strong rebound in deal activity. Corporate cash spending by S&P 500 companies in 2025: about $4 trillion - Used to support the M&A and capital allocation outlook. Cash devoted to M&A: 20% increase - Expected increase in corporate cash allocated to M&A activity. Mutual funds lagging benchmark: 75% - Kostin cites this as evidence that many underweight megacap positions.

Pivotal Quotes: "I think it is a difficult time just because there's more uncertainty than normal about the policy environment." — Jan Hatzius: Hatzius explains why the 2025 macro forecast is unusually tricky. "Tariffs are, in our view, the biggest risk to what otherwise is quite a positive outlook." — Jan Hatzius: He identifies trade policy as the main threat to growth and markets. "The driver of these stocks over the past decade has been superior earnings growth, superior sales growth, superior earnings growth in terms of the comparison with the rest of the market." — David Kostin: Kostin explains why the Magnificent Seven have dominated and may still lead.

Implications: The base case is still growth, rate cuts, and equity gains, but investors should expect more volatility from tariffs, immigration policy, and regulation. Big tech may keep leading, though less dramatically, while AI and M&A become more important medium-term themes.