Plain English with Derek Thompson

The Big 2025 Economy Forecast: AI and Big Tech, Nuclear’s Renaissance, Trump vs. China, and What’s Eating Europe?

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Hosts

Derek Thompson

About the episode

Happy new year! And what better way to celebrate the freshly torn calendar page than by welcoming one of Derek’s favorite writers to the show to tell us what’s in store for the 2025 economy. Michael Cembalest is the chairman of market and investment strategy for JPMorgan Asset Management, and the author of the truly spectacular newsletter, Eye on the Market. Today, we start with stocks and describe the truly historic—and historically unprecedented—dominance of the so-called Mag-7 tech giants. Then, we draw the connection between Big Tech’s historic run and the surge of AI spending. After a discussion on the history and future of nuclear power in America, we do a pit stop on the European economy, where we evaluate the continent’s tradeoff between safety and growth, and move on to China to disentangle that economy’s slowdown. Finally, we connect it all back to a Trump agenda that is a fascinating brew of old-fashioned Reaganite deregulation, newfangled crypto enthusiasm, mid-19th century tariff obsession, mid-20th century industrialization policy, and … a bunch of other ingredients that I think I’ll just let Michael tell you about.

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Summary

  • In the following excerpt, Derek and Michael Cembalest dive into the extreme dominance that Big Tech has had over the stock market recently.

    Derek Thompson: It’s a real honor to have you on the show. I’ve been reading you for years and years, and your Eye on the Market newsletter is, as I’ve told you before, I think just about the single best economic primer that ever hits my inbox. So thank you for elucidating your analysis right here on the show.

    Michael Cembalest: It’s a low bar. It’s a very low bar.

    Thompson: There’s so much ground that I want to cover here. I think we should start with AI and stocks, and we should begin where you do in your report, with a close look at the tech giants: Apple, Alphabet, Amazon, Microsoft, Meta, NVIDIA, Tesla, a.k.a. the Mag Seven.

    I generally knew that Big Tech was in the middle of a sensational run before I read your report, but I did not understand just how historically unusual their dominance has been in the last few years. So why don’t you start by educating us? How does the dominance of the Mag Seven today compare to previous eras?

    Cembalest: I mean, there’s nothing comparable to it. If you look at things like the share of market cap from the top seven or 10 stocks, we have long since blown through the heights of 1999. Share of profits, share of market cap, contributions to year-to-date return, we’re kind of off the charts. And the reason why we pay so much attention to it in the investments industry is it’s wreaking havoc on traditional active money management. Right? I mean, the premise, the Graham-Dodd approach to investing, going back over 80 years, has been about diversification.

    And all of a sudden, you have this cluster of stocks that are doing so well and generating such high returns that if you haven’t been at least market-[weighting] those stocks as an active manager, it would be practically impossible for you to match or outperform the index that you’re benchmarked to.

    So the whole active management industry is intensely focused on what’s been happening with these stocks. And anybody that’s been dared to under-weight them over the last couple of years has generally gotten wrecked.

    They’re generating unprecedented amounts of free cash flow, and the document that you’re referring to is the “Eye on the Market Outlook.” And it came out January 1. And we had a meeting at J.P. Morgan where we had some internal discussions with our investors, and what I was trying to explain to them was, “We’ve had profitable stocks before, but the free cash flow of these Mag Seven stocks are way higher than the free cash flow, as a percentage of revenue, of all of the market leaders that have preceded them, going all the way back to the 1950s.” They make oodles and oodles of money, which is why they can afford to be pouring hundreds of billions of dollars of capital spending each year into AI-related R&D and infrastructure.

    Thompson: So you’re looking at a set of stocks that is dominating the economy unlike any other set of publicly traded companies has dominated the economy in the U.S. going back, basically, as long as we have good records. Your records go back to the 1960s, 1950s.

    I mean, you might have to go back to the Gilded Age of Rockefeller, Carnegie, to look at a time when a handful of companies so bestrode the entire U.S. economy. We’ve talked about the statistics, you know, free cash flow. What would be your plain-language analysis of what it means for an economy where a handful of companies so dominate public returns?

    Cembalest: I think “bestrode” is the right word because it conveys this image of a colossus lumbering across the landscape. And I think that’s right. I mean, what was allegedly going to constrain this was a more activist antitrust policy.

    And while Google has lost some lawsuits here and there against Epic Games and things like that related to the Google Play Store, and the amount of money that it pays every year to Apple for being the exclusive search engine on Apple devices, so far, the teeth in the remedies that have been applied in these antitrust judgments have been de minimis. So far, that hasn’t really changed the landscape.

    There have been two periods before where either one company or a small number of companies, like a handful, garnered 15 to 20 percent of all the capital spending taking place in the economy. It happened in the late ’60s with IBM and a couple of other mainframe companies. Then it happened with the fiber build-out in 1999, 2000, and it’s happening again now.

    And where you have a small group of companies—and NVIDIA’s projected 2026 sales would represent something like 15 percent of all the capital spending taking place in the economy. I mean, that’s just kind of remarkable to think about, and there’s this explosive arms race of the big hyperscalers, which we can talk about, to acquire these GPUs.

    I don’t have a question about NVIDIA’s order book. I have questions about the people comprising NVIDIA’s order book, and that’s why this is all so important to focus on.

    This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.

    Host: Derek Thompson
    Guest: Michael Cembalest
    Producer: Devon Baroldi