How AI Is Changing the Stock Market and the Economy

Well, and always great to have a chance to speak with Wharton Emeritus Professor of Finance, Jeremy Siegel, who is also a Senior Economist at WisdomTree to talk about what's going on in the markets and the economy. Hi, Jeremy, how are you, sir? I'm very good, Dan, thank you much. Okay, so let's start out with the Fed because everybody is talking about what we might see these next two meetings. What is your sense on, will we see a rate increase? I think that's kind of the given, but when we might see it? I think no increase at all this week.

First of all, markets have calmed down a bit, probabilities are low, but let's face it, it's a week before the midterms. Warsh wants, it would be really ruffling feathers with Trump. He needs Trump on his side for future increases. So, doing it now, even when the market doesn't really expect it is, I think, not at all in the cards. December is another story, and I do think we're going to get an increase there, but of course, there's still more than two months of data there to come to see. It could, you know, it even could be two increases.

At this point, I say one, but again, the data will, a lot depends, I think, you know, does the war start up again? The kinetic war, as we say, with Iran, right after the midterms or not, and then what's happening to the price of oil and everything else. Because the latest inflation data hasn't been great, and so that's why a lot of people are leaning that way. Yeah, it hasn't been great, to say the least, but it hasn't been so horrible that we have to rush to increase. You know, leaving it for six, eight more weeks is not going to make that much difference to the economy, and as I said, I think political considerations here are very, very

strong. What are your thoughts then moving forward about 2027 and the Fed with rates? Now, obviously, as you have said, the data really is dependent on that, and we could see a whole lot of things occur between now and let's say March or April, but if the pattern continues, is two rates the number, or could we even see more than that? Well, I think a lot really depends on the AI build-out. I mean, right now, the instability of expectations is very high. I mean, you know, we get good reports, strong demand, AI stocks go up, all of a sudden there's a wobble if there's some

problem up there with competition or cyber or whatever, and it goes down, and that seems to be driving that long-term interest rate, and that long-term interest rate is a big determinant of what the Fed is going to do, as we speak right now, I think it's just at five or below, it was up much higher early on, but there's been that wobble in expectations on AI. So, you know, what happens, I think, in 2027 really is gonna depend a lot about whether the AI build-out is as strong as we anticipate now or is not. How should investors then think about this? Because I think it's hard at times for

them to really, you know, put the dart right in the center of the dartboard here lately, because of all the money being invested. You don't have to pick one, and you shouldn't put it on the center of the dartboard. That's why, I mean, what we see is, really the stocks are on the fulcrum, all the tech stocks and AI stocks on one side, and when they go down, we see the value stocks and bonds go up. There's where diversification pays. That's what you want. You wanna hold a broader market because you don't put all your chips in the AI basket, don't put all your chips in the

value basket. You don't have to hit that bullseye. Balanced investing, certainly, as I look at it now, is probably more valuable than it's been for a long time. But the latest earnings we got were fairly good across the board. I mean, every- Across the board, the earnings are good. They're good in the non-tech sector as well as the tech sector. You know, but don't forget, that's third quarter. We always have to be looking forward. Stocks depend on forward earnings. Now, a lot of these firms are giving guidance, I know, but they're often pretty giving. I often said, has Jensen Huang ever given a negative picture of what AI is gonna

be? And many of these other firms are very optimistic because they're in it. I mean, we need to, you know, it comes at the edges. You know, the economist Torsten Slack has written that firms are not getting the payoff from the AI. Goldman Sachs put out an article that firms that have biggest penetration of AI do not have higher profit margins than those that don't. Others say this is like a J-curve type of identification. It takes time to develop that infrastructure and you're not gonna get the profits at the beginning. All these narratives are competing with one another. And, you know, as the data accumulates, is

the amount that firms are spending on tokens paying off or not? You know, many people think that, you know, many of the open source cheaper models are gonna be okay for 95% of the firms, but the 5% that need to be on the edge, you know, they have to spend high. And, you know, how much is involved in them? I mean, there's so many drug firms and, you know, certain technology firms that have to use the best and the latest. But again, I think all those type of questions are questions that will, you know, data will begin to reveal through the course of the next three, six, nine months. And is some of that optimism seemingly out

there around AI and what it could bring? And I know you've talked about the question of productivity as we move forward. Has that to a degree, really been able to hold the markets relatively positive the way they have been over the last couple of months? I think in comparison to the inflation of AI. In comparison to the inflation of the war. Let's also place the following. If you take a look at the non AI sector of the S&P, what is it selling at? You know, 16 times earnings, 50. It's not like it's over high. You know, it's a decent rate, but we're nowhere in a 2000 bubble. Even AI stocks and, you know, are selling

now sometimes less than 20 times earnings because we know some of the tremendous surges are not gonna continue forever. So you have to discount them. So, you know, I would say that the market is reasonably priced between the scenarios. It is hopeful, but not overly so. It is aware of the negative scenarios and has priced that probability in. It doesn't mean that a negative scenario will not bring the market down. It most certainly will. But at this particular point, if it's a negative scenario on, you know, just the AI demand and the technological change and the cost

of the tokens going way down, that could benefit the value stocks. They could go up at the same time AI goes down. That's why this balance of investing is so important. Does the fourth quarter mean anything specifically to you from a historic perspective of what may or may not play out? No, I really don't think so. You know, that it's special. Don't forget, a lot of companies are, it isn't their fourth quarter. They have fiscal years that start every different place. Jeremy, great to talk to you as always. Thanks, sir. Thank you very much, Dan. You got it. Professor Jeremy Siegel, Wharton Emeritus Professor of Finance

and Senior Economist at Wisdom Tree.