Jeremy Siegel, Wharton emeritus professor of finance and senior economist at WisdomTree, shares his perspective on the state of the U.S. economy, analyzing recent rate cuts, inflation progress, employment data, tariff uncertainty, and what they could mean for markets and growth in 2026. This episode is part of the “Faculty Predictions” series.
Transcript
Dan Loney: It’s great to be joined, as we have him every month, by Jeremy Siegel, Wharton emeritus professor of finance and also a senior economist at WisdomTree. Jeremy, great to talk to you. Let me start out by just getting your general thoughts on the state of the economy as we wrap up 2025, and this coming at a time when the Federal Reserve just made a recent cut to rates.
Jeremy Siegel: There are two bumps we have to get over in the next two months. First of all, an expected ruling from the Supreme Court on the tariffs. That could churn things up, depending on how it’s stated, and that generates even more uncertainty. I’m not a fan of tariffs. I’ve never been one. I think it was not legal to begin with. But nonetheless, the Supreme Court making that determination and not giving [President Donald] Trump time to work with Congress to make it legal will turn the pot. I hope they do give him time.
Secondly, another potential government shutdown on January 30. We don’t want that. No one wants that. And yet that is looming. The Democrats have made health care a big issue, and I think they’re going to stick to it. And there’s seemingly no progress in Congress on moving towards a compromise on this issue. Those are the two near-term bumps.
Loney: The data is starting to roll in as well. We got the jobs data a few days ago. October was a negative, November was a positive. We’ve just gotten some inflation data as we’re taping this right before the Christmas holiday. Give us your thoughts on what that data is telling us right now.
Siegel: Well, first of all, the inflation data was extremely good. We’re finally getting the lower shelter prices — which are so important — into the index. And that’s a major reason why it came in as well as it did. We are getting a bump from the Trump tariffs, but it’s much more minor than we had feared, for a number of reasons, including lower rates than we had feared. As a result, the inflation outlook looks quite good for 2026. We would be between 2% and 2.5%, which is very close to the Fed target.
Let me talk about the employment data, and then I’ll go into the Fed, and where it should be. Slow growth may be slightly negative if we make a correction. We’re getting, on the private side, positive. We got a big negative on public because of the [Elon] Musk option of quitting in nine months. That was nine months ago. Now, in October, we got a big jump there.
But the private sector is just about producing near zero jobs. The only increase in GDP is productivity gains at this particular juncture. I expect it to be maybe one to two percent this quarter. But we’re just getting some data, because of the delays, to look at what this quarter will do. I think there’s a lot of tailwinds next year. There’s inflation — lower than people fear — which is going to be a positive. I also think that the tax cuts are going to be money in the pockets of a lot of consumers that they may not be counting on now. And also in the hands of corporations.... Once we get over these two bumps, 2026 looks good in terms of the economy.
Loney: How do you think Wall Street and equities in the markets will do?
Siegel: I’ve always said the Fed should [keep interest rates] in the 3% to 3.5% range. We’re almost there. It should be 100 basis points below the 10-year [Treasury rate]. The 10-year is [at about] 4.10%, so that would put Fed funds at 3.10%. And so we still got 25 to 50 basis points to go, which I think is the direction there.
What about equities? Well, I am beginning to see more signs of rotation — real rotation. A lot of head fakes with rotation. What I mean by rotation is, away from the Mag 7, to the broader economy. The Mag group has had headwinds over the last two or three months, and their valuations, although not crazy, do not leave room for any disappointment. I expect that a lot of the other firms might be able to take advantage of some of the AI technologies that could increase their margins and their profits. But is that a certainty? I don’t know. But overall, I would not be surprised to see gains on the S&P next year at 5% to 10%. Okay, [that will be] good, but much more modest than the previous three years.
Loney: Is it a surprise that AI stocks have been taking the hit that they have in the last few weeks?
Siegel: Well, not with the questions that are being asked about them over building potential. Data centers are costing a lot more, and we’ve hearing signs of delay. There’s always a threat of new chips that might really not make those data centers as necessary. And we understand what’s happening with Oracle. It says it’s going to spend [$300 billion]. The market does not like that. There are always threats from China and undercutting. Take a look at OpenAI and ChatGPT, and all of a sudden we got [Google’s] Gemini, which jumps up in the No. 1 place. Then there’s competition on all the large language models and what kind of premiums can they charge. So there are a lot of things going on.
It might have surprised people that the only Mag 7 stock that has just recently [moved] into high territory is Tesla, and it’s really on self-driving. I think self-driving is the first big thing that AI is going to accomplish. It means millions of drivers are not going to have jobs. I think self-driving will be a reality in five years for a majority of trucks and long hauls, as well as taxis.
Loney: What are you most watchful, then, about, as we head into the new year?
Siegel: Again, I’m looking at the [anticipated] Supreme Court [ruling on tariffs] and whether Congress can, in fact, negotiate to avoid another shutdown. And then, of course, we’ll see the progress on AI. There’s always the threat that someone’s going to [overtake]. Remember what happened to Nvidia’s stock when DeepSeek came out.... I mean, is there going to be another surprise?
We all remember what happened in the internet when everyone wanted fiber optic cable, and they were booming, and then all of a sudden, we learned how to put 10 times the amount of information in a single fiber optic cable. All of a sudden, the demand for that collapsed. All those things can happen. They’re good for the consumers, obviously, but very bad for the firms that are producing it. So there could be a lot of churn depending on AI developments, which seem to be occurring faster and faster.
