Welcome everyone. I'm delighted to host a conversation today with Ruchir Sharma, chairman of Rockefeller International, a longtime colleague, adviser, and friend. A popular market commentator on TV and in print, author of best-selling books, including his latest, What Went Wrong with Capitalism. He's recently published his latest piece for the Financial Times outlining, as he does every year, the top 10 global trends for 2026. Ruchir, it's great to have you here again.
Thanks, Greg. This is one of the moments that you and I look forward to the most, looking out at the beginning of a year with you. And you're almost unique in this, willing every single year to talk about the top 10 trends you see for that year and to be willing to talk about what happened in the prior year on an interview like this with me.
So why don't we start before we get into 2026 and the predictions you've made there. Go back to 2025 and let's start with one of the trends you predicted in 2025 that you pretty much nailed, that really worked out the way you expected. And then we'll get to maybe something that didn't go as well. But let's start on the positive side since you got a lot of it right.
Well, if we look back at 2025, the overarching theme I had there, Greg, was that this would be the year that would mark the end of American exceptionalism. And what I really meant by that was that the American market had outperformed the rest of the world by a very significant margin right up until the last... over multiple years. In fact, it was a 15-year stretch punctuated by an outlier where the rest of the world outperformed. In 2025, what we saw was that the rest of the world stock markets, in dollar terms at least, outperformed the US by the widest gap since 2009.
Wow. Since before the whole 15-year run where the American markets were ahead.
Exactly. And so I think that was a very significant call because people forget now that at the beginning of 2025 the entire investment community was obsessed with this term American exceptionalism, which is the fact that there's no other place in the world worth investing in. It's only America. And my point is, yeah, I love America. I think it's a great place to invest in, but how much of a capital would we put here? Because as we had discussed back then, that the American weight, or the American stock market's weight in the global MSCI indices which people use, was approaching 70%.
And I thought that was getting a bit too ridiculous.
Particularly the US economy is about a quarter of the world's economy.
Yeah. So like a massive disconnect. So I think what we saw in 2025, which played out, was the fact that even though the American market was relatively resilient, the US economy was relatively okay, the rest of the world stock market significantly outperformed the US, with the S&P's returns almost double the return we got in the global stock markets. Right? So that I think was a very significant thing which played out. We don't know exactly how it would play out, but that's what played out.
And by the way, before we get off this theme, because we talked about this last year at the time, because so many people pushed back on it, and as you said, you called it. It's a relative case that you're making. You weren't down on the American economy or even on the American market. You were merely saying that the US equity markets had gotten to almost 70% of world equity market capitalization and it was too much, right? And the relative had to start to correct. And that was your point then. And so the American markets did do pretty well in 2025 and there was a lot of resilience and you weren't betting against that, you were just saying relatively speaking it has to come back into a better balance.
Yes. Yes. I think so that worked out okay and that was the overarching theme of what we discussed back in 2025. Now if I were to look back in terms of what didn't quite work out as I thought, I think it has to do with the fact that I personally thought that just given the amount of money that is being spent on AI by these hyperscalers as we call them, I thought that the market would begin to get much more worried about that and we've seen some fragmentation there. In fact if you look at the so-called Magnificent Seven companies, five out of the seven have underperformed the S&P 500 this year.
Which is actually, that's a big change though. Yeah, that's a big shift from the prior, you know.
Yeah. So only two companies have outperformed the S&P 500 by a very significant margin. Those are Nvidia and Google.
Oh, Google. Okay. So Microsoft behind too.
Marginally, marginally, right?
So that's how we ended the year. So I think that, but I thought that the underperformance would possibly be greater because if you look at these companies, what's happening is that the price to free cash flow multiple, you know, most people look at the price to earnings multiples, but the price to free cash flow multiples of these companies is now approaching 50, 60, 70 times just because free cash flow growth is obviously dropping much faster compared to their earnings growth.
Because of the capital expenditures they're making in AI.
Yeah, you know, so which they can amortize over time, but the free cash flow growth has really slowed down of these companies. So I thought that the market would begin to penalize these companies more and it's not. So I'd say because the optimism about AI and with the returns on AI, and that's one of the themes that we're going to discuss for 2026, I think that's been the big change.
Well, that's a perfect transition to beginning to talk about 2026. And let's go to one of these great debates that's happening out there that as always you're in the middle of and you've stuck a stake in the ground saying, you know, effectively be careful with some of the exuberance around AI. And I want to make sure we parse this as well because I know you believe that it is potentially a breakthrough technology at the same time. So when you talk about, and you use the word bubble and you analyze bubbles and you've got four O's in bubbles which you can talk about here, what are you specifically referring to in the AI context, particularly against the backdrop of what I just said, which we can go to after that. You do believe that AI could be potentially a breakthrough technology and your argument is you can both have a bubble and have a breakout technology and in fact sometimes those two things do come together at the same time. Arguably, some of that was in the internet time. So let's talk through first the bubble and then the dichotomy between some of your bubble concerns and the fact that you do think AI could be a real breakout technology.
I've studied bubbles for a long period of time. In fact, it's a topic that's fascinated me. And if you look at the last 200 years, starting from the...
And that is in Ruchir Sharma diligence land, it's 200 years of bubbles. Yeah. All the way back to tulips almost, right?
Yeah. You know, like so if you look back at the first, you know, bubble, you know, which had a big economic consequence, that had to do with the railroad bubbles, right, you know, which were two late 19th century...
And there were two of them in that century.
And then what you see since then are a few consistent patterns. One, that whenever there is some major breakthrough technology, it is always accompanied by a bubble because in English terms, what is a bubble? A bubble is a good idea gone too far.
Right, so that is the pure English as far as that's concerned.
Now of late what we've seen is there's almost a bubble and bubble talk that a lot of people agree with about bubble, bubble and stuff. And what I've tried to do is to come up with a framework that how do you know if something is a bubble, what is the consistent pattern that we have seen when I study the big bubbles and these include things like China in 2015, Japan in the late 1980s and stuff, you know, there are a few...
Yes, of course. That's the most obvious one.
But Japan was, remember Japan's, the Nikkei didn't get back to the same level.
Like three decades, right?
And there was a major disconnect there which is that the Japanese economy was about 15% of the global economy back then. But the Japanese stock market at one point in time was nearly 50% of world stock market cap.
Yeah. So like a massive disconnect which took place back in 1989.
Now when I look back at all these bubbles, there are a few consistent patterns that I see. So let's talk about the four O's because that's the framework that I came up with. The first O has to do with overvaluation, that in any bubble because there's so much excitement, a lot of people driven by this new era thinking are willing to pay up a lot for what they think is a very exciting future. So the valuations become very high of everything at the heart of a bubble. And one other very simple test because valuation at times can be misleading because remember in 2008 we had the housing bubble but the stock market never got that expensive.
Because you know, because the earnings were okay but the earnings were being artificially inflated by too much debt in the system. So just looking at P/E multiples sometimes can be misleading because you have to look at whether you're over earning as well and if the earnings is being driven by too much debt. So there's a bit more deep analysis we're going to do. But in very simple terms, if I look at the big bubbles of the last century or so, there's one pattern which is that the price increase in inflation adjusted terms tends to be about 10 times over a 10 to 15 year time horizon, right? Like the price increase now American tech firms led by the Magnificent Seven have experienced such a price increase over the last decade or so. Now what I'm trying to do is just try to come up with some objective criteria. This is what happened in the past. It doesn't have to happen again. But what's the objective criteria? So when I look at valuations and even the stock market's overall valuations, yes, it was much more expensive in '99, 2000. But if you look at the last 100 years, we are in the, you know, top 5 percentile of the valuation that we've ever experienced on any metric that you look at. Whether it's price to earnings, price to long-term earnings, price to free cash flow, we're all there in the 95th percentile to between 100th percentile as far as valuations.
And when you look at that though, can you parse it? Because unlike 2000 and some of the companies then that were trading at, you know, 100 times revenue or whatever it was, the Magnificent Seven while they've traded up significantly, the earnings creation still is enormous. And the market position is so dominant. You know, you would still expect a run from here that, you know, I don't know whether it justifies the valuations, but it's a different animal than, you know, businesses that really have not become financially anywhere close to a lot of these companies. That doesn't mean there aren't companies within the AI universe that are following the, you know, the tailwinds taking everybody along, but there may be parts of the market that are going to be bubble-like and will not be justified, but then parts that are, you know, when you look out 5 years from now, those companies were so good, even though they had traded up 10x, they really justified.
Yeah. But the only comeback I'll have here, Greg, is the fact that if capitalism is truly working, then we will see churn as well. Because if you look at the big winners back in '99, 2000, very few of them still exist today. And even Microsoft and Amazon which existed back then went through a very long bear market before they came back.
Right? So I think the whole point is that these are great companies but that doesn't mean that they're going to outperform every year, you know. And also if you look at the S&P 500, just look at the amount of churn which has happened since '99, 2000 as well.
It keeps accelerating, right? More and more churn. Every decade the S&P 500 turns even faster. The last decade it's been much less and that's... oh, that's okay. You know about, you know...
Is that so? That's true. The last 10 years the S&P 500's become more concentrated and the churn has gone down.
Wow, that's interesting because you would think in a world of technology with all the pace of change the churn would have gone even faster but that's not the case.
It's possible that because of a new technology the churn may accelerate because these are companies...
Like AI could cause this.
Yeah, AI could cause this because these companies end up spending so much that it sort of hurts their profitability and some new companies maybe the late adopters or whatever like in 2000 they are the real beneficiaries of that. So anyway just...
Like on this topic of the four O's, so I've tried to establish that yes, that if you look at valuations whether it's in terms of just raw prices or multiples that we are pretty extended. Now you can say that we're not as extended as in 2000 but we are quite extended.
I would argue that we're not as extended into things that, with hindsight, it's always hard at the time, you know, really were not going to be sustainable business models. I would argue that more of it is in like these Magnificent Seven in companies that are likely to be around in some form, you know, longer. But I hear you and what you're trying to do is establish objective criteria. So the first one is based on that, based on just prices, valuations, that's the result.
Then let's look at the second O though which I speak about which is over-ownership, that because there's so much excitement everyone just wants to own the same thing or there's too much concentration of money which goes into a few stocks and that happens. And here there's one data which I think gives me some real cause for concern that if you look at just the American stock market today, 52% of the average American's wealth today is in the stock market, 52%.
Yeah, in equities in general, most of it is public equities. Very few people have access to private investments. So now the fact is that American households, equities form 52% of their entire financial wealth. That's way above the number at the peak in 2000. America today is possibly the only country in the world where there's a larger share of America's savings in the stock market than in property. That's a huge change which has happened. So there's a lot of excitement about the stock market and people have put in lots of money into the American stock market and you can see it in terms of the trading, the retail trading activity has been off the charts and people are buying call options. There's massive amount of retail trading and there are all these stories where a lot of the young generation they have sort of said that we can't afford to buy a home so let's punt around in the stock market.
Right? Right. So you have seen that.
So that kind of frantic retail trading activity that you see and this very heavy ownership of the market is also something which has taken place now. So my second O, which is over-ownership, also checks out. The third has to do with over-investment, that because there's too much excitement in any sort of bubble you end up getting lots of investment that goes through. And as you've seen that in AI, the investment has been accelerating very sharply and now tech investment if you look at it in the economy is at about 6% of GDP, higher than we were in 2000. Now you can argue that over time this should increase anyway.
It should, right? Because it's a more central part of the economy today and will continue.
But it's accelerated very sharply and now the issue is that a lot of the technoptimists, they're telling us that the only way that AI pays off is if we take out labor.
But wait, before we go out to that, some of that tech investment is in capital investment which this country is behind on. Right? I mean like when you look at trying to enhance the energy capacity of the country, which a lot of this going into data centers and... you know, China for example has invested a tremendous amount more. Now a lot of it's government money, not private money. But isn't some of this a catch up in things that will be good long term for the country one way or another? You have a greater energy production capacity, doesn't that last for decades and decades and it's...
Yeah, Greg, I think that, you know, we have to make a distinction here now. Even it happened in '99, 2000 that the bubble ended up being pretty good for the economy, but what's a good thing for the economy and what's a good investment can be two different things, right?
So the individual stock, you know, stocks and individual companies may be a big difference between the '99, 2000 bubble and let's say the 2008.
Yes. Right. Like in housing it was a completely wasteful bubble. Whereas in '99, 2000, you got a bubble in the tech sector, but that ended up laying the groundwork for a lot of productivity increases that you saw in the subsequent years after that.
And you think this one might be more like that along my point, which is it's actually real investment going into real things and that'll have a benefit over time.
Yeah. Yeah. And the fourth O, less concerned about that, has to do with over-leverage, that if you look at the balance sheets of corporates, you look at the balance sheets of households, those are not that extended. And yes, these cash generators, Amazon, Microsoft, now they all started issuing debt as you know. But they're not, but they're at least not anywhere close to as leveraged as some of the companies were back in '99, 2000. So that's a saving thing. The only fault line again I'll point out there is that this time the entire buildup of leverage has happened on the government's balance sheet and that is something we need to keep an eye on because it comes to my final point on this topic which is that if you look at every single bubble in history, there is no single point at which a bubble just bursts, right? That there's no point at which something gets too extended and it bursts under its own weight. There's always been one catalyst which has burst a bubble and that's higher interest rates.
Well, let's transition to that. Although I do want to, we'll make sure we spend some time on the federal debt which is something you and I are completely aligned on and the, you know, spending, having a deficit of 6%, 7% of GDP when you're close to full employment. This is the first time in history we've done that.
Yes. Every time I say this now, I make the point that it's not a political statement since both parties have now done it in the last five years.
Yes. But let's transition to rates. Because so you're saying that rates are every single time the source of the prick.
Now, the Fed is trying to balance this. The word I keep saying they're trying to avoid is stagflation, right? Which is unemployment starting to go up and inflation being sticky or continuing to go, you know, starting to go up as well, which by the way, you have to be, you know, around a long time now, like me, to remember stagflation. In the early 1980s was the, you know, most extreme time obviously. So they've started dropping rates really in the last, meaning of 2025, more division than I've seen in the Fed in a long time. Forget about politics. I think the people sitting on the Fed disagree about where we are because some are going after employment and some are going after inflation still. Where do you think we are with the Fed? You know, now looking out in 2026, what's going to happen from here?
Well, first the facts that the Fed has missed its inflation target for more than 5 years in a row now.
Yeah, that was the 2% target. 3% seems to have become the new normal. And I don't see the Fed, even by its own admission, getting back to a 2% rate for the next couple of years. And I think that that's a problem because this country is facing an affordability issue here that, you know, for many people grocery prices and other daily staples, their prices have gone up 20, 30% or more over the last 5 years or so and they're feeling the pinch of that. So I'm not in favor of the Fed cutting interest rates further from here. And my fear is that if the Fed tries to cut rates more from here, the long end, which is much more independent of the Fed, even though the, you know, the Fed is still involved in buying some of the long-term securities, I think that that's what could end up getting unanchored. So if I were to see some threat to the economy in 2026, the leading threat, it would be that the long end gets unanchored, then inflation is still, long rates spike up. The Fed is still keen to cut interest rates because it's focused on the labor market and there are other political issues bearing on it, but the long end begins to get unanchored. And the, you know, sometimes you have to watch stuff happening in some other country to know as to how it can have a butterfly effect here. And one country I'm watching very closely in this regard is Japan because Japan's where this experiment first started of the government building up massive amount of debt, always stimulating. And now in Japan with sticky inflation as well there, they're being forced to normalize interest rates and long-term interest rates are showing some signs of getting unanchored.
And so I think that if it happens there then and something bad happens there that could have a negative knock-on effect on the US because then the worry could shift here.
That okay, what is the world's premier country with the world's reserve currency doing with its debt. So that's something I'm watching very closely.
Very fair. Question for you though. If you're the Fed chair and employment weakens from here, what are you doing on that? I mean, you know, and let's agree maybe inflation at the same time is staying sticky. And I agree with you on the 3% target, although I think part of that is that we're running these big budget deficits and they're okay. You know, everybody's aware of the deficits and obviously nominal growth, if you have a 3% deficit and you can generate real growth of three or four percent, you can outpace even a 6% deficit. So I tend to think they'll never say this, but you know, a little bit more inflation in the system if you become as much of a debtor nation as we have is a bit of a tonic. Not the right way to do it, but I...
Yeah, but Greg, you know, there's like a real problem with that, which is that if you look at it for the average person...
Affordability is the number one issue today.
I agree. Right. So, it's very difficult to sort of justify this. And in fact, it is. I'm just saying that I think some of that's unspoken in the mix.
Yeah. But I think I'd much prefer them to actually cut the deficit and run it at a less hot rate than do it this way. But I think that's part of the reason why, you know, they might be willing to tolerate.
It could be. But I think that this is where the, you know, the political class may get a bit more active because, you know, one of the things is that we tend to look at this from a pure financial perspective, but there's a political economy also out there.
