Daybreak Weekend: Broken Capitalism and a 2026 Stock Outlook

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:01This is Bloomberg Daybreak Weekend, our global look at the top stories in the coming week from our Daybreak anchors all around the world. Straight ahead on the program, a look at a wave of new books that show capitalism may not be doomed. I'm Nathan Hager in Washington. I'm Caroline Hepker here in London, where we look at Bloomberg Intelligence's best ideas for European stocks in 2026. I'm Doug Krizner looking at the outlook for Asian equity markets in 2026. That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg 1130 New York, Bloomberg 99.1 Washington DC, Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

1:54Good day to you. I'm Nathan Hager. We begin today's program with a look at some new books that argue capitalism isn't doomed, just misaligned. And fixing it may mean rebalancing the relationships among markets, states, and workers. It's the subject of a Bloomberg Opinion piece titled The Five Forces That Broke Capitalism and One Fix. And we are joined by that piece's author. He's John Authors, columnist for Bloomberg Opinion. It's great to have you with us, John, because I'm always down for a good book recommendation. And there are a lot of books out right now on the crises of capitalism. I think you've sifted through, what, like a dozen of these?

2:33Yes. So can you pick out any themes in particular that stand out from some of these tomes? Well, first of all, the popular phrase involving Sherlock Holmes might come up here, but capitalism is in a crisis. Nobody seems to disagree with that. But the key points that keep coming again is that capitalism has reinvented itself on many occasions. It's an amorphous beast and that is why it has survived as long as it has. And the odds are that it will eventually do that again. Another key point that keeps coming through is that capitalism is always and ever a partnership between the state and markets.

3:17markets can't work unless you have somebody acting as a tough referee at the very least which needs to be some kind of a politically legitimate state so you always do actually need government and the different models of capitalism that have worked have involved different basic compacts between the government and the markets. So let's walk through some of the crises that capitalism has gone through in the past. I think from what you've been reporting, there's been like four different forms of capitalism in just this last century, right? Well, depending on exactly how you define what we have at the moment.

4:06Capitalism, there's one of the most interesting books, but also one I have to warn anyone out there is an extremely long book. It's 1 ,300 pages. Oh. Just called Capitalism by Sven Beckett, who is a history professor at Harvard. And this is basically a life's project. So there were many different precursors. But what you can truly recognize as capitalism comes together from a confluence of factors in Britain with the Industrial Revolution at the beginning of the 19th century and then really becomes its first clearly defined form after Britain wins the wars against Napoleon and starts on the century of British dominance.

4:53so that you have industrial might behind it and then you have trade with the colonies to internationalise it because capitalism always needs to be able to expand. And that was a model of a fairly laissez-faire version of capitalism that was adopted by Americans and used by Americans through the Gilded Age to eventually eclipse, overtake the UK at their own game. there was a lot of inequality you need to read dickens or steinbeck to see the kinds of problems that could arise and it only really fails it really collapses in 1929 with the great crash and then with the depression from that you get capitalism 2.0 eventually emerges the elements of that you know the post-war settlement at breton woods the new deal Keynes is the motivating figure on this described often very wrongly in the US as a socialist Keynes was a liberal and he continued to be a very active political member of the Liberal Party at a time when the Labour Party in Britain was actually in power and it certainly would have behooved him to become Labour so despite what some people may say about Keynes he was a capitalist but one that certainly believed in much more of a role for government than other capitalists do.

6:17This model again, particularly in the environment after the war, works very well for a while. It gives us the GI Bill, gives us the Marshall Plan, and it's based around the US dollar with the US dollar itself being linked to gold, and it falls apart when America realises it can no longer afford all the new society welfare state it is built for itself and it's a misadventure in Vietnam and so Richard Nixon ends the tie to gold and then you get a new version which we would all I think naturally connect with Ronald Reagan and Margaret Thatcher. Neoliberalism giving markets much more of a role in a globalized capitalism with low barriers to trade, free flow of capital and financialization which again helps win the Cold War, works wonderfully well, but again collapses under its own weight with the global financial crisis.

7:17So we are now in a situation analogous to the 30s or the 70s when there was an intense intellectual ferment. You can certainly see an analogue to that in the amount that intellectuals are pounding out different ideas of how capitalism might be made to work now. speaking with John Authors, Bloomberg opinion columnist, about the crises in capitalism that have built up over the last century, leading now to a time where it seems like capitalism is really being disrupted by artificial intelligence, while at the same time, the response from the government is protectionism. It seems like those two ideas really butt up against each other.

8:04Yes, that is the issue. It will resolve itself in another 10 or 20 years. It will be obvious what was going to win. We had Obama tried as what you might call a kind of return to Keynesian-ish capitalism, which people didn't want. the tea party revolt was about limited state going back to more of a laissez-faire version that didn't really take hold either and then you had the you know the world economic forum the whole idea of esg capitalism the idea of stakeholders becoming more benevolent taking a broader interest in their ownership of companies that's also a model that's now i think been decisively defeated by Donald Trump.

8:46So we now have this return to something that is barely even capitalism at all, of mercantilism, treating the world as a zero-sum game, and the US government basically deciding it can behave like China has been behaving for a while and intervene in the private sector at will. You could call that state capitalism, crony capitalism, but it's plainly a model that has had appealed and that has worked at times for a while. but then you also have with any form of capitalism it needs to be able to grow otherwise it won't keep enough people happy with it the best chance of growing is if you can somehow or other improve productivity that's that was part of why britain had its uh generations in the sun because it worked out before anybody else how to boost the productivity of mills and factories in industrial revolution now the argument now is that ai may actually be it's not like one of these uh periodic crises within capitalism that i was talking about like the 30s and the 70s or the gfc it could be more like another industrial revolution it'll change the nature of work to change what capital can do as profoundly as that did uh and that would be wonderful at one level in that that would promise if you can get that much more productive to to create the money create the wealth that would enable you to deal with the inequalities that many people find unbearable the problem is that it would do that by uh you know it's a very common estimate i now gather for for as many as 70 percent of jobs not to be needed anymore um how do you reconcile any version of capitalism needs the consent of people it needs the consent of states it needs to overlap with some kind of democracy if it means 70 unemployment that's not going to fly so that leads to this fascinating argument which i now understand far better universal basic income or something like it you would have under an AI world if AI is as potent as we think it is you would have to have more redistribution because so many human beings would be rendered irrelevant so how are we going to do that it plainly involves some kind of a more active state to oversee that than we have had under neoliberalism, under Thatcher and Reagan's model?

11:23Are we prepared to allow the current companies that dominate AI to continue to do that, or do we need to rein them in somehow? And then who is actually going to decide how to share out the wealth? Andrew Yang, the presidential candidate, referred to it as the freedom dividend, the idea that everybody would be given a basic income. There is Victor Schwetz of Macquarie who wrote one of the books I've been writing about suggests that it would be more of a compensation payment for irrelevance. and there are fascinating arguments on either side about this that maybe enforced idleness will allow us to go away and write novels performing plays do yoga pilates or or whatever that this could be a spur to to great creativity into the the finding of new jobs but obviously you can also imagine it turning into something quite dystopian but it does raise the issue if you're going to create a technology that means that we don't have a use for half of the people who might want to work what else are you going to do because that's not a fair system that people will go along with unless you find some way to deal with that if ai succeeds as hoped then it really could deal with a lot of the issues of of scarcity that it does turn us into a position of abundance that we really can create enough for us all to get by happily.

12:54But the cost of that is that it would require a massive reimagining of what we want a state to do, what we, the people, want to arrange our society. You can say this is a democratic state that's ultimately chosen by us. somehow or other there is a relationship between what people decide in elections and what markets decide in markets in buying and selling and you need to find a way to reconcile those two which will almost certainly be different from any model of capitalism we've had so far. Our thanks to John Authors, columnist for Bloomberg Opinion. And coming up on Bloomberg Daybreak Weekend we discuss a fresh perspective on European stocks for the new year.

13:42I'm Nathan Hager, and this is Bloomberg.

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15:00This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington. Up later in the program, we'll look at how equity markets may fare in Asia next year. But first, 2025 has seen explosive growth of tech stocks, the toll of tariffs, and the hunt for rare earths. In Europe, the benchmark Eurostox 600 index has seen significant outperformance with record highs both for that index and the FTSE 100 in London. So what's in store for stock pickers in 2026? Let's get more on that now from Bloomberg Daybreak Europe anchor Caroline Hepker in London.

15:36Nathan, if you're thinking of some New Year's resolutions, perhaps Bloomberg Intelligence can give you a helping hand. The team who track thousands of companies all over the world have come up with 50 of the most interesting stocks to watch that you can resolve to keep your eye on over the next 12 months. And joining me now to discuss is Bloomberg Intelligence's Director of Equity Research, Tim Craighead. Great to see you, Tim. Pleasure to be here. How did you come up with the ideas to begin with? I suppose, how do you think it's going to be helpful to people? Yeah, so these 50 ideas, which we do as a little annual effort, are part of a broader group of what we call focus ideas.

16:16And these are ideas that have three pillars. One, we have a high conviction, fundamental view, whether it be revenue, earnings, margins, a new product, whatever. Secondly, it's different from what the market thinks. It's out of consensus. And thirdly, there are catalysts ahead that we think will affect change in market sentiment. And these 50 all have catalysts coming up that are important in 2026. We think market sentiment will change. Interesting. So the selection is global, but I want to focus in mostly on European companies. And thinking about 2025, the strength of European stocks has really caught many people by surprise.

17:03Is that thought to continue into 2026 overall for the European market? Yeah, it's interesting. There's this old phrase about U.S. exceptionalism. And you look at the last 15 years, U.S. markets have outperformed, broadly speaking. But in 2025, the U.S. wasn't that exceptional. All markets were exceptional, in fact. If you look at Europe, you look at emerging markets, you look at the U.S. as well. And the European market for the past 12, 18 months has, in fact, done, as you said, markedly well. Interestingly, it's been for a very different reason than, say, what we saw in the U.S. There, it was all earnings-driven.

17:50Valuation did rise a little bit. It is a lofty market multiple now at 20-plus times forward earnings. Europe, interestingly, at only 14, 15 times at this point. The gain has been all valuation. Quite often we talked about how cheap Europe is relative to the U.S. That discount has narrowed. And this whole move that we saw in Europe this year has been, like I said, because of valuation rise. 2026, we think, is a different game. We don't foresee a big multiple expansion from here. We need earnings. And if tariffs are back burner, that was yesterday's story, if economic recovery slowly comes about in 26, we think that there is earnings growth to come through.

18:42that's what's really needed to drive the market higher from here. So you've picked about 17 European companies. Many of them are industrials that you've got sort of on your radar. Why? And what do you think is going to drive that sector in 26? It's interesting with industrials, probably more than any other group. It's a really diverse set of actors, if you want to think about it that way. ACS, Big Spanish Engineering Company. It's on the list because it owns a company called Turner Construction, which is the U.S.'s largest contractor building data centers. It's an AI play. In contrast, you look at Alstom, you know, it's trains and train equipment.

19:32It's all about a new integrated signaling system across Europe that they're putting in place that we think is driving revenue going forward. So, drastically different. Kion, they make forklifts, but they have electric forklifts. And distribution centers are going through a change with decarbonization, electrification, and it plays right into Kion. Sodexo, is that really an industrial? Well, from a classification perspective, it is. It's food service for hospitals and schools and corporate cafeterias. They've had two years of negative earnings trends. A new CEO is in. We think there's a change afoot to improve what's been pretty low retention of existing clients.

20:21And that's really where they fall down relative to peers. So it's a very broad group of different, very specific ideas. European financials have been really big winners in 2025. I suppose can that continue? I wonder whether it's based also on the idea of the central bank of the ECB, maybe a pivot on European interest rates. So a couple of thoughts here. Three European financials are on this list, but I'll put it in some broader context. One is Danske Bank. It's a Scandinavian bank. We do see growth picking up there. They've been constrained on what they can pay in dividends because of a regulatory issue from a couple of years back.

21:05That now is over. We think dividends and payouts are going to be improving. Same thing with a company called OTP Bank, which is Hungarian, where earnings are doing well. We think growth is going to be good, and they're going to increase their dividends. Not on this list, but also a focus idea is Barclays. And that plays right into the story you're talking, and our broader European banks team does think a potential ECB shift the other direction. You've got a steepening yield curve. You borrow shorter term. You lend longer term. That's good for net interest margins. They think that the European bank group is pretty positive.

21:45Okay, so one to watch in terms of banks. But we can't exclude artificial intelligence. which I have learned such a tremendous amount when I think back to January 2025, downloading half a dozen brand new AI apps to figure out whether they could help my work, my research, my life, and think that's what everybody else was doing around the world. How will artificial intelligence help a European market that is largely without big tech names? I mean, it's very true. So a couple of thoughts here. You know, we do have ASML here. It is not a focus idea right now. It has been, and we think about it. That's the pure play.

22:33SAP is a focus idea, not on this list. We like it, but it's sort of a secondary play on AI and how that's driving cloud software. The big elements from a European perspective are twofold. One, are there secondary enabling type companies that you can take advantage of? I mentioned ACS earlier, the infrastructure play. That's a classic case in point. A third way, which is even more indirect, but frankly we think is the real longer-lasting item, is companies across different businesses actually implementing AI to drive either revenue or efficiencies or margins. We just published a new C-suite level survey where we talked to 600 companies in depth across nine different industry groups.

23:27And it was all about what are you doing to take advantage of AI. And it was quite constructive from the standpoint of, A, there are revenue opportunities. There are efficiency opportunities. It's not about cutting workforce at this point. There's been some announcements, some of which might have been sort of using this as a scapegoat. But that's not the primary aim for AI. Far from it. So I think it's going to be one of those behind the scene opportunities to drive better earnings in Europe from an implementation vantage point. Okay, so that on artificial intelligence. Yes, I wonder if the surprises will continue in AI in the year ahead.

24:09Well, there's also Pharma, which has been very much dancing on the point of that Trump tariff pin. But you've picked out some biotech names to think about. Indeed. And those biotech names, they happen to be U.S. as they are, but it goes in, there's a number of names on the list that are new product innovation type stories. And we actually have had a European biotech recently on our Focus Ideas Revolution, but it kind of did what we expected it to do, and we've taken a step back. But Bridge Bio has a new drug to deal with dwarfism, which actually is a much bigger problem than you, or much bigger ailment than you might think, especially for kids and getting them on something.

25:07This is an oral therapy. It's easier to take. And, you know, it's great. There's another, Alnenum, if I pronounce it correctly, that is a new therapy for thickening heart walls, which, again, you don't think is a common issue, but it's a big revenue opportunity for this little biotech company. And, you know, broadly speaking in pharma, it's a really interesting area we're quite focused on as we look into 2026 because we are past the scare of Trump pricing policies. We're past the concern about tariff this or that, it seems. And as we look ahead, there's a massive wave of new product development in areas like oncology that big European pharma companies are quite exposed to.

25:56Think AstraZeneca as a case in point. It's probably the best new product positioned company across global pharma, in our humble opinion, our pharma analysts' opinion. So interesting companies ahead. The other item to watch out for is there is also the biggest patent cliff coming up in the next two years facing global pharma. It's as much of a U.S. as it is a European issue. They're really interesting dynamics in the area of pharma. Yeah, very interesting with drug discoveries, as you say. And lastly, you're toasting, perhaps, a good year ahead for Diageo. Why? Yeah, really interesting. Because I like scotch, and I'm just joking.

26:40Although I do. They've suffered a couple of years of negative earnings revisions. Too much inventory in the U.S. China was a big growing market. It's faltered. We think things have been cleaned out. There's a new CEO who's starting. We think that there's a recalibration, new initiatives. And if there is a broad backdrop of a better economy in 2026, U.S., European, it's a pretty good backdrop for Diageo. Okay. I might stick to grapes myself. Wonderful. We have some fresh ideas for 2026 to power us through the months ahead. Tim, thank you so much for giving me some of your time. Tim Craighead is Bloomberg Intelligence's Director of Equity Research.

27:28Thank you. And I'm Caroline Hepker here in London, and you can catch us every weekday morning for Bloomberg Daybreak Europe beginning at 6 a.m. in London. That's 1 a.m. on Wall Street. Nathan. Thanks, Caroline. And coming up on Bloomberg Daybreak weekend, we'll look ahead to what's in store for Asian equity markets in 2026. I'm Nathan Hager, and this is Bloomberg.

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29:01This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington, turning to Asia now, where many equity markets appear set for a dynamic new year. For more, let's get to Doug Krizner, host of the Daybreak Asia podcast. Nathan, in the last year, many questions loomed over the Asian equity markets. One dealt with the outlook for artificial intelligence. We remember well the deep seek moment. It suggested China was closing the gap in the AI race with the U.S. Now, the AI trade also raised questions over valuations. And at the same time, there was a lot of anxiety over how Asian exporters would be impacted by U.S.

29:41tariff policy. And then when it comes to China, of course, questions surrounding the property market as well as the story on domestic demand. So as we head into the new year, let's consider the outlook for Asian stocks. I'm joined by Bloomberg's John Lee. He is Research Content Manager for the APAC. John joins us from our studios in Hong Kong. Thank you for being here. So I just highlighted a few of the concerns, and it seems a number of these issues were also on the minds of U.S. investors, as if there were parallel concerns. Yeah, there definitely was parallels. Now, the biggest driver for Asian equities was, same as the U.S., was the artificial intelligence or AI trade.

30:24And if you look at the markets that really did well, like South Korea, Taiwan, Japan, and China, it's all because of companies that were linked to the AI theme. So I'm talking about companies like SK Hynix, Samsung Electronics, TSMC. So that was a big theme. There were other themes as well. Defense was a big issue in Asia, especially with the continuation of the Russia-Ukraine war. So some of the biggest outperformers were defense stocks as well, like Mitsubishi Heavy and Hanwha Aerospace. I'm curious about participation. Do you have a sense of whether the gains were primarily due to retail investors or whether institutions were helping to drive these advances?

31:08That's an interesting question. We've done some analysis and the initial jump up in the share prices, especially in Korea, which was the biggest outperformer this year was led by domestic institutions. And then the second leg was driven by foreigners coming back into the markets, but they were reducing their underweight positions. And recently, we've seen some participation by retail investors. I'm wondering about the flows. I know there's been a lot of Asian participation in US markets contributing to the gains that we have seen for US stocks. Do you expect some of that capital to be repatriated back to Asia as we look ahead to the new year?