CoreMacro
| US
US macro analysis on the Fed, the consumer, and fiscal policy, and the investment calls that follow.
It appears that households have been able to spend more than they’ve earned since May by dipping into their swollen brokerage accounts. Bulked-up equity holdings could herald a future where consumption is more sensitive to stock market ups and downs. That’s great in bull markets but could be an unexpected drag on activity when the next bear arrives.
Contrary to widespread narratives, there is little cash on the sidelines. The aggregate amount of investable funds-to-equity market cap ratio is at an all-time low in the US and very low in other developed markets.
Recent economic data have been reasonably firm. We will cut our 12-month US recession probability to 40% from 50% if the Supreme Court strikes down President Trump’s tariffs. This would take our scenario-weighted year-end 2026 price target for the S&P 500 to 6375 from 6200.
US Treasury yields require a higher premium for both geopolitical risk and inflation risk, but higher bond yields are not necessarily bad for stocks.
With the US unemployment rate and interest rate close to the ‘neutral’ u-star and r-star respectively, further Fed rate cuts risk pushing up inflation and long-term inflation expectations. This is bad for bonds but good for stocks. Plus, two new trades are: short TOPIX versus DAX; and short CAT versus SPX.
Much like the 2000 episode, we expect this year to unfold in two stages: A “Great Rotation” from tech stocks to non-tech names in the first half of 2026 followed by a broad-based selloff in stocks in the second half on the back of a weakening US economy.
At major technical crossroads, markets eitherpull back before staging a sustainable breakout, or attempt to break out only to drop considerably (i.e., a fakeout). We believe the latter dynamics are more likely to play out.
2026 has closer parallels with 2021 than with 2000 because an ultra-accommodative Fed can prolong the stock market rally even as a tech capex boom ends. Plus, a new tactical trade is short silver versus gold.
We have been surprised that consumption has held up well despite anemic payrolls growth. This brief considers ways that consumption might continue to beat our base-case expectations.