Monetary

The current macro environment is a toxic brew of many of the same vulnerabilities that haunted the global economy in the lead-up to past recessions: Rising oil prices, an unsustainable tech capex boom, elevated equity valuations, excessively high homes prices, and brewing stresses in private credit and other parts of the financial system. While global equities look increasingly oversold in the very near term, they will still finish the year below current levels.

Higher oil prices threaten the global economy, warranting an underweight stance on equities. Over the long haul, industrial metals will fare better than crude.

The Fed will not cut rates again until core inflation trends lower. This remains likely as the tariff impact on goods inflation wanes, but the recent energy price shock could delay any meaningful downtrend.

The neutral rate in the US is being propped up by a variety of forces that are at risk of reversing. These include the AI capex boom, large budget deficits, and the extraordinarily high level of household wealth. As such, interest rates are likely to surprise to the downside over the next few years.

The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.

The Fed will keep rates on hold in H1 2026, but dovish policy surprises are likely in the second half of the year.

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.

This morning’s CPI report signals that the worst of the tariff impact on inflation may already be in the rearview mirror.

Measures of labor market utilization improved in December, ruling out a January cut and significantly reducing the odds of a March cut.

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.