Halfway There

The majority of jobs being created are low skilled healthcare jobs at exceptionally low wages, and technology sector productivity is allowing the C-suite to cull the herd.

In this week’s note we mark our 2026 outlook to market, dig into the earnings and capex boom, discuss developments in monetary policy, wrap up the labor market data released this week and end with a discussion about supply concerns returning to the Treasury curve offsetting weak labor data and the drop in expected inflation.

· Halfway There: The first half of 2026 has broadly tracked the outlook’s expectations, with 10-year Treasury yields and real rates reaching the forecasted levels and equities following the anticipated correction-and-recovery path, even though the catalyst was the Iran War rather than capital-demand pressure. “Duration tightening” remains the dominant macro theme and we expect it to gain momentum under new Fed leadership. Labor market instability and a return to disinflation supports our forecast two 25bp rate cuts later in the year.

· Boom Times: Earnings growth and capital investment remain strong, but the rate of change is likely peaking, especially in AI infrastructure and data-center-related spending. While the secular capex trend may continue, leadership is expected to rotate from AI producers toward broader industrial and manufacturing beneficiaries. Survey data, private credit pressures, and stock underperformance among major infrastructure spenders are warning signs of saturation.

· Different Starting Points: Fed Chairman Warsh’s comments at Sintra are evidence that the Fed is moving toward a more classic liberal approach to monetary policy, including less forward guidance and a smaller balance sheet footprint. Warsh’s focus on volatility suppression, and fiscal dominance, suggests the Fed will pursue balance sheet reduction and perhaps outright sales of mortgage-backed securities. First up is an end to the Reserve Management Purchases (RMPs) U.S. and global central bank conditions are divergent, The Fed, ECB, BOE, BOC and BOJ face different inflation, energy, fiscal, and policy-rate starting points. Japan is the poster child for central banker’s bank profitability blind spot from decades of overly accommodative monetary policy that degraded economic dynamism.

· Quiet Quitting: The June labor data was weak, with household employment contracting sharply, labor force participation falling, and unemployment declining for the “wrong” reason as workers left the labor force. Wage growth, especially in services and healthcare, is compelling evidence of abundant labor-market slack. The Fed needs to intensify their focus on technology innovation adoption on the labor market. Healthcare is adding low-wage jobs while technology and finance show employment contraction alongside stronger wages, suggesting productivity and AI adoption are reshaping labor demand. Overall, the soft labor market strengthens our conviction that the Fed will cut rates in September and December as core disinflation reemerges.