Not So Hot
In our 2006 outlook, the only scenario where 10s would fall below 4% was much weaker than expected growth, cyclical stocks look offsides and the Fed is behind the curve, again
This week’s note details a resetting of the economic outlook as the ‘run it hot’ consensus runs into restrictive rate policy and a slower than expected transition from the Biden Administration’s accommodative fiscal policy. Here is a summary:
Markets flashing growth concerns: Despite strong year-to-date performance in non-tech cyclicals, earnings expectations for 1Q26 have been cut sharply, and the Treasury bull flattening (falling real rates, deeper curve inversion) signals markets are aggressively marking down the “run it hot” growth outlook.
Earnings narrowing to AI beneficiaries: S&P 500 earnings growth remains near historical mid-cycle averages overall, but most strength is concentrated in tech and communication services tied to AI, while broader 4Q25 cyclical earnings growth was tepid and 1Q26 expectations were revised lower.
Bond market signaling Fed easing: The drop in 10-year yields and deepening 3m–2y inversion suggest rising economic weakness and increasing policy restrictiveness, with markets implying the Fed needs to resume rate cuts.
Credit stress emerging but not systemic: Weakness in BDCs, CLO equity tranches, and high-yield duration points to strain among lower-quality, floating-rate borrowers; however, overall credit growth remains subdued, making risks more idiosyncratic than systemic.
Capex boom not yet broadening: Regional Fed manufacturing and services surveys show tentative stabilization in current orders, but capital expenditure plans have weakened. S&P 500 capex remains heavily concentrated in the technology and communication sectors, suggesting broad-based investment remains elusive despite the powerful tax incentives in the One Triple B Act.
Payroll Payback: We preview next Friday’s employment report, in short, we see little evidence demand for labor has strengthened. A weak report should put rate cuts back in play despite resistance from Biden appointees and the regional repo rate resistance.
Cautious but not bearish outlook: While equities are vulnerable to a cyclical “growth scare” correction—especially in midterm years—we are less bearish than a year ago but are maintaining elevated cash positions looking for a better entry point to capitalize on our expectation of broader capital investment beyond AI later in 2026.
We are spending next week in NYC, keep your eye on the Substack chat function and our X feed for exact times of television appearances we have scheduled for Tuesday and Thursday.
With a lag, on Monday morning March 2, we are releasing the full note to free subscribers as we do once a quarter. Our intention is to tempt you to become a paid subscriber, we appreciate our clients subsidizing our work and tolerating our periodic sharing with those of us interested in our work, but not yet fully committed to Ironsides Macro’s, ‘it’s never different this time’.