Renaissance

The war wasn't free, the manufacturing renaissance is ready to launch, inflation is a fiscal phenomenon, the housing outlook, allocation changes and our sector outlook

This week’s note focuses on our outlook for a post-Iran War capital boom…

· The Iran conflict has raised energy prices, tightened financial conditions and increased margin pressure across consumer sectors while prolonging stress on small banks due to a still-flat yield curve. Growth is uneven: consumption is stable but soft, while capital investment is accelerating and positioned to become the main driver of earnings. We argue that higher energy costs act as a cyclical headwind but reinforce the longer-term case for US investment-led growth.

· Structural forces—reshoring economics, relative labor cost convergence, shale energy, and corporate tax reform—are finally aligning to support a US manufacturing revival. Policy choices delayed this transition by favoring consumption over investment, but recent data suggest non‑residential capex is gaining momentum. Upcoming industrial earnings and manufacturing surveys are framed as critical confirmation that investment-led growth is replacing consumption-led growth.

· March producer prices were softer than expected despite an energy spike, supporting the view that energy shocks are disinflationary demand shocks under tight fiscal and monetary conditions. Unlike 2021, subdued government spending and money growth prevent firms from passing higher costs through to consumers. We conclude inflation is fundamentally driven by fiscal and monetary forces rather than supply shocks.

· Housing activity remains deeply constrained, with homebuilder sentiment falling despite favorable demographics, due largely to prior Federal Reserve balance sheet policies that distorted mortgage markets. Large-scale MBS purchases compressed mortgage spreads and fueled an affordability crisis by driving synchronized price increases across regions. The section argues regulatory relief and balance sheet normalization could lower mortgage rates and revive residential investment.

· Early financial sector earnings suggest fears around private credit were overdone, with regulatory relief and yield curve normalization positioned to boost bank profitability. The author shifts allocation toward industrials and long-duration Treasuries to reflect confidence in an investment-led expansion. Overall, the outlook favors capex-sensitive sectors, selective financials, and patience toward consumer sectors still facing margin pressure.