Why This Isn’t A Bubble & Early 2026 Looks Like Goldilocks | Warren Pies

Episode Summary

Executive Summary: Warren Pies argues 2026 begins in a Goldilocks regime—growth stays solid, recession is unlikely, and inflation remains contained early in the year—supporting equities and keeping bonds relatively firm at first. He expects the Fed’s cutting cycle to near its end, then later pivot to an overheating/inflation-risk phase that could steepen the curve and pressure bonds, while stronger earnings and higher margins keep stocks fairly valued rather than in bubble territory.

Main Topics: 2025 forecast review: wins, misses, and framework (Priority: 5/5): Pies reviews his 2025 calls, noting accurate reads on equities, oil, inflation, and AI demand, while acknowledging misses on quality factor performance and small caps. He emphasizes framework quality over precise point forecasts. 2026 macro outlook: Goldilocks first, overheating later (Priority: 5/5): He expects the first half of 2026 to feature cyclical disinflation, supportive fiscal policy, and AI capex without recession or a big inflation boom. The second-half risk shifts toward overheating and bond-market stress. Rates, the Fed, and the yield curve (Priority: 5/5): The discussion centers on how Fed cuts transmit through the two-year and the curve. Pies expects another cut in Q1 2026, then a nearing terminal rate that normalizes the curve and eventually raises bond-backup risk. Inflation mechanics: shelter, oil, and tariffs (Priority: 4/5): Pies breaks down inflation into shelter, crude oil, and labor. He argues shelter keeps disinflating despite noisy government data, oil remains weak enough to suppress CPI, and tariff inflation in goods will be largely looked through by the Fed. Housing and labor as recession indicators (Priority: 4/5): He uses residential construction payrolls and housing activity as his preferred recession lead indicators. Despite restrictive mortgage rates, he does not see the housing weakness spilling into a broad recession because fiscal support, AI investment, strong balance sheets, and labor hoarding cushion the economy. Equity valuation and earnings support (Priority: 5/5): Pies rejects bubble claims, arguing the S&P 500 deserves structurally higher multiples due to heavier weighting toward high-margin, less-cyclical businesses. He expects strong earnings and margin expansion to support a move toward 8,000. Commodities as the next rotation (Priority: 4/5): He sees a likely mid-to-late 2026 shift from overweight bonds to overweight commodities, citing breakouts in gold, silver, copper, natural gas, and a potential end to oil’s deflationary tailwind.

Key Arguments: The market can reach 8,000 in early 2026 and still be fairly valued because today’s index mix is less cyclical and more margin-rich than in prior eras. 2026 starts with Goldilocks: no recession, no inflationary boom, and enough fiscal/AI support to keep growth positive while inflation remains subdued. The risk later in 2026 flips from overcooling to overheating as the Fed nears the end of the cutting cycle and the market starts pricing a terminal rate. Shelter inflation is still disinflating; October data quirks likely understate shelter by about 20 bps, but the broader trend remains downward. Oil weakness is a key disinflationary force, and the labor market is weakening even if headline data are temporarily noisy after the shutdown. The Fed will likely focus on the lower end of the K-shaped economy and keep an easing bias longer than many expect to protect politically stressed households. Balance sheet policy matters mainly through duration, not reserve abundance; buying bills is less important than any shift that removes duration from the market. A recession is not the base case because fiscal deficits, AI capex, and strong consumer balance sheets offset housing weakness. Commodities are increasingly attractive because multiple asset classes are breaking out, and oil’s deflationary drag may fade in the second half of 2026. Wall Street is too bearish on multiples; if margins expand and the Fed cuts into a non-recessionary backdrop, P/E compression is unlikely.

Data Points: S&P 500 target (2025 view): 6,800 - Pre-2025 target mentioned as a prior call that was ultimately near the year’s framework. S&P 500 target (2026 view): 8,000 - Pies’ call for early 2026 market levels. Expected correction in 2025: +10% - He expected a correction in late Q1/early Q2 2025 from stretched sentiment. 10-year Treasury average forecast: 4.0% to 4.1% - His 2025 expectation for the 10-year yield. Actual 10-year Treasury average: ~4.25% - He notes the bond forecast was too aggressive. Brent crude threshold: Below $60 - His oil call that ultimately played out. CPI weight of shelter: ~40% - He emphasizes shelter’s importance in the CPI basket. Shelter data adjustment: ~20 bps - He says October data quirks likely understate shelter inflation by about this amount year over year. Fed funds rate after a Q1 2026 cut: 3.5% - He expects another cut in Q1 2026, taking the policy rate there. Two-year yield relative to Fed funds: ~20 bps below - He expects the 2-year to trade slightly under the policy rate while cuts are still expected. Terminal rate estimate: ~3.25% - He cites this as the likely end of the cutting cycle. 2s/10s curve shape: ~100 bps+ steepness - He expects the curve to normalize and steepen toward or beyond this level. Current mortgage rate reference: ~6.25% - Used as evidence housing remains restrictive. Mortgage rate needed to re-accelerate housing: ~100 bps lower - He argues a further decline would be needed to truly stimulate housing. Current deficit-to-GDP: ~6% - He cites fiscal support as a reason recession is unlikely. Expected margin expansion in 2026: +90 bps - Analyst consensus expectation that he says is plausible outside recession. Market mix shift: ~50% tech, mature tech-heavy - He contrasts today’s index composition with the more cyclical 2005-2006 market. Peak concern in 2025: Overcooling growth - He describes the main 2025 risk as growth weakening too much rather than inflation. Future risk in 2026: Overheating - He expects the dominant risk to flip as the cycle matures.

Pivotal Quotes: "I think the market goes to 8,000 by some point in early 2026." — Warren Pies: His headline equity target for early 2026. "So it's Goldilocks. And that's going to be the defining feature for this market for the first half of 2026." — Warren Pies: Describing his macro base case for growth and inflation. "I have a hard time coming up with what is the bare argument for 2026." — Warren Pies: Explaining why he remains bullish on equities absent a macro shock.

Implications: Listeners should expect an initially supportive 2026 for risk assets, with equities favored over bonds early and commodities becoming more compelling later. The key watchpoints are Fed terminal-rate expectations, shelter/oil trends, and whether inflation re-accelerates enough to stress bonds and steepen the curve.