Why economists are feeling more confident about 2026

Economist Steve Moore said on The Will Cain Show that confidence in the economy is rising for 2026, pointing specifically to stronger growth and improving inflation trends. For investors, a combination of sustained growth and moderating inflation could ease pressure on monetary policy and reduce the likelihood of further aggressive rate hikes, a dynamic that bears on risk allocation and positioning into 2026.

Analysis

Market structure: An expectation of stronger growth and easing inflation into 2026 favors cyclicals (industrials, financials, energy, materials) and small-cap cyclicals; these should outperform long-duration, high multiple growth names if 10y yields reprice +25–75bp over the next 6–12 months. Supply/demand signals point to tighter commodity demand vs. safety-bid for core bonds—expect cross-asset rotation: higher yields, stronger USD, commodity upside (oil, copper), and lower implied vols for equities absent shocks.

Risk assessment: Key tail risks are a persistently hot services CPI (>3% core by mid-2026), Fed hiking surprises, or a geopolitical shock that reverses risk-on flows; any of these could spark >10% equity drawdowns and a flight to duration. Time horizons matter: days–weeks for positioning flows and vol; months for yield-curve and earnings revisions; quarters for fiscal/spending impacts. Hidden dependencies include labor-participation trends and China demand; catalysts to watch are monthly CPI/PCE, NFP, and 2–3 Fed minutes releases.

Trade implications: Tactical overweight cyclical sectors and financials, underweight long-duration tech and long-dated Treasuries; prefer 3–9 month plays to capture yield re-pricing and earnings leverage. Use pair trades to express relative-view (small caps vs mega-caps), and option structures (call spreads on cyclicals, cheap downside hedges on broad beta) to control drawdowns while keeping capital efficient.

Contrarian angles: Consensus may underprice sticky services inflation and wage-driven upside risk—if services CPI lingers >3% the market will reprice rates up sharply and cyclicals can suffer. Conversely, if core inflation falls toward 2% by mid-2026, the current risk-on move is underdone and gives another 8–15% runway for cyclical ETFs; historical parallels: 2013 taper-tantrum shows rapid repricing risk if Fed signals surprise tightening. Hedge crowding into cyclicals with short-dated puts or VIX exposure.

Key Decisions for Investors

• Establish a 2–3% portfolio long in XLF (Financial Select Sector SPDR) using a 6–9 month 1.5–2.5% OTM call spread to capture rate-driven earnings lift; target +15–25% absolute, stop-loss -8% (enter within next 4 weeks).
• Reduce long-duration Treasury exposure: cut TLT weighting by 50% within 2 weeks and redeploy proceeds into IEF (7–10y Treasury ETF) and 1–2% in TIP (inflation-protected) to defend vs. 25–75bp yield shock through 2026.
• Execute a relative-value pair: long 2% IWM (iShares Russell 2000) and short 1.5% QQQ (Invesco QQQ) over a 3–9 month horizon to capture cyclical/small-cap tilt; unwind if small-cap underperforms by >6% relative or if QQQ outperforms by >8%.
• Option hedge: buy 3–4% notional of 3-month SPY puts (5–7% OTM) as tail insurance against a >8–10% market drawdown; simultaneously sell 12–18 month out-of-the-money VIX call spreads funded by small premium sells to offset cost if volatility remains low.
• Monitor triggers for adjustment: if core PCE/CPI prints breach >3.0% (monthly) or unemployment falls below 3.8% (monthly), tighten risk limits and reduce cyclical exposure within 5 trading days; if core inflation rolls toward ≤2.2% by mid-2026, add a further 1–2% to cyclical ETF longs.