2026 Macro Themes

The most important 2026 macro themes as I see the world..."it's a delicate balance"

This is part 1 of a 3 part 2026 outlook series that is being released over the coming weeks:

1. Macro Themes

2. Investable Ideas

3. Top Picks

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1. The midterm elections are a must win for Trump’s safety, wealth, health and legacy, and the administration’s focus and prioritization on winning will reflect that.

Republicans are rightly nervous about midterms and its likely this increases rather than abates. Democrats had strong showing in recent elections while Trump approval and popularity ratings are declining and the growing young electorate is becoming increasingly disenfranchised via unequal economic pain. Fiscal stimulus and populist policies are the only remedy to try to win (buy) voter support into November 2026.

Separate but related, the 2026 midterm elections carry significant importance for Trump and his family (think of the impeachment, investigations and wealth destruction that occurred following last midterm loss and carried into his retirement period).

Adding to the importance of the elections are the narrow margins by which Republicans control the House and Senate. The House is more vulnerable to random swings and incumbent discount while the Senate has a slightly better map with favorable Republican districts. The setup is high stakes.

In a rising populism environment, spending is necessary to try to win voters. It will be imperative that main street is not in the same dire economic conditions it is in now to win. The caveat is if the administration calculates that its ‘soft wins’ against immigration, DEI and geopolitical America first strategy are enough to offset the ‘hard losses’ tolling the middle class financially/economically. Recent Democratic victories, declining approval ratings and rising populist polls make this unlikely to be the case heading into November

Investors should open their minds to the idea that the market is not the #1 priority of the administration this year and rather politics and populism take center stage again. If Mamdani et al are winning elections, that’s proof of a low market priority for voters; additionally, Biden outperformed in 2022 despite a bad market

Across the board, the administration has a delicate balance to sustain. They will be seeking to lower oil prices (while helping producers - cough cough Venezuela), increase power generation and energy independence, target main street stimulus with both fiscal and monetary means, keep the stock market and AI leadership in positive territory but not ‘fuel’ it in such a large way that jeopardizes popularity among populist/socialist swing voters.

2. There will be no recession and the economic risks skew towards overheating.

The US has been in an economic expansion for over 5 years following the (2 month) 2020 COVID recession and with record stock markets, tax receipts, maximum deficit reduction efforts via DOGE, tariffs and spending cuts, baseline fiscal deficits are still running at ~5.5%. Going into an election year, this is unlikely to improve.

Additionally, the administration’s three negative demand shocks are largely over. The effective tariff rate has topped (with risks of rebates/reductions), government spending cuts are likely to flatline and the one-time negative shock from ending southern border immigration is in the past.

These self-induced downward cyclical pressures are being replaced with excess tax refunds for individuals (adjusting for no tax on tips, OT, SS that began last year) and other OBBB incentives like immediate capex expensing. Again, given its an election year the risks skew to more stimulus (tariff stimulus checks, housing incentives or other ‘affordability’ measures).

We expect the economy and nominal growth to remain strong.

3. Global ‘main street’ growth will inflect higher.

The fiscal sustainability crisis is not just a US phenomenon. China, Japan and Europe are all running deficits in the ~2-10% range as well. There is zero appetite globally for austerity or pain in asset prices that could risk deterioration of tax receipts.

For many years straight, when push comes to shove governments have consistently demonstrated their interest in inflation and debasement over austerity. The ‘crisis’ responses come quicker and last longer. We are seeing signs of a strong rebound in credit creation globally as well which I would call the ‘smart money’ trade. Governments’ actions are telling individuals and corporates to borrow money because debt is going to be inflated away. This is one of the reasons inflation is so sticky and can become entrenched. It’s a behavioral dynamic that cannot be done away with lip service.

For proof of this, look no further than every developed country’s sovereign debt market. Japan’s 10yr breaking above 2% looks like it could go straight to 4%. Europe and the US yield charts are also very bullish. Yields globally are in a clear and decisive uptrend that has been consolidating for a number of years now.

4. The stock - bond correlation will flip back to positive, especially as the year progresses.

From 2H 2021 through 1H 2024, stocks and bonds were positively correlated (e.g. stocks went down when bonds went down, yields up). From 2H 2024 through 2025, that flipped to a negative correlation (e.g. yields went down, bonds up, when stocks went down).

By now most investors can list the major headwinds facing long-term bonds:

1. >5% fiscal deficits despite record tax receipts and attempts to cut spending

2. Waning demand from foreign buyers (particularly the largest in Japan and China)

3. Fed balance sheet duration reduction

A few related but separate dynamics I’d mention are:

4. Fed RMP purchases (“front end QE”) and cuts help to put a floor on long end yields by supporting markets, liquidity and growth

5. Spillover effects of higher growth and yields globally

6. Additional supply concerns are hovering the fixed income market due to AI capex, main street capex reignition and renewed mortgage demand

Of course I should also mention the tailwinds for bonds but this list is shorter. It mainly stems from banking deregulation and a steeper yield curve that increases the demand for longer dated credit.

The point I just can’t stop thinking about is that we’ve continued to see horrible sovereign bond performance despite a policy induced main street recession that’s been ongoing for nearly 2 years. This is colliding with election incentives that require main street to be reinvigorated, which are the cohorts of consumers and businesses that have the highest propensity to consume.

5. Asset dispersion will be profound between winners and losers and the main focus is finding ‘win-win’ setups.

While many unanswered questions lie ahead that will determine the ultimate path for 2026, we do our best to try to ascertain the direction of travel based on the information we have, the incentives at play and previous historical reaction functions.

It’s a delicate balance…

1. How does the administration generate their highest likelihood of election victory while reigning in the fiscal sustainability crisis?

2. Assuming prioritization of the former, how to effectuate stronger main street demand without stoking inflation?

3. How does the Fed continue duration tightening of their balance sheet while sustaining a strong stock market that was propelled by their continual support of duration?

4. How to achieve a smaller trade deficit and weaker dollar to restore domestic manufacturing and critical industries while maintaining foreign capital inflows?

5. By all measures the Powell Fed has surprised dovish on nearly all occasions - reduced QT, ended QT and restarted QE in all 3 cases sooner than expected, all the while losing ~$100B per year from an upside down balance sheet. How does a Trump appointed Fed chair surprise even more dovish? When does Trump begin feuding with his newly appointed Fed chair?

The next post, part 2 of this series, will translate these themes into investable ideas I am putting capital behind this year.