In an interest rate-driven cycle, the housing market feels the impact first. Historically, an 8% drawdown in residential construction payrolls precedes a broader recession. The absence of this drawdown, due to labor hoarding by builders, is a key reason the US economy has remained resilient.
2026 will be a year of two halves. The first half continues a "Goldilocks" phase with risks skewed towards economic cooling, favoring bonds. The second half will see a transition where the primary risk becomes overheating and resurgent inflation, signaling a portfolio rotation into commodities.
The October 2025 government shutdown forced data collectors to input zeros for parts of the shelter survey. This technicality will artificially depress the year-over-year CPI shelter component for six months, making disinflation look stronger than it actually is until about April 2026.
The bond market will become volatile not when rates hit a certain number, but when the market perceives the Fed's cutting cycle has ended and the next move could be a hike. This "legitimate pause" will cause a rapid, painful steepening of the yield curve.
Research shows new immigrants are absorbed into the housing market faster than the labor market. A policy shift towards border shutdowns and deportations would therefore likely ease shelter inflation more quickly than it would ease wage pressures, creating an unintuitive economic effect.
A "Goldilocks" scenario of steady growth and disinflation could propel the S&P 500 to 8,000 by early 2026. This isn't a bubble prediction; rather, the market's structural shift to higher-margin tech companies means such a level would represent fair value, not dangerous overvaluation.
The "K-shaped" economy presents a dilemma. The Fed will prioritize easing for the struggling lower end (housing, affordability), even if it risks overheating the asset-owning upper end. Political pressure from the masses outweighs concerns about asset bubbles, guiding policy toward the path of least political resistance.
Today's high S&P 500 valuation isn't a bubble. The market's composition has shifted from cyclical sectors (where high margins compress multiples) to mature tech (where high margins expand them). This structural change supports today's higher price-to-sales ratios, making the market fairly valued.