New York - December 1, 2025 ~ The team at Infrastructure Capital Advisors has completed its 2026 market and economic outlook with a brief recap of its 2025 outlook.  This insight report covers the overall economy and the stock and bond markets.

Review of 2025 Outlook: Published Jan. 2025

2025 Market & Economic Outlook Report: click here see the report.

2025 Market Outlook Summary:

2025 Stock Market and Economic Outlook:

1. We are bullish on stocks with a 7,000 target on the S&P 500 Index assuming an 18% effective corporate tax rate is enacted. Our target represents 22x consensus 2026 S&P Estimate of $316 after adjusting for a reduction in the corporate tax rate from 21% to 18%. The 22x multiple is justified by the lower corporate tax rate which drives higher returns on invested capital resulting in higher earnings growth. If there is no corporate tax cut our S&P target falls to 6,600 and if there is a full cut to 15% our target rises to 7,500. Result: Target working well with market fading when we get to 6,900 area for the S&P 500 Index.

   
   

2. We continue to be bullish on investment banks, financials, REITs, small caps and preferred stocks, but tech stocks genrerally will outperform these sectors unless rates start to drop in 2025. Investment banks very likely to benefit from both M&A boom and AI related IPO wave. We are underweight on defensives including health care, consumer staples and utilities.

2025 Bond Market and Inflation Outlook:

1. We remain bullish on bonds despite the recent sharp selloff of 10-year treasuries in response to a hawkish Fed and expect the 10-year to move into the 3.5%-4% range by the end of the first quarter of 2025. Result: We have finally declined below 4% on the 10-year after a recalcitrant Fed finally figured out the real economy is slowing and employment declining.
   

2. The best cure for higher rates is higher rates.  There has been almost 120bp of tightening in financial conditions and associated increase in the dollar that has not yet been reflected in economic growth or inflation. If rates remain in the current 4.75% range with the 30-year mortgage over 7%, we will have a significant decline in housing leading to slack in the labor market and slow economic growth.  The current 7.3% rate is only 70bp below the high for the Century and over 200bp above the 25-year average. The only financial condition that matters is the 30-year mortgage rate as housing declines have caused 12/13 post WWII recessions. 

2026 Stock Market Outlook:

Our 2026 S&P 500 Index target is 8,000 for 2026, assuming a 23x multiple of 2027 Estimated S&P earnings of 348.   That high multiple is justified due to the ongoing AI boom, increased visibility on Fed rate cuts and historically low corporate tax rates. The 2017 decline in the corporate tax rate from 35% to 21% increased the theoretical multiple on the S&P by 4 multiple points.

2026 Bond Market and Economic Outlook:

1. We continue to be bullish on Treasury bonds with a 3.75% year-end 2026 yield target on the 10-year, which is 100bp over our forecast of the neutral/terminal rate of Fed Funds.  The economy is slowing (see details in charts below) and weakness in the US job market will likely cause the Fed to cut rates 4 times over the next year. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit.

   1. US 10-year bonds are 80% correlated to the expected terminal Fed Funds rate and 25% correlated to global bonds (see graph below).  The budget deficit is relatively static and has been in the 5% of GDP range for years, so not a key driver of interest rates in the short to medium term.

   2. We also believe investors can benefit from high yield bonds and preferred stocks as we do not expect a big increase in defaults and we expect treasury rates to decline below 4% as the economy weakens.  

   3. We are forecasting that US GDP growth increases to 3% as the Fed reduces rates to the neutral rate of 2.75-3.00%, which should cause the housing and construction sectors to recover.  The sustainable growth rate of 3% can be derived from the US savings rate of 20% with the after-tax return on investment being approximately 15%.

2. Tariffs are positive for economic growth in the medium to long term as the additional revenue from tariffs reduces the federal budget deficit and crowding out of private investment.  Savings and investment are 70% correlated with GDP growth globally according to an IMF study.

   1. We forecast that the Federal Budget deficit declines to $1.45 Trillion in Fiscal 26 with tariffs contributing $400 billion of incremental revenue based on an expected average tariff rate of 17.5%.  This deficit is only 4.6% of GDP which is sustainable with nominal GDP likely to grow in the 5% range over time (see projection of future deficits below). We forecast that the reduction in the deficit will also boost sustainable GDP growth by .2%.

Market implied policy rate continues to forecast 10-year yields:

Investment spending has slowed dramatically with the housing and construction sectors in recession:

Increased tariffs have put the US Budget Deficit on a sustainable path: