April 2026 Commentary and Economic Outlook
- InfraCap Management
- Apr 13
- 8 min read
APRIL 2026 EDITION:
Commentary and Economic Outlook
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MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register and attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, April 16th 2026 @ 1:30PM EDT. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Portfolio Manager, will walk you through updated market commentary, and economic outlook for the coming months. SIGN UP! |
 | Recent Developments: |
We are confident the Strait of Hormuz will open as the entire world needs it to reopen:
There could be a negotiated settlement preceded by a ceasefire.
The US may reopen the Strait unilaterally by destroying energy infrastructure and possibly involving ground troops.
A coalition, possibly including the UAE, reopens the Strait after the US/Israel finish their bombing campaign.
After the Strait is reopened, we expect oil to decline to approximately $70 as there will be residual inventory issues and a risk premium relative to the $60-65 pre-war price. We also expect inflation to decline in the second half of 2026 as the oil spike finishes flowing through core and we annualize the tariff increases. This decrease will facilitate 3 rate cuts which will cause the 10-year yield to decline to 3.75%. We reiterate our 8,000 S&P 500 Index target supported by strong EPS growth and lower interest rates.
We believe that private equity firms have been unfairly penalized by fears of losses raised by auto related defaults, but our work indicates that these issues are not material for the large private equity/credit firms.
We estimate that private credit has a full cycle default rate of 5-6% with a potential peak of 10% this cycle as compared to high yield bonds at 3.0% and preferred stocks at only .6%.
We also believe that losses in the private credit markets in the absolute worst case will be 5% comprised of an unprecedented 10% default rate and a recovery rate of 50%.
At a peak default rate of 10%, private credit funds will be able to withstand the increase in defaults and that level is already more than reflected in publicly traded companies such as alternative asset managers and BDCs.
Despite ongoing uncertainty in the Middle East, we expect the stock market to rally in April as we pass tax day, which causes a temporary liquidity draw and as we head into earnings season which we expect will refute the AI and private credit short theses.
| 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.
Targets are not just designed to signal buys but also sales. Our 7,000 target worked well in 2025 as the market pulled back when it hit 6,940.
Our bullish stance on bonds and stocks is dependent on declining PCE this year. Consequently, reopening the Straight Is critical. At the current $100 price, there would be an approximately 2.5% increase in core PCE which would keep the Fed on full hold.
We also believe that the Ai short theses are both inconsistent and overstated. Specifically, the theory that cloud service companies will get inadequate returns on their cap ex, yet every software business and other many other businesses will be supplanted by AI are inconsistent. We forecast that cloud service companies will achieve excess returns on investment as every business recognizes both the opportunity of AI and the competitive risk.
We expect tech to outperform value stocks as value stocks are now fully valued and tech stocks are heavily discounted to the point of trading at valuations typical of value stocks.
We now believe that the rotation out of tech is overdone with tech stocks now trading like value stocks and defensive stocks are fully / overvalued.
Regional banks should benefit from more Fed rate cuts which will cause an expansion in NIM. We recommend rotation out of Investment Banks which are fully valued.
| Bond Market: |
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.
Base real inflation is already below the Fed’s target and 2nd half inflation prints should be very low after both tariffs and energy price increases finish flowing through inflation reports during the first half. We expect that the Warsh Fed will cut rates 3 times in the second half of 2026 as the new Fed relies more on forecasts and market based/real time inflation measures vs. the current delayed and imputed estimates.
US 10-year bonds are 80% correlated to the expected terminal Fed Funds rate and 25% correlated to global bonds. The budget deficit is relatively static and has been in the 5% of GDP range for years, so not a driver of interest rates in the short to medium term.
Market implied policy rate continues to forecast 10-year yields with a 1% average spread.
We recommend investors add 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.
| Economy: |
Assuming oil prices drop below $70/barrel, we remain optimistic that PCE core approaches the Feds arbitrary 2% target by year end as the shelter component continues to gradually reflect market prices and tariff impacts roll off later in the year. The money supply (monetary base) is down almost 6% year over year. The expected decline in inflation supports our view that the 10-year declines to 3.75% and the S&P hits 8,000 by the end of the year.
Both Trueflation and Realflation support our bullish view
Not only is the Fed’s inflation of 2% both too low and too precise, it is also based on a deeply flawed PCE index. Specifically, the PCE index uses the shelter component from CPI that is delayed by two years relative to market rents, but also uses imputed prices that are completely disconnected from market inflation. The imputed estimate of financial services is the most distorted with increases in stock prices resulting in imputed inflation as investors pay higher management fees even though management fees remain unchanged. In addition, the BEA performs other arcane and likely unreliable estimates of increases in the prices of deposit accounts based on changes in interest rates and insurance inflation based on loss rates vs. actual insurance rates. The financial services component of PCE raised Y/Y inflation by .5% relative to a market-based estimate, which caused Y/Y PCE core to be 3% vs. a market rate measurement of financial services inflation.
We publish a Realflation measure of PCE core that uses market rents and market financial services inflation to estimate what the real market inflation rate. PCE-R for the last twelve months was less than 2%, which indicates the Fed should cut the Fed Funds rate to the neutral rate of 2.75% as soon as we get clarity on oil prices post resolution of the Iran war. The Fed should also create a more flexible inflation target of 2-3% to reflect the fact that the US has been most prosperous historically when inflation was in this range, that it is impossible to princely hit a 2% target and the measurement of inflation is highly inaccurate.
Truflation as of 2/12/26: 0.75% YoY:
Realflation Also Below 2.0%:
We are forecasting robust US GDP growth of 3.3% in 2026 primary driven by continued strong personal consumption of 3% and a resumption in investment growth of 4% as housing and construction recover in response to the dramatic decline in 30-year mortgage rates by almost 100bp.
Average post WWII GDP growth is 3.15% so our forecast is not out of line with historical averages.
We are negative on the selection of Kevin Warsh as the Fed Chair nominee as he was a member of the Fed that raised rates 17 meetings in a row during the Mid-2000s even though Core PCE inflation was approximately 2% and remained hawkish even after the GFC was well under way. Warsh would likely be a worse Fed Chair than Powell due to his continued strong commitment to the disastrous 2% inflation target. He is a classic Rhino who does not care about the middle class and is hyper focused on the flawed 2% target.
We do still expect the Fed to cut rates 3 times as PCE core is very likely to roll down to approximately 2% by year end. Given Warsh’s history of hawkishness it will be easy for him to convince the FOMC to implement cuts. Consequently, we are reiterating our 8,000 S&P target and 3.75% year end target on the 10-year bond.
The Fed Funds target rate and the Fed’s net balance sheet are not independent variables; the target Fed Funds rate drives the size of the Fed’s net balance sheet. The Fed did badly mismanage its total balance sheet during the Pandemic as it was buying so many long term treasuries it was forced to borrow $3 trillion of reverse repo from the banks in order to keep Fed funds above zero, resulting in a massive loss on long term securities as long rates rose. These losses resulted in the Fed having negative $200 billion of negative equity, which makes the Fed technically insolvent. If the Fed cuts rates three times this year, the last of the reverse repo built up during the Pandemic should be reversed and the balance sheet should be normalized with liabilities matched with long term assets. If the Fed wanted to further shrink the balance sheet it would have to stop paying interest on reserves.
We are in a recession in the interest sensitive Residential and Construction industries due to overly hawkish Fed policy. The recession continued in the Q3 GDP numbers with both sectors still declining a total of .4% for the quarter and overall investment near zero. The reported number was above trend at 4.3% driven by strong personal consumption expenditures of 3.5%, which is not likely to be sustainable. GDI, an alternative measure of economic growth was a more modest 2.4% for the quarter.
The monetary base is the critical leading indicator of inflation and GDP growth. M1 and M2 have become outdated indicators after the GFC as banks now have massive excess reserves so the Fed can no longer control the size of bank balance sheets to restrict credit. In addition, non-bank lending has grown exponentially, further limiting the importance of M1 and M2 relatively to the monetary base.
The monetary base has shrunk by over 6% Y/Y (vs. a normal growth rate of 5%) and oil prices are down over 15%, both of which are very deflationary and could lead to a recession.
The “Hatfield Rule” is a recession indicator which states that if housing starts drop below 1.1MM there will be a recession. It is superior to the “Sahm” rule as housing is a leading indicator and employment is a lagging indicator.
Consequently, there is a significant shortage of homes in the US of approximately 4MM homes. Also, there is now an active group of investors buying new homes to rent which provides for more resilient demand than has existed in the past. A decline in the housing sector accounted for 12 out of 13 post WWII recessions.
In addition, employment growth has stalled with less than 22k jobs created on average over the last 4 months according to the employer survey showing no growth over the last 7 months and over 850k jobs lost according to the household survey. Continuing claims also remain elevated at almost 2MM.
Private investment GDP drives economic cycles.
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.
We forecast that the Federal Budget deficit will decline 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%.
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