February 2026 Commentary and Economic Outlook
- InfraCap Management
- 8 minutes ago
- 6 min read
FEBRUARY 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, February 12th 2026 @ 1:30PM EST. 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! |
 | Economy: |
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 forecasting 4th quarter GDP growth of 3% resulting in 2025 GDP growth ending the year at 2.6%
The Atlanta GDP Now forecast of is comprised of approximately 2% from personal consumption with 1% coming from the volatile Net export component, and almost 1% from inventory builds for a total of over 4%. Contributions from Investment and government spending are less than .3%, so sustainable growth in Q2 is less than 2.3%.
We do 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.
We are optimistic that Warsh will reform the Fed’s forecasting models to replace the flawed Keynesian Phillips curve models with models that incorporate increases in the money supply.
We view the surge in gold and other metals as a loss in crypto exceptionalism vs. a loss of confidence in the US or other major countries. Crypto is clearly not digital gold and has ceded the momentum trade to the metals complex.
Inflation does not become sticky or entrenched. Inflation is caused by excessive money supply growth in excess of nominal GDP growth. The false notion that expectations fuel inflation came from a lack of understanding of the impact of a 1,200% increase in oil prices during the 1970s.
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 only reason the US economy is not in recession is the housing sector has become less cyclical as home building has remained muted since the GFC with only an average of 1.1MM homes started with a peak of 1.8MM. During the 10 years prior to the GFC, starts averaged 1.7MM with a peak of 2.3MM.
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.
We publish a real time CPI estimate that calculates the shelter component of CPI utilizing real time, national data from Zillow and Apartment list.
CPI-R continues to be a be below CPI-U (Core CPI) and has been a reliable predictor of CPI-U.
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 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%.
| Stock Market: |
Our 2026 S&P 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 as the Mag 8 are fully valued with our models currently showing only 1.8% average upside.
We do not think that AI stocks are in a bubble as the MAG 8 are fairly valued but not substantially overvalued. In addition, we believe that any major company that does not invest substantially in AI will be left behind. We do think there will be an AI bubble over the next 3 years which creates a huge opportunity for investors in today’s market.
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.
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.
Given the decline in rates and our bullish outlook on stocks, we recommend large cap dividend stocks, small cap stocks and high yield fixed income.
| 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.
The economy is slowing and weakness in the US job market will likely cause the Fed to cut rates 4 times over the next year. GDP growth only averaged 1.5% last year and the interest sensitive construction and residential sectors have contracted over the last year in response to tight Fed policy.
Importantly, 2 members of the 7-member Federal Reserve Board came out for a July rate cut. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit.
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.
| Commodities |
We lowered our 2025 target on oil from $80 to $70 (range of $60-80) as it has become clear that Trump will use his influence with the Saudis and Russia to limit price increases despite tighter sanction on Iran. This policy will offset a good portion of one-time price increases from tariffs. We do not expect an increase in US production. We do see support for oil below $60 as most forecasters ignore the price elasticity of supply and demand for oil. Middle East wars will only impact prices if oil production facilities are destroyed.
Artificial Intelligence and data centers have opened new growth prospects for natural gas midstream companies to supply gas fired power plants. Natural gas plants have some of the shortest times to build and we believe they are best positioned to supply reliable power quickly.