May 2026 Commentary and Economic Outlook
- InfraCap Management
- 1 hour ago
- 6 min read
MAY 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, June 11th 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: |
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Our upside target for the S&P 500 Index is now 8,850 as S&P 2027 earnings estimates have risen 9% this year since we established our 8,000 year-end 2026 target in December. 10-year rates would need to be near 4% to justify our upside target.
We do not expect a negotiated settlement to the war and believe that the Strait will need to be reopened by force. We expect the S&P to stall during the May/June time frame unless the Strait is reopened.
If the Strait is reopened in the first half of the year, we forecast GDP growth of 3.5% and would raise our S&P target to 8,600 based on surging 2027 EPS estimates and the likely decline in interest rates below 4%.
The market could likely to stall or pull back in May/June after the bulk of earnings are reported and oil prices remain elevated due to the Iranian war.
The Fed Funds target rate and the Fed’s net balance sheet are not independent variables, The only way to reduce the size of the Fed balance sheet is to stop paying interest on bank reserves held at the Fed.
We support the New York City Pied-à-terre tax as it is a tax on excessive consumption vs. most taxes that impact wage income or investment which are both critical drivers of economic growth.
Upward mobility is limited in the US by sub-standard basic education in low-income school districts. We support Tutoring America, which provides grants to low-income schools for technology, software and tutors to assist students in returning to grade level math and English so they can effectively participate in regular classrooms. We also give grants in schools in developing countries such as Ethiopia, focused not only on education but also providing basic nutrition supplementation and health care screening in rural areas
| Stock Market Outlook: |
We are increasingly confident in our 8,000 year-end S&P target as 2027 consensus EPS estimates have risen 11% this year, from 350 to 385, mainly due to a 17% tech sector increase. Consequently, our target of 8,000 is just 21x EPS vs. 23x at the beginning of the year.
21x multiple is consistent with the 10-year yield at 4.35%, indicating that rate cuts are not necessary to support the 8,000 target.
Every 25 bp of 10-year yield impacts the equilibrium multiple by 1 point.
If the 10-year drops to 4.0% our S&P target goes to 8,850.
The market could likely to stall or pull back in May/June after the bulk of earnings are reported and oil prices remain elevated due to the Iranian war.
| Bond Market: |
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 miss mange its total balance sheet during the Pandemic as it was buying so many long-term treasuries it was forced to borrow over $3 trillion of reverse repo from the banks 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. Eliminating interest on reserves would lower the demand for Fed reserves which reduces Fed liabilities and would allow the Fed to shrink its assets to match its reduced liabilities.
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. It is also possible that the models adjust the BLS’s flawed shelter component so that the Fed is no longer always two years behind the curve as the Powell Fed was.
Market implied policy rate continues to forecast 10-year yields with a 1% average spread.
We believe investors can benefit from adding 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: |
PCE Index Deeply Flawed: 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.
Real GDP growth has averaged its highest in the 3 – 5% inflation range.
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.
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% YoY. 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.
We 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%. During the Great Financial Crisis, the peak default rate was approximately 10% for high yield bonds and private credit. We do not expect banks or the high yield market to sustain significant losses as those sectors have very limited exposure to the buyout credit market where most losses are occurring. A 10% loss rate would imply that the market has, as usual, massively overreacted to the increase in private credit defaults by selling BDCs, alternative asset managers and some financials down by over 30%, which implies an over reaction by at least 20% given the most draconian potential loss rate of 10%.
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.
A declining monetary base will stabilize inflation to the target level.
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