October 2026 Commentary and Economic Outlook
OCTOBER 2026 EDITION:
Commentary and Economic Outlook
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 | Economy: |
The Fed raised rates despite overwhelming evidence that inflation is rapidly cooling. Specifically, over the last four months CPI core has declined by 0.5% to only 2.4%, and annualized inflation is only 1.8%. CPI Y/Y is only 2.1% excluding airline fares, which are almost exclusively driven by rising energy prices.
The Fed’s hawkish policy stance has caused the 10-year yield to rise to almost 5% which has driven the 30-year mortgage to over 7.25%. The housing sector is already in a mild recession, but the recent rise in rates is likely to put it into a deep recession where housing starts are likely to drop to less than 1MM units per year. This drop should cause a GDP drag of 0.25 - 0.30% and will likely cause GDP growth to drop to the low 2% area despite the tailwind from AI investment.
ICA’s real-time market inflation, CPI-R, is tracking at 1.29% YoY vs Core CPI of 2.45% YoY. Core CPI Shelter is 2.99% vs InfraCap’s Realtime Shelter index showing 0.03% YoY.
Annualizing the trailing 3 months of Core CPI results in inflation of only 1.64%.
When adjusting Core PCE with our shelter index and excluding Financial Services and Airfares, PCE Core was +0.18% in August and +2.16% YoY. This compares to reported PCE Core of +0.25% in August and 3.01% YoY.
Core PCE may never hit 2% as the methodology for calculating medical care costs results in much higher levels of inflation in the 3.5% range vs. CPI at 2.5% and the 20% weight in PCE means that it will be extremely difficult to ever hit 2% except if there is a deep recession or financial crisis.
The Fed should change their preferred inflation index to CPI from PCE. PCE inflation as reported is highly distorted. Over 30% of the PCE index uses imputed prices vs. market prices, which creates massive distortions such as portfolio management services increasing 21% over the last 12 months. In addition, the BEA imputes the cost of checking accounts without interest that shows an increase in the cost of checking accounts when interest rates rise. Consequently, if the Fed raises interest rates, financial services inflation would rise and not fall.
By including a large swath of consumption not paid by consumers, such as government and employer health care payments, the weighting of other services becomes distorted. The net result is an index that does not reflect what consumers actually buy and more importantly an index that the Fed has less control over. Shelter, which is the primary sector the Fed controls, is only approximately 15% of PCE vs. 35% of CPI, and healthcare, which is driven by secular factors vs. cyclical, is over 20% vs. only 10% in CPI.
| Stock Market: |
We are bullish on the market with an 8,300 target on the S&P 500 Index which represents 20x 2027 S&P earnings and assumes the 10-year ends 2026 in the 4.75% - 5.00% range.
2027 consensus S&P earnings continue to steadily rise (20x 2027 S&P EPS). Our target assumes the Strait does not open by year end and oil stays in the $80-100 range with the 10-year remaining in the 4.75% range. Every 25bp of yield impacts the S&P multiple by 1 multiple point.
S&P earnings estimates continue to melt-up with the current estimate of $412 (SPX INDEX EE) up 18% since the beginning of the year. Every 25 bp of 10-year yield impacts the theoretical equilibrium multiple by 1 point. If the Strait reopens and oil drops below $70 with the 10-year dropping to the 4% area, our target rises to 9,000 which is 22X 2027 S&P earnings.
In May 2026, we launched the Infrastructure Capital Nasdaq Option Income ETF, QVOL. The fund seeks high income and to outperform the Nasdaq 100 on a total return basis by screening for reasonable valuations based on PEG ratios (Price Earnings ÷ Growth). We seek to eliminate the “Dogs of the Daq”, which are companies we believe are overvalued but held in the Nasdaq.
When deploying option strategies, we seek high levels of income by writing single stock call options which provides theta above that of Index or ETF call options. The option alternative chart displays the potential Theta Yield of the S&P 500 Index, Nasdaq-100 Index, and a single large cap technology stocks (MRVL).
| Bond Market: |
The Only Financial Condition that Matters is the 30-Year Mortgage:
The Fed controls short- and long-term interest rates which almost exclusively impact the housing sector. Very few home buyers have enough stock to use the proceeds to buy homes so the stock market is largely irrelevant. Eleven out of twelve US recessions were caused by a housing decline.
Warsh and the hawkish FOMC have tightened financial conditions dramatically:
Real 10-year interest rates (H15X10YR Index) have surged from 1.9% to 2.4% over the last four months, which represents a dramatic tightening of monetary policy. The surge corresponds with an increase in market expectations of two rate hikes within the next year.
Inflationary expectations have plunged from a high of 3.4% to only 2.3% based on treasury implied inflation (ILBE US). The 10-year almost always trades at approximately 100 over the expected Fed Funds rate, which implies that the treasury market does not expect any rate increases as the 10-year bond has only risen 25bp over the last 4 months while the expected Fed Funds rate has risen 75bp (MIPR).
The Fed’s deeply flawed policy framework led it to make yet another major policy error. The Fed’s policy framework is fatally flawed due to the fact that 1) It follows the massively distorted PCE price index 2) Its inflation forecasting model is completely broken as it ignores money supply growth and follows the failed Phillip’s Curve inflation model and 3) It follows an inflation target that is completely arbitrary and empirically too low.
It is imperative that the Fed’s policy framework is reformed and we are hopeful that the Warsh task forces will make significant changes that avoids policy mistakes like todays or the “transitory” debacle.
The US is headed toward deflation. Historically inflation is only caused by excessive money supply growth and oil price spikes. In the 70s oil prices rose 1,200% and the money supply grew at an average rate of 10% per year. Right now, the money supply (Mo) is declining by over 10% per year and oil prices have declined by over 20% from recent highs. If the Fed reforms its data feeds, it will cut rates aggressively to avoid the potential for disinflation.
DISCLOSURE
This information is not an offer to sell, or solicitation of an offer to buy any investment product, security, or services offered by Jay Hatfield, or Infrastructure Capital Advisors, LLC, (”ICA”) or its affiliates. ICA, will only conduct such solicitation of an offer to buy any investment product or service offered by ICA, if at all, by (1) purported definitive documentation (which will include disclosures relating to investment objective, policies, risk factors, fees, tax implications and relevant qualifications), (2) to qualified participants, if applicable, and (3) only in those jurisdictions where permitted by law. Jay Hatfield or ICA may have a beneficial long or short position in securities discussed either through stock ownership, options, or other derivatives; nonetheless, under no circumstances does any article or interview represent a recommendation to buy or sell these securities. This discussion is intended to provide insight into stocks and the market for entertainment and information purposes only and is not a solicitation of any kind. ICA buys and sells securities on behalf of its fund investors and may do so, before and after any particular article herein is published, with respect to the securities discussed in any article posted. ICA’s appraisal of a company (price target) is only one factor that affects its decision whether to buy or sell shares in that company. Other factors might include, but are not limited to, the presence of mandatory limits on individual positions, decisions regarding portfolio exposures, and general market conditions and liquidity needs. As such, there may not always be consistency between the views expressed here and ICA’s trading or holdings on behalf of its fund investors. There may be conflicts between the content posted or discussed and the interests of ICA. Please reach out to the ICA for more information. Investors should make their own decisions regarding any investments mentioned, and their prospects based on their independent research, and not on any subjective opinion(s) made either by ICA, ICA employees or affiliates. The information presented should not be construed as legal, tax or accounting advice or as a recommendation to invest in any of the products or strategies described, and may not be appropriate for individual investors. Such persons are urged to consult their own legal, tax and investment counsel before making any investment decision.This material must be preceded or accompanied by a prospectus. The information contained herein represents our subjective belief and opinions and should not be construed as investment, tax, legal, or financial advice. For a prospectus with this and other information about the Funds, please visit www.infracapfunds.com. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. Please read the prospectus carefully before investing. For more information about the Funds, Fund strategies or Infrastructure Capital, please reach out to Craig Starr at 212-763-8336 (Craig.Starr@icmllc.com). The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. QVOL, ICAP, SCAP, and BNDS ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.
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