Why This Isn’t A Bubble & Early 2026 Looks Like Goldilocks | Warren Pies

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We said it in 2024, the markets should hit SE7,000 at some point in early 2026. And the big important statement there is, and it still won't be overvalued. It will still be fairly valued. And I would say the same thing here today is that I think the market goes to 8,000 by some point in early 2026. We're not going to go into a recession, but I don't think we're going to have some big inflationary boom either. So, it's Goldilocks, and that's going to be the defining feature for this market for, I think, the first half of 2026. I have a hard time coming up with what is the bare argument for 2026.

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All right, everybody. Welcome back to another episode of Ford Guidance. And joining me today is Warren Pis, founder of 314 Research. Warren, good to have you back on the show. It's been a minute. What's going on?

Host: Yeah, man. It's great to be back. Just wrapping up the year and kind of taking an assessment of all the damage, you know. So yeah, it's there's been some damage. It's been a big year for you know, it feels like a lifetime ago that back in April we saw equities sink 20%. Like it it feels like that was years ago, but it's you know, it's just half a year ago. It's it's nothing. There's a lot's happened. And I wanted to reach out because you always put out some great kind of reviews of the past year and then also looking forward to 2026. So, I figured we could start the conversation by just kind of going through some of your your your wins and misses for for 2025. I know you've been reflecting on them a little bit and would just love to hear about yeah, how do you think the year went and and and where were some of your strong points or and some of your misses.

Warren Pies: I'm going to say the thing everybody says whether they had a good year or a bad year in this business and it's I'm just going to get it out of the way, but it's like yeah, these forecasts are, you know, you can't put too much weight into them. I think you want to like check back at the end of the year and see where your framework is versus like did we hit the target, right? And so I'm going to some of our targets hit very kind of uncannily well, but I'm not I'm not going to take a whole lot of credit for that or try and act like a a guru. What I'm more proud of is that the general macro framework that we laid out was correct.

Host: You know, our view for that and that and and what did that mean? So like first off, what were our views coming into the year?

Warren Pies: Coming into the year, we had like a 6,800 price target on the S&P 500. We thought sentiment was really stretched coming into the year. So, we expected a plus 10% correction somewhere between late Q1, early Q2. So, like some of that stuff was on worked out well. And then we thought that the 10ear would be strong. And that was like most out of consensus thing from us probably is we we expected the 10-year to average like 4 to 41 and it was more like 425. So we were probably a little aggressive on that. We thought at some point the tenure would revisit the lows we put in in 2024. So again aggressive on that. I'd kind of chocked it up to some crazy policy that deemed the bond market. But you know that was like one of our other views.

Another view was that oil would hit would break below 60. Brent Brent Brent crude is our benchmark and that's we had that call and then it happened and then we reiterated it at H2. And then we never moved our target down. We didn't panic like so many Wall Street came into the year very bullish and then panicked during liberation day and we were more like hey we we had downgraded equities in February and we were more ready to be offensive at that point in time. And so um that was kind of a it was a really stressful period but we we looked through it well. I think we guided clients through well.

We also Fernando my partner is very well hers in the AI stuff and so we helped our clients through the deepseek saga and we basically said this is if anything this is going to increase GPU demand and so that ended up working out. So yeah those were like the that was like the broad picture. What did we get wrong? like we called for a quality rebound. I mean, quality's been in an awful bare market. Quality factor. It's been an awful awful bare market. The worst on record. And so that was a a bad call. I think I was too bearish on small caps to be honest. Like that worked for a good while, but we've been in somewhat of a new regime coming out of Liberation Day.

But the the thing I'm, you know, you can go through the calls. I think we did actually very well on the calls compared to anyone else that put them up against anybody. Um, but like I said, that's not really where you're going to I don't want to make a living off that really every year. The the thing I'm proud of is like we we were convinced that the hire for longer call, which was a big part of the community. If you go back one year ago when you were doing these calls going out to 2025, what was everybody calling for? They were calling for like 5% tenure or a 6% tenure. the, you know, the idea was that bonds had sold off when the Fed cut. So this is all indicative of a Fed mistake and the Fed was losing control of the market and all these things. And we had a very like I'd say accurate framework to look at all that price action and in synthesize it.

And so our view was like no, that's we're going to fade the Fed mistake crowd. We're going to fade higher for longer. On the other side of this, we can't make a case for inflation. You see three broad vectors of inflation. shelter, crude oil, and the labor market. And we think all three of those are in cyclical declines in 2025. And so that was the framework we had. I did not see the insanity of tariffs on Liberation Day that happened and that was just um that that was not something I thought that there would be some volatility around that, but I could have never imagined how insane the policy actually was. So that was the the the the outlook. And then going into 2026, I think a lot of those themes, just because the calendar flips doesn't mean the fle the themes flip, but I think it's good to to wonder about the duration of some of those things as we go into 2026.

The main one, like I said, that I'm proud of is that we we had a good beat on inflation. And I I don't think those three factors, crude oil, uh shelter inflation as as measured by the CPI, which is converging with the market at this point in time. And uh in the labor market, I don't see any of that pressuring inflation over the first like half of next year, let's say. So what I really see is this Goldilocks environment where we've had cyclical disinflation. Uh fiscal has been supportive like everyone's covered at this point. Six, the deficit's closed a little bit. I think it's going to blow back out through the first half of next year. Um and that is supportive of the overall economy. the AI buildout is supportive of the overall kind. So, we're not going to go into a recession, but I don't think we need the we're going to have some uh big inflationary boom either. So, it's goldilocks and uh and that's going to be the defining feature for this market for I think the first half of 2026.

And the the question what we should all look towards I think given that framework is how how is this Goldilocks delicate balance going to break? Are we going to break from overheating or overcooling? And our view is that the risk in 2025 was over cooling growth basically. So we wanted to be more or less long bonds through most of the year and overweight bonds. And I think that we're going to transition at some point in 2026 where the risk is overheating.

Host: a lot of different points I want to jump into on all of that, but I think one of the the most preient ones that I I see consistently in the way you analyze markets and macro is this idea of monetary policy like changes in the short rate and how that impacts the long bond and then how that therefore impacts the economy and markets. And so to your point last year, you know, we had that moment where they first started to do their first couple cuts and they did a couple they, you know, they started with 50 the long and sold off pretty significantly. U and then I felt like that framing led to the context of this past fall when they also went and cut again. Um and like I I'll put my hands up. I was in the camp that I thought was going to happen. I thought they were going to cut and we'd see the 30-year sell off like crazy and it kind of just chopped around.

Um and then so now we have we also just had the December meeting. they cut rates and you know the long end's been pretty subdued. Um looks like there's still going to be a few more cuts in 2026 and then you start to mention about how you think there's this risk of of this slight overheating. So I would imagine that's that's bearish for bond. So I just want to understand like throughout these different examples and sequences like how do you how do you think about the sensitivity of the impact? Like is it just too many rate cuts from the Fed that you know if they do one extra too many the long end throws a tantrum or is it other dynamics? Is it more fiscally led? Like how does this all work in your head?

Warren Pies: I think it's a matter of these uh the fiscal impulse blowing back out next year on a structural level which keeps like kind of ambient inflation higher than it would otherwise be and that's we're in a a high inflation secular environment. I don't think that's a a controversial statement at this point in time. I think more more importantly is that some people get into that secular mindset and they can't see the cyclical near-term and the cyclical near-term was pretty supportive for inflation. And I think that's going to be with us a little bit for a little bit.

Um, a lot of macro people don't really know what to do with the oil, but I think it's a really important factor in that. And so to me, I think, you know, you have this glut it's formed out on the sea. It has to come on shore. The curve has to move. Oil prices have to go down a little bit more, at least stay weak down here so they're not going to pressure inflation. I think the labor market is like a is like uh is is weakening, you know, and there's a lot of debate on immigration, everything like that. The bottom line is unemployment rates going up and you can see it in all the alt data. We had a data blackout but I think it's pretty clear now that the data that the labor market's weakening and you know we just had this CPI report and there's some sketchiness to it but the the shelter inflation is still uh dis shelter is still disinflating and that's a long kind of lead time and uh you can argue about how it's calculated but it is what it is.

So those things you have to kind of look at those things and say when do they start to change? Um, I think the market does fine in the bond market. So, like if I don't think that the stock market is going to uh or I don't think that the the economy is going to go into a recession and cause a problem for risk assets, then from a big picture, the other way that we get there is from a Fed tightening. Um, and the first step to tightening is to see the end of the cutting cycle. And I do think that's the view that's coming closer to view. And I think we start to see that at some point in 2026.

And when you study those turning points where a cut cycle transitions to a potential hike cycle, we don't have to have a for sure hike cycle. It's just we're going to pause and it's a legitimate pause. It's not a pause within a cutting cycle. It's a pause and the next move could be a hike. When you study things and how the curve shifts around and when when that happens, um I think it that's when you start getting more of a risk from bonds backing up, right? And so, you know, you can you can talk about people talk about term premium, but it's it's kind of synonymous with yield curve steepness. And so, you know, we one of the things we said is, yeah, turn premium is going to go up. Not a really it's kind of benign thing because we're going to see a bull steepening as we as this cut cycle matures. And that's what's happened.

And so, but we're not at a place even though this the yield curve 2's 10 yield curve is is at its cycle high, it is not normal yet, you know. So when you get to the end of a cut cycle, the the yield curve will go to a more normal place and normal incorporates Fed policy and where the market the forward guidance for Fed policy is. So that to me is uh that's the event that I'm really looking for next year. I think we spend most of next year where the Fed dangles. I think we get a cut in Q1 and the Fed dangles two more cuts out in front of the market which keeps things like the two-year will, you know, so the Fed cuts again in Q1 that takes the Fed funds rate to 35 and the two-year will probably stay, you know, 20 basis points below that as we expect the cut cycle to continue. And then as we but as we get further down the line, no matter what the Fed does, if the market starts to see that there's a terminal that the terminal rate is almost here, that's that event is coming, that's when I think you start seeing the yield curve shift into a quote normal position, which would be, you know, where maybe 100 basis points plus between the twos and tens.

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Host: During that, you mentioned a couple points about just the recent data, especially the inflation data, and and you characterize it as as as sketchy. And yeah, it's it was a weird one and I'd love to just double click into like the really granular perspective you have on on inflation because to your point, you know, we we had the government shut down and then, you know, we I think we outright missed October in terms of CPI and then we got bits and pieces of November and underneath that was this this very interesting dynamic around owner's equivalent rent and what was going on there and therefore shelter and I know, you know, to your point about your call in 2025, you saw more disinflation than what was expected because of that. So, I'd love to just hear specifically what were your takeaways from that and how do we think about shelter inflation right now and then how do you contrast that with the goods side and and whether that's being driven at all higher by by tariffs or whether you see that as as sort of noise.

Warren Pies: Yeah. Well, I think it the goods is is going there is still more inflation because you're getting from this like inventory detocking to where tariffs are going to have to come through. That's why we've seen this lag on the goods side for inflation. And I still think there's tariff inflation in the good side, but I also think there's consensus at the Fed now to look through that, especially when the you and who the next Fed chair is. We'll see. But that's why I think Trump would be as a kind of just go off as a as a side note, Trump would be wise to select someone like Chris Waller because he could build a consensus and make an intellectually sound argument for looking through that tariff inflation. I don't think that either of the Kevins have the uh chops to do that effectively. So, you know, he thinks he's making a a good move putting someone like Kevin Hassid in there and I I think that that would be um more problematic. So, anyways, that but that's goods inflation. You go back to the Fed's Teal book in 2018, they talked about looking through the tariff inflation. I think there's a lot of reasons and you can construct argument. So, I'm not so worried about that.

the OEER in shelter print. I mean, the bottom line is is that uh well, we got to think like it's you can't just look at year-over-year because it's a it's a a chained together series of months. And in October, they didn't collect data. And so, part of the shelter survey just gets filled as a zero. And for a bunch of technical factors that stays in that that zero stays in the survey in the uh inflation data for like six more months. So it would roll off in April or so. Um so it's going to depress the year-over-year shelter and OER component which is a huge component of CPI. Like 40% of CPI is shelter. Um and OAR is the biggest component of that and OAR and the rent survey are all they're actually all the same source there. But you don't need to get down that point. I think the bottom line is is that it's probably overstating the the disinflation, the shelter year-over-year rate by like 20 basis points.

So, you know, I think everyone in the market at this point, I think it took us a minute to say like, well, how do they treat that October number? Oh, they filled zeros in. Oh, that's that's odd. And okay, well, now we just have to make our adjustment. Well, why don't we assume like some, you know, rough estimate that that corresponds to the last monthly amount that we saw in the survey. So, you do that and then it raises the year-over-year numbers by like 20 basis points. And uh you'll see probably a jump in shelter inflation once we on a year-over-year basis once we get into like that April period. So there's going to be you'll probably hear a lot of discussion around that at Fed press conferences and stuff as people try to understand how to weigh everything out and I think they'll just basically look at it and say shelter inflation is moving down and there's and we can look at market based metrics like does the best one that we look at if you listen to like there's like San Francisco Fed wrote a good paper on on how to understand the components of shelter and rental inflation and we look that's core logic uh single family rent index and that's been rolling over aggressively. So to me that's the leading edge and all the other stuff is kind of um good for like intellectual arguments or like or data you know deep in the weeds data guy arguments on Twitter which are fun but uh the big picture is that we're shelter there is no real like case that shelter inflation is a problem.

Uh, one of the things we said last year is that the upshot of the immigration policy is that there's papers out of Europe on this is that uh, new immigrants are actually absorbed faster into the housing market than they are in labor market. So if you go through a if you shut down the border and you do some do start doing a wave of deportations, you actually loosen the shut the housing market faster than the labor market even. So there offset the inflation factors.

Host: Yeah, that's a great overview of how to think about inflation coming out of the shutdown because that's just been what's so confusing is we're we're trying to piece apart based on what we had where we've been for the last couple months at what felt like a pretty important inflection point to be so started of data and I'm curious like how do you applying what you just did to the inflation side. I'd love to hear about the labor side like what is what are the relevant metrics to track there right now versus what is lagging, what is noise.

Warren Pies: I mean, this goes back to something we talked about maybe a year ago when I was on your show last time where we said how we use the we we we we use the residential construction market as a way to leg our cyclical view. You know, I mean, I feel like I made that I've emphasized that. I've talked about that on podcast and there's like a little bit of a snackback. People be like, well, you know, this is only so much of the economy and like you you I get all that like there is no perfect like you you can't boil the ocean here. The idea is like we need to have a rule of thumb and then make adjustments for the cycle that we actually are living through. So, our rule of thumb, our source of truth, our belief is that if we're going to have a recession, it's going to show up in the housing market first, especially when this is like a Fed cycle, your more typical Fed cycle. We're not having like a it's not a pandemic. It's not a it's this is a Fed cycle. It's an interest rate driven cycle. The Feds, if if we're going to have it, it's that that's how we're going to get there. And I think the area of the economy where that policy shows up most acutely is the residential housing market.

And so we watch residential construction payrolls closely and then we model out the factors up the farther up the chain to say like you know where are we on this and uh our research says that every modern recession we've seen like an 8% draw down in residential construction payrolls before you've had a more serious recessionary draw down in overall employment. And so and there's other cyclical areas you can look at. You look at manufacturing and you look at overall construction, but nothing leads quite like residential construction. So, that's where we focus and I think there's a lot of excess capacity there. I mean, the housing market is not This is where we get back to our place where we were a year ago if you went back and saw that that uh interview we did is that this is we think policy is restrictive. I I get to the restrictive policy by backing it out from um say we're at six and a quarter on 30-year mortgage. Well, are you stimulating or restricting housing activity? And I think it's pretty evident. We've been restricting housing activity for a while. And I there's been a little bit of a snapback. When we get down to 6%, you see mortgage applications go up and things like that. But I don't think that uh I still think we're restrictive. I think you would need to get to re accelerate the housing market. I think you need to um probably get rates down even further, another 100 basis points or something in the mortgage.

So my that's my view on it. Now, there's a ton of reasons that are fighting against that. Like, that's the the overall view, but it's an extremely slow cycle, and we are not calling for a recession. We're not calling for a recession because you have almost 6% deficit to GDP right now. That's we expect that to go higher in the first half of the year with tax rebates and all the other big beautiful bill aspects that come through. Um, who knows what's going to actually happen with tariffs in the Supreme Court and whatnot. So I think that fiscal impulse stays high. You have all the AI infrastructure buildout that's going on that's kind of happening as a um support to the economy and consumer balance sheets are just really strong. And so and I think on even related to housing the builders know we're in a we're in a housing shortage and and we're in a labor shortage for where where they're at. So they're hoarding labor. You've seen despite the fact that our models say like there should have been probably recession level layoffs in the residential construction payroll market, residential construction market, we haven't seen that. There are still at cycle highs. So, um, builder margins need to fall before you see layoffs that would really flow through the economy. I don't think we get there. I just that's the net of all that. Um, but I it's our way of having a framework around this this massive economic machine. It's our it's our toe hold into the economy is through the house.

Host: It Yeah, it's interesting that you're kind of saying that it's a it's a typical Fed cycle because it is, you know, in terms of like know we had the hikes and now we have the cuts and we're all tracking and hyperfixating on neutral and all of that. But there's also this I mean I mean tell me if if this is history repeating itself but there is this idea of that you know the K-shaped economy that we've that everybody's talking about right now and how there's this weird characterization where you have the Fed is focused on being dovish because they can see the the the lower end of the K is really struggling. They need to unlock that. Then the upper tranch the upper leg of the K is just doing great. You know we got big fiscal deficits. They're earning you know three and a half% on their cash still. we're funding AI like crazy. It's making max 7 earnings awesome, which is making equities awesome. Like that is that to me does not feel like a normal Fed cycle. Um, and I'm just curious like how do you characterize how the like what the Fed is prioritizing between those two legs.

Warren Pies: I think it's that's that is like the defining character characteristic of this cycle is the whole K shape. Everyone's talking about it. I think that that it explains so many like there's all these crazy fights on Twitter or just like you can get into a really heated debate over the economy right now and I think it's really all about your your perspective like some the people who think the Fed is accommodative. They look at things like financial conditions which is a really big code word for like stock prices you know credit spreads and stock prices. So they look at the asset market and they say, "You're telling me the Fed is restrictive? Like you're crazy. You're, you know, look at what's happening. You know, we're in a bubble basically and you're going to make this case." So that's that's their perspective. The other perspective looks at uh the lower strata that looks at the real estate market. It looks at the fact that we're our, you know, automobile sales in the United States are below 2018 levels. Looks at existing home sales being below the trough GFC levels. Uh it looks at the fact that you're seeing housing starts that aren't going to support the level of payrolls we see in the residential construction market and everybody's complaining about that. They look at the pain, the affordability crisis. All that stuff is wrapped together and they say, you know, we need to get rates lower because we're it's just we can't make these payments.

And so the perspective on the lower K if you're looking at the lower K if you're looking at the real estate market or those different aspects of the economy you you can easily see the restrictiveness of the Fed right so it's a it's a matter of perspective and you have to say okay cognitive dissonance is like a thing that you have to deal with in markets you have to be able to hold all these competing time frames and you know possibilities in your head you have to make an argument that we're in a cyclical disinflation but a secular inflationary world and keep all this stuff straight, you know, and so you have to keep this straight that some things you look at will make you think that the Fed's accommodative and they'll think make you think the economy is reheating and some things you look at are going to make you think you're right on the ledge of a recession. And so that's just the way it is. It's messy. There's a lot of a gray area there. And so the real big question to answer is what will the Fed look at? What will policy makers look at? because I don't who cares what you know we're not here to just talk about politics. We're here to make money and think about where the Fed's going to go. And I think the it's very clear in this K-shaped world the Fed is going to watch the lower K. The political pressure is getting real at this point in time. Took look at the elections in New York City. Uh I think you're starting to see more genuine frustration out of those groups in society understandably. Um and the Fed is going to be responsive to that. You know, policy maker that's why you're seeing Donald Trump even say, "Hey, get rates down. He doesn't understand how to get rates down, but he wants them down." You know, like feels it like that political feedback loop is getting really intense.

So they're not gonna what what are they going to do? Crash? I think it's hilarious to think that they're going to crash the stock market to teach asset owners a lesson, but also further put like the real estate housing market in depression and hurt the the little guy. Like you can't no more likely that they're going to let this upper K run really hot and risk a bubble or whatever else. We're not in a bubble yet. Risk a bubble in the upper K to save the lower K and to stop the political pressure that's building there. That's the way I synthesize the K-shaped dynam.

Host: It's a lot of gears turning in my head. I guess like I'm just trying to think through like what are the what are the anchor points that that inflect this and how that ties in with your view of 2026 which is that it sounds like for the first six months you think they can walk this line of helping to ease the lower end of the K without the top end blowing out. But then it sounds like you think this is going to go a little too far and then maybe what happens is they cut a little too much. fiscal deficits whine a little too much and then yeah we're helping the lower end decay but we're getting inflation and then the long end sells off and then equity sell off. Is that sort of the line of thinking?

Warren Pies: I think that's the way we go. It's a matter of how long these these tensions can persist. But that's exactly right. Like I think um when does that all come to an end? I I'll say second half probably late in the year would be my guess. But we won't know until we start like running through and we don't and this the fact that we haven't had data makes it that much harder, you know, to to forecast this stuff. So, all I can say is that I think we're passing through this period where the risk was cooling of the Goldilocks and like I was worried, not really, but more worried about growth than inflation last year. And we're going to hit a transition point next year where the risk flips back to inflation. And I think that the Fed is going even though they they can address the lower K right now because there's still that case to be made. But once that if inflation were to really come back, if you started getting oil firming up, if you started to see the labor market firm up um and the shelter component wasn't doing enough, you know, you saw super core and some of these other things, credibility becomes an issue for the Fed.

And and I don't want to call them bond vigilantes because I just can't stand that term. I just think you're going to get you're going to you're going to get a a realization that this cut cycle might be the risk is the realization that the cut cycle is not going to go any farther than that three and a quarter terminal rate or something like that. And a three and a quarter terminal rate gives you a two-year that's right about at 34, not much farther than it is here. And it gives you a yield curve that's much steeper than it is right now. And so, you know, put a 100 basis points between the twos and the tens and you can start seeing how and that's just phrase one. If we ever had to consider a hike, then you get even steeper and things like that. So, that's when you start having these bond market problems risk threaten the the stock market.

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Host: How do you incorporate, if at all, the Fed's balance sheet operations into this whole dynamic? Like, do you see that as a vector that's useful, or you kind of do you take the Fed at face value when they say it's not relevant to monetary policy, it's just technical changes on the balance sheet, or or do you see it as a as a way to maybe better walk the line that they're trying to do right now?

Warren Pies: Well, they always were going to need to do uh reserve management purchases. I mean, this was always like something post 2019 we knew they were going to do. It's just a matter of how they were going to do them. I I think it's going to be fun to watch how this So, first off, QE works, balance sheet policy works in two channels, and this is something we've talked about for years