Piper Sandler Strategist: Stocks Have a Strong Backdrop for 2026

Market Focus on Interest Rates and Inflation

• 🎯 The market has been heavily focused on the direction of interest rates, which in 2022 and 2023 were primarily driven by inflation.
• 💡 A shift is occurring with softer employment data beginning to influence market sentiment, suggesting a move beyond recent economic drivers.

Historical Playbook for Market Recovery

• 📈 The strategist suggests investors look to historical periods with high inflation anxiety, where softening employment and Fed rate cuts signaled the end of a bear market and the start of a rally.
• 🔄 This playbook indicates that current conditions, despite a strong market rally, could represent the early stages of a broader economic expansion.

Understanding the Current Rally

• 📊 The recent rally is attributed to PE expansion rather than earnings growth, particularly for large-cap and growth stocks, driven by a significant decrease in inflation.
• 📉 While the labor market has softened, this has led to a nearly 200 basis point drop in interest rates from their peaks, creating a more favorable environment for the economy.

Labor Market Reset and Business Cycle

• 🛠️ The current labor market is undergoing a reset, unwinding the massive hiring surge seen during the pandemic, which is distinct from margin-pressure-induced layoffs.
• ⚠️ Layoffs are occurring due to AI, post-COVID normalization, and cyclical factors, particularly in smaller businesses, a trend expected to persist into 2026.

Signals for Economic Expansion in 2026

• 🚀 Forward-looking indicators, including changes in interest rates, oil prices, money supply growth, and the yield curve, suggest that manufacturing and transportation sectors will finally enter expansion in 2026.
• 💰 Additional fiscal policy measures expected in 2026 are seen as a bonus, further supporting economic normalization and a broader market improvement.