Underpriced Downside Tail Risk with a Constructive 2026 Macro Regime
Markets appear to underprice downside tail risk—especially in rates—because policy uncertainty centers on whether labor-market deterioration or stickier-than-expected inflation will dominate; base case is modest easing, steeper 2s10s, improving equity breadth, and growth normalizing into 2026.
Markets appear to underprice downside tail risk—especially in rates—because policy uncertainty centers on whether labor-market deterioration or stickier-than-expected inflation will dominate; base case is modest easing, steeper 2s10s, improving equity breadth, and growth normalizing into 2026. Key risks remain a sharper rise in unemployment or re-accelerating inflation that would force a materially different policy path.
“Market-based measures—especially five-year, five-year-forward TIPS yields—do not reliably predict future real interest rates relative to macroeconomic model estimates. Macroeconomic models imply a modest 0.25–0.50 percentage-point rise in r‑star since 2018, whereas the larger rise in TIPS likely reflects premiums and noise.”
— Liberty Street Economics
“Downside tail risks—especially in rates—appear underpriced as the Fed balances potential labor-market weakness against inflation persistence; base case expects inflation to remain the dominant constraint, a modest easing tilt, a steeper curve, and a constructive 2026 for small caps and financials amid a soft-landing backdrop.”
— Deer Point Macro
“Markets are underestimating downside tail risk—particularly in rates—because pricing remains focused on inflation persistence rather than a potential labor-market-driven slowdown. Macro and equity breadth indicators point toward a soft landing, a modest easing tilt, broader capex re-engagement (led by IT/AI), and a constructive backdrop for small caps and banks in 2026.”
— Deer Point Macro
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