1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 17
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
economic goals rather than short-term political motives and its independence and credibility
anchors inflation and economic growth expectations.
A politicized Fed may cause the short-end of the U.S. yield curve to fall on expectations of a lower
equilibrium policy rate – the rate that neither strains nor stimulates demand, allowing the
economy to operate at its potential level. Upside pressure on growth and inflation expectations
could cause investors to demand a premium for holding longer-dated U.S. Treasuries, steepening
the yield curve.
Beyond Treasuries, an aggressively dovish Fed could initially buoy equities as lower policy rates
reduce discount rates and lift valuations, particularly in rate-sensitive sectors like technology and
growth stocks. Following the initial euphoric stage, ultra-loose monetary policy could give way to
structurally higher inflation which could raise market volatility and erode profitability. At the time
of this writing, betting markets believe the frontrunners for the top job to be National Economic
Council Director Kevin Hassett and former Fed Governor Kevin Warsh.
Race to become the next Fed Chair is between the two Kevins, as per betting markets
90%
75%
60%
45%
30%
15%
0%
Aug 2025
Sep 2025
Kevin Hassett
Oct 2025
Kevin Warsh
Nov 2025
Christopher Waller
Dec 2025
Rick Rieder
Source: Polymarket, Scotia Wealth Management
Capital expenditure plans are ambitious, but the companies embarking on this spending are
of much higher quality than their predecessors
Beyond monetary policy, investors have been closely watching the substantial capital expenditure
(capex) initiatives undertaken by companies globally – especially the leading technology firms in
the U.S. This is not unprecedented. Historically, every major technological breakthrough has
required heavy capex before their benefits became widespread – whether it was railways in the
19th century, electrification in the early 20th century, or, more recently, connectivity infrastructure
and computing resources during the dot com era to which the current AI cycle has often been
likened to.
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