Inflation, Profits, and the Drivers of Growth
Weekly Market Update
Top Three Takeaways
We expect the policy path, not labor market slack, to determine the U.S. inflation outlook. The federal funds rate sits below economic rules-based prescriptions in unrestrictive territory. Globally, real policy rates continue to fall in many countries despite above-target inflation. We see easy policy as supportive of forward nominal growth.
Companies continue to report record profit margins, which supports employment and consumption. Every post-WWII recession was led by a profit-margin squeeze that filtered into layoffs and consumption downturns. We favor companies with margin durability as the cycle matures.
Incoming data validates our framework. Amid strong profits, capex expectations are rising, while underlying inflation indicators remain elevated. These signals reinforce our view that inflation pressures reflect the policy stance and support our preference for gold as a portfolio hedge over duration.
This Week in Charts
Looking Closer
Every U.S. recession since the 1960’s has been preceded by declining profit margins. When margins compress, corporate caution rises, hiring and capital expenditures slow, and consumer behavior weakens.
Market and Data Recap
Inflation is a monetary (policy) phenomenon, not a labor market story.
The evidence does not support the Phillips Curve1 narrative as the data shows no meaningful link between labor market slack and future inflation, despite the theoretical premise that a tight labor market should fuel persistent price pressures. Though the Phillips Curve remains a feature of central bank inflation outlooks, policymakers appear less willing to focus solely on labor market slack to explain the inflation path.
What does determine the inflation outlook? The stance of monetary policy. Policy rates remain low relative to rules based recommendations, and real policy rates are declining. When monetary policy is too loose, inflation rises, whereas restrictive policy puts downward pressure on inflation.
For investors, this means the inflation debate should focus on policy settings, not labor market narratives. With policy becoming more accommodative, we expect it will be challenging to sustainably return inflation lower to central bank targets. Our expectation for this upward pressure on rates and rate volatility keeps us cautious about adding back to duration for now.
Bottom line: Inflation responds to policy, not labor slack. We maintain a shorter-than-benchmark duration and preference for gold to hedge portfolios against inflation and rate volatility as policy remains easy relative to economic data.
Corporate profits drive the labor market and consumption cycles.
The conventional wisdom is that since “consumer spending is 70% of GDP (in the U.S.),” consumption must drive the economy. The data says otherwise. Consumer spending moves coincidently with GDP, not ahead of it, and provides little predictive insight into the economic path ahead. Consumption growth has tracked GDP growth almost one-for-one over the last 70 years.2
Profit dynamics, by contrast, lead the cycle. Every U.S. recession in the post-WWII period followed a profit-margin squeeze (Figure 1). Consumer behavior begins to respond when margins compress, corporate caution rises, and hiring and capex weaken. This sequencing is consistent, empirical, and critical for investors building conviction in the macro regime.
Bottom line: Profits drive cycles as companies look to expand hiring and firing, leading to labor market shifts and changes in consumption. With profits at all-time-highs, we prefer exposure to companies best positioned to maintain these record profits despite K-shaped market and consumer dynamics — those with durable revenue streams linked to secular themes like AI.
The framework is playing out today with above target inflation, record profits, and rising capex.
Expectations for corporate capital expenditures are strengthening in an environment of strong business profitability. The National Association for Business Economics’ (NABE) expected capex readings point to stronger actual investment levels, particularly across technology, infrastructure, and automation-driven sectors.3 This reinforces our conviction in the AI-linked capex cycle that remains a powerful structural driver into 2026.
On inflation, breadth indicators continue to tell a clearer story than headline prints. The share of Consumer Price Index (CPI) components rising more than 5% remains above the 2015-19 average, reflecting still-elevated momentum beneath the surface. This dynamic aligns with our policy-based inflation view: broad-based price pressures persist when policy remains looser than macro conditions warrant and only tighten meaningfully once real rates rise into restrictive territory.
Capex as a structural driver in 2026 and easy real policy rates both in the U.S. and globally point to a resilient nominal growth environment for the next 12 months. As the cycle matures and risk valuations remain in the top decile of the last 20 years, volatility (like we’ve seen of late) may be a coincident theme in this environment. However, we plan to use volatility as a potential opportunity to add core equity exposure until the profit or policy backdrop shifts.
Bottom line: Despite crosscurrents, we expect easy monetary policy, a durable AI-led capex cycle, and fiscal stimulus from the U.S. tax bill to support a strong nominal growth environment in 2026 as inflation remains above target. As the cycle continues, periods of volatility could potentially create opportunities to add to core equity exposure.
1 The Phillips Curve is an economic theory that illustrates an inverse relationship between inflation and unemployment, suggesting that lower unemployment in an economy is associated with higher inflation and vice versa.
2 U.S. Bureau of Economic Analysis as of November 25, 2025
3 National Association for Business Economics, Business Conditions Survey as of November 25, 2025
The degree to which monetary policy is tight or loose drives inflation, corporate profits lead the growth cycle, and corporate hiring decisions drive shifts in the labor market. AI-led capex and record profits are still supportive of an evolving labor market, and we see easing U.S. monetary policy as an additional catalyst for resilient nominal growth in 2026. As the cycle continues, we continue to prefer large cap, AIoriented companies that have a remarkable ability to defend their margins and growth potential. We prefer gold over long duration exposure as a portfolio ballast in a sticky inflation environment amid easy monetary policy.
See our weekly CIO Strategy Bulletin for more details