The half-full glass

The Holy Grail all investors hope for is a perfectly clear macro and policy backdrop that leads to a certain earnings and stock-market outcome. Regrettably, those waiting for such a perfect alignment spend most of their career on the sidelines or, worse, bet against the market’s inevitable advance. And when they do get a screaming “buy” signal, such as the spring of 2009 — or more recently, in 2025 — things usually are too scary at that point to act. So, they wait some more.

The reality is that, when you add it all up, the outlook is typically fuzzy enough that what Bulls see as a “half full” glass, Bears see as “half empty.” That’s what makes a market.

At Federated Hermes, we’ve made some of our most prescient market calls on the back of a “half-full” glass. This might be sheer luck. However, as I have pointed out before, bulls have two positive forces that often repay their optimism. The first is that, historically, in four out of five years markets go up. The second is that, as the half full glass is, by definition, half empty, policymakers — the Federal Reserve and the fiscal authorities/politicians — tilt the policy odds to fill it.

In this spirit, we present a variety of forces and policy actions we anticipate should favor the Bulls and reward our overweight stance on stocks with a 7,500 year-end 2026 market target on the S&P 500. (It has already hit our 6,500 year-end target for 2025.) Here are the five biggest “half empty” reasons to be bearish, and why in each case we see the “half full” result eventually prevailing:

1. The jobs slowdown should spark a new Fed rate cut cycle, finally reviving the interest-rate sensitive areas of the economy still in recession. For over three years now, we and others have been screaming that the Fed’s data-driven approach under Chair Jerome Powell led to a too-long delay in hiking rates in 2022, despite the obvious inflationary forces coming from $7 trillion in fiscal demand stimulus against a supply-constrained economy. This approach is akin to driving down a curving road with only a rearview mirror for guidance, and a cracked one at that. It resulted in a prolonged period of restrictive monetary policy choking the interest-sensitive components of the US economy, such as the housing, regional banking and small company sectors. Although the present Fed is fond of forward-looking dot plots and interest-rate guidance, the reality is that its economic and rate forecasts have been unusually poor indicators of what they actually end up doing. So, for some time now, we have focused more on what the Fed’s rearview mirror will look like when they gaze into it at their next meeting, rather than what they publicly state about their forward thinking. We think the economy entered a soft patch in late spring, and we anticipated correctly that it would lead to softness in the labor market absent a Fed cut. We got word of that definitively with last week’s August jobs report, now squarely in the Fed’s rearview mirror. So, it will be no surprise if they cut rates next week. They likely will do so each of the next several meetings into next year as they work their way toward our long-standing 3.0% fed funds target. These probable rate cuts would be particularly good for the interest-rate sensitive sectors of the economy noted above. As those catch fire, they should reinforce the growth dynamic present in other economic sectors, such as tech. The market has already begun to sniff this out, with small caps and banks leading the charge, alongside tech, off the April lows. And as they do, and as earnings continue to climb higher, hiring and spending should re-accelerate: the half-full glass.

2. The Federal spending cutbacks along with the tax cuts and investment incentives in the One Big Beautiful Bill Act should reduce inflationary pressures and, eventually, lead to an investment boom. Another near-term negative pressure on the economy has been the spending cutbacks in the law that were used to fund the permanent extension of the tax cuts for individuals and small businesses, along with the creation of investment-tax incentives. The curtailment of the massive federal government spending boom of the last few years has been a “half empty” problem for economic activity in 2025, for sure. Federal spending is expected to grow “only” 3.3% year-over-year this year and in 2026, after growing at an incredible 4.7% average pace during the Biden presidency. The half-full side of these cutbacks, however, is about to start as we enter the year-end “budget flush” season in the fourth quarter and especially in 2026, as companies respond with spending plans to take advantage of the accelerated depreciation and other incentives in the legislation. We estimate these incentives could add an extra 60 basis points to GDP growth next year and are one reason our 2026 GDP forecast is nearly 100 basis points ahead of the textbook economic consensus.  Another gulp from the half-full glass, please.

3. The AI spending war among the Mag 7 should lead to a productivity boom starting in 2026. Another source of market worry — though perhaps one that lurks in the background — is whether the current AI spending war among the market’s leading technology stocks (the so-called Mag 7) will prove to be a one-time stimulus that drops off precipitously in 2026 or 2027 with no longer-term impact on the economy. While this outcome is a risk for sure, we see a far more optimistic possibility as the economy powers into the new year. Throughout the economy, and for many of the companies we speak with, AI applications are broadening out and developing at a rapid rate. While no one knows how this will go, it seems increasingly likely to us that, along with the investment incentives already now in place that we noted above, the economy may be poised for an upward leap in productivity. Already, early reports have been positive. In the second quarter of this year, for instance, productivity expanded 3.3%, compared to an average growth of 1.2% over the Biden presidency. That productivity gain surely helped produce the record corporate earnings and upward revisions reported for the second quarter. We expect more good news to come. A productivity boom would lead to faster GDP and corporate-profit growth than labor market growth — just what the economy needs in a labor-constrained world. Half-full.  

4. The end of the trade wars should unlock longer-term capital spending plans. Another obvious cause of the late spring and early summer economic slowdown that finally evidenced itself in last week’s dismal jobs number has been the trade wars. As we’ve noted previously,  the actual dollar impact of trade and tariffs on the US economy has been greatly exaggerated; imports only represent 14% of the US economy, and the entire one-off impact of the Trump tariffs will probably add less than 75 basis points of incremental inflation, spread over many months. Still, the unsettling headlines have been full of the day-to-day gyrations in the tariff negotiations, producing a reasonable amount of uncertainty about the future structure of the international economy. So, a temporary slowdown in trade-related investment from what it otherwise would have been has surely occurred. With the tariff wars now drawing to a close, however, a major bounce-back in capital expenditures (capex) is almost certainly upon us. In some estimates, corporate capex next year could be up 7% or more compared to 2025. Another reason for our above-consensus, “half-full” 2026 economic growth forecast.

5. The immigration crackdown could lead to an acceleration in legal immigration into the US labor force. Of all of President Trump’s collection of policy initiatives, the immigration crackdown — from a purely economic (not social policy) perspective — has certainly constrained the US economy. Criminal activity, we hope, is down, given the focus on criminals for deportation. Whatever side of the issue you are on vis-a-vis social policy, many of the undocumented immigrants participate in, and improve, economic growth. The decline of this sector of the labor force, along with the reduction in foreign-born workers here legally that has accompanied the crackdown, has been a negative for growth this year—perhaps enough to have cut labor force growth from 2.4% to 1.2%. A growing economy’s fuel is labor force growth plus productivity growth, so the decline in labor, all other things being equal, will slow GDP growth. Our “half full hope,” which we’ve been alluding to since the fall of last year, has been that the enforcement of our country’s immigration rules will lead to improved and accelerated legal immigration into the country. Immigration reform might even become a Republican-led issue by 2026, as many sectors of the economy push the politicians to act to develop a more sane and organized approach to vetting and legally processing the necessary inflow of both skilled and unskilled workers for the growing US economy. If the Republicans can pass legislation such as this, they would probably extend their electoral majorities, while at the same time throwing another log on the economic growth policy mix already in place. We will see. Perhaps another half-full glass on the way.

Also noted previously, the market has moved pretty far and fast off its April lows, and some form of correction or pullback would certainly be welcome. However, in our experience, when the backdrop is particularly powerful, markets can sometimes “correct” by simply treading water for a period of time, during which laggards that benefit from an avoidance of a big economic or stock market correction themselves start catching a bid. That’s been the call we have made and, so far, it is working. For instance, from the start of the present quarter, the Russell 2000, a measure of small-cap stock performance, is up 10.2% against 4.9% for the S&P 500 and 10.6% for the Mag 7. We anticipate this broadening-out trade will continue, and given the backdrop outlined here, it seems more likely than a deeper, full-blown correction.

Said differently, every half-empty glass has its half-full part. We will stay focused on that.

Read more about our current views and positioning at Capital Markets.