Lead-Lag Live

After the Rate Cuts: Jay Hatfield on Why Income, Small Caps, and Credit Could Lead Into 2026

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to break down what the Fed’s latest rate cuts mean for markets, income investors, and portfolio positioning heading into 2026.

From a potential melt-up toward 7,000 on the S&P 500 to why preferreds, high yield credit, and small-cap value could outperform as rates fall, Hatfield explains how investors can navigate a market caught between easing policy, slowing growth, and lingering inflation uncertainty.

In this episode:
– Why Fed cuts historically favor risk assets and income strategies
– How preferred stocks and high yield credit could see upside beyond yield
– Why small caps benefit from rotation away from mega-cap tech
– How dividend and equity income strategies reduce portfolio volatility
– What Jay expects for inflation, rates, and markets into 2026

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SPEAKER_01:

You know, our funds are up, so iCap, XCAP are up significantly, tech stocks are down significantly. So it's good to have a DuraStoy portfolio. And particularly now, you know, our models show that uh tech stocks, the Mag 8, because we include Brock Hunt, it has only like four or five percent upside versus the whole market having more like 15. So there's so many other opportunities with so much better upside and lower risk because they're not trading fully valued. So we do think it's a good time from a lot of different perspectives to rotate.

SPEAKER_00:

All right, well, it's the holidays, and I'm officially going to be spoiling one of you. I'm giving away this duffel bag packed with a bunch of our signature Few Crew branded merch that has all the inside jokey slaying that you only get if you actually get it. So what's inside? Well, a men's What Up Plitches hoodie, an exquisite hoodie for her, and a few other things to take you from, I think I get it, to Few Crew certified. Now, if you want in, here's the deal. You have to follow at Lead Leg Report on X, follow me, Mela underscore Schaefer on X, subscribe to Lead Leg Media on YouTube, and like and share this video. You do that, and boom, you're entered. No gimmicks, no funnels, and no nonsense. One winner gets the whole package. The rest of you stay f ⁇ ed until next year. Happy holidays from the Few Crew. I'm your host, Melanie Schaefer. Welcome to Lead Lag Live. The Fed just lowered its benchmark rate by a quarter point to the third cut this year, and markets responded with as optimism about easier monetary policy took hold. At the same time, bond yields remain elevated, and the 10-year Treasury sits about at about 4.2%, meaning fixed income is still offering real yields for investors willing to hold through the volatility. It's a snapshot of a market caught between rate cuts, sticky inflation, and economic uncertainty, making positioning for 2026 more important than ever. My guest today is Jay Hatfield, CEO of Infrastructure Capital Advisors. Jay, it's always great to have you on.

SPEAKER_01:

Thanks, Melanie. It's great to be on.

SPEAKER_00:

So given the Fed's rate cuts, what does what do you think the signals sort of about the economy and is it improving or is this a response to softening growth and inflation pressure?

SPEAKER_01:

Well, the right way to think about the Fed is that they control all cycles. And so what the way they do that is they uh can increase or decrease the money supply, which we focus on a monetary base. That raises interest rates, and then that impacts the housing market. So in this cycle, they've done exactly that. They raised rates finally after blowing it for a year. That slowed the housing market. The housing market was in fuego and shelter inflation. Now they're easing rates. Oh, and then we had we have a recession. We have data on our website, if you care, that shows clearly housing is in a recession, as is construction. But of course, intellectual property, which is tech, and industrial equipment, which is mostly tech, is doing well. So we have the tail of two economies. Uh so next year we do think that inflation's coming down. Um can't see it yet because shelter is very delayed, but according to the VLS. So we're gonna get inflation close to two, the uh Fed funds rate close to 275, tenure about 375. So that's a great environment for stocks. And we do we have a 7,000 target this year, which is working really well. We're approaching that target. Seems like we want to melt up to that target right now. And then 8,000 target for next year, which is simply the same multiple we're using this year, which is 23 times times 2027 earnings. When you're doing year-in 26 targets, you use the following year's estimates. So we're bullish on higher risk fixed income, like preferred, like PFFA and uh BNDS, which is our high-yield bond fund. And though uh small caps, SCAP should do well, non-tech should do well as it is, has been doing since the Fed uh became more dovish when they basically announced they were gonna cut this this uh meeting. And so we think that'll continue next year. Not that tech will be terrible, but it's pretty fully valued. So we think the other sectors will do better like they are now. And um so a great environment to invest. Um pretty simple. Follow the Fed. Fed's cutting, you want to be long, Fed's increasing, like 22, you want to be out of the market. So uh we think we're appropriately bullish. It's not that controversial, but our other calls have been more controversial and extremely correct. But I think most strategists should be 7,700 to 8,000 for next year.

SPEAKER_00:

So, Jay, I just I want to talk specifically a little bit about preferreds, I mean, with yields where they are. How do you view the opportunity in income-oriented assets and even corporate bonds for next year?

SPEAKER_01:

Well, we we've been a little bit surprised on preferreds that they've they've done fine. They delivered basically their coupon, like our far our fund is up almost exactly the same as the coupon. But normally in a Fed uh cutting cycle, they would be up double digits, so you get some price appreciation too. And we do think that'll occur next year. What happened this year that held it back? There's a lot of uncertainty about the Fed. So, yeah, they cut, but it was like one month they're super hawkish, next month they're more dovish. A lot of uncertainty and a lot of new issue from microstrategy Boeing being good examples. Next year should be more normal issuance, hopefully. And uh more clarity on Fed funds rate. Because when it actually gets cut to say three or 275, then there's no ambiguity. It doesn't really matter what the Fed says. They're not gonna raise it anytime soon. So, and also then you just get the reality of investors looking at their statements saying, oh, I'm getting 2% of my money market fund. Where can I get more yield? And we think they're gravitate towards high yield bonds and preferreds and probably our funds because they're have good track records, as we are getting pretty strong inflows right now. So we're optimistic next year. The great news about PFFA and BMDS is you get eight or nine percent yield. So we're never wrong again. It's not like tragic, like getting nine is not the end of the world. And you know, it's half of my IRA, so I'm happy with that return. But just the history would argue for more mid teens or at least low teens returns next year.

SPEAKER_00:

Joe, I want to pivot for a minute and talk about uh SCAP. You've been bullish on small cap value for a long time that we've been chatting here and heading into 2026. Why do you think small caps stand to benefit in a rate kind of environment? And what kind of yield or value pickup are you expecting?

SPEAKER_01:

Well, we there's a little bit of a misunderstanding about small caps that they're over-levered. And therefore, they need to uh, you know, so they benefit when leverage increases, or I'm sorry, when rates go down. But it's really that there's a rotation from tech to non-tech, and small caps are dominated by non-tech. That's a better way to think about it. They're also higher risk, so they're gonna outperform their large cap even in the same sector. So small caps are a risk-on trade. And so we've been correct that they are correlated with Fed funds or Fed policy. They have been significantly outperforming since the Fed became dubbish, not all year, but since the Fed became dubbish. And that trend's likely to continue next year.

SPEAKER_00:

Yeah, and you've mentioned um, you know, AI and tech um a bit already, but for investors worrying about volatility specifically in growth or mega cap tech, why might uh dividend stalwarts be attractive at so you know there are a lot of examples like today, for instance, where you know our funds are up, so ICAP, XCAP are up significantly, tech stocks are down significantly.

SPEAKER_01:

So it's good to have a DuraSoy portfolio. And particularly now, you know, our models show that uh tech stocks, the Mag 8, because we include BrockCon, it has only like 4 or 5% upside versus the whole market having more like 15. So there's so many other opportunities with so much better upside and lower risk because they're not trading fully valued. So we do think it's a good time from a lot of different perspectives to rotate. And so the SCAP and ICAP are attractive for that rotation. And also, but if you do also like I do, like to get strong income, like I have a lot of ICAP in my IRA and SCAP, then they're great ways to get total returns. It should be in good years, normal years, low teens. Um, they're they're there this year, and you get the yield. Whereas with fixed income like PFFA, the NDS, you'll have a few years where there's a catch-up, like maybe next year, but thereafter you get pretty much the coupon. So equity income, low teens, fixed income, higher risk, single digits. What about oil? High single digits. Sorry. High single digits.

SPEAKER_00:

Yeah, okay. So I just want to make sure that we talk about oil prices, which it's softened. Um, you're expecting inflation to continue its downward trend. Given that, given that backdrop, Jay, how much conviction do you have on your forecast for 2026?

SPEAKER_01:

For oil prices or inflation? Yeah, correct. You know, we we still are sticking to our 70, like 60 to 80 target. Oil has been depressed by OPEC really pounding on the price, probably somewhat related to the Trump administration encouraging them to do so. And so we do think that they are kind of out of bullets in terms of increasing production and you'll have normal growth in demand. And so we say that oil's more of a buy down here. It's not like we're super bold up about it, but uh, we are having a cold winter. That's good for demand. So we think it'll normalize into more into that, at least into the range, so above 60, maybe get to 70. Our range is work pretty well, though. When it went to 75, we said, oh, it's probably gonna come in, which it definitely did. So we're we're mildly constructive on wealth.

SPEAKER_00:

Jay, I I wanna uh as I'm sort of start to wrap up, I want to talk a little bit about portfolio construction for sort of income hungry investors that might be facing an uncertainty coming up into the new year. What kind of portfolio tilt do you think might make sense on over the next 12 or 18 months?

SPEAKER_01:

Well, if you're more conservative, you should definitely have a fixed income allocation. A lot of uh strategists use 40%. We would weight that more towards the higher risk fixed income, which we already discussed. The NDS, PFFA, that's IO bonds preferred. Because when the stock market does well, those fixed income securities will almost always outperform investment grade, which is MUNI's, ag funds, mortgages, treasuries. So you know, we wouldn't, I think 40 is a good number. If you need more income and less risk, you could do more than 40. If you're younger and more aggressive, you could do 10, 20. We wouldn't do zero. Uh so uh that kind of fixed income allocation gives you you can sleep better at night. And then, but if you want more growth and some income, so you don't have to, maybe that can mitigate some expenses you might have. Then you can put in our equity funds, like AMCA. Um, and that is pretty low risk right now, low beta, more like fixed income, high cap, non-tech correlated, but you know, decent amount of market risk. SCAP does well when rates are lower, higher risk fund. So it depends on your desire for income versus stability versus total return, equity income, if you want more total return, fixed income, higher risk, if you want good returns like high single digits, but low, way less volatility.

SPEAKER_00:

Jay, I really I really appreciate your insight. As always, just to uh finish up, can you let investors and advisors know where they can go to get to be in contact with you or to uh learn more about your research?

SPEAKER_01:

Infocapfunds.com. And I would look for our macro research is particularly unique, and that's great data. So take a look at that.

SPEAKER_00:

Thanks, uh Jay, as always for joining us, and thanks to everyone for watching. Be sure to follow and subscribe for more episodes of Lead Leg Live.

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Michael A. Gayed, CFA

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