Markets Recalibrate: Inflation, Expectations, and the New Investment Playbook - 12/15/25

In this episode of Paramount Wealth Perspectives, Chris Coyle and Chief Investment Officer Scott Tremlett unpack one of the most misunderstood dynamics in today’s market: why Fed rate cuts are not bringing down mortgage rates or long-term yields. They break down the growing disconnect between policy moves and market behavior, and explain why inflation credibility — not Fed action — is driving the long end of the curve.

Chris and Scott explore how markets are digesting the first cut, why investors are recalibrating expectations for growth and earnings, and what a “higher for longer but not restrictive forever” rate environment really means for portfolios. They examine consumer sentiment, inflation psychology, and why dispersion — not broad trends — is becoming the defining feature of this cycle.

The conversation dives into 2026 earnings expectations, the role of AI as a margin driver rather than a hype cycle, and the shift toward business models anchored in pricing power, cash flow durability, and balance sheet strength. They also take a close look at bonds, highlighting why fixed income is relevant again and how investors should think about duration, income, and flexibility in today’s market.

Chris and Scott close by discussing investor behavior in a post–easy money world: what discipline truly means, why this environment rewards preparation over prediction, and how to build portfolios that can thrive even when narratives shift.

If you’re navigating rising yields, persistent inflation, market rotation, or uncertainty around the Fed’s next move, this episode offers a clear, grounded framework for understanding what matters most — and what to ignore.

Transcript

Chris Coyle: 0:00

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Hello everyone. Welcome to Paramount Wealth Perspectives, your go-to podcast for the latest updates on global markets and current economic events. This is your host, Chris Coyle. I am the market director and an advisor here at Paramount Associates Wealth Management, and today I'm joined by our Chief Investment Officer, Scott Tremlin. Let's start with last week because a lot of people expected a very different reaction. The Fed cut rates, yet mortgage rates and longer term yields didn't really cooperate. Walk us through what actually happened. Yeah, and this is where headlines can really mislead people. Last week was a perfect example of why the Fed doesn't directly control the rates that matter most. To households and investors, the Fed cut short term rates, but markets immediately focused on what the cut signaled and not the cut itself meaning, meaning the first cut isn't a victory lap. It's often an emission that something is slowing, and when inflation is sticky, markets don't hear relief. They hear uncertainty. So instead of long-term rates falling. Investors demanded more compensation for inflation risk and fiscal risk that pushed longer term yields higher, and mortgage rates followed. So for people watching from the outside, it probably felt backwards. That's the key. People think fed cuts equal lower mortgage rates, but mortgage rates live in the long end of the bond market, and that part of the market is obsessed with inflation credibility if inflation isn't clearly beaten. The first cut can actually make markets nervous. That policy is getting ahead of itself. And inflation is the key word there it is. The concern last week wasn't runaway inflation, but persistent inflation services, inflation, housing related costs, wages enough to keep long-term investors cautious. That's why we saw the front end behave one way in the backend of rates another. Let's bring that into this week. What's the market really focused on right now? This week is about digestion. Markets are stepping back and asking, okay, if rates aren't coming down quickly, what does that mean for growth, earnings and positioning? You can see it in the way that different parts of the market are reacting. How so? Well, cyclicals have held up better than people expected. Credit hasn't cracked equity volatility is contained. That tells you markets aren't panicking, but they're recalibrating. The idea that we're going back to zero rates anytime soon is fading fast. And that's a big shift from earlier in the year, huge shift. Earlier markets were pricing a clean disinflation story with rapid cuts. Now it's more of a higher, for longer, but not restrictive forever environment. That's a very different playbook. Does that change how people should think about risk? What changes where risk is? The risk isn't that rates are too high. It's assuming they'll bail out every bad decision. That's no longer a safe assumption. Markets are rewarding. Balance sheet quality, cashflow, durability, and income. Again, let's talk about inflation expectations, specifically consumer confidence data came out recently and it painted a pretty clear picture what stood out to you. Consumers are still uneasy. they may not expect inflation to reaccelerate dramatically, but they don't feel like it's behind them either. That matters because inflation psychology drives behavior spending, borrowing and wage demands, and that feeds back into rates. Exactly. Long-term rates don't just care about current inflation prints. They care about whether inflation expectations are anchored. When confidence weakens. And inflation anxieties linger. Bond markets demand a premium, so again, not a fed problem as much as credibility problem, right? The fed can cut, pause, or hike, but markets decide whether that policy feels appropriate right now. Markets are saying, we're not convinced inflation risk is gone. Let's zoom out to 2026, because that's where a lot of forward-looking investors are focused. What do earnings expectations look like? Well, earnings expectations for 2026 are still constructive, but they're becoming more selective. This isn't about everything growing together anymore. Dispersion is a story, Meaning winners and losers. Separate more clearly. Exactly. Companies with pricing power, productivity gains, and strong margins are positioned well. Others that relied on cheap capital or financial engineering are going to feel pressure. The cost of capital actually matters again. How does AI fit into that conversation? Well, AI is less about revenue hype, and more about margin transformation over the next few years. The real earnings impact comes from cost efficiency and not just growth. That's why quality businesses adopting technology intelligently. Matters so much. So not a broad tech trade. No, it's not 2021. It's about execution and not exposure. If we tie this back into markets overall, what's your base case for 2026? Well, it, it's more of a world with a slower but resilient growth inflation that continues to cool but doesn't collapse, and rates that stay structurally higher. Than the last decade. That environment doesn't kill markets. It just changes the leadership. And what about volatility higher than the ultra calm years, but healthier volatility forces discipline. It separates investing from speculation. Let's talk about bonds for a minute, because higher for longer doesn't mean bonds are broken, but a lot of people still think that, yeah, bonds aren't broken at all. They're just behaving like bonds. Again, for years, they were distorted by zero rates and massive central bank intervention. Now income is real. And yield actually means something. So how should people think about fixed income today? Well, really as a source of stability and income and not just a hedge, you're starting to get paid to wait again. That is incredibly valuable, especially when equity markets aren't delivering smooth returns. Does the timing of bond maturity still matter anymore? It does, but flexibility matters more. You don't need to make an all or nothing bet on rates collapsing a diversified approach across durations, lest you participate if rates fall without being punished if they don't, and don't get me wrong, I'm not saying that there aren't other opportunities out there in lieu of bonds, and we've spoken about those before. Absolutely. And circling back to inflation, you've said a few times that inflation isn't the headline risk anymore. It's the persistence that matters. Can you expand on that? Sure. Inflation today isn't about shock events. It's about embedded costs, housing services, insurance, labor. Those don't reverse overnight, even if headline inflation drifts lower, the bond market cares about whether those pressures fully normalize, and that feeds back into long-term yields again, every time. That's why you can't assume rate cuts automatically translate into lower borrowing costs. Markets want proof and not promises. One thing investors are also asking about is the consumer, are they holding up or are cracks starting to form? Well, it's really a tale of two consumers we've talked about before. Higher income households are still spending and relatively insulated while lower and middle income consumers are starting to feel the pressure from rates, prices, and affordability. Does that show up in earnings? It does. You're seeing it in margins, pricing strategies and guidance. Companies serving higher end consumers look very different from those exposed to the stretch balance sheets. Again, dispersion. Let's talk about small caps for a moment. They've had a bit of resurgence recently. Is that sustainable? Parts of it may be. Uh, small caps benefit from cyclical improvement and domestic exposure, but they're also more rate sensitive. So if rates stay higher, longer quality within small caps matters just as much as it does elsewhere. So not a blanket endorsement, Chris. Never a blanket endorsement. That's the theme of this entire conversation. Broad narratives are fading and the details are what matter. Now, as we look toward 2026 again, what do you think markets are still underestimating. I think really just the adjustment process. People underestimate how long it takes markets to adapt to a new regime. We're coming out of an era defined by free money, essential bank backstops. That mindset doesn't unwind in a quarter or two. And that creates behavioral risk. Exactly. Investors keep waiting for the old playbook to work again. The longer it doesn't, the more frustration builds. That's usually when mistakes happen. Chasing, panic, selling, or over concentration. If you had to summarize the mindset investors should carry into the next year, what would it be? Really patience over prediction, preparation, over reaction. You don't need to guess every fed move or inflation print. You need a portfolio that can withstand different outcomes. That sounds simple, but it's not easy. Uh, it never is, but simple and boring usually outperforms exciting and fragile over time. Final question before we wrap up this section. If someone is feeling uneasy right now, what's the most important thing they should remember? Really, that discomfort doesn't mean something is broken. It often means markets are normalizing. Volatility, rotation, and uncertainty. The price of long-term returns. The goal isn't to eliminate them, is to manage them intelligently, and that brings us full circle. It does this environment rewards investors who stay disciplined, diversified, and focused on fundamentals. The Fed matters, but it's not the whole story. The market is bigger than any single meeting or headline. Let's bring this home for investors listening. With everything we've discussed, fed cuts, inflation concerns, earning expectations, what actually matters most right now? I think three things. First, stop reacting to headlines. Fed decisions are inputs, not outcomes. Second, focused on income and resilience. Cash flows matter again. And third, accept that timing beats prediction. You don't need perfect foresight, you need durability. So less about betting on cuts, more about building portfolios that can live in this environment. Exactly. This isn't a market that rewards shortcuts. It rewards discipline. Diversification and patience. If you get those right, you don't need the Fed to save you. That's a strong note to end on. It's the reality we're investing in, whether people like it or not. One thing I want to push on a bit more is this idea of discipline. A lot of investors say they're disciplined, but markets like this tend to expose whether that's actually true. That's exactly right. Discipline sounds easy when markets are going straight up. It's a lot harder when leadership rotates, rates stay elevated and narratives break down. What we're seeing now is a market that's forcing people to earn their returns again. Earn them exactly how. By being selective, by understanding what you own and why you own it for the last decade, you could get away with having high risk and letting multiple expansion do the work in a higher for longer rate environment that doesn't fly. Cash flows, balance sheets, and valuations matter again. And that shows up clearly in the dispersion that we're seeing. Absolutely. The gap between strong and weak businesses is widening. That's not a bad thing. It's actually healthy. It creates opportunity for active decisions and thoughtful portfolio construction. Awesome. Thanks Scott, as always, myself and our listeners, appreciate your insights. Thanks, Chris. I'll catch you again in two weeks. I also want to thank our audience for tuning in and remember to please submit your questions via email to general@paramountassoc.com. For now, stay informed. Stay ahead and join us next time for more key updates shaping the global economy.