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

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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Episode Transcript

SPEAKER_01 (00:35):
You know, our funds are up, so iCap, XCAP are up
significantly, tech stocks aredown significantly.
So it's good to have a DuraStoyportfolio.
And particularly now, you know,our models show that uh tech
stocks, the Mag 8, because weinclude Brock Hunt, it has only
like four or five percent upsideversus the whole market having
more like 15.
So there's so many otheropportunities with so much

(00:57):
better upside and lower riskbecause they're not trading
fully valued.
So we do think it's a good timefrom a lot of different
perspectives to rotate.

SPEAKER_00 (01:18):
All right, well, it's the holidays, and I'm
officially going to be spoilingone of you.
I'm giving away this duffel bagpacked with a bunch of our
signature Few Crew branded merchthat has all the inside jokey
slaying that you only get if youactually get it.
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Well, a men's What Up Plitcheshoodie, an exquisite hoodie for

(01:40):
her, and a few other things totake you from, I think I get it,
to Few Crew certified.
Now, if you want in, here's thedeal.
You have to follow at Lead LegReport on X, follow me, Mela
underscore Schaefer on X,subscribe to Lead Leg Media on
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You do that, and boom, you'reentered.

(02:01):
No gimmicks, no funnels, and nononsense.
One winner gets the wholepackage.
The rest of you stay f ⁇ eduntil next year.
Happy holidays from the FewCrew.
I'm your host, Melanie Schaefer.
Welcome to Lead Lag Live.
The Fed just lowered itsbenchmark rate by a quarter

(02:22):
point to the third cut thisyear, and markets responded with
as optimism about easiermonetary policy took hold.
At the same time, bond yieldsremain elevated, and the 10-year
Treasury sits about at about4.2%, meaning fixed income is
still offering real yields forinvestors willing to hold
through the volatility.

(02:43):
It's a snapshot of a marketcaught between rate cuts, sticky
inflation, and economicuncertainty, making positioning
for 2026 more important thanever.
My guest today is Jay Hatfield,CEO of Infrastructure Capital
Advisors.
Jay, it's always great to haveyou on.

SPEAKER_01 (02:59):
Thanks, Melanie.
It's great to be on.

SPEAKER_00 (03:02):
So given the Fed's rate cuts, what does what do you
think the signals sort of aboutthe economy and is it improving
or is this a response tosoftening growth and inflation
pressure?

SPEAKER_01 (03:13):
Well, the right way to think about the Fed is that
they control all cycles.
And so what the way they do thatis they uh can increase or
decrease the money supply, whichwe focus on a monetary base.
That raises interest rates, andthen that impacts the housing

(03:35):
market.
So in this cycle, they've doneexactly that.
They raised rates finally afterblowing it for a year.
That slowed the housing market.
The housing market was in fuegoand shelter inflation.
Now they're easing rates.
Oh, and then we had we have arecession.
We have data on our website, ifyou care, that shows clearly

(03:59):
housing is in a recession, as isconstruction.
But of course, intellectualproperty, which is tech, and
industrial equipment, which ismostly tech, is doing well.
So we have the tail of twoeconomies.
Uh so next year we do think thatinflation's coming down.

(04:20):
Um can't see it yet becauseshelter is very delayed, but
according to the VLS.
So we're gonna get inflationclose to two, the uh Fed funds
rate close to 275, tenure about375.
So that's a great environmentfor stocks.
And we do we have a 7,000 targetthis year, which is working

(04:42):
really well.
We're approaching that target.
Seems like we want to melt up tothat target right now.
And then 8,000 target for nextyear, which is simply the same
multiple we're using this year,which is 23 times times 2027
earnings.
When you're doing year-in 26targets, you use the following

(05:04):
year's estimates.
So we're bullish on higher riskfixed income, like preferred,
like PFFA and uh BNDS, which isour high-yield bond fund.
And though uh small caps, SCAPshould do well, non-tech should
do well as it is, has been doingsince the Fed uh became more

(05:25):
dovish when they basicallyannounced they were gonna cut
this this uh meeting.
And so we think that'll continuenext year.
Not that tech will be terrible,but it's pretty fully valued.
So we think the other sectorswill do better like they are
now.
And um so a great environment toinvest.
Um pretty simple.
Follow the Fed.
Fed's cutting, you want to belong, Fed's increasing, like 22,

(05:49):
you want to be out of themarket.
So uh we think we'reappropriately bullish.
It's not that controversial, butour other calls have been more
controversial and extremelycorrect.
But I think most strategistsshould be 7,700 to 8,000 for
next year.

SPEAKER_00 (06:06):
So, Jay, I just I want to talk specifically a
little bit about preferreds, Imean, with yields where they
are.
How do you view the opportunityin income-oriented assets and
even corporate bonds for nextyear?

SPEAKER_01 (06:18):
Well, we we've been a little bit surprised on
preferreds that they've they'vedone fine.
They delivered basically theircoupon, like our far our fund is
up almost exactly the same asthe coupon.
But normally in a Fed uh cuttingcycle, they would be up double
digits, so you get some priceappreciation too.

(06:40):
And we do think that'll occurnext year.
What happened this year thatheld it back?
There's a lot of uncertaintyabout the Fed.
So, yeah, they cut, but it waslike one month they're super
hawkish, next month they're moredovish.
A lot of uncertainty and a lotof new issue from microstrategy
Boeing being good examples.

(07:00):
Next year should be more normalissuance, hopefully.
And uh more clarity on Fed fundsrate.
Because when it actually getscut to say three or 275, then
there's no ambiguity.
It doesn't really matter whatthe Fed says.
They're not gonna raise itanytime soon.
So, and also then you just getthe reality of investors looking

(07:22):
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 gravitatetowards high yield bonds and
preferreds and probably ourfunds because they're have good
track records, as we are gettingpretty strong inflows right now.
So we're optimistic next year.

(07:42):
The great news about PFFA andBMDS is you get eight or nine
percent yield.
So we're never wrong again.
It's not like tragic, likegetting nine is not the end of
the world.
And you know, it's half of myIRA, so I'm happy with that
return.
But just the history would arguefor more mid teens or at least

(08:03):
low teens returns next year.

SPEAKER_00 (08:05):
Joe, I want to pivot for a minute and talk about uh
SCAP.
You've been bullish on small capvalue for a long time that we've
been chatting here and headinginto 2026.
Why do you think small capsstand to benefit in a rate kind
of environment?
And what kind of yield or valuepickup are you expecting?

SPEAKER_01 (08:23):
Well, we there's a little bit of a misunderstanding
about small caps that they'reover-levered.
And therefore, they need to uh,you know, so they benefit when
leverage increases, or I'msorry, when rates go down.
But it's really that there's arotation from tech to non-tech,
and small caps are dominated bynon-tech.

(08:45):
That's a better way to thinkabout it.
They're also higher risk, sothey're gonna outperform their
large cap even in the samesector.
So small caps are a risk-ontrade.
And so we've been correct thatthey are correlated with Fed
funds or Fed policy.
They have been significantlyoutperforming since the Fed

(09:06):
became dubbish, not all year,but since the Fed became
dubbish.
And that trend's likely tocontinue next year.

SPEAKER_00 (09:11):
Yeah, and you've mentioned um, you know, AI and
tech um a bit already, but forinvestors worrying about
volatility specifically ingrowth or mega cap tech, why
might uh dividend stalwarts beattractive at so you know there
are a lot of examples liketoday, for instance, where you
know our funds are up, so ICAP,XCAP are up significantly, tech

(09:33):
stocks are down significantly.

SPEAKER_01 (09:34):
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 weinclude BrockCon, it has only
like 4 or 5% upside versus thewhole market having more like
15.
So there's so many otheropportunities with so much

(09:55):
better upside and lower riskbecause they're not trading
fully valued.
So we do think it's a good timefrom a lot of different
perspectives to rotate.
And so the SCAP and ICAP areattractive for that rotation.
And also, but if you do alsolike I do, like to get strong
income, like I have a lot ofICAP in my IRA and SCAP, then

(10:20):
they're great ways to get totalreturns.
It should be in good years,normal years, low teens.
Um, they're they're there thisyear, and you get the yield.
Whereas with fixed income likePFFA, the NDS, you'll have a few
years where there's a catch-up,like maybe next year, but
thereafter you get pretty muchthe coupon.

(10:40):
So equity income, low teens,fixed income, higher risk,
single digits.
What about oil?
High single digits.
Sorry.
High single digits.

SPEAKER_00 (10:52):
Yeah, okay.
So I just want to make sure thatwe talk about oil prices, which
it's softened.
Um, you're expecting inflationto continue its downward trend.
Given that, given that backdrop,Jay, how much conviction do you
have on your forecast for 2026?

SPEAKER_01 (11:05):
For oil prices or inflation?
Yeah, correct.
You know, we we still aresticking to our 70, like 60 to
80 target.
Oil has been depressed by OPECreally pounding on the price,
probably somewhat related to theTrump administration encouraging
them to do so.

(11:25):
And so we do think that they arekind of out of bullets in terms
of increasing production andyou'll have normal growth in
demand.
And so we say that oil's more ofa buy down here.
It's not like we're super boldup about it, but uh, we are
having a cold winter.
That's good for demand.
So we think it'll normalize intomore into that, at least into

(11:47):
the range, so above 60, maybeget 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 mildlyconstructive on wealth.

SPEAKER_00 (12:01):
Jay, I I wanna uh as I'm sort of start to wrap up, I
want to talk a little bit aboutportfolio construction for sort
of income hungry investors thatmight be facing an uncertainty
coming up into the new year.
What kind of portfolio tilt doyou think might make sense on
over the next 12 or 18 months?

SPEAKER_01 (12:18):
Well, if you're more conservative, you should
definitely have a fixed incomeallocation.
A lot of uh strategists use 40%.
We would weight that moretowards the higher risk fixed
income, which we alreadydiscussed.
The NDS, PFFA, that's IO bondspreferred.
Because when the stock marketdoes well, those fixed income

(12:40):
securities will almost alwaysoutperform investment grade,
which is MUNI's, ag funds,mortgages, treasuries.
So you know, we wouldn't, Ithink 40 is a good number.
If you need more income and lessrisk, you could do more than 40.
If you're younger and moreaggressive, you could do 10, 20.

(13:03):
We wouldn't do zero.
Uh so uh that kind of fixedincome allocation gives you you
can sleep better at night.
And then, but if you want moregrowth and some income, so you
don't have to, maybe that canmitigate some expenses you might
have.
Then you can put in our equityfunds, like AMCA.
Um, and that is pretty low riskright now, low beta, more like

(13:26):
fixed income, high cap, non-techcorrelated, but you know, decent
amount of market risk.
SCAP does well when rates arelower, higher risk fund.
So it depends on your desire forincome versus stability versus
total return, equity income, ifyou want more total return,

(13:47):
fixed income, higher risk, ifyou want good returns like high
single digits, but low, way lessvolatility.

SPEAKER_00 (13:54):
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 goto get to be in contact with you
or to uh learn more about yourresearch?

SPEAKER_01 (14:04):
Infocapfunds.com.
And I would look for our macroresearch is particularly unique,
and that's great data.
So take a look at that.

SPEAKER_00 (14:14):
Thanks, uh Jay, as always for joining us, and
thanks to everyone for watching.
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