MAKING HAY MONDAY — January 5th, 2026 The K-Shaped Economy Comes Due
"Quiet inflation feels better than loud austerity." —Billionaire investor, Ray Dalio
"Anybody who disagrees with me will never be Fed Chairman." —Donald J. Trump (perhaps, not to mention, acting president of Venezuela?)
— The K-Shaped Economy Comes Due —
Hello, Subscribers:
A recurring theme of this newsletter has been the unprecedented nature of financial and economic conditions in the post-Covid era. Our acknowledgement of this has caused us to note multiple times that because there has been such a convoluted confluence of forces, both good and bad, making credible forecasts was nearly impossible.
Yet, at times, we have fallen into the trap of going beyond our preferred "anticipations" and all too often made predictive declarations. Moreover, we have done so without the appropriate qualification about the uncharted waters we've been in — and are still in.
Unquestionably, some of those have worked out wonderfully, particularly our repeated urging for our readers to have considerable precious metals exposure, including the related miners. Additionally, we have endorsed the accumulation of key industrial metals, and their producers, like palladium, copper and, more recently, aluminum.
Our bond market calls have also been almost totally spot-on, particularly our very bearish views on long-term Treasuries starting in mid-2020 and continuing into early 2022. Anticipating one of the worst bear markets in bond market history definitely ranks as one of our best calls. Moreover, we correctly foresaw the related inflation eruption that was looming. We began to write about that in this publication's predecessor newsletter in 2021. It was further chronicled in the elder Haymaker's book, Bubble 3.0, published in segments beginning at the start of 2022.
Another anticipation about which we can hold our heads high was our table-pounding bullish stance on energy at the end of 2020. This was vehemently advocated in our December 2020 newsletter Totally Toxic. (Note, both the bond and energy recommendations were contained in Haymaker's predecessor newsletter, the Evergreen Virtual Advisor, aka, EVA.)
[Chart: Total Return of the State Street Energy Sector Select (XLE) vs the S&P since 12/31/20 — Bloomberg]
As you can see above, despite the energy sector's big lag since the start of 2023, it has roughly doubled the S&P's total return since the start of 2021. Despite that outperformance, it remains brimming with bargain-priced stocks (though after today's explosion in oil service stocks, that list has shrunk a bit). The energy sector continues to represent less than 3% of the S&P 500's market value. That's barely over one-third of Nvidia's capitalization alone!
However, one of our worst expectations was related to the economy.
We made the big mistake of agreeing with the consensus back in 2022 that a recession was likely. Prior to Russia's unscrupulous attack on Ukraine, we thought an economic contraction could be avoided. But the eruption in almost all commodity prices that occurred back then, especially oil and natural gas, changed our mind. A late, but very aggressive, tightening campaign by the Fed also led us to believe a recession was probable. The twin bear markets in stocks and bonds that year only served to heighten our downturn concerns.
On the exculpatory side, we did opine that an earnings recession was more likely; that did, in fact, happen. Further, by 2023 we began to appreciate that $2 trillion federal deficits were preventing what should have been a normal economic down cycle. As a result, we shifted our views, though we did frequently note that, adjusting for unparalleled peacetime/non-recession deficits, most of the private sector would almost certainly have been in a recession. (You can see this effect by reviewing the tellingly high percentage of new jobs that came from government-related sectors.)
Ok, that's enough history! What do we anticipate happening in 2026?
Given the foregoing mea culpa, you may not give a rip but we now want to share some charts that clearly illustrate why this economy is unlike anything we've ever seen before… and that goes for the stock market, too.
The University of Michigan's consumer surveys are among the most closely followed economic trackers. As you can see below, according to a number of their graphics, consumers think we have been in a brutal recession… and still are.
[Charts: University of Michigan consumer-sentiment series, ~7 graphics back to ~1960]
We realize this chart collection borders on chart overkill, but we wanted you to see the broad nature of this consumer malaise. We chose these from dozens of others the University of Michigan published in November because they go back 65 years. Clearly, that covers a lot of downturns (those are indicated by the shaded vertical bars on each of these).
What's also clear is that consumers are as pessimistic as they have been in past recessions going back to when JFK was in the White House. These include some of the most vicious economic swoons over that timeframe.
Further, if you go back and look at what the stock market had been doing in 2008, 1981, 1974, and 1970, working backwards, you'll quickly realize those were characterized either by falling stock prices or what GaveKal Research's Charles Gave calls Ursus Magnus; i.e, whopper bear markets. (The 1960s recessions were mild, as you can see from consumer outlooks in those days; yet, December 1961 to June 1962 did produce a six-month market cliff-dive of almost 30%.)
You might reasonably wonder how we can be experiencing allegedly robust GDP growth and one of the priciest stock markets of all-time concurrent with deep-recession consumer sentiment. A partial answer may be found in what is almost undeniably a "K-shaped" recovery. This means that affluent consumers, the upper and smaller part of the "K", who also tend to represent the bulk of investors, are in fine shape. They have been enormous beneficiaries of the asset inflation seen post-pandemic and, actually, has characterized most of the last 17 years. Yet that's a small percentage of the overall population; thus, it's plausible that the decided majority of Americans are not enjoying the fruits of this "Special K" economy. It's also a reality that the top 10% of earners drive roughly 50% of consumer spending.
Another explanation is that how people feel and what they are doing are two very different things. There's an old saying, slightly paraphrasing, that when Europeans are downbeat, they save, but when Americans are feeling blue, they spend. Maybe that's more than just a clever quip.
There are two main interpretations of this remarkable divergence. One is that we're just a bear market away from having high-end consumers join in the negativity. If so, that could tip the overall economy into a recession very quickly. That is certainly a possible outcome. Some have said that the economy no longer leads the stock market; rather, it's the market that leads the economy.
Yet another is that 2026 is about to see the mother of all mid-term election manipulations. As we all know, Donald Trump's approval ratings are dismal. His desperation is becoming palpable. Consequently, he is VERY likely to pull out all the stops to stoke the economy over the next 10 months.
On the monetary side, he's preparing to name a new Fed chairman who will do his bidding. He's on record saying he'd like to see a 1% fed funds rate. This is despite an inflation rate that is running around 3%. (By the way, take the most recent 2.7% CPI report with a big shaker of salt; there was a lot of guesstimating in arriving at that number.)
In other words, we could soon be looking at a most inflationary negative fed funds rate of 2%. Frankly, it's doubtful even a Trump puppet at the Fed will cut that much, but there's little doubt short-term rates are heading lower. However, longer term rates on bonds and mortgages are a totally different story; they've been rising even as the Fed has cut rates by 1.75% (175 basis points) since the summer of 2024.
On the fiscal side (i.e., federal deficit spending), probabilities are high we'll see plenty of stimulus coming from bonus depreciation for businesses, unusually large tax refunds (estimated to be around $100 billion) and, barring Supreme Court intervention, a $500 billion, or so, tariff rebates to individuals making $100,000 or less.
This is where the above-documented consumer negativity might come into play. It's entirely possible, if not probable, that should the typical American start to experience a replay of the Covid stimulus windfalls, they will spend accordingly. The fact that their collective outlook is so bleak presently may create a powerful rebound effect.
Other supporting factors: - A continuing surge in AI-related spending - Multi-trillions of investments in reindustrializing the U.S., including by a plethora of foreign countries and companies - An en fuego "gig" economy (e.g., Uber drivers, independent IT workers, consultants, etc.) - Inflation-adjusted oil prices among the lowest in recent decades during an economic expansion - Generally depressed foodstuff prices (meat is obviously a glaring exception) - The potential for a much weaker dollar, aiding U.S. exporters
Without question, there are a host of offsets to the above, such as health insurance premiums rising at a double-digit clip, roaring auto coverage costs, and spiking utility bills. Additionally, despite lower financing costs, the ultra-critical big-ticket items of housing and autos are likely to be anything but affordable.
Yet, based on what's at stake for Mr. Trump, don't be surprised if there is a revival of the old cash-for-clunkers program and, possibly, a multi-trillion-dollar effort, spread over several years, to produce affordable housing. The former is relatively easy to pull off; the second is much, much more challenging. Yet, it is arguably America's gravest societal problem (along with pervasive deception and corruption in high places). On the other hand, there are few issues that have as much bipartisan support as does making homes more accessible to Generations Y (Millennials) and Z (Zoomers).
Please realize this is not a confident forecast of bubbly times for the U.S. economy in 2026. In fact, even if we're mostly right about the stimulus heading our way, we'd argue that the eventual outcome will be an inflationary boom, with the first part of that much more durable than the second. And you know how voters feel about inflation! However, a CPI spike might not occur until after the mid-terms, especially with "guidance" from the White House to the Bureau of Labor Statistics.
What we are confident of is that the Trump administration is going to give injecting the U.S. economy with a hefty dose of amphetamines its best shot (pun intended). As a result, we believe investors should be on the hunt for those securities that are prime beneficiaries from the "run-it-hot" effort.
In that regard, arguably the world's foremost expert on liquidity, Michael Howell, sees the liquidity dam that has been contained mostly within financial markets, breaking and flooding into the real economy. If he's right, this has an excellent chance of reviving Main Street at the expense of Wall Street. In our view, it's about (terribly sorry) "damn" time.
— Equity Highlight —
Now onto our specific stock selection for the week: Jacobs Solutions (NYSE: J).
It should be a familiar name to alert readers who may recall our initial 2024 write-up on this premier engineering and construction company.
J continues to operate well under the radar for most investors, which isn't surprising in a market obsessed with AI, semiconductors, and hyper-growth stocks. But for those of us who are increasingly focused on long-duration assets, cash flow visibility, and a company with multiple growth drivers, Jacobs may be quietly offering one of the more compelling setups in the industrial space. While it has risen a bit from when we first pointed the spotlight on it in April 2024, we think it's once again looking like an intriguing "picks and shovels" play on both America's reindustrialization and the hyperscaler capex boom.
One reason we were initially attracted to J was due to the definitive upside range expansion (i.e., breakout) it had in the spring of '24. After that, it did run up about 25% in fairly short order. Yet, since then, as you can see, it's been (to use a Wall Street euphemism for "dead in the water") consolidating.
[Chart: Five-Year Price Chart of Jacobs Solutions (J) with Breakout Line Displayed — Bloomberg]
With a market cap in the $17 billion range and an enterprise value just over $18 billion (meaning, it has very little debt, net of cash, relative to its valuation) Jacobs sits at the intersection of public infrastructure, clean energy buildout, advanced manufacturing, and data-center construction. The company recently reported a record backlog exceeding $23 billion, representing a year-over-year increase of 14%, with a trailing 12-month book-to-bill (orders vs billings) ratio of 1.2x. Put more plainly, backlog outpacing current revenue suggests future sales growth tailwinds and project demand resilience.
And execution is starting to shine through the numbers. Q3 FY2025 revenue increased by roughly 5-7% YoY, with adjusted net revenue up 7% and EBITDA (earnings before interest, taxes, depreciation, amortization; basically, gross cash flow) growth running at 14% year-over-year. Even better, management is guiding for FY2026 adjusted revenue growth of 6-10%, and EPS (earnings per share) between $6.90 and $7.60, which would represent mid-teens growth relative to the prior year. That EPS figure also highlights a major disconnect in how the stock is currently being valued.
On a trailing basis, the P/E reads high (somewhere in the 39-52x range) due largely to nonrecurring (hopefully) charges, largely a result of exiting lower margin business lines. But the forward P/E, based on the range of estimates, compresses into a much more palatable 17.7 to 19.6 band. That's roughly a 25% discount to some of its large-cap peers, despite better backlog momentum and a cleaner balance sheet. By 2029, Value Line has EPS coming in around $10. That's a ways off, but a low-20s multiple on those possible profits creates a three-year price target around $230 versus $135 today. J also carries a stellar earnings predictability rating of 90 from Value Line. (During his long and legendary career, Warren Buffett reportedly kept a Value Line binder on his desk at all times.)
[Chart: Five-Year Price-to-Sales and P/E Ratio for J — Bloomberg]
The valuation story gets more compelling when viewed through the lens of PEG ratios (P/E to growth rate) and cash conversion. The five-year PEG sits somewhere between 0.5 and 1.5, depending on the source. This suggests again a business that, at worst, is fairly priced for its growth trajectory, and at best, is meaningfully undervalued relative to its expected earnings expansion. EV/EBITDA checks in around 14x, below the 15-18x range that many industrial quality names typically command, particularly those with clean government exposure, secular tailwinds, and growing margin profiles.
J has guided adjusted EBITDA margin toward 14.4-14.7% for the current fiscal year. This marks a significant improvement over prior cycles and is reflective of a better business mix, pricing power in structural growth sectors like water, data centers, and life sciences, as well as portfolio optimization away from traditional engineering and construction work.
One of the quiet levers Jacobs is pulling effectively is capital return. In FY2025, the company returned roughly $1.1 billion via dividends and buybacks, retiring about 3% of its publicly traded shares. It now yields a modest $0.32 per quarter, or about 1.1%, not much below the S&P's percentage payout. Between continued share reduction, margin expansion, and a backlog with favorable mix, per-share earnings are getting a multi-factor lift even if top-line growth stays in the mid-single digits.
Technically, the stock remains range-bound. Its relative strength rating has moved up from the mid 60s into the low 70s, which is constructive, but still shy of the breakout-level 80+ readings that typically precede leadership runs. Price action has seen support in the $130-$138 area, with resistance now forming in the $160-$168 range; coincidentally near the stock's 52-week highs. From a tactical standpoint, that's a range worth respecting. But fundamentally, the setup is stronger than price action currently implies.
The most obvious risk, and potential pitfall, associated with J is its exposure to government and corporate capex cycles. Any policy shift or recession-triggered spending slowdown could push projects down the line, even if they don't get cancelled outright. Execution also matters since the backlog is only as good as the company's ability to deliver on it profitably. But that's part of what you pay for here: a long history of project management at scale, a highly disciplined leadership team, and durable relationships across multiple sectors of public and private infrastructure.
On the discipline angle, this is in contrast to many of its competitors which have taken big write-downs due to poorly bid contracts. Here's how Google Gemini describes this aspect:
From its inception, Jacobs differentiated itself from rivals like Bechtel or Fluor by intentionally avoiding 'lump-sum' or 'fixed-price' turnkey construction projects. The Risk Factor: Fixed-price contracts force the contractor to bear the risk of cost overruns, inflation, and weather delays. Joseph Jacobs famously viewed this as 'unprofessional' and akin to gambling with the company's future. The 'Cost-Plus' Preference: The company built its reputation on cost-reimbursable (cost-plus) and professional services contracts. Under this model, the client pays for the actual costs plus a set fee, ensuring the company remains profitable even if the project scope expands.
Trust Team Haymaker that this is a mega issue when it comes to engineering and construction companies. Some of those that have taken on massive projects at fixed prices have gone the way of all flesh, including Morrison-Knudsen and Westinghouse.
Compared to other publicly traded engineering and consulting peers, Jacobs is neither the cheapest nor the flashiest, but it may be one of the most underappreciated. Forward multiples are reasonable, earnings growth is accelerating, cash is being returned to shareholders. And, maybe most importantly, its addressable market is being expanded by federal policy, geopolitical trends, and corporate necessity. It should also receive a material uplift from the "run-it-hot" scenarios we articulated in our opening macro section.
You don't have to dig too deep into the business to see that Jacobs seems rather overlooked as it pertains to most AI infrastructure. After all, someone has to design and engineer the hyperscale data centers that will house the chips, power the algorithms, and keep the servers cool enough to run inference loads at scale. Jacobs is already doing that work for tech companies, utilities, defense contractors, and public-private partnerships with multi-decade timelines. The recent convergence of data-center demand and grid fragility only deepens Jacobs' relevance, particularly as it continues to pivot toward energy resilience, water-scarcity mitigation, and advanced industrial facilities, all of which it calls out specifically in its business strategy.
On a related note, J is in an enviable position to benefit from the hundreds of billions, if not trillions, of overseas investments in key U.S. industries the Trump administration has been able to secure. (We do appreciate there is justifiable skepticism as to whether all of this will actually occur; we're inclined to take the under on the headline amounts but, ultimately, there should still be a meaningful surge in new capex coming to America's shores.)
If there's one takeaway, it's that Jacobs is for investors looking for the literal foundation under the next leg of the AI trade. It's got the backlog and margins to thrive in 2026 but the valuation lags, which we think is where the opportunity lies. In a market increasingly desperate for reliable growth, the plausible potential for revenue acceleration and an undemanding valuation — Jacobs could be one of the few that offers all three along with being one of the purest plays on the reindustrialization of America.
The Haymaker Team
— Individual Growth Portfolio — (SB: Strong Buy / B: Buy / H: Hold / S: Sell) [Holdings table rendered as an image on Substack — individual ticker rows did not extract as text.]
Note: Back on June 30th, we had proposed selling ½ of Schlumberger (SLB), for a loss of roughly $6 per share, from $42 to $36, or approximately 14%, and swapping the proceeds into Helmerich & Payne (HP). H&P has roughly doubled from $15.20 to $30.94 since then, regaining far more than the hit on SLB. At this point, we'd suggest selling one-third of HP to capitalize on the massive move it has had.
— Individual Income Portfolio — (SB: Strong Buy / B: Buy / H: Hold / S: Sell) [Holdings table rendered as an image on Substack — individual ticker rows did not extract as text.]
Note: Petrobras (PBR) has declined from $12.70 at the time of our initial recommendation to its current price of $11.72. Last week, we suggested dollar-cost-averaging into PBR. Accordingly, the new percentage allocation to this one should be approximately 1.5% (150 basis points).