GM. This is Milk Road Macro, the newsletter that checks the economy’s pulse like a paranoid friend checking their ex’s Instagram story, just to see where things are headed.
Here’s what we’ve got for you today:
- ✍️ Where are we in the business cycle and what will happen in 2026?
- 🎙️ The Milk Road Macro Show: 2026 Liquidity Outlook: Is the Global Liquidity Cycle Past Its Peak? w/ Michael Howell
- 🍪 The artificial intelligence boom isn't cooling off
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Prices as of 10:00 AM ET.
WHERE ARE WE IN THE BUSINESS CYCLE AND WHAT WILL HAPPEN IN 2026?
It’s that time of the year when everybody is looking ahead to a fresh new year.
Many people are releasing their outlooks for 2026.
I actually hate these new year outlooks, because they’re kind of stupid and quite funny (nobody really knows what will happen).
And yet, here I am, writing about my own 2026 outlook.
I want to concentrate specifically on one of the most important factors to think about from an investing perspective: the business cycle.
Where are we in the business cycle?
This is a subject of much debate.
So, let’s do some crystal ball gazing… 🔮
I’ll walk you through some of the ways that I like to look at the business cycle.
And where I think it might be going next…
So, where are we in the business cycle?
This is the ISM Manufacturing Purchasing Managers Index (PMI).
It is a monthly business survey that attempts to measure sentiment within the American manufacturing sector.
It's often considered the favorite "business cycle gauge" - because the manufacturing sector is the most cyclical part of the U.S. economy.
So why is this useful?
In extremely simple terms - when the PMI is rising (business cycle upturn), it's generally a time to be greedy and "buy the dips".
And when the PMI is falling (business cycle downturn), it's generally a time to be cautious and "sell the rips".
Historically, near to the top of a PMI upturn is generally where you will find bursts of "speculation mania".
Think 2017 and 2021 crypto frenzies.
But as you might be able to see - we haven't really had any kind of “cycle” for years.
It's just been a mess.
We haven't seen a "real business cycle upturn" since 2020/2021.
It’s just been largely stuck below 50 (contraction), only briefly poking above 50 (expansion).
So, the PMI has not been particularly useful.
Instead, we can attempt to gauge the business cycle using market-derived measures.
Or in other words, what are markets saying about where we are in the cycle?
I'm going to turn the PMI into a shaded area and use it as a base - and then we can build on top of it.
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WHERE ARE WE IN THE BUSINESS CYCLE AND WHAT WILL HAPPEN IN 2026? (P2)
First, here's my Global Economy Index (yellow).
This attempts to measure the relative strength of the global economy as a whole.
It includes currencies, bond yields, commodities and shipping rates.
The Global Economy Index generally lives several months in the future.
So, I’ve advanced it forward by three months.
The Global Economy Index shows we might have seen a weird and underwhelming "full cycle" between late 2022 and early 2025.
But during this time the PMI remained relatively low.
And now a "new cycle" that started in 2025 might be in the early stages.
Or in other words, the PMI just decided to skip a cycle.
But I wouldn't consider this late 2022 to early 2025 period to be a "real full business cycle".
Let's add another line (white).
I'll label this "coincident business cycle" - it’s another index of mostly U.S. equity based business cycle measures.
This white "coincident business cycle" line generally lives with the business cycle in real-time.
When it's rising, it generally indicates that (on a relative basis):
- Expectations of domestic growth are strengthening.
- Investors are explicitly willing to own more cyclical investments and smaller companies.
- The freight segment of the economy (moving stuff around) is expected to perform well.
- Order books are expected to improve, more stuff is being produced and general business confidence is rising.
This white line did not "confirm" a business cycle upturn during 2023 and 2024 - it just melted lower.
But now it might be "confirming" a cycle upturn in 2025 (so far at least).
The coincident business cycle (white) clearly shows that there has been a notable shift in investor behaviour in recent months.
Investors appear to be preparing for, and positioning for, an “expansion” into next year.
In my view, the confusing late 2022 to early 2025 period could be considered similar to the 2019 to early 2020 period.
The global economy (yellow) showing some promising signs - but the coincident business cycle (white) remaining subdued and not "confirming the cycle".
Then, everything rolling over due to a sudden shock (2020 pandemic, 2025 tariff shock).
This may explain why we’ve seen a long period of dominance from popular mega-cap tech equity names (which can still thrive without a true business cycle expansion), while a lot of the rest of the market has lagged behind.
But can we look even further into the future?
Yes.
But the further we look, the murkier things get.
(And the messier our chart gets.)
Nevertheless, we can use the 10-year U.S. Treasury yield minus the 2-year U.S. Treasury yield.
Also known as the 10yr-2yr spread.
This is a measure of the Treasury yield curve.
When it steepens (rises), it generally means bond investors are expecting stronger growth in the medium-term future.
This isn't true all of the time, and there are different "types of steepening".
But we won't get into that.
Generally, most of the time, a steepening yield curve = improving forward growth expectations.
This historically lives roughly 6-12 months in the future.
It's not perfect and this leading correlation has broken down a number of times in the past.
But anyway, here's the 10yr-2yr spread (represented as a z-score), advanced by nine months.
Remember, these lines are staggered.
So white is coincident.
Yellow is advanced by three months into the future (to signify a short leading relationship).
And red is advanced by nine months into the future (to signify a longer leading relationship).
This currently looks like a particularly promising configuration to me.
It shows that we may have started a new "real business cycle upturn" this year.
However, to see this “new cycle” continue to play out, the 10yr-2yr spread (the most “leading” component) should ideally steepen further into the first half of 2026 (so, the red line will start to rise again).
My current view is that there's a good chance this steepening will happen.
This could occur due to the 2-year Treasury yield being dragged down further by Fed rate cut expectations increasing, with the 10-year Treasury yield remaining roughly flat (or even rising) due to resilient growth expectations - causing the yield curve to steepen further.
If it’s true that a “new cycle” started in 2025, let's assume that this potential new cycle plays out in a similar way to previous cycles.
All three of these staggered lines should converge around a major top at some point within the green box (late 2026-early 2028).
Watch out - here come the “I can tell the future” arrows.
Any other “early cycle” signs?
Yes - there are quite a few.
One in particular is hidden in jobs data.
Many people are currently concerned about a weakening U.S. labor market, with headline job growth falling and the headline unemployment rate rising.
But, if you want to get a read on the general direction of the overall economy, headline jobs and unemployment data is not the best thing to look at, because it is significantly lagging in the context of long-term cycles.
The headline data almost always lags the cycle - often by quite a long period of time.
Instead, we can look specifically at overtime hours and temporary help - because this is showing “early cycle” signs.
The ASA Staffing Index - a private weekly measure tracking shifts in temporary and contract work - has historically hinted at where the broader economy may be headed.
It’s generally a leading indicator for the labor market.
The ASA Staffing Index measure bottomed in 2024 (on a year-on-year basis) and has now posted 14 weeks of consecutive year-on-year growth.
Historically, these are classic “early-cycle” signs: businesses see more activity, so they add hours and temps before committing to costly full-time hires.
The most leading of all labor market indicators is suggesting that the economy is currently recovering from a “recession-like” slump in 2023 and 2024 - not deteriorating further.
So what does all of this mean?
Obviously, there’s a lot of conjecture here.
After all - this is crystal ball gazing stuff…
But, if this is all true, and we are set for a business expansion in 2026 - what should we expect to see?
- The U.S. economy continues to remain resilient - with signs of a general "reacceleration" in economic data.
- The PMI rises, signalling improving confidence within the manufacturing sector.
- The stock market “broadens out” - with more cyclical segments of the market like transports, banks, industrials, energy and small-caps (the stuff that hasn't really worked for three years) outperforming popular mega-cap names (which may also still do relatively well, but underform more cyclical sectors).
- Commodities, particularly industrial metals and energy, perform well.
- As we progress through the "expansion", more speculative, high volatility equities, particularly in emerging industries, should perform well.
- And yes, that should include bitcoin and crypto - if this “time is not different”.
So, the set-up is there for 2026 to be a big year.
And there’s evidence that investors are already positioning for a business cycle expansion - as shown by the coincident business cycle (white).
But the most important thing to watch is probably the 10yr-2yr spread.
If this steepens further in the first half of 2026 - it could be game on.
But if it flops over and starts falling - this could kill the cycle.
That’s it for this edition - catch you in the next one.
2026 LIQUIDITY: WHAT COMES NEXT? 🔥
In today’s episode, we sat down with Michael Howell to talk about the 2026 liquidity outlook and whether the global liquidity cycle is past its peak.
Here is what you will hear:
- Why the Fed stopped QT (Dec 1) and may add liquidity in 2026 without calling it QE
- How a big Treasury General Account and heavy bill issuance can drain reserves and tighten markets
- The warning signs Howell watches, from repo stress to the SOFR IORB gap and trade fails
- What this setup means for positioning, from late cycle volatility to gold, silver, and Bitcoin as hedges
Tune in and see for yourself 👇
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BITE-SIZED COOKIES FOR THE ROAD 🍪
The Trump administration expects the economy to grow at a pace of 3% and thinks the Fed can continue to lower interest rates in that environment. Joe Lavorgna, counselor to Treasury Secretary Scott Bessent, said the economy is experiencing a boom without inflation tied to President Trump’s deregulatory and pro-growth policies.
Vanguard has advised investors to ditch the traditional “60% equities, 40% bonds” portfolio for the opposite: “60% bonds, 40% equities”. “This is a position we suggest investors consider for the next three to five years”, Roger Aliaga-Diaz, Vanguard’s global head of portfolio construction said.
The artificial intelligence boom isn't cooling off - it's getting bigger, according to Bank of America analysts. In a new report, the bank forecasts a 30% year-on-year surge in global semiconductor sales that will finally push the sector past a historic $1 trillion annual sales milestone in 2026.
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