The Great Moderation Is Over | Liz Ann Sonders on What Replaces It

Jan 14, 2026

Liz Ann Sonders, the Chief Investment Strategist known for her insights into macroeconomics, dives into the evolving economic landscape as we approach 2026. She discusses how instability, rather than uncertainty, shapes investor behavior, and the implications for the labor market and inflation dynamics. Sonders highlights the K-shaped economy, the shifting correlation between stocks and bonds, and the significant impact of AI on productivity and capital spending. Her analysis reveals how we might need to rethink diversification and market positioning in this new, volatile era.

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INSIGHT

2% May Be A Floor, Not Ceiling

The Great Moderation forces (globalization, cheap energy) are fading and inflation volatility may return.
Treat 2% inflation as a possible floor, not a ceiling, implying yields may behave more like the temperamental era.

INSIGHT

Stocks, Bonds: A Shifting Relationship

The stock-bond correlation depends on whether yields track growth or inflation and may swing toward the temperamental-era relationship.
Expect more back-and-forth as markets and policy find a new regime.

INSIGHT

Labor Market: Headwinds And Tailwinds

The labor market shows cross-currents: very low initial claims but weaker hiring and continuing claims rising.
Compressed immigration lowers labor-force growth, increasing reliance on productivity gains.

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In this episode of Excess Returns, we welcome back Liz Ann Sonders to discuss the evolving market and economic landscape heading into 2026. The conversation focuses on why this cycle feels fundamentally different, how instability rather than uncertainty is shaping investor behavior, and what that means for inflation, the labor market, Federal Reserve policy, and equity markets. Liz Ann breaks down the growing bifurcation across the economy and markets, the shift away from the Great Moderation era, and how investors should think about diversification, earnings, valuations, and AI-driven capital spending in a more volatile and fragmented environment.

Main topics covered
• Why today’s environment is better described as unstable rather than uncertain
• The K-shaped economy and growing bifurcation across consumers, sectors, and markets
• Inflation dynamics and why 2 percent may now be a floor rather than a ceiling
• How deglobalization, supply chains, and tariffs are changing the inflation regime
• The shifting relationship between stocks and bonds
• Hard data versus soft data and what sentiment is really telling us
• The labor market’s headwinds and tailwinds, including immigration and hiring trends
• AI’s impact on productivity, jobs, and capital spending
• The AI capex boom and how it differs from the late 1990s tech cycle
• Earnings growth, valuation compression, and market broadening
• Rolling recessions versus traditional economic downturns
• Federal Reserve challenges under a conflicted dual mandate
• Why factor-based investing matters more than sector or style calls

Timestamps
00:00 Introduction and why this cycle feels different
02:00 Uncertainty versus instability in markets
03:30 The K-shaped economy and market bifurcation
07:00 Market broadening, small caps, and diversification
09:00 Inflation measurement challenges and data reliability
12:00 Why inflation may stay above 2 percent
15:00 Stock and bond correlations across cycles
17:30 Labor market crosscurrents and immigration effects
20:45 AI, productivity, and entry-level job pressures
24:30 Sentiment versus fundamentals in markets
27:30 Retail trading, behavior, and market psychology
31:00 Rolling recessions and post-pandemic distortions
38:00 Technology, cyclicality, and sector rotation
40:30 The Fed’s policy dilemma and internal disagreements
45:00 AI capital spending and comparisons to the dot-com era
51:00 Earnings growth versus valuation expansion
55:00 Factors, GARP, and portfolio positioning for 2026