Why Models?
Research shows that using data-driven models, even simple ones, results in better decision-making. Grove et al. (2000) did a comprehensive meta-analysis of 136 studies evaluating mechanical, formulaic models vs. human expert predictions across medicine, psychiatry, and more. They found that mechanical, rules-based models exceeded or beat expert human judgment 94% of the time.
In this article, we'll share one of those models: the Barnyard Forecast. We’ll share what that model is saying right now about the likely direction of stocks over the next 6-18 months, and what we’re doing about it.
The Barnyard Forecast
Aristotle believed “first principles” are the starting points for all knowledge and inquiry. Anytime you’re dealing with a complex problem, adopting “first principles thinking” can help break it down into its most basic, undeniable truth first and then build solutions from the ground up.
Let’s start with a complex problem: Are stocks going to go up or down in the next 6-18 months?
Take a second to consider that question. How would you answer it?
Most people will immediately jump into an answer, citing an article they read or an interview they saw on CNBC. However, the first principle approach is not to give answers, but to ask more questions. Before we try to answer whether stocks are going to go up or down, we first need to know: “What causes stocks to go up or down in the first place?”
We believe these four “first principles” collectively drive the direction of stocks:
1 Economy
2 Interest Rates
3 Earnings
4 Inflation
Those forces drive the “Opportunity” in the market, so E+I+E+I=O. (Hence the name, Barnyard Forecast.)
If you’re reading an article in the Wall Street Journal, ask yourself: What impact does this have on earnings, interest rates, the economy, or inflation? If it has little-to-no impact on those specific areas, it is inconsequential—at least for the stock market. It’s only noise.
To the greatest extent possible, we try to boil everything we do down to some kind of objective score. Each of the four metrics above gets a score between 0 and 2. Let’s go through each of the four:
Economy (.5/2)
The economy has remained strong. AI infrastructure investment continues to drive a steady wave of capital spending, while consumers have remained resilient. Consumer spending reached a record high in May, with gains broadly distributed across categories.
Counterintuitively, a strong economy is a bad thing for our model. Why? A stronger economy lowers the score because it increases the likelihood of a more restrictive Federal Reserve (“Fed”). The economy’s underlying strength gave the Fed room to prioritize its commitment to lowering inflation, leading to the first increase in the Federal Funds rate since 2023.
Historically, rate hikes have been associated with lower forward stock returns. The chart below shows the average forward returns in different Fed cycles:
Since 1956, the S&P 500 has generated total returns of 11.4% when the Federal Funds rate declined by 0.5% or more in the last 12 months. When the Fed increased the Federal Funds rate by 0.5% or more, the S&P 500 rose by an average of 5.9%. Even in a hiking environment, however, stocks increase more often than not, with 68.5% of the 317 hiking months showing positive returns.1
Interest Rates (1/2)
The 10-year U.S. Treasury yield touched 5% in September, reaching levels only seen in late 2023 and, before that, June 2007. Mortgage rates have followed suit, with the 30-year rate, a key driver of housing activity, climbing from 6% in March to 6.75%.
Despite higher interest rates, the yield curve—meaning the difference between short and long-term rates—remains positive. That is the primary driver of our model, which is supportive of stocks.
Earnings (2/2)
Earnings have been nothing short of remarkable so far in 2026. Forward growth remains strong, with earnings per share (EPS) expected to grow over 35% in 2026 and around 15% in 2027, and consensus estimates for next year continue to be raised. As of late August, projected earnings had risen for 66 straight weeks—surpassing the prior 46-week recovery streak after the 2008-09 Financial Crisis.
And it’s not just technology; it’s nearly every sector. In July, analysts raised their earnings forecasts for all 11 S&P 500 sectors, which is usually something we only see following a recession.
Inflation (1/2)
Headline CPI increased 3.4% year-over-year in August, and Core CPI, which excludes the more volatile food and energy components, remained lower at 2.4% year-over-year. However, inflationary pressures are building. The escalating conflict in the Middle East has driven gas prices higher. Diesel hit $6 per gallon, which risks pushing inflation higher across the economy.
Overall (4.5/8)
We view a score of 4 or above as indicative of a constructive environment for stocks. Today, the Barnyard Forecast stands at 4.5 out of 8, pointing to a modestly positive backdrop over the next 6 to 18 months. That said, the list of concerns continues to grow. If 10-year yields continue to hold above 5% and inflation continues to run hot into the end of 2026, the forecast could slip toward a neutral score of 4.
So, What Does That Mean?
Now, let’s talk specifically about what this means for you and the portfolios we’re managing. In everything we do, we start with the core tenets of each strategy, which are:
However, within each strategy, we “tilt” based on the opportunity at hand. For example, in our Rising Dividend™ Cornerstone strategy, we target an equal mix of Security, Income, and Growth. When the Barnyard Forecast score is high (5+), we would become more offensive and tilt towards higher total-return Growth opportunities. When the Barnyard Forecast scores lower (3 or lower), we may adopt a more defensive position, tilting more towards Security.
Over the last few years, we’ve been tilted more towards Growth. Right now, however, the Barnyard Forecast suggests the environment is less favorable for stocks than it has been in recent years. That doesn’t mean it’s a bad environment; it’s just not as good as it once was. Therefore, our moves in 2026 have been to add Security and Income. As we said in our Winter 2025 letter:
“We also expect the AI trade to soften, which we’ve already seen a bit to close 2025. The AI spend is already significant, and expectations are high. Much of that optimism is being baked in, so we would expect a valuation-driven slowdown at some point. Ideally, the market expands from just the “S&P 10” into the “S&P 490”—where the benefits of AI start to trickle into the real economy and positively impact all businesses, not just a few.”
While our optimism is lower than it was a year ago, we remain constructive about stocks. Our “Barnyard Forecast” suggests the opportunity is a slightly above average 4.5/8, so we’re still slightly tilted towards “Growth,” but less so than we were to start the year. If/when the environment shifts towards “Neutral” (4 out of 8), we would consider an even more meaningful tilt towards Security and Income.
Using the Barnyard Forecast and other models we’ve built over the decades helps us “shrink the menu”—immediately cutting down to the first principles that are most relevant in making decisions.
If this letter raises any questions, or you’d simply like to talk through your own mix, reach out to your advisor. We’d love to hear from you.
1. Source: U.S. Federal Reserve (FRED). DCM’s own calculations. Past performance does not guarantee future results.
This article, written by Nathan Winklepleck, Director of Investment Strategy & Solutions and member of our Investment Policy Committee, was featured in the Fall 2026 edition of the Rising Dividend Report.
This has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results. An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Neither the firm nor its agents or representatives may give tax or legal advice. You are encouraged to consult with a qualified professional before making any purchasing decisions.
References to “Security,” “Income,” and “Growth” describe relative investment emphases, not outcomes or guarantees. No strategy can ensure a profit or protect against loss.