Piper Sandler's Macro Select Pivot: A Structural Shift or Cyclical Rotation?

The foundation for Piper Sandler's new strategy is a clear victory lap. In 2025, the Macro Select model delivered a 22% return, decisively outperforming the S&P 500's 16% gain. This 600-basis-point alpha was not a fluke but the result of a disciplined, forward-looking framework. The firm's proprietary "HOPE" logic-focusing on Housing, Orders, Profits, and Employment-allowed it to correctly anticipate the market's broadening, moving beyond the narrow leadership of mega-cap technology that had dominated for years.

With the new year underway, that proven track record is being leveraged to justify a decisive pivot. Chief US Equity Strategist Michael Kantrowitz has explicitly shifted the model's focus to a portfolio of "cyclical quality value". This is a strategic repositioning, not a minor tweak. The new mandate targets stocks with four specific traits: strong earnings surprise and earnings revisions, coupled with attractive earnings yield and high levered profitability (ROE). The goal is to capture the economic cycle's normalization, moving away from the "bubble-esque" growth names that lack self-financing capabilities.

The immediate implication is a rotation away from the "Magnificent 7" era of market dominance. The updated list, now featuring names like AT&T and Kilroy Realty, signals a hunt for alpha in overlooked corners of the industrial, utility, and consumer discretionary sectors. This setup frames the core question: is this a tactical rotation to capitalize on near-term catalysts, or a structural repositioning to a new market regime? The model's 2025 success provides the credibility for the pivot, but its 2026 performance will determine which narrative holds.

The Macro Engine: From Easing to Normalization

The strategic pivot in the Macro Select model is not happening in a vacuum. It is explicitly tied to a fundamental shift in the macroeconomic engine that drives markets. The firm's proprietary "HOPE" framework-which analyzes Housing, Orders, Profits, and Employment-served as the guide for navigating 2025's broadening market. Now, that same framework is being used to signal a new phase: the transition from a high-rate environment to one of sustained normalization.

The most critical catalyst is the Federal Reserve's policy shift. After a period of holding rates steady, the central bank has accelerated cuts, a move that Kantrowitz describes as the "Eureka Moment" for the model. This easing cycle is the primary macro tailwind, directly lowering the cost of capital for the industrial, utility, and real estate companies now in focus. For the cyclical value thesis, this is the essential precondition. Lower borrowing costs can stimulate investment, support housing demand, and improve cash flows for capital-intensive firms, all of which are reflected in the HOPE metrics.

Adding to this monetary tailwind is a potential fiscal boost. The "One Big Beautiful Bill" Act is cited as a source of new stimulus, specifically expected to provide $191 billion in individual tax relief. This targeted support for middle-income households is a direct lever for the consumer discretionary sectors now highlighted in the model's new picks. The logic is straightforward: more disposable income in these hands can drive a resurgence in spending on goods and services, directly benefiting companies in retail, hospitality, and consumer staples.

The validity of this macro setup is supported by the model's own 2025 performance. Its outperformance was built on correctly anticipating the market's broadening, which began as the Fed started cutting. The 2026 pivot assumes this cycle is now maturing, moving from easing to a phase where the benefits of lower rates are being felt across the economy. The potential impact on the cyclical value thesis is significant. It provides a structural rationale for the rotation away from growth-at-any-price stocks. If the HOPE framework's signals are correct, and the fiscal and monetary policies deliver as expected, the economic normalization that the model is betting on could create a fertile environment for the high-earning, high-ROE companies it has selected. The engine is shifting, and the new fuel is easing and targeted spending power.

Financial Impact and Portfolio Construction

The strategic pivot to "cyclical quality value" is now operational, with a clear blueprint for portfolio construction. The model's methodology is rigorous, sorting the S&P 1500 universe into deciles based on a composite score of earnings and value factors. The new portfolio is explicitly targeting the top decile-companies with a score of "1"-to capture the highest concentration of the desired traits: strong earnings momentum and high levered profitability. This is a disciplined filter, designed to isolate the most compelling opportunities within the broader cyclical value thesis.

The new top picks exemplify this profile. AT&T, Graham Holdings, and Kilroy Realty are highlighted as representative names. While their sectoral exposures vary, they share a common thread: a focus on generating robust returns from existing capital. AT&T, for instance, is a classic high-ROE utility-like business in a regulated sector, offering a defensive yield. Kilroy Realty is a pure-play industrial REIT, positioned to benefit from the normalization of commercial real estate cycles. Graham Holdings, a diversified media and education company, carries a high-ROE profile typical of a quality value name. The model's selection of these specific stocks signals a hunt for earnings power and capital efficiency, moving decisively away from the low-ROE, high-growth-at-any-price models of the past.

This construction is driving a tangible sector rotation. The model's new focus is heavily weighted toward industrials and utilities, sectors that have historically lagged during the tech-dominated bull market. The performance of a stock like UGI Corporation underscores this shift. With a 33% one-year return, UGI has been a standout performer, demonstrating the market's early appetite for high-quality, value-oriented names in the utilities space. This isn't just a list of stocks; it's a signal that capital is beginning to flow into these overlooked sectors, seeking the earnings yield and profitability that the new model's top decile filter identifies as key.

The financial impact of this construction is twofold. First, it provides a clear, factor-based rationale for the rotation, moving beyond sentiment to a quantifiable screen. Second, it sets up a potential divergence in performance. If the macro normalization thesis plays out, these high-ROE, value-oriented cyclical names could see their earnings and cash flows expand, re-rating their valuations. The model's 2025 success gives it credibility, but the true test is whether this portfolio construction can generate alpha in a broader market that is finally broadening beyond its narrow leadership.

Valuation, Catalysts, and Key Risks

The investment case for Piper Sandler's new "cyclical quality value" strategy rests on a clear set of valuation metrics, a specific forward catalyst, and a defined set of risks. The model's emphasis is on tangible financial strength, not just growth potential. It targets stocks with attractive earnings yield and high levered profitability (ROE), a classic value-oriented filter. This isn't about chasing momentum; it's about identifying companies that generate substantial returns from their capital base at reasonable prices. The portfolio construction, which sorts firms into deciles and targets the top tier, provides a disciplined framework for finding these diamonds in the rough.

The primary catalyst is the broadening of market leadership. The model is explicitly designed to capture the shift away from the "Magnificent 7" era of market dominance. As the Federal Reserve's easing cycle lowers the cost of capital and fiscal stimulus supports consumer spending, the thesis is that capital will rotate into the industrials, utilities, and consumer discretionary sectors now in focus. The early performance of names like UGI Corporation, with a 33% one-year return, suggests this rotation is already underway. The durability of the case hinges on this macro-driven re-rating continuing.

The most significant risk is a failure of the macro normalization thesis. If inflation proves more persistent than expected, it could force the Federal Reserve to pause its easing cycle or even reverse course. A prolonged period of higher-for-longer rates would directly undermine the strategy's core premise. For cyclical and value stocks, which often carry higher leverage and are more sensitive to borrowing costs, this would be a major headwind. It could stall the housing and manufacturing recovery that the HOPE framework is tracking, while also compressing the earnings yields the model seeks. In that scenario, the rotation away from growth stocks would stall, and the high-ROE, value-oriented picks could face renewed pressure.

The bottom line is that this is a bet on a specific macroeconomic trajectory. The strategy's valuation metrics provide a margin of safety, but its ultimate success depends on the Fed and fiscal policy delivering the sustained normalization it anticipates. Any stumble in that process would challenge the very foundation of the "cyclical quality value" thesis.