January 2026 Market Commentary

January 2026 marked a volatile start to the new year, with equity markets navigating geopolitical uncertainty, shifting interest rate expectations, and ongoing sector rotation beneath the surface. Major U.S. equity indices finished the month mixed but generally resilient, following a sharp mid-month drawdown and subsequent recovery. The S&P 500 declined modestly, finishing down approximately -1% to -2% for the month. The Nasdaq Composite underperformed, falling roughly -3% to -4% amid continued weakness in mega-cap technology and AI-linked stocks. Meanwhile, the Dow Jones Industrial Average proved more defensive, ending the month near flat to slightly positive, supported by strength in industrials, energy, and financials.

Market volatility spiked mid-month amid renewed geopolitical and policy concerns. Tariff threats toward European allies triggered a sharp risk-off move on January 20, when the S&P 500 declined more than 2% in a single session and the Nasdaq dropped roughly 2.4%. The selloff was led by mega-cap technology stocks, underscoring investor sensitivity to policy risk and crowded positioning in growth sectors.

Beneath the surface, sector dispersion emerged as a defining theme. Cyclical and value-oriented sectors - including energy, industrials, and financials - outperformed, benefiting from firm commodity prices, improving manufacturing sentiment, and a steepening yield curve. In contrast, information technology and communication services lagged, reflecting ongoing profit-taking in AI-linked mega-cap and increased uncertainty around the long-term monetization of AI investments. Defensive sectors such as utilities and consumer staples also underperformed, as investors selectively rotated into economically sensitive areas rather than broad risk-off positioning.

Key risk narratives in January centered on persistent geopolitical uncertainty, elevated Treasury issuance, fiscal deficits pressuring long-term yields, and growing scrutiny of the AI investment cycle following extreme capital expenditures by hyperscalers. Earnings expectations also remained in focus, with investors increasingly differentiating between companies with near-term cash flow visibility and those reliant on long-dated growth assumptions.

Fixed income markets reflected a clear tug-of-war between slowing inflation and fiscal supply dynamics. Short-term Treasury yields declined modestly as markets continued to price in potential Federal Reserve rate cuts later in 2026. In contrast, long-term yields remained elevated, resulting in a modest steepening of the yield curve. This environment favored financials and cyclicals while pressuring long-duration equities such as growth stocks and REITs. Credit markets remained orderly, with investment-grade and high-yield spreads largely contained - indicating no immediate signs of recessionary stress, though sensitivity to macroeconomic data and policy signals increased.

Following the prolonged government shutdown in late 2025, the economic calendar has gradually returned to a regular release schedule, starting with the December 2025 inflation and sentiment data. The latest Consumer Price Index (CPI) report reinforced the theme of gradual - but uneven - disinflation. While both headline and core inflation have moderated meaningfully from their 2022–2023 peaks, progress remains incremental rather than decisive, leaving markets highly sensitive to each monthly data release.

Headline CPI rose 2.7% year over year in December, in line with consensus expectations. On a monthly basis, prices increased 0.2%, marking the slowest annual pace of inflation in nearly a year. The moderation was driven primarily by softer energy prices - particularly gasoline - as well as continued cooling across goods categories. Goods disinflation has emerged as a key stabilizing force as supply chains normalize and pricing power in durable goods continues to fade.

Core CPI - which excludes food and energy to better capture underlying inflation trends - increased 2.6% year-over-year, representing a slight improvement and one of the lowest readings since early 2021. On a monthly basis, core prices increased 0.3%, reflecting ongoing strength in shelter and services categories. Although housing inflation continues to decelerate gradually, services inflation, particularly in wage sensitive sectors, remains sticky and is preventing a more rapid return to the Federal Reserve’s 2% target.

Consumer sentiment data for December also showed stabilization. The University of Michigan Consumer Sentiment Index increased to 56.4, rebounding from the weakness seen earlier in the fall. Inflation expectations continued to ease, with one-year expectations declining into the mid-2% range and five-year expectations remaining anchored near 2.5% to 2.6%. Anchored long-term expectations are particularly significant for policymakers, as they reduce the risk of a wage-price spiral and provide the Federal Reserve greater policy flexibility. Consumers reported improved views on current financial conditions and job security, although forward-looking expectations remain cautious. Elevated borrowing costs and higher cumulative price levels continue to weigh on spending intentions, particularly for interest-rate-sensitive purchases.

Taken together, the inflation and sentiment data support the view that inflation is gradually moving toward the Federal Reserve’s 2% objective, though progress is not conclusive yet. Headline disinflation is encouraging and reflects easing commodity and goods pressures. However, persistent services inflation, especially housing-related components, continues to anchor core readings above target.

For markets, the data preserve the policy debate. Softer headline inflation strengthens the case for eventual rate cuts, while sticky core components justify a measured and data-dependent approach from the Federal Reserve. This tension between improving headline trends and resilient core inflation will likely remain a primary driver of Treasury yields, yield curve dynamics, and equity market volatility in the weeks ahead.

The December 2025 employment report closed out the year with clear signs of labor market cooling. The U.S. economy added fewer than 50,000 jobs during the month, while the three-month moving average turned negative, reflecting a loss of approximately 17,000 jobs. Despite softer hiring, the unemployment rate edged down from its 2025 high of 4.5% to 4.4% in December. The decline likely reflects reduced labor force participation and slower workforce growth rather than a meaningful reacceleration in hiring.

Companies largely maintained hiring freezes throughout the quarter. While trade policy uncertainty played a role earlier in the year, firms increasingly cite AI adoption and productivity optimization as key factors behind restrained hiring plans. Entry level corporate positions have been disproportionately affected, as these roles are more easily automated through AI-enabled tools and workflow efficiencies.

Job gains, though modest, were concentrated in health care, professional services, and government. Health care continued to benefit from structural demand trends, while public sector hiring remained supportive. In contrast, cyclical sectors such as manufacturing and construction delivered mixed results, reflecting softer capital expenditures and continued sensitivity to elevated interest rates.

Wage growth also continued to moderate. Average hourly earnings increased 0.3% month-over-month and 3.9% year-over-year, extending the steady deceleration observed throughout 2025. A sub-4% annual wage growth rate represents a meaningful shift, as it reduces upward pressure on services inflation, particularly in labor-intensive industries. The easing in wage gains aligns with cooling trends in core services inflation and supports the view that labor-driven price pressures are gradually subsiding. Overall, the December employment report reinforces the narrative of a slowing - but not collapsing- labor market. Hiring has softened materially, yet unemployment remains contained and wage growth continues to normalize. This combination supports the broader soft-landing framework while strengthening the case for a cautious, data-dependent Federal Reserve policy stance entering 2026.

The Conference Board’s Leading Economic Index (LEI) for November 2025 declined modestly, reflecting continued late-cycle softness in forward-looking economic indicators. The monthly decline was primarily driven by weakness in consumer expectations and manufacturing demand. Average consumer expectations for business conditions detracted –0.23 from the index, while the ISM New Orders Index subtracted –0.17, underscoring cautious sentiment among both households and businesses. These components continue to signal slower forward momentum, particularly in cyclical and capital-sensitive areas of the economy.

However, several components provided partial offsets. The interest rate spread between the 10-year Treasury and the federal funds rate contributed +0.03, reflecting modest steepening of the yield curve after a prolonged inversion. Labor market-related inputs also remained supportive. Average weekly initial jobless claims added +0.07, and average weekly manufacturing hours contributed +0.06, indicating that although hiring has slowed, labor conditions remain stable rather than deteriorating. Building permits and manufacturers’ new orders for consumer goods and materials made small positive contributions, suggesting that housing and goods demand are weak but not collapsing. Financial components such as the S&P 500 Index and the Leading Credit Index were flat for the month. Looking at the six-month trend through November, the broader pattern remains one of gradual stabilization rather than accelerating contraction. Consumer expectations (–1.38) and ISM new orders (–0.89) were the largest drags over that period, highlighting persistent caution about future growth. At the same time, equity prices (+0.61), the Leading Credit Index (+0.19), average weekly hours (+0.18), and initial jobless claims (+0.13) provided meaningful positive contributions. Modest improvements in financial conditions and continued labor market stability have helped offset ongoing weakness in manufacturing and sentiment.

Overall, the November LEI suggests the economy remains in a late-cycle slowdown, but without the broad-based deterioration typically seen ahead of a recession. Forward indicators are soft, particularly in manufacturing and expectations, yet labor and financial conditions remain sufficiently stable to support the soft landing narrative entering 2026.

In January 2026, President Trump formally nominated Kevin Warsh to succeed Jerome Powell as Chair of the Federal Reserve, marking a pivotal transition in U.S. monetary policy leadership. Warsh previously served as a Federal Reserve Governor from 2006 to 2011 and was a senior economic advisor in the George W. Bush administration. More recently, he has been affiliated with the Hoover Institution and has emerged as an outspoken critic of the Federal Reserve’s pandemic era stimulus and the subsequent inflation surge. His background combines direct central banking experience with market-oriented policy views and a reputation as a credible institutionalist. This profile has positioned him as a relatively market friendly choice compared with more overtly political candidates, helping to reassure investors during the leadership transition.

Markets reacted swiftly to the nomination, particularly in rates and currency markets. Treasury yields initially steepened, reflecting uncertainty about the future policy path and the perception that a leadership change could alter the Federal Reserve’s reaction function. Equity markets experienced modest volatility, with financial and cyclical sectors outperforming on expectations of a firmer stance toward inflation, while long-duration growth stocks lagged as rate uncertainty increased. Analysts broadly characterized Warsh as a data dependent and credibility focused nominee, which helped temper concerns about overt political influence over monetary policy.

Looking ahead, a Warsh led Federal Reserve is expected to emphasize institutional credibility, inflation discipline, and clearer communication around policy normalization. While he has criticized the Federal Reserve’s past dovish bias, he is not viewed as aggressively hawkish. Instead, his leadership could result in a more symmetric reaction function, with greater tolerance for holding rates higher for longer if inflation risks reaccelerate. Importantly, his appointment could signal more caution about large-scale balance sheet expansion and emergency stimulus, potentially increasing the role of fiscal policy as the primary macroeconomic stabilizer.

For investors, the leadership transition introduces a new policy regime risk. A more orthodox, inflation-focused Federal Reserve could anchor long-term inflation expectations and support the dollar, but it may result in higher real rates and greater rate volatility. Conversely, markets will be closely watching how the new Chair navigates political pressures amid elevated fiscal deficits and geopolitical uncertainty. Ultimately, the nomination underscores that 2026 could be a turning point for U.S. monetary policy, with implications for equity valuations, bond yields, and real asset performance.

As we begin 2026, broad market expectations reflect optimism tempered with caution. Equity markets have started the year on a positive note, with major U.S. indexes posting gains in early January as investors respond to resilient economic data, easing monetary policy expectations, and persistent enthusiasm around AI–driven growth. Early trading activity suggests that the market’s focus will remain on corporate earnings, rate cut prospects, and the evolving macro backdrop as more economic data rolls throughout this month.

Looking ahead to full-year 2026 forecasts, Wall Street strategists generally anticipate further gains for the S&P 500, though not necessarily at the exceptional pace seen in recent years. Major firms’ year-end 2026 price targets cluster within a range implying mid-to-high single-digit to low-double-digit returns from late-2025 levels. Deutsche Bank offers the most bullish projection, with a target of near 8,000, citing continued AI investment and earnings expansion. Morgan Stanley projects the index around 7,800, while Goldman Sachs forecasts 7,600 based on anticipated earnings growth and productivity gains. Additional forecasts from JPMorgan, HSBC, and Barclays fall within the 7,400 to 7,800 range, while Bank of America maintains a more conservative target near 7,100. Taken together, the average Wall Street year-end target for 2026 is approximately 7,600, reflecting a consensus expectation of continued equity market appreciation and an estimated gain of roughly 11% from late-2025 levels.

Earnings expectations remain a central pillar of this outlook. Analysts broadly project meaningful S&P 500 earnings per share growth in 2026, supported by sustained technology sector strength, capital expenditures tied to AI adoption, and resilient consumer demand. While estimates vary, firms such as Goldman Sachs anticipate approximately 12% year-over-year EPS growth, with total earnings per share approaching or exceeding $300 for the index by year-end. Sustained profitability growth is widely viewed as critical to extending the 2026 rally, helping to justify elevated valuations and reinforce the forward outlook.

Despite generally constructive forecasts, strategists caution that risks remain, including elevated market valuations, potential volatility stemming from shifts in monetary policy expectations, and geopolitical or fiscal uncertainties. As such, while the consensus leans toward a solid year for equities in 2026, market participants should remain attentive to incoming data on inflation, corporate earnings trends, and the pace of Federal Reserve rate adjustments.

As we move into 2026, we have begun to strategically rebalance exposure within areas of the market that have led performance, particularly large-cap AI, semiconductor, and hyperscaler stocks. While we remain constructive on the long-term secular growth of AI, the magnitude of recent gains, elevated valuations, and increasingly crowded positioning have prompted us to trim select exposures. This is not a shift away from AI, but rather a rotation of capital toward areas where fundamentals, valuation, and long-term demand appear more attractively aligned. Specifically, we are increasing emphasis on the “picks-and-shovels” of the AI buildout, meaning the enabling inputs and infrastructure required to support continued expansion. Key bottlenecks in the AI ecosystem include advanced memory, power generation and transmission, energy-intensive materials, and physical inputs that cannot be scaled as rapidly as software or compute capacity. As a result, we see attractive opportunities in targeted equities and ETFs tied to memory and storage, energy infrastructure, and industrial materials, where supply constraints and sustained demand may support durable pricing power.

Within materials, we are particularly focused on precious and industrial metals with critical AI and electrification applications, including silver, platinum, palladium, and copper. These metals play essential roles in data centers, power grids, semiconductors, cooling systems, and electrification infrastructure. Unlike many technology assets, these markets face structural supply constraints, long development timelines, and increasing cross industry competition, creating a favorable backdrop for selective exposure.

In parallel, we are closely monitoring developments in the U.S. yield curve, particularly as the long end has begun to steepen. A steepening curve driven by rising long term yields relative to short term rates can signal shifting expectations around growth, inflation persistence, and fiscal dynamics. For investors, this environment carries important implications. It can create headwinds for long duration assets while improving the outlook for financials, select cyclicals, and income-oriented strategies. It also reinforces the importance of active duration management within fixed income allocations.

Overall, our positioning reflects a focus on risk management, diversification, and forward-looking opportunity identification. By trimming crowded leadership areas and reallocating toward structural enablers and underappreciated constraints, we aim to participate in long-term growth themes while maintaining resilience across a range of economic and market outcomes.