Market Update – January 2026

With just three weeks having passed in the New Year, the news cycle has given investors no shortage of headlines. In the realm of geopolitics, we have already seen the U.S. military’s apprehension of the Venezuelan President, tragedy surrounding the suppression of widespread protests in Iran, and a resurgence in concerns regarding tariff policies, with the most recent fast moving tariff target cycle focused on the Trump administration’s aim in acquiring control of Greenland.

With these volatile political headlines, there has been a corresponding swing in markets. In these three short weeks that have passed, global stocks have hit new all-time highs, had their worst single day drop in three months, and quickly rebounded as fast moving news developments continue to transpire. Despite the recent volatility, we believe that investors would be wise to keep a calm mind and focus on fundamentals.

When looking back on 2025, the S&P 500 finished the year, returning nearly 18%. This positive return on the market occurred despite a post “Liberation Day” tariff announcement induced selloff that saw the same index down nearly -15% on the year in early April.

The recovery from that market decline was a lesson that these volatile headlines, while alarming at the moment, are often temporary in their most dramatic market impacts and should be viewed accordingly from a purely investment-oriented perspective. When looking at the current fundamental backdrop, one sees an economy with potentially accelerating growth and moderating inflation, along with a market that has seen gains with broadening participation across sectors, market caps, and regions.

Market Summary

Prior to this week’s recent volatility, equity markets had broadly continued the substantial rally displayed in 2025.  Markets recouped much of Tuesday’s losses following optimistic comments from the U.S. President regarding the framework of a Greenland deal at the World Economic Forum; however, equity participation on both the upside and downside has largely exemplified a notable trend in divergence of fortunes from the previous year.   

This divergence is most notable in the S&P 500 being modestly positive year-to-date (0.5%) compared to small cap stocks (per the Russell 2000) having gained ~8.7% early in the year.  While having lagged the large cap index over the course of 2025, the relative momentum in small caps is beginning to reach a few key milestones.

In fact, over the 1-month, 3-month, and 1-year time horizons, the Russell 2000 has outperformed the S&P 500 on a total return basis.  In just the past six months, the Russell 2000 has risen ~20.8%.

On a sector basis, the S&P 500 has shown a similar divergence in performance trends relative to what transpired in 2025.  Communication services and technology dominated with significant outperformance over the course of the prior year while energy, materials, and consumer staples were middle of to back of the pack.  This year’s leaders have become laggards and the year-to-date race has flipped in its early days.

Energy (~9.2%), materials (~8.4%), and consumer staples (~6.2%) are among the market leaders outperforming year-to-date.  Industrials (~7.3%) have also led, continuing upon their successful run in 2025.  Meanwhile, technology (~-2.5%) and communications services (~-0.1%) have joined financials (~-2.5%) as early laggards for the S&P 500 on the year.

These trends are still very short lived, and much can change over the course of the remaining year with a reversion to longer running outperformance trends (of tech and growth-oriented sectors) a very real possibility.

However, a broadening of market participation in the form of a “catch up” from other sector participants could be a potentially healthy dynamic for a large cap market that has become highly concentrated in recent years.  This broadening can be further seen in performance of the equal weighted S&P 500 index, which is up ~2.4% on the year compared to the traditional market weighted S&P 500.

The charts below (from J.P. Morgan Asset Management) display the degree of concentration that has developed under the surface of the S&P 500 index.  The top ten companies in the index make up ~39.2% of the overall index’s market cap, a percentage that has rapidly risen over the course of the past decade to levels unseen over the past 30 years.  Valuations, while elevated above their averages overall, display a wide gap between the top 10 and the remaining index constituents.

Regionally, equity markets have continued the trend of foreign stock outperformance seen in 2025. Both international developed (~2.2%) and emerging markets (~5.4%) have produced higher gains than their U.S. counterparts. This phenomenon so far in the year has been despite the US dollar being relatively stable. A significant portion of the outperformance seen in international developed equities last year was due to dollar weakening relative to developed market currencies.

In fact, the MSCI EAFE Index returned ~31.2% relative to a ~23% gain in the equivalent index hedged to the dollar. The index still outperformed the S&P 500 after removing the impacts of currency, but the relative outperformance was much narrower.

The US bond market, while volatile year-to-date, is nearly flat on the year. This being after a six day swing that saw the Bloomberg US Aggregate Total Return index swing from ~0.3% positive on the year to -0.3% negative. Investment grade credit spreads rose and remain above their lows following the Greenland trade scare, but overall these spreads remain at a range below their highest points of 2025.

Greenland

In the span of less than a week, discussions surrounding the United States’ pursuit of Greenland saw a significant rise in tensions that quickly calmed following President Trump’s visit to the World Economic Forum in Davos. Tensions seemed to have eased materially following a series of negotiations that resulted in a preliminary framework agreement between the United States and several European allies.

Just days earlier, President Trump had threatened in a social media post to impose 10% tariffs beginning February 1st on imports from eight European NATO allies unless an agreement was reached regarding what he described as a “complete and total purchase of Greenland,” with rates set to rise to 25% by June 1st in the absence of a deal. Those proposed tariffs have now been withdrawn following progress toward a negotiated arrangement, signaling a meaningful de-escalation in what had quickly become a major geopolitical and market concern.

The administration has continued to emphasize Greenland’s strategic importance, citing national security, Arctic shipping routes, and critical mineral access as key motivations behind the U.S. initiative.

However, recent talks have allegedly shifted away from outright acquisition toward a broader cooperative framework involving expanded U.S. investment, enhanced military coordination, and joint resource development with Denmark and allied European partners. Greenlandic officials and European leaders, who had initially characterized the U.S. approach as aggressive and destabilizing, have acknowledged that the revised framework better respects their concerns of sovereignty while still addressing shared strategic objectives.

This diplomatic pivot was accelerated during discussions held alongside the World Economic Forum in Davos, where President Trump and senior administration officials met with European leaders to recalibrate the U.S. approach. Markets appeared to respond favorably, as the removal of immediate tariff threats reduced the risk of a transatlantic trade dispute and helped stabilize investor sentiment that had been unsettled by the prospect of escalating retaliatory measures.

Importantly, the now-withdrawn tariffs would have applied broadly to goods from the U.K., Denmark, Norway, Sweden, France, Germany, the Netherlands, and Finland, potentially undermining the trade framework agreements reached last year between the U.S., the European Union, and the U.K. Those prior agreements had capped tariffs at 15% for the E.U. and 10% for the U.K., and there was considerable uncertainty as to whether the proposed new tariffs would supersede or stack atop those existing arrangements.

Their removal preserves the integrity of those agreements and avoids reopening a highly sensitive transatlantic trade front.

European officials had previously signaled readiness to retaliate if tariffs were enacted, including a proposed package targeting up to $108 billion of U.S. imports or invoking the E.U.’s “Anti-Coercion Instrument,” a powerful and never used mechanism that could restrict U.S. access to European financial and service markets. With negotiations now progressing constructively, those measures appear to be off the table for the time being, further reducing near-term trade risk.

From a macroeconomic perspective, while trade between the U.S. and E.U. is economically significant, it does not dominate GDP for either bloc — accounting for roughly 4.8% of E.U. GDP and 3.4% of U.S. GDP in 2024. Still, avoiding renewed friction is meaningful given Europe’s role as the U.S.’s largest trading partner and source of imports, particularly at a time when markets remain sensitive to geopolitical shocks.

Further in the background remains the pending Supreme Court decision on the constitutionality of the Trump administration’s broad “Liberation Day” tariffs implemented in 2025. The ruling has been delayed multiple times, suggesting a closely divided court. Administration officials have indicated that alternative legal pathways for future tariffs would remain available even in an adverse ruling.

Overall, the shift from confrontation toward negotiation in the Greenland episode represents a constructive development for markets, reinforcing the importance of diplomacy in managing geopolitical risks that can quickly spill into global trade and investor confidence. While the recent emerging crisis seems to have stalled, it has yet to be seen how the tense episode could impact economic relations among the Western world moving forward. We will continue monitoring both the legal backdrop surrounding U.S. trade authority and evolving geopolitical negotiations for their potential market implications.

Economy

After a brief data drought due to the 43-day government shutdown last year, economic reports have returned to their regular schedules. January has already seen several key data points released regarding economic activity, inflation, and the labor market for the November and December 2025 periods. These releases are beginning to provide a clearer picture of how the economy performed to close 2025 and where it is positioned for the start of 2026.

With regards to economic activity, this month saw reported retail sales for November (0.6% vs 0.5% est) and total vehicle sales for December (16.02m vs 15.80m est) both outperform economists’ expectations. Manufacturing also showed signs of life in December, with industrial production (0.4% vs 0.1% est) and manufacturing production (0.2% vs -0.1% est) providing upside surprises.

While the advanced estimate for Q4 2025 GDP will not be released until late February, the Atlanta Fed’s GDPNow forecasting model is tracking for accelerating growth in the fourth quarter that exceeds economists’ expectations. The model is tracking for quarterly growth of 5.4% (as of January 21st) compared to current consensus forecast of 2.1%.

Thursday will see the release of the third estimate of Q3 2025 GDP which is expected to remain at the same level of prior estimates of 4.3%. These figures reflect the strength of a resilient consumer and a potential revival in manufacturing activity.

Inflation continues to be an issue top of mind for investors heading into 2026. Risks of an uptick in pricing pressures lead to concerns over interest rates for bond investors, the housing market, and for elevated equity valuations. The most recent inflation report regarding December CPI provided additional reason for optimism that pricing pressures continue to abate despite concerns over tariff pressures and resilient economic activity.

December’s core CPI number (ex-food and energy) provided the third consecutive report of year-over-year inflation that was lower than consensus estimates. The year-over-year numbers for CPI and core CPI in December were 2.7% and 2.6% respectively. Month-over-month core CPI reported 0.2% growth (0.3% est) which tracks core inflation running at roughly a 2.4% rate; above the Fed’s 2% target but tracking in the desired direction.

Alternative data sources continue to suggest moderating inflationary conditions, some suggesting surprising implications. Truflation, a privately researched index that tries to provide a real-time proxy for current inflation, is currently tracking for just ~1.4% on a year-over-year basis. Core Truflation is on pace for just ~1.5% on a year-over-year basis. While this private metric does not perfectly reflect the future results of core CPI (it can vary from it significantly), the two have trended in the same direction as seen in the chart below.

Core CPI YoY and Core Truflation YoY (Jan 2021-Jan 2026)- Bloomberg

The labor market continues to display mixed signals that currently point to an overall loosening of what were once very tight conditions. In the latest December report the unemployment rate came in better than expected (4.4% vs 4.5% est), representing an improvement from the 4.6% rate reported in November, but still among the highest levels post-pandemic. After a bounce back in November (64k vs 52k est), December nonfarm payrolls (50k vs 70k est) missed expectations.

Of note, average hourly earnings for employees have grown at a consistent pace over the past year, with the latest data reporting at a 3.8% gain year-over-year in December. While these are lower than the post-pandemic inflation surge of the early 2020’s, they remain at a level that does not suggest negative pressures on the labor market.

Another key element of the recent labor data emerges from examining the makeup of the unemployment rate.

When assessing the data based off the “status” of those in the labor force, the dominant contributor to the unemployment rate continues to be “reentrants” into the labor force as opposed to a significant acceleration in permanent job losers or temporary layoffs. While permanent job losses have picked up modestly over the past year, they remain well off their highs from the pandemic and its immediate aftermath, and in our view do not signal an alarming shift in labor market dynamics.

Federal Reserve

Dominating the conversation around the central bank and interest rate policy has been both the well-publicized pressure campaign from the Trump administration on chairman Jerome Powell and the narrowing list of candidates for his replacement in May. As discussed in previous newsletters, the decision-making process regarding monetary policy comes down to a vote among 12 members of the FOMC. While the chairman of the committee is tasked with guiding the contingent through policy discussions, his or her vote has the same impact as any one member.

The headlines regarding the tension between the President and Fed Chair is a troubling conversation, but we do not see it as a threat to the institution’s ability to set the appropriate policy for the U.S. economy. Of course, we would expect that the President’s preference will be to appoint a new Fed Chair who tilts towards the “dovish” end of the spectrum, which would continue to tilt the balance of the FOMC towards a more moderate enactment of interest rate and monetary policy.

Perhaps the irony of the current dynamic between the White House and central bank is that if current conditions and trends hold there is likely economic reason for the FOMC to continue a cautious path towards lowering the fed funds rate further.

Core inflation has and may continue to cool, and the labor market, while still healthy, has loosened. While the meeting in January is expected to see a “pause” in the cutting cycle, interest rate futures markets are anticipating another cut by the end of the summer and the potential for a second cut by year-end.

If inflation cools at the rate suggested by the Truflation metrics we displayed earlier, or the labor market shows greater weakness, there will be ample room for further moderation. At this point, however, the market seems more than content with the current expected path of monetary policy and economic variables accompanying it.

Earnings

Earnings season is well underway as results from the 4th fiscal quarter of 2025 continue to be released. Thus far, 50 companies have reported for the S&P 500, with just under half of those coming from the financial sector. Of the 50 companies that have reported, 43 of those announced positive sales growth and 39 posted positive earnings growth for the quarter. The average sales surprise has been a narrow beat of 0.95%, while the earnings surprise has been higher at an 8.7% average beat.

At this point in time, it is difficult to make any comprehensive observations on earnings performance for the overall market given the only substantial sample size on a sector or industry basis provided is from banking. However, if earnings growth were to continue at the current pace of ~18.10%, it would represent the 10th consecutive quarter of earnings growth for the index and the 5th straight quarter of double-digit earnings growth.

As for bank earnings, there are some optimistic insights regarding the consumer and business activity to take away from their recent reports. For one, Bank of America and JP Morgan saw their average loans grow 8% and 9% respectively from the year prior, signifying an increased demand from borrowers. This demand can be seen as a positive sign for the underlying economy.

Morgan Stanley, which beat on the top and bottom line, saw a 47% jump in investment banking revenue. The company stated it was “seeing an accelerating pipeline in M&A and IPOs”, another positive sign for economic activity going forward.

Of course, conversation has also turned to the surprise announcement from the White House ordering banks to voluntarily cap credit card interest rates at 10%. The President clarified at the World Economic Forum in Davos, following the initial statements from a social media post, that he was asking Congress to set the policy. Expectations are that it is unlikely for there to be enough bipartisan support to pass such a law.

Furthermore, CEO Jamie Dimon of JP Morgan declared such a policy would “be an economic disaster” that would see a drastic reduction in credit card business for Americans. The proposed policy will see much debate given the balance of dynamics at play between inflationary pricing pressures from high rates and the willingness of credit card issuers to extend credit at capped lower rates.

Overall, the tone set by the first earnings releases from banks and the overall expectations for corporate earnings broadly continue to be largely positive. Guidance for the year ahead will be held to a high standard given current market valuations. We will be paying close attention to the performance and commentary provided from the Magnificent 7 and adjacent A.I. theme, which have helped propel this market over recent years.

Furthermore, we will be monitoring as to whether real corporate performance reflects the recent broadening of stock market performance exemplified by small cap and international equity participation over the past year. This would be a healthy dynamic that would assist in continuing market momentum through 2026.

Conclusion

As we look ahead, markets continue to balance a constructive fundamental backdrop against an unusually active geopolitical and policy environment. While headlines may remain noisy and short-term volatility inevitable, the underlying pillars of economic growth, moderating inflation, resilient earnings, and increasingly broad market participation remain supportive of a favorable long-term outlook.

Risks surrounding geopolitics, inflation persistence, and policy uncertainty should not be dismissed, but history suggests that markets are ultimately driven by fundamentals rather than headlines alone. In this environment, maintaining a disciplined, diversified, and risk-aware investment strategy remains the most effective way to navigate uncertainty while participating in long-term wealth creation. We remain committed to positioning portfolios not for the next headline, but for the opportunities that unfold over full market cycles.