January 2026 Market Update

At the same time, some cracks are becoming harder to ignore. Manufacturing has now been in contraction for nearly a year, inflation—while moderating—remains above target, and the path for interest-rate cuts appears narrower than markets once anticipated.

Below is a snapshot of what unfolded in January, what’s driving the current environment, and how we’re thinking about positioning portfolios.

Market Performance: Leadership Begins to Broaden

Small-cap stocks finally stepped into the spotlight in early 2026. After years of being overshadowed by mega-cap technology companies, small caps surged, with the Russell 2000 outperforming both the S&P 500 and Nasdaq for 14 consecutive trading sessions.

This shift suggests investors are expanding beyond the largest technology names and seeking opportunities in:

• Domestic-focused companies
• Businesses with “Main Street” exposure
• Firms that could benefit from improving financing conditions

January performance for major U.S. indices:

• S&P 500: +1.37%
• Nasdaq 100: +1.20%
• Dow Jones Industrial Average: +1.73%

While mega-cap technology remains important, the broadening of leadership is a constructive sign for overall market health.

Economic Snapshot: Solid, but Slowing

The economy entered 2026 with momentum. Q3 2025 GDP grew at a 4.4% annualized pace—the strongest in two years—and early Q4 estimates pointed to 3–4% growth. That said, evidence suggests growth is gradually cooling.

High-frequency data show activity becoming more concentrated in services and government spending rather than broad-based private demand. Most forecasters expect economic growth to normalize closer to 2% over the course of 2026—still healthy, but far from booming.

Labor Market

• December payrolls increased by just 50,000 jobs, well below 2024’s monthly average of 168,000
• Job cuts were concentrated in retail and manufacturing
• Unemployment held steady at 4.4%, pointing to gradual cooling rather than sharp deterioration
• Wage growth has moderated, helping keep real incomes positive without reigniting inflation

Inflation & Interest Rates

• Headline CPI rose 2.7% year over year in December—moving closer to target, but not quite there
• Producer prices posted their largest monthly increase in five months, partly due to tariff-related cost pressures
• Goods-sector inflation has been stickier, while services inflation continues to cool

Against this backdrop, the Federal Reserve used its January meeting to reinforce a patient, data-dependent approach to monetary policy.

Federal Reserve: January Meeting Reinforces a Patient Stance

The Federal Reserve concluded its first policy meeting of 2026 on January 28 by holding interest rates steady, maintaining the federal funds target range at 3.50%–3.75% after a series of cuts late last year.

In post-meeting remarks, Chair Jerome Powell emphasized that policymakers are encouraged by progress on inflation but are not yet confident enough to declare victory. Officials continue to see a labor market that is cooling gradually without showing signs of significant deterioration, and inflation that is easing, though still above the Fed’s 2% long-term target.

Key takeaways

• Policy is not on a preset path — decisions will be made meeting by meeting based on incoming data
• Labor market conditions appear to be stabilizing, with unemployment holding near 4.4%
• Inflation pressures are increasingly concentrated in goods, while services inflation continues to cool
• The Fed views its current stance as appropriate to support both price stability and maximum employment

For households and investors, this reinforces a likely period of rate stability rather than rapid cuts. Mortgage rates and savings yields may fluctuate with broader market forces, but dramatic near-term shifts driven by Fed policy appear less likely.

Manufacturing vs. Services

• The Institute for Supply Management’s (ISM) manufacturing index remained in contraction for a tenth straight month at 47.9
• New orders are weak, inventories are shrinking, and job losses continue in manufacturing
• Services sectors remain in expansion
• Housing transactions rose roughly 5% in December as mortgage rates declined
• Credit spreads remain near historic lows, suggesting financial conditions are still supportive

In short: goods-producing sectors are under strain, while consumers and service-based industries remain comparatively resilient.

Our Outlook

The current environment is best described as:

• Tempered growth
• Ongoing disinflation
• A Federal Reserve nearing the end of its easing cycle

Encouragingly, market leadership is becoming more diversified. After years of narrow dominance by mega-cap technology, small caps and cyclically sensitive areas are beginning to participate more meaningfully. That creates opportunity in segments that were largely left behind during the prior rally.

At the same time, we are in a mature economic expansion. Policy uncertainty, geopolitical tensions, and shifting rate expectations are likely to produce periodic volatility.

Our approach remains focused on:

• Balancing cyclical exposure with high-quality holdings
• Maintaining valuation discipline
• Preserving flexibility and capital for future opportunities

In environments like this, what you avoid can matter just as much as what you own.

If you’d like to discuss how these trends relate to your portfolio or broader financial plan, we’re always happy to connect.