January brought a mix of encouraging signals and emerging pressures for the U.S. economy, setting the tone for a complex start to 2026. Consumer activity stayed strong, and service-related industries continued powering growth. At the same time, lower mortgage
rates helped revive interest in the housing market, bringing more buyers back into the fold.
However, not everything moved in the right direction. The manufacturing sector remains under strain, marking its tenth straight month of contraction. Inflation has cooled from its highs but continues to hold above ideal levels, even as political voices grow louder in calling for more aggressive rate cuts. Meanwhile, the Federal Reserve continues pacing its moves carefully, signaling patience rather than urgency.
Below is a breakdown of what shaped the markets in January, what the current indicators are telling us, and the themes we are paying close attention to moving forward.
Major U.S. Stock Indices
Early 2026 marked a long-awaited shift in market leadership. After years of trailing behind mega-cap tech names, small-cap stocks stepped into the spotlight. The Russell 2000 outperformed both the S&P 500 and the Nasdaq for 14
straight trading days—a rare streak driven by investors looking for opportunities beyond the biggest household names.
This rotation suggests a renewed appetite for companies more tied to the domestic economy—businesses that tend to benefit as borrowing conditions ease and local demand stabilizes.
Here’s how the major indices performed:
- The S&P 500 rose 1.37%.
- The Nasdaq 100 added 1.20%.
- The Dow Jones Industrial Average led the group, gaining 1.73%.
Economic Snapshot
Momentum carried over into early 2026 as the economy continued expanding at a solid pace. Gross Domestic Product (GDP) for Q3 2025 came in
at a strong 4.4% annualized—the best reading in two years. Early estimates for Q4 pointed to growth somewhere in the 3–4% range, although forecasters generally agree that growth is beginning to cool from its recent highs.
Recent data shows that gains are becoming more concentrated. Services and government spending are carrying more of the load, while broader private-sector momentum appears to be drifting toward long-term averages. Most economists expect growth to settle near 2% throughout 2026—steady, but not explosive.
The labor market also showed signs of deceleration. December payrolls increased by only 50,000, notably lower than the 2024 monthly average of 168,000. Jobs losses were mainly in retail and manufacturing, though the unemployment rate stayed at 4.4%, indicating a gradual cool-down rather than a sharp downturn. Wage growth has moderated as well, supporting consumer purchasing power without adding new inflationary pressure.
Inflation continued trending toward the Federal Reserve’s goal, with the December Consumer Price Index rising 2.7% year over year. But producer prices saw their steepest increase in five months, reflecting cost pressures tied to recent tariffs. At its late-January meeting, the Federal Reserve kept rates unchanged
at 3.5–3.75% and suggested only one additional cut is likely for the year, emphasizing reliance on incoming data and independence from political rhetoric.
Manufacturing continues to illustrate the economy’s divide. The ISM index remained in contraction territory at 47.9, with weak demand, declining inventories, and ongoing layoffs influenced by cost-related headwinds. In contrast, the services sector is still expanding, housing activity jumped 5% in December thanks to mortgage relief, and credit markets remain calm with spreads near their lows.
Our Outlook
As we look ahead, we see a landscape shaped by slowing—yet still positive—growth, moderating inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One of the more meaningful shifts: market leadership is becoming more balanced. After years of dominance from mega-cap technology names, smaller and cyclical companies are showing renewed strength, opening doors in areas that haven’t participated fully in prior rallies.
Still, this is a mature stage of the expansion. Policy uncertainty and global tensions are likely to generate swings in market sentiment. In this environment, we remain focused on maintaining exposure to high-quality businesses, balancing opportunities in economically sensitive areas, and managing risks thoughtfully. What investors avoid can often be just as important as what they choose to include.
If you have questions or would like to discuss how these developments may influence your portfolio, our team is always here to help.