The new year is off to an exciting start, with plenty of turbulent headlines to help thicken the plot. Markets continue to grind higher despite all the noise, and January delivered reasonably positive returns to start 2026. The old axiom “as January goes, so goes the year” would hint that we can be cautiously optimistic that this year should have a profitable outlook for investors.

For those who crave excitement

During the first month of 2026, we encountered a very long list of challenging headlines: a U.S. invasion and regime change in Venezuela, a short verbal skirmish around potential invasion of Greenland, a deficit/budget/interest rate scare in Japan, another round of possible conflict with Iran, ongoing weakness in Labor Market data, the parabolic rise and fall of silver prices as part of a “debasement trade” against the U.S. dollar, and escalating social unrest around ICE activities.

As a big finish, just as the month ended, we learned that Kevin Warsh has been picked by President Donald Trump to succeed Jerome Powell as chair of the Federal Open Market Committee (FOMC) – a move that gave the markets a moderate surprise due to his past reputation for being “hawkish” on inflation.

It was an astounding flow of challenging headlines for investors – yet the S&P 500 managed to touch a new all-time high late in the month and finished January with a 1.4% gain.

Resilience in the face of turbulent geopolitical headlines

The U.S. is currently dealing with military and political challenges in several regions around the globe. Additionally, the global tariff program is still awaiting a decision from the Supreme Court, which will add more complexity to already shifting markets.

The capital markets are remaining quite steady in the face of these many uncertainties, which is both surprising and comforting. The financial markets are indicating that the Supreme Court may strike down the existing tariff program, but investors are also assuming that backup plans are in place. It is presumed that we will, ultimately, move forward with some type of tariff package that is very similar to the current program (with roughly 15-18% average rates).

We have continued to receive confirmation of our long-held thesis: regional geopolitical (even military) skirmishes seldom are substantial enough to impact the global economic outlook, and, therefore, don’t typically have meaningful long-term impacts on the financial markets. A large-scale military conflict with Iran (or China) could be meaningful enough to bring turbulence to the global financial markets.

There are also some encouraging signs within the U.S. large-cap market. The “Magnificent 7” (Mag 7) group of tech companies are no longer moving in lockstep. Several companies in the group (Microsoft being the most notable) were down during January, while the others were up (Google the most notable). This dispersion of results is a healthy sign that the market is placing more rational valuations on companies, and not simply piling money indiscriminately into the artificial intelligence (AI) space.

We are in the midst of earnings season, with several Mag 7 companies beating estimates. Earnings growth is expected to be broad-based this quarter (outside of the Mag 7), and this should help support a broadening of market leadership.

Economic challenges for the FOMC

The economy continues to generate reasonably strong growth, but is clearly benefitting from very robust consumption by the wealthiest households. Additionally, capital expenditure in the corporate space is heavily reliant on the largest AI-related companies – a trend that should continue to drive activity and earnings for the immediate future.

Beneath the surface, there are still issues in the labor market. Job creation (payrolls) continues to crawl along at extremely low levels, and it appears that household spending growth is outpacing income growth. This has resulted in falling savings rates for the average household, with savings rates near the bottom end of what is considered to be a normal/healthy range.

Housing affordability is very poor, and several measures of consumer sentiment indicate that the average household is feeling the pressure of slow wage growth and rising living costs. We expect (along with many other firms) to see a period of below-average growth during the first half of 2026. This is a sub-optimal situation for the broad economy and gives the Fed plenty of justification for trying to push rates lower (to help stimulate broad activity).

Inflation remains elevated, and the full impact of the impending tariffs has not been felt yet. In fact, inflation could rise further from here. Consequently, the Fed must remain “data dependent” and reactive to what they learn over coming months. There are several Fed members (plus the Administration) that advocate strong proactive moves to stimulate activity before the economic data worsen any further.

The challenge to this approach is that it would risk over-heating the economy if they move too soon or cut too far (or both). At this time, the Fed appears nearly evenly divided in the proactive/reactive argument. For now, they appear to be dedicated to a slow, measured pace for rate cuts.

We expect economic activity to be soft enough that the Fed will cut rates twice in 2026 to 3.25%. This should be enough to give the broad economy a very modest boost, helping to stabilize activity at our normal GDP growth rate of 2.00%.

Outlook and summary

The U.S. economy appears to be headed for a brief below-average patch, and the labor market continues to face challenges. Economic growth continues to be driven primarily by the wealthiest households and AI-related corporations. Inflation is still too high, but the FOMC believes it will taper off on its own in 2026. Monetary and fiscal stimulus should help broaden economic growth to a wider group of households as the year transpires. We have become a bit more optimistic that we are headed for more stable, sustainable economic growth as we move through 2026.

The equity markets should be bolstered as interest rates head lower. We have elected to modestly increase our equity exposure, back to our longer-term target of 3% overweight equities. However, due to better valuation and growth outlooks, we have allocated the overweight to the international space, seeking to take advantage of better valuations and long-term growth prospects. Additionally, this may provide some moderate protection against ongoing devaluation of the U.S. dollar, which seems to be a durable trend.

We are here to provide our clients with peace of mind about their financial future. Anchoring to a sound, long-term financial plan will help everyone weather storms like these. We will remain disciplined, and consistent in our strategies and philosophies. We are confident that together we will manage our way through this (hopefully brief) challenging time.

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