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Tune out the noise
The start of 2026 continues to deliver plenty of drama, but markets are mostly unimpressed. More geopolitical flare-ups, fresh questions around Fed independence, and a wave of affordability proposals have filled the headlines, yet equities remain steady. Market leadership is rotating and broadening as past champions fade and new ones advance. Small- and mid-cap stocks pushed to new highs during the week, while large-cap stocks paused after their recent run, a sign that investors are reallocating amid easing financial and regulatory conditions.
The Case-Shiller valuation crowd would call this blind optimism, but earnings and margin growth beg to differ. December’s economic reports took more air out of the recession and stagflation calls, and the U.S. economic resiliency endures. Let’s count the ways: Low energy prices, moderating inflation, solid growth, and broadening earnings are doing the heavy lifting, even as the news cycle barks louder. Ignore the puzzling affordability proposals from the administration; fundamentals still have the louder voice.
Markets are holding their ground
Energy is playing the role of a shock absorber recently. Oil prices briefly jumped on fears of supply disruptions tied to Middle East tensions, then quickly reversed as those fears cooled. WTI oil is near five-year lows, and gasoline prices are one of the only household expenses not testing people’s patience. Consumers continue to benefit from lower fuel costs (electricity costs notwithstanding). Oversupply projections for 2026 suggest that even renewed geopolitical stress is more likely to cause only short-term pain rather than lasting inflation pressures.
December’s inflation data helped calm consumer and economist nerves slightly. Aside from some nitpicking about unsettled government shutdown data, December’s core CPI came in softer than expected. These readings support the case that inflation is cooling. A January rate cut looks unlikely, both because the Federal Reserve said as much and because the announced DOJ investigation will prompt the committee to circle its wagons to reinforce the idea that it will not cave to political pressure.
The latest data keeps the door open for gradual easing later this spring. Market odds suggest the first cut will come in June, but additional January and February data should only strengthen the case for an April cut. Despite political noise around Chair Powell, he won’t stand in the way of data pointing toward rate cuts. He has admitted that the policy may still be slightly restrictive. After the appropriate waiting period, another cut will probably come before he leaves the Chairman's seat. Headlines don’t matter to the Fed as much as labor and inflation data, and they shouldn’t matter to you either.
Growth remains the third leg of this stool. Recent GDP momentum and resilient consumer spending point to a sustainable expansion. A coming wave of $100 billion to $150 billion in tax refunds from last year’s retroactive tax changes adds another near-term tailwind, even if it temporarily stalls disinflation progress. Housing data surprised to the upside as lower mortgage rates and slower price growth helped lift both new and existing home sales.
Corporate earnings kicked off this past week. Profits are expected to grow across sectors, with productivity gains juicing earnings faster than stagnant payrolls. The low quit and layoff rates mean that most employers have more tenured workers than at any time in the past few years, which is paying off handsomely. Banks, many of which reported this week, delivered mixed reactions to early earnings. The broader outlook for financials remains constructive, given improving loan growth and rising deal activity, but expense guidance and credit-card rate cap concerns weighed on many stocks.
Rotation Takes Center Stage
One of the most important developments so far this year has been the shift in market leadership. The narrow, mega-cap-driven rally of recent years is giving way to broader participation. Cyclicals, value stocks, small- and mid-caps, and international equities are outperforming, reflecting confidence in continued economic resilience and further Fed easing. If 2025 was the year of international stocks, 2026 might be the year of the smid-cap.
Russell 2000 +7.9% YTD
This does not mean technology or AI-related stocks are losing relevance, though. The semiconductor industry and memory stocks are sprinkled throughout the top performers of the S&P 500 year-to-date, with Sandisk showing off a blistering 74% return for January. The difference now is that there is more balance. Investors are spreading exposure beyond a single theme, which helps ease valuation pressure and improves the market’s overall health.
Within the S&P 500, as of Friday’s close:
- 350 companies are positive
- 320 companies are beating the index return (>1.19%)
- 89 companies are posting over 10% returns
- 9 companies are posting over 25% returns (7 are associated with semiconductor, AI, and memory)
What this means for investors
In the week ahead, investors should stay focused on earnings momentum, PCE inflation data, and any escalation in policy or geopolitical developments that could spill into markets. Treasury yields and rate expectations will remain sensitive to incoming data, especially signs that inflation cooling is sustainable.
The market’s message has been consistent: volatility tied to politics and geopolitics comes and goes under this administration, but market fundamentals tend to persist. Sectors such as materials, energy, and industrials are off to a strong start. But who will ultimately emerge as the winners?
Investors should be cautious about trying to pick winners in areas they don’t fully understand. Maintaining selective diversification and leaning into segments benefiting from broadening growth may prove more effective than reacting to every twist in the news cycle or every turn of the rumor mill (and there are plenty of both).
Thanks for reading — Stephen
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