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Due to the delayed economic reports caused by the baby government shutdown at the start of the month, this past week delivered a rare week where markets had to process everything at once. Investors were digesting fresh data like Cool Hand Luke on egg night.
Throughout the week, we got new data on consumers, jobs, inflation, and policy expectations while also confronting a fresh wrinkle in the AI story: Will AI reshape corporate earnings even across high-flying industries? It turned into a volatile week that pushed equities lower at the same time that underlying economic fundamentals began to show gradual improvement.
Major U.S. indices finished in the red, with technology leading the pack into the red. The Nasdaq Composite fell 2.10%, while the S&P 500 and Dow Jones Industrial Average declined 1.39% and 1.23%, respectively. Mid-cap stocks held up relatively well, with the S&P Mid-Cap 400 slipping only 0.66%. Notably, value stocks continued to outperform growth for a seventh straight week, extending the leadership gap even further. Beneath the surface, flows continued to rotate toward defensive and cyclical areas such as utilities and producer manufacturing, while technology services, commercial services, and financials lagged.
International continues to shine as well. Developed and emerging markets equities are both leading in performance over domestic indices. If you aren't taking international diversification seriously yet, then you just aren't a serious person.
Source: Bloomberg via Daily Chartbook
Bond markets told a calmer story. Treasury yields moved lower over the week, with the 10-year yield touching a new year-to-date low as investors rotated toward safety during equity volatility. Investment-grade credit produced positive returns but trailed Treasuries. High-yield bonds remained relatively resilient. Taken together, markets are becoming far less concerned about possible economic deterioration and more focused on uncertainty around market positioning and valuations.
A busy week for the economy
The week’s economic releases offered a mixed but ultimately constructive view of the U.S. economy. Consumer spending is showing signs of fatigue after a strong run through 2025. December retail sales were flat, and control group sales declined modestly, suggesting real consumption softened at year's end. Spending has been consistently outpacing income growth, and many households are reducing their savings rate or subsidizing spending from existing savings to close the gap. It was inevitable that consumers would hit the wall and pause to rebuild savings or at least stop the bleeding.
Looking ahead, income growth could improve in the short term. Tax changes passed last year are expected to boost household cash flow through refunds and adjusted withholdings in 2026. The labor market is showing tentative signs of stabilization after a period of nearly two years with dismal hiring.
January payrolls surprised to the upside, with employers adding 130,000 jobs. Private payroll growth was even stronger once federal job cuts were excluded. The nonfarm payroll revisions were also revealed, and it was ugly. Job growth throughout 2025 was nearly non-existent, with only 181,000 jobs created. If the January jobs growth doesn’t get revised away (A BIG IF!), it will mean the economy produced 70% as many jobs in January as the entire year prior.
The strong start to 2026 sets a positive tone and removes some pressure from the Federal Reserve to keep up the cutting cycle. Supporting the positive turn was the falling unemployment rate, which declined to 4.3%. Now, there are still plenty of headwinds, including the lack of non-healthcare jobs being created, but January was an improvement in that area, too.
Only 181,000 net new jobs were created in 2025
Inflation data reinforced the idea of slow but steady progress. Headline CPI rose 0.17% month-over-month and slowed to 2.39% on an annual basis, helped by falling energy prices. Core inflation remained firmer at 0.30% for the month, but still clocked the lowest annual reading since March 2021 (2.50%). The path back to 2% is likely to be uneven and isn’t likely to be achieved in 2026. Shelter inflation continued to ease but may prove to be a long-lived distortion from the October government shutdown. New owner equivalent rent data will filter through in April and October. Until then, we may be underestimating the inflation rate.
Tariff-related price pressures remain visible in goods inflation, which remained persistent after excluding the large drop in used vehicle prices. Still, the overall trajectory points lower, even if the path gets bumpy through the summer. With both labor and inflation data showing more positives than negatives, the fears of stagflation from last summer are a distant memory.
The stock market plays musical chairs
Stronger labor data and still-elevated core inflation will reinforce the Federal Reserve’s patient stance. Rate-cut odds fell throughout the week, with investors increasingly assuming policy will remain on hold for the foreseeable future. The improving labor backdrop reduces urgency for easing, even as inflation trends move in the right direction. Excluding outright bad labor market data, rate cuts may perpetually be “one or two meetings” away until inflation is clearly shaking off tariffs and other distortions.
Tragically, improving macroeconomic data did not translate into stronger equity performance. Volatility increased as investors rushed to reallocate out of AI-impacted industries and into the new HALO trade: Hard Assets, Low Obsolescence. Mega-cap technology stocks led declines, with the Mag 7 down roughly 2% for the week and nearing a 7% loss for the year to date. IT Services companies have been crashing for weeks, and the pain is spreading. Concerns about AI disruption are no longer relegated to technology, triggering selling in financial services, insurers, real estate, travel services, and transportation companies.
At this stage, those fears remain largely speculative. There is little evidence of meaningful revenue disruption, and many companies with falling stocks are still producing strong earnings. However, markets are forward-looking, and the rapid repricing suggests investors are beginning to question concentration risks and long-standing winners. The shift toward utilities and other defensive sectors, alongside demand for Treasuries, highlights a market transitioning from momentum-driven leadership toward broader participation and higher selectivity.
Other assets: precious metals and cryptocurrencies experienced sharp swings but ultimately stabilized alongside equities late in the week. Oil prices remained range-bound as supply concerns and softer demand expectations offset one another.
What’s next and what it means for investors
The coming weeks will test whether improving fundamentals can stabilize the panicky investor sentiment. Markets should focus in the next few months on confirmation that labor market momentum continues and that inflation keeps grinding lower. Reacceleration is a real possibility from tax-refund-induced buying, but that should be temporary if it manifests at all. Policy expectations remain highly sensitive to incoming data, meaning volatility is likely to persist even if the broader economic trend stays steady. Don’t count out new (and unaccounted for) domestic or international geopolitical risk either.
Source: Duality Research vis Daily Chart Book
For investors, the message is to balance rather than outright retreat. Economic conditions support continued earnings growth, but leadership is broadening, and rotations are becoming more abrupt. Diversification across sectors, market capitalizations, and regions looks increasingly important as concentration risks fade and new winners emerge.
The market is not signaling recession. Instead, it appears to be adjusting to a world where growth is steadier, policy easing is slower, and technological disruption is the new uncertainty. So be forewarned, these combinations may produce choppier markets, but they also create opportunities for patient investors who are willing to look beyond short-term or oversold swings.
