January Market Update

With 2025 now behind us, some clear takeaways have emerged: headlines, policy proposals, and new technologies can cause markets to move quickly in the short term. Declining markets cause emotions to run high but can also create opportunities.

As we settle into the new year, the economy continues to  show signs of resilience, and corporate earnings growth  remains robust. The U.S. economy is likely to remain in  growth mode in 2026, as it benefits from fiscal stimulus and  potential continued easing from the Federal Reserve (Fed). 

Corporate executives have confidence in the long term, as evidenced by increased M&A activity and the strength of earnings growth from the S&P 500. While valuations entered the year elevated compared to historical averages, the combination of economic growth, earnings growth, and increased corporate spending on deals and technology should provide a supportive backdrop for investors.

Of course, risks remain. Policy uncertainty isn’t likely to go away. Plus, the Fed’s focus on its dual mandate of employment and inflation has led to divisions among the voting members of the Federal Open Market Committee (FOMC) and creates an unclear picture of how aggressive the central bank may be when cutting rates in the upcoming year.

Foreign risks remain as well, with ongoing conflicts in Europe, the Middle East, and the recent actions in Venezuela serving as continued sources of regional instability. While U.S. markets tend to react to these types of risks only when they impact the U.S. economy and corporate earnings, these sources of geopolitical uncertainty should be monitored, as they could negatively impact markets in the future.

Despite the risks, a dramatic shift in the big picture doesn’t appear likely. A modest economic slowdown is anticipated to start 2026, with a rebound later in the year. The slowdown in the labor market will be felt in the first half of the year and will have an impact on consumer spending. But strength in the high-end consumer and continued spending on artificial intelligence (AI) buildout should keep growth in positive territory in the early part of the year. The 75 basis points of Fed easing in the fourth quarter and stimulus from the One Big Beautiful Bill Act should power growth in the second half of the year.

As it pertains to the market, we remain in a pretty good place to start the year. Market fundamentals were impressively resilient throughout the course of 2025, with further improvements expected for corporate earnings. Risks always exist. Despite them, the economic background is still supportive for investors. The most likely path forward remains continued economic and earnings growth leading to market appreciation in the year ahead, despite the potential for short-term setbacks along the way.

We believe that the AI theme has legs to it and that an allocation to technology and large-cap growth remains key to portfolio construction. We also continue to believe that diversification will play an important role. Owning some areas composed of value companies, mid- and small-cap companies, and international holdings should help navigate volatility in the AI names.

There is also a place for fixed income in a well-diversified portfolio. Current yields on high-quality bonds may give clients the chance to lock in income in the intermediate part of the curve. As they have done historically, we believe bonds should continue to act as a buffer during periods of equity market volatility.

This year will surely bring a new set of surprises to consensus views. As we learned in 2025, these periods tend to be full of investment opportunities. While short term headlines may introduce volatility, staying focused on big-picture fundamentals provides a clearer guide for portfolio decisions and opportunities to take advantage of these periods.