The U.S. economy kept pushing forward last month, continuing its above-trend pace thanks to steady consumer spending and a strong services sector. Housing activity also picked up as lower home loan rates helped bring more buyers back into the market.

Still, not everything is moving in the right direction. Manufacturing has now shrunk for ten straight months, and while inflation has eased somewhat, it remains sticky. At the same time, the Federal Reserve is taking a measured stance on interest-rate cuts despite mounting political calls for more aggressive action.

Here’s a rundown of January’s market behavior, what’s driving the economic narrative, and where our attention is centered going forward.

Major U.S. Stock Indices

Small-cap stocks finally stepped into the spotlight at the start of 2026. After years of lagging behind the "Magnificent 7," these smaller companies surged, with the Russell 2000 beating both the S&P 500 and Nasdaq for 14 consecutive trading days.

This shift suggests investors are widening their scope, looking past mega-cap tech giants and seeking opportunities in companies tied more closely to the U.S. domestic economy. Many of these firms also stand to benefit from an improving financial backdrop.

Here’s how the major indexes performed:

• The S&P 500 rose 1.37%.
• The Nasdaq 100 added 1.20%.
• The Dow Jones Industrial Average led with a gain of 1.73%.

Economic Snapshot

The economy entered 2026 on solid footing. Third-quarter 2025 GDP reached an annualized 4.4%—the strongest reading in two years. Early indicators for Q4 suggested growth in the 3–4% range. However, momentum does appear to be leveling off. More frequent data points show activity concentrating in services and government spending rather than broad-based private-sector growth. Many economists expect the pace to normalize to around 2% throughout 2026—steady, but not booming.

Payroll data also showed signs of moderation. December saw just 50,000 new jobs, compared to an average of 168,000 per month in 2024. Most of the weakness came from manufacturing and retail. Even so, unemployment held at 4.4%, indicating a labor market that is cooling gradually rather than declining sharply.

Wage increases have calmed, but they are still outpacing inflation, which is giving consumers some financial breathing room without sparking renewed price pressures.

Headline CPI came in at 2.7% year over year in December. While closer to the Fed’s target, it’s not quite there yet. More concerning is that producer prices posted their biggest monthly jump in five months, driven in part by tariff-related cost increases.

At its late-January meeting, the Fed kept rates unchanged at 3.5–3.75% and signaled only one possible rate cut for the year. Policymakers emphasized their focus on economic data while reaffirming their independence as political scrutiny intensifies.

Manufacturing remains a weak spot. The ISM factory index stayed in contraction for the tenth month in a row at 47.9, reflecting falling orders, lower inventories, and job losses worsened by tariff pressures. Yet the services side of the economy continues to expand. Housing transactions climbed 5% in December after mortgage rates dropped, and credit spreads remain historically tight. The result is a split economic picture—goods-producing industries are softening, while consumers and service providers remain resilient.

Our Outlook

The landscape today is shaped by moderate economic growth, easing inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One encouraging sign is that market leadership is extending beyond the biggest tech names. Small caps, cyclical stocks, and other areas that lagged during the previous rally are starting to gain traction.

Still, this is a late-stage expansion, and uncertainties around policy decisions and global developments could stir periodic market volatility. We’re taking a balanced approach—carefully adding cyclical exposure where appropriate, focusing on quality companies, and keeping discipline around valuations. Preserving flexibility is also key, ensuring we can act if new opportunities arise.

As always, if you have questions or want to discuss your portfolio in light of these trends, our team is here and ready to help.