Strong Start but Uncertainty Looms
January delivered a solid start to the year for financial markets. Equities posted gains, economic data remained resilient, and enthusiasm around artificial intelligence continued to support key growth sectors. At the same time, outlook for leadership at the Federal Reserve, renewed geopolitical tensions, and softening consumer sentiment served as reminders that today's market environment remains highly dynamic.
A Strong Start for Markets
Equity markets began the year on solid footing, with the S&P 500 gaining 1.44% in January (year-to-date through 01/31/2026, per Bloomberg). Fixed income returns were more modest, as the Bloomberg U.S. Aggregate Index finished the month up 0.11% (year-to-date through 01/31/2026, per Bloomberg). However, we did notice pockets of the equity markets, such as AI related software companies, perform much better than the S&P 500.
Investor sentiment was supported by several favorable trends, including stable monetary policy, resilient economic data, and continued strength in technology and AI-related sectors. These factors helped maintain market momentum despite intermittent bouts of volatility.
However, strong headline returns can often mask underlying risks. This is where we believe scenario-based portfolio analysis becomes critical. In our opinion, it is important to allow advisors to understand not only how portfolios perform in favorable conditions, but also how they may respond when conditions change.
Monetary Policy and the Shifting Macro Landscape
The Federal Reserve held its policy rate steady at 3.50%–3.75% at its January meeting (per CNBC), following three rate cuts in 2025 (per CNBC). Policymakers cited steady growth and moderating inflation as justification for maintaining current policy settings.
Late in the month, President Trump announced that Kevin Warsh would replace Jerome Powell when Powell's term ends in May. While additional rate cuts remain possible, Warsh's historical emphasis on balance sheet reduction introduces uncertainty around the trajectory of future policy easing.
Meanwhile, markets experienced mid-month volatility following renewed tariff threats tied to Greenland and U.S.–EU relations. Equities sold off sharply on January 20 before rebounding after diplomatic de-escalation was announced the following day. While tensions seem to be at bay for the time being, it is a stark reminder that geopolitical risk remains, especially under the Trump administration.
Economic Data: Resilient, but Showing Cracks
We believe January's economic data largely supported the Federal Reserve's cautious stance, though several indicators warrant close monitoring.
Retail sales rebounded in November, rising 0.6% after October's decline (retail sales month over month data from Bloomberg). While encouraging, questions remain around the breadth of consumer participation.
Consumer confidence declined meaningfully, with the index falling to 84.5 (Consumer Confidence Index data from Bloomberg), which marked its lowest level since 2014 and reflects growing concerns around inflation, borrowing costs, and economic stability.
GDP data surprised to the upside, with third-quarter growth revised higher to 4.4% (quarter over quarter growth of Gross Domestic Product from Q2 2025 to Q3 2025 from Bloomberg). Inflation readings remained in line with expectations, as December CPI rose 0.3% month-over-month (month-over-month Consumer Price Index growth from Bloomberg) and 2.7% year-over-year (year-over-year Consumer Price Index growth from Bloomberg).
Taken together, the data paints a mixed picture: economic growth remains intact, but sentiment is weakening. We believe this divergence increases the risk of uneven market outcomes across sectors and asset classes.
Earnings Season and the AI Investment Cycle
January earnings from major technology companies reflected a constructive, though increasingly selective, environment.
ServiceNow, Meta Platforms, Microsoft, and Tesla all exceeded revenue and earnings expectations. At the same time, elevated capital expenditures emerged as a consistent theme, particularly related to AI infrastructure and cloud investment.
Microsoft reported moderating cloud growth, Tesla saw slowing year-over-year revenue growth, and Meta's increased spending was largely overlooked following improved full-year guidance.
While AI-related investment continues to support growth, return on capital is becoming a key differentiator between long-term winners and laggards.
In our opinion, this widening gap reinforces the importance of portfolio customization. Advisors can no longer rely solely on broad sector exposure to capture growth trends. Instead, they must evaluate how specific holdings may perform under varying adoption, spending, and profitability scenarios.
Bringing It All Together
January's strong market performance is encouraging, but it should not be mistaken for stability. Beneath the surface, shifting monetary leadership, geopolitical tensions, evolving consumer behavior, and changing corporate investment patterns continue to shape an increasingly complex landscape.
For advisors, success in 2026 will depend not on predicting a single outcome, but on preparing for many.
Scenario Planning in 2026
As we look ahead, we believe there are enough positive indicators to continue supporting equity markets. Economic growth appears to remains resilient, inflation seems to be moderating, and innovation continues to drive long-term opportunity.
At the same time, we expect a growing divide between winners and losers across sectors, regions, and individual securities. Policy uncertainty, geopolitical risks, and shifting consumer behavior will likely amplify dispersion in returns. In this environment, static portfolio models are no longer sufficient.
In our opinion, advisors need tools that allow them to:
- Test portfolios across multiple macroeconomic outcomes
- Stress-test client allocations against market shocks
- Evaluate trade-offs between risk, return, and resilience
- Adapt models as new data emerges
We believe this is not only help for client retention but also for client acquisition. We believe it provides a level of transparency and clarity that both current and prospective clients need, especially amidst uncertainty and volatility.
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