January 2026 Market Commentary

January 14, 2026

• Federal Reserve cuts rates for third consecutive meeting.
• Third quarter GDP grew at an annualized rate of 4.3%
• November Returns: S&P 500 -0.1%. Bloomberg US Aggregate Bond index -0.2%.

Markets closed out another strong year on a relatively quiet note. Though an awaited Santa Claus rally failed to materialize, investors were nonetheless treated to a strong year of returns in 2025. In the US, the S&P 500 returned 16.4%, marking its third consecutive year of double-digit returns. The Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) once again led the way, up a collective 22%. However, within the vaunted group, there was notable return dispersion as Alphabet surged 65%, while Amazon gained just 5%. The dispersion reflected investors increased scrutiny of companies’ progress and promise with artificial intelligence (AI). In 2025, investors became more sensitive to Mag 7 valuations, leading to periodic bouts of volatility. Investors also became more attuned to the potential return on investment (ROI), or lack thereof, on the hundreds of billions of dollars spent by Mag 7 companies on AI infrastructure. In 2026, investors will likely become even more discerning, which could benefit those companies demonstrating a clear link between their AI investments and revenues.

International market returns were particularly strong in 2025 with developed markets (MSCI EAFE index) up 27.9%, their best year since 2003 and emerging markets (MSCI EM index) up 30.6%, their best year since 2017. International markets benefitted from multiple factors including attractive valuations, US dollar weakness, and fiscal stimulus and other policy initiatives in a number of countries including Germany, Japan, and China.

December continued to see the release of important economic data previously delayed by the government shutdown, including third quarter GDP, along with employment and inflation data. Third quarter GDP surprised to the upside, growing at an annualized pace of 4.3%. That easily exceeded the 3.3% consensus forecast and was 0.5% faster than the 3.8% pace recorded in the second quarter. Growth was led by consumer spending which grew at an annualized rate of 3.5%, its fastest pace since fourth quarter 2024. Demand was strong for both goods and services, which rose 3.1% and 3.7%, respectively. Trade and government spending were also positive contributors. Business spending was the notable laggard, shrinking 0.3%, marking the third time in the past four quarters in which business spending has fallen. The decline resulted from a small contraction in inventories, which offset a small increase in fixed investment.

Due to the government shutdown, no inflation data was recorded for the month of October. November inflation data showed headline consumer prices rose just 0.2% from September and 2.7% from a year ago. Core CPI, excluding food and energy, slowed from 3.0% in September to 2.6% in November, the slowest pace of growth since March 2021. Some investors viewed the data as being indicative of relatively benign inflation conditions, despite ongoing concerns about the potential impact of higher tariffs. Others, however, saw artificially weak inflation data distorted by the delayed collection of prices until the second half of November, when retailers were discounting items for the holiday shopping season. December’s data should be relatively free from government shutdown related distortions, providing better insights into the current state of inflation.

Employers added 50K jobs in December, bringing total new hires in 2025 to 584K, far below the 2.0M hired in 2024, and the slowest pace of job growth since 2020. Unemployment did, however, fall 0.1% to 4.4%, aided by a small decline in the labor force participation rate which fell to a four-month low. One interesting data point that bears watching in 2026 is the number of people employed part time for economic reasons. That number rose by 980K over the course of 2025 to 5.3M, the second-highest level since 2021, following November’s 5.5M reading. According to the Bureau of Labor Statistics, these are individuals who would prefer full-time employment but are working part time because their hours have been reduced or they are unable to find full-time jobs. The rise in this category is indicative of weakening labor market conditions.

Given ongoing concerns about inflation and labor market conditions, all eyes were on the Fed as it met in early December. Without the benefit of third quarter GDP data, or November inflation and employment data, all of which were released after the meeting, the Fed had the unenviable task of having to make monetary policy decisions without access to the full complement of data to which it is accustomed. Nonetheless, as expected, the Fed cut rates by 0.25%, lowering the fed funds rate to a range of 3.50-3.75%. Reflecting both the current ambiguous nature of inflation and employment data as well as the diverse range of viewpoints held by the various Fed members, for the first time since 2019, three members objected to the Fed’s decision. Of those three, one voted for a 0.50% rate cut. The other two voted to leave rates unchanged, concerned about the potential for higher inflation.

The Fed also updated its Summary Economic Projections (SEP) showing it now expects 2026 GDP growth of 2.3%, up a full 0.5% from its prior forecast of 1.8%. Core PCE inflation is now expected to end 2026 at 2.5%, down from the prior forecast of 2.6%, while the outlook for unemployment remained unchanged at 4.4%. Overall, the projections pointed to relatively constructive economic conditions, despite ongoing uncertainties.

Speaking at his post-meeting press conference, Fed Chair Jay Powell, addressed the two components of the Fed’s dual mandate- inflation and labor markets- saying, “In the near term, risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. There is no risk-free path for policy as we navigate this tension between our employment and inflation goals.” Having cut rates by 0.75% since September, Powell described the current level as “within a broad range of estimates of its neutral value” leaving the Fed “well positioned to determine the extent and timing of additional adjustments based on the incoming data.” A Santa Claus rally is the tendency for stocks to rise during the last five trading days of December and first two trading days in January. Since 1950, the S&P 500 has risen about 78% of the time over these seven trading days with an average return of ~1.3%. In 2025, a rally failed to materialize with the S&P declining 0.4% over the seven days. For the month of December, large cap stocks (S&P 500) were essentially unchanged, down 0.1%. Small caps (Russell 2000) were down 0.7%. International markets capped a strong year with solid returns as developed markets (MSCI EAFE) rose 2.9%, while emerging markets (MSCI EM) gained 2.7%.

Like equity markets, bond markets capped a solid year with muted December returns. The Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, shed 0.2% in December, but gained 7.3% in 2025, marking its best year since 2020. Within bonds, corporate high yield bonds were the best performing sector, up over 8% reflecting their greater correlation to equity markets. Municipal bonds gained 4.3%, a notable achievement given record issuance estimated at ~$575B.

December witnessed a steepening of both the treasury and muni yield curves with the short ends falling and the long ends rising, reflecting both Fed’s interest rate moves in the near term and continued longer-term concerns about elevated inflation and higher debt levels.

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