The U.S. economy continued to move forward last month, maintaining an expansion that surpassed its long‑term trend. Strong household spending and steady performance across service industries played a central role in sustaining this momentum. The housing market also regained traction as declining mortgage rates encouraged more buyers to reenter the market.

Still, there are growing signs of strain beneath the surface. The manufacturing sector has now contracted for ten straight months, and although inflation has cooled from its peak, it remains higher than policymakers would prefer. Adding to the complexity, the Federal Reserve continues to signal caution on rate cuts even as political pressure intensifies for a more aggressive pivot.

Below is a breakdown of the major developments from January, what’s driving them, and where we are concentrating our attention moving forward.

Major U.S. Stock Indices

Early 2026 marked a long-awaited resurgence for small‑cap equities. After years of lagging behind the so‑called “Magnificent 7,” smaller companies staged an impressive rally. The Russell 2000 outpaced both the S&P 500 and the Nasdaq for an unprecedented 14 consecutive trading days.

This shift suggests investors are beginning to look beyond mega‑cap tech, seeking opportunities in companies tied more closely to the domestic economy. These smaller firms may benefit from improving lending conditions and tend to be more sensitive to economic inflection points.

Index performance for the month:

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

Economic Snapshot

The economy entered 2026 with substantial strength. Third‑quarter 2025 GDP reached an annualized 4.4%, the strongest in two years, and fourth‑quarter estimates pointed to a still‑solid 3–4%. Even so, this pace appears to be leveling off. Recent real‑time indicators show growth becoming more concentrated in services and government activity, rather than across a wide range of private‑sector contributors.

Most economists expect growth to cool toward roughly 2% over the course of 2026—a pace consistent with the broader trend. It’s steady and sustainable, but not particularly fast.

Labor market data reinforced the theme of gradual softening. December payrolls increased by only 50,000 jobs, well short of 2024’s monthly average of 168,000, with reductions especially pronounced in manufacturing and retail. Even so, unemployment held at 4.4%, signaling moderation rather than a sharp downturn. Wage gains have slowed but continue to support real purchasing power, helping consumers maintain spending habits without reigniting inflation.

December’s Consumer Price Index rose 2.7% over the previous year—close to but still above the Fed’s target. Meanwhile, producer prices jumped the most in five months as tariff‑related impacts made their way through supply chains.

In its late‑January meeting, the Federal Reserve kept interest rates unchanged at 3.5–3.75% and indicated that perhaps only one additional cut may occur in 2026. Officials emphasized a data‑dependent stance and reiterated the importance of central‑bank independence amid rising political pressure.

Manufacturing remained a weak spot, with the ISM index registering 47.9 for the tenth consecutive month of contraction. New orders, inventories, and employment all pointed to ongoing challenges, worsened by tariff‑related cost pressures. In contrast, service‑sector activity continued expanding, housing transactions climbed 5% in December as mortgage rates declined, and credit spreads remained historically tight. These dynamics reflect an economy with two diverging paths: strained goods production alongside still‑healthy consumer activity.

Our Outlook

As we progress through 2026, the landscape is shaped by moderate economic growth, steady disinflation, and a Federal Reserve approaching the end of its rate‑cutting cycle. One notable shift is the broadening of market leadership. After an extended period dominated by mega‑cap technology stocks, smaller companies and cyclical sectors are beginning to regain relevance.

At the same time, we remain in the later stages of the expansion. Policy uncertainty and global tensions may spark periodic volatility, so maintaining balance is essential. Our approach prioritizes high‑quality companies, disciplined valuations, and selective exposure to cyclical opportunities. In conditions like these, avoiding unnecessary risks is often just as important as pinpointing the right investments.

If you have questions about your portfolio or any of the market developments discussed above, our team is always here to help.