As we moved through the early part of 2026, the U.S. economy continued to grow at a pace above long-term trends, supported by steady consumer activity and a services sector that remains remarkably durable. The housing market also regained traction as lower home loan rates encouraged more buyers to reenter the market.

Still, not all indicators are moving in the right direction. Manufacturing output has now declined for ten straight months, and inflation pressures persist despite moderating slightly. To complicate matters further, the Federal Reserve is signaling a more cautious stance on future rate cuts even as outside voices push them to move more forcefully.

Below is a look at the major events from January, the trends shaping the data, and what we're watching next.

Major U.S. Stock Indices

Early 2026 brought a noticeable shift in market leadership. After spending years overshadowed by the “Magnificent 7,” small-cap companies surged, leading to a standout performance from the Russell 2000. In fact, the index outpaced the S&P 500 and Nasdaq for 14 consecutive trading days.

This rotation reflects investors’ increasing interest in domestically focused businesses, especially those poised to benefit from improving financing conditions and broader economic participation beyond mega-cap tech.

Here’s how the major indices performed:

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

Economic Snapshot

The U.S. entered 2026 on solid footing. Gross Domestic Product (GDP) for Q3 2025 reached a 4.4% annualized rate—the strongest reading in two years—while early data for Q4 suggested growth between 3% and 4%. Even with this strength, the expansion appears to be topping out. Real-time data shows that growth is becoming narrower, leaning more heavily on services and government expenditures rather than widespread private-sector momentum.

Many economists anticipate that growth will settle closer to the long-term trend of around 2% throughout 2026. While still healthy, it signals a step down from last year’s performance.

The labor market is also adjusting. December payrolls expanded by only 50,000—well short of 2024’s monthly average of 168,000—with job losses most pronounced in retail and manufacturing. The unemployment rate remained at 4.4%, pointing to a slow cooling rather than a rapid decline. Wage increases have eased, supporting purchasing power without accelerating inflation.

Inflation continues to move in the right direction but hasn’t fully reached the Fed’s target. December’s Consumer Price Index rose 2.7% from a year earlier. A notable concern is that producer prices experienced their biggest monthly jump in five months, partly due to tariffs gradually raising input costs.

Late in January, the Federal Reserve kept rates unchanged at 3.5% to 3.75% and projected no more than one additional cut this year. Officials stressed a data-dependent posture and reinforced their independence as political scrutiny ramps up.

The manufacturing sector remains under pressure. The ISM manufacturing index came in at 47.9—marking the tenth month in contraction—with soft demand, reduced inventories, and job losses exacerbated by tariff-related challenges. In contrast, services industries are still expanding, home sales climbed 5% in December thanks to lower borrowing costs, and credit spreads remain extremely narrow. These indicators highlight a split economy: goods production is struggling while consumer-facing sectors show resilience.

Our Outlook

The prevailing landscape features moderated economic growth, continued but gradual easing in inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One key development: market performance is becoming more balanced. After years dominated by large-cap technology, small-cap stocks and cyclically sensitive sectors are beginning to participate in a more meaningful way, revealing opportunities in areas that previously lagged.

At the same time, the expansion is mature, and uncertainties around policy decisions and global tensions are likely to introduce volatility. Our focus remains on maintaining exposure to areas with cyclical potential while emphasizing quality holdings, thoughtful valuations, and capital preservation. In markets like this, steering clear of vulnerabilities can be just as important as identifying promising opportunities.

If you have any questions about your portfolio or want to discuss these trends in more detail, our team is always here to help.