Markets kicked off 2026 with some bumps, but the foundation still looks solid. January’s pullback had more to do with shifting policy expectations, sector shakeups, and global headlines than any real breakdown in the economy.

 

Earnings season started positive. We saw  earnings were up roughly 8% from the fourth quarter of 2025, according to Confluence. Even so, markets sold off late in January as investors reacted to shifting expectations around interest rates and growth.

 

A major policy development was President Trump’s appointment of Kevin Warsh as Chair of the Federal Reserve. Known for his hawkish stance, Warsh’s appointment added some uncertainty. At its first meeting of the year, however, the Fed held rates steady, describing economic growth as “solid,” unemployment as stabilizing, and inflation as “somewhat elevated.” Fed Chair Jerome Powell also pushed back on comparisons between today’s AI-driven growth and the late-1990s tech bubble, saying current conditions do not reflect “irrational exuberance.”

 

Energy markets were influenced by both corporate and geopolitical factors. The Financial Times reported that several European oil companies plan to reduce stock buybacks by 10% to 25% amid excess supply and low prices. These dynamics, combined with the arrest of Venezuelan President Nicolás Maduro in early January, are expected to have global implications. Despite these pressures, energy stocks surged nearly 15% in January, making the sector the month’s top performer.

 

Technology and AI-related stocks pulled back as investors felt hesitant on finally realizing profit within these AI companies. While this may feel like a warranted concern, let’s look at the sector around this time last year.

 

Within the first quarter of 2025, the technology sector fell sharply, losing. 13% within the first three months. However, time marched on and the technology sector finished 2025 with a 42% total return. Today, Bloomberg expects technology earnings to grow more than 30% in 2026, led by semiconductors, where earnings are projected to rise over 60%. This normal history of volatility, strong earnings projections, and a look at the chart showing a correlation of sales to returns, we are still optimistic on the technology sector, especially within the AI realm.

 

 

Sector performance in January broadened, but varied. Technology and financials declined at 1.7% and 2.4%, reported. materials gained 8.7%. Energy and materials, however gained nearly 15% and 8.7%, respectively. Eight of eleven S&P 500 sectors finished the month higher, and all sectors remain positive over the past year.

 

Labor market data continues to signal resilience. Jobless claims remain low, layoffs are limited, and payroll growth is tracking close to expectations. The Atlanta Fed estimates fourth-quarter GDP growth at 4.2%, supporting the view that economic momentum carried into the new year. Unemployment is expected to remain in the low-4% range, little changed from December.

 

Market returns reflect this balance between strength and uncertainty. Year-to-date, the Dow is up 1.8%, the S&P 500 has gained 1.5%, and the Nasdaq is up 1.23%. Over the past year, the Dow is up 10.8%, the S&P 500 is up 15.8%, and the Nasdaq is up 19.7%

 

Looking ahead, it should be noted that February is historically a weaker month, with average gains of less than 0.2%, according to Argus Research. Volatility is normal, and we see the following as the broad setup: profits are growing, valuations are reasonable, the economy is expanding, and interest rates are likely to trend lower over time. While setbacks are likely, our outlook for 2026 remains optimistic.

 

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