Fixed Income & Equities Markets Week in Review

US equities posted gains during the first full week of 2026, as investors balanced focus on the path for interest rates, the latest economic data, earnings expectations, and valuation.

Hopes for declining interest rates remained a primary focus. Treasury yields were volatile throughout the week as investors recalibrated expectations for Federal Reserve (Fed) policy. While inflation data continued to show gradual progress, it was not decisive enough to materially shift the market’s view on the timing of potential rate cuts. In addition, Friday’s December non farm payrolls data showed that while job growth has slowed, it may not be slow enough to push the Fed to lower rates.

Incoming economic data this week reinforced the narrative of a stable US economy. Labor market data suggested continued cooling but without signs of stress, while consumer and manufacturing indicators showed a mixed message. The takeaway was that data may not be compelling enough to motivate the Fed to continue lowering rates before Fed Chair Powell steps down and is replaced with a new Fed chair this year.

Fourth quarter 2025 earnings season is set to get underway next week. As such, investors are focusing on the information that will be shared from corporate America. For 4Q 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is 8.3%. That compares with the estimated growth rate of 7.2% at the beginning of the quarter (on September 30th). Nevertheless, focus is less on backward-looking results and more on forward guidance. Companies with clear revenue growth, margin visibility and stable demand are likely to be rewarded. Next week, 14 of the S&P 500 companies will report results, with the bulk of news coming from the financial services sector.

During the week, there was ongoing concern about narrow market leadership. Mega-cap stocks continued to exert influence on index performance, while small- and mid-cap stocks struggled to gain traction. Sector rotations reflected short-term positioning rather than a clear change in leadership.

As we start down the path of 2026, there are catalysts that could keep this bull market in place. However, disappointments relative to expectations on these topics could also trigger volatility. The market has become expensive during this multi-year run. The price/earnings (P/E) ratio for the S&P 500 is 21.8x forward earnings expectations, versus the 10-year average of 18.7x. Thus, the market is essentially “priced to perfection.” With much of the good news already factored in, there is little room for disappointment. Some of the “moving parts” to keep in mind relative to expectations during the coming year include: 1) stimulus benefits from the “One, Big, Beautiful Bill”, including a surge in tax returns; 2) the Fed’s potential path for interest rates; 3) the path of inflation; 4) labor market trends; 5) economic data; 6) tariff negotiations and outcomes; 7) AI’s growth and profitability trends; 8) visibility for corporate America’s earnings growth; and 9) consumer spending patterns.