Monthly Market Update – January 2026

Stocks Start 2026 Hot — Even as Winter Weather Chills Much of the World

The new year delivered a surprisingly warm start for global investors—even as frigid temperatures swept much of the Northern Hemisphere. January’s market performance suggested 2026 may break from the hyper narrow, tech-led narratives of recent years. Instead, investors are navigating a more complex landscape defined by shifting leadership, geopolitical surprises, and policy uncertainty. Yet despite the noise, markets held up well, and most major asset classes were up in the first month of 2026.

Key Takeaways

• U.S. ECONOMY SHOWS LITTLE SIGN OF SLOWING The U.S. economy grew faster than expected in the third quarter of 2025, the best in two years, thanks to surging exports and increased business investment. Everyday spending by consumers remained solid at 3.5%, continuing to power most of the growth.
• GDP GROWTH POINTS TO PROMISING RETURNS If real GDP holds near 3%–4% and inflation stays around 2%–3%, nominal GDP could grow 5%–6% in 2026—a backdrop historically aligned with solid corporate earnings gains and double-digit market returns. 
• WHAT’S DRIVING THE U.S. ECONOMY? Despite concerns that AI spending is the only thing keeping the economy afloat, recent data shows the U.S. economy is broadly healthy. While AI investment has certainly boosted growth, consumer spending remains the main driver—just as it typically does during expansions.
• ARTIFICIAL INTELLIGENCE: BOOM, BUBBLE OR BOTH?  AI is broadly recognized as a long‑term growth engine, with revenues expected to climb more than 30% per year. While some worry about an AI bubble, Capital Group argues we’re still early in the cycle—more like 1998 than 2000—leaving AI room to run.
• CONSUMER CONUNDRUM Consumer confidence unexpectedly dropped in January to its lowest level since 2014. Notably, this contrasts with the University of Michigan’s Consumer Sentiment Index, which actually improved in January. The two surveys have diverged in the past because they measure different things.  
• WATCH WHAT THEY DO NOT WHAT THEY SAY Despite weak consumer confidence surveys, real‑world economic data tells a different story. Hard data show that consumers have been spending at surprisingly strong levels since mid‑2025.
• MIDTERMS MAY MEAN MESSY MARKETS Markets have historically behaved differently in midterm election years, often posting weaker returns and incurring more volatility in the first half of the year before improving closer to Election Day. Investors shouldn’t be surprised to experience some turbulence.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of January 31, 2026. Performance figures are index total returns: U.S. Bonds (Barclays U.S. Aggregate Bond TR), U.S. High Yield (Barclays U.S. HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

A Broader Rally Takes Shape

If there was one theme that defined equity markets in January, it was broadening. After years dominated by a handful of mega-cap U.S. tech giants, leadership shifted noticeably.

U.S. Stocks: Small Caps and Value Take the Lead

While the S&P 500 rose another +1.5%—its ninth straight monthly gain—smaller and cheaper stocks took center stage.

• Small caps jumped +5%, outpacing larger peers.
• The so-called “Magnificent Seven” mega-cap names gained less than +1%.
• Value sectors surged, especially Energy, which soared +14.4% as geopolitical events pushed crude prices sharply higher.
• Tech, meanwhile, fell for the third consecutive month, as investors grew more selective about paying premium valuations for future growth.
  

The rotation shows how quickly market leadership can shift—and why diversification, underappreciated in recent years, is back in fashion.

International Stocks: Emerging Markets Shine

Outside the U.S., the picture was even brighter.

• Emerging markets jumped +8.9%, helped by a weaker U.S. dollar.
• They beat developed-market international stocks by the widest margin since mid-2025.
• The MSCI EM Index even notched its first record high since 2021.

Bonds: Muted Moves, but Global Bonds Get a Lift

Bond investors saw a more subdued January.

• The 10-year Treasury yield ticked up to +4.24%, while the two-year rose to +3.52%.
• The Bloomberg U.S. Aggregate Bond Index posted a slim +0.1% gain, with mortgage-backed securities leading.
• Global ex-U.S. bonds rose +1.6%, lifted in part by the weaker dollar.

Japan grabbed headlines early in the month as its government bond (JGBs) yields spiked to decades-high levels amid fiscal concerns, before easing in late January. With Japan’s February 8 election ahead, markets will be on alert for potential shifts in fiscal policy or bond supply.

 2025 Rotation Continues Through January 2026

January 2026 Total Return (%)

Source: Bloomberg. Data as of 1/31/2026.

Dollar and Commodities: A Weak Dollar, Surging Oil

The U.S. dollar continued its late-2025 slide, falling another –1.4% in January and touching its lowest level since early 2022. A narrowing U.S.–global interest rate gap and ongoing policy uncertainty weighed on the currency.

Commodities, meanwhile, staged an impressive rally:

• The Bloomberg Commodity Index surged +10%.
• Brent crude jumped +13%, rebounding sharply from a five-year low as geopolitical risks—including tensions involving Venezuela and Iran—intensified.

Economy and the Fed: Solid Data, Steady Rates, New Fed Chair Nominee

Economic data generally came in better than expected.

Economic Highlights

• Unemployment fell to +4.4%, even as payroll gains underwhelmed.
• Manufacturing heated up: ISM Manufacturing rose to 52.6, its first expansion in 11 months.
• The “New Orders” index—often a forward-looking signal—posted its biggest jump since 2020.
• Inflation held steady: headline CPI at +2.7%, core at +2.6%.

Consumers were more conflicted. Confidence fell to its lowest level since 2014, but sentiment—another gauge—bounced from near-record lows.

Fed Holds Steady, Warsh Nominated as New Chair

The Federal Reserve kept interest rates unchanged at 3.50%–3.75%, with two members voting for cuts. The central bank reiterated that future easing will be gradual and data-dependent.

President Trump’s nomination of former Fed Governor Kevin Warsh as the next Fed Chair ended months of speculation. Markets expect Warsh to be measured rather than aggressive on rate cuts or balance-sheet policy.

Elsewhere, central banks in Canada and Japan also left rates unchanged.

Geopolitics: A Mounting Source of Market Noise

January’s headlines were packed with geopolitical tensions—from the U.S. operation to depose Venezuelan President Maduro and President Trump’s Greenland-related tariff threats. These developments contributed to currency volatility, oil price swings, and increased uncertainty around global growth. For now, markets appear resilient, but geopolitical uncertainty remains a consequential wildcard.

Looking Ahead: Settle in, but Buckle Up

Heading into the year, expectations for steady U.S. economic growth, improving corporate earnings, and gradual Fed rate cuts remain supportive for stocks. Extended valuations and elevated levels of leverage remain as downside risks. 

The market has a fair amount of momentum behind it as the first month of 2026 concludes. Tailwinds outnumber headwinds with more rate cuts on the horizon, tax rebates from the One Big Beautiful Bill right around the corner, as well as economic and earnings strength forecasted for the remainder of the year. As long as trade tensions, energy shocks, or economic surprises don’t derail the picture, markets have the backdrop to sustain further gains.

Still, with leadership shifting and risks elevated, a diversified, strategic portfolio approach matters more than ever. February has traditionally been a seasonally weak month, and midterm election years have been historically weak. February is one of just two months (September is the other) that is negative on average since 1950 over the trailing 10- and 20-year periods. And as discussed in the “Midterms May Mean Messy Markets” section below, midterm elections years have historically resulted in relatively lower returns and higher volatility than non-midterm years. That never means investors need to run for the hills and abandon their long-term plans, but rather that it warrants moderating expectations and being ready for a bumpier path in the near term. 

Source: Bloomberg. Data as of January 31, 2026.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

US ECONOMY SHOWS LITTLE SIGN OF SLOWING

The U.S. economy expanded more than originally estimated in the third quarter. The third and final estimate of real Gross Domestic Product (GDP) for Q3 2025 was revised higher to +4.4% from the previous estimate of +4.3% on December 23. Wall Street was expecting it to remain at the prior estimate of +4.3%. It was the strongest quarter of growth in two years. Better than previously reported exports and business investment drove the upside surprise, more than offsetting a slight downward revision to consumer spending. Consumer spending, measured by Personal Consumption Expenditures (PCE), is the main engine of the economy, and it increased +3.5% in Q3, versus +2.5% in Q2 and just +0.6% in the first quarter. The PCE component contributed +2.34 percentage points to real GDP growth in Q3. Net exports added +1.62 percentage points to growth in Q3, as imports fell -4.4% versus -4.7% in the prior estimate, while exports increased +9.6% versus +8.8% in the previous estimate. Government Spending increased +2.2% following a -0.1% decline the second quarter and +0.6% in the first quarter. The Personal Saving Rate fell to +4.2% from +5.3% in the prior quarter. The GDP Price Index (GDP Price Deflator) was unrevised at +3.8%, unchanged from the second quarter, and is up from +3.4% in the first quarter. The bottom line from the report is that the U.S. economy showed much stronger growth in the spring and summer despite higher U.S. tariffs and was revised higher in each of the prior two estimates. In addition, Corporate Profits surged after two quarters of weak or negative results (adjusted earnings before taxes shot up 4.5% in the July-to-September period). The final piece of the 2025 GDP puzzle, fourth-quarter GDP, won’t be available for another few weeks. The Atlanta Fed GDPNow is currently projecting +4.2% growth in Q4. If that holds—though it will likely fall with subsequent inputs—it would put the overall 2025 growth rate at right about 3.0%.

US Economy Grew 4.4% in the Third Quarter, Best Since Q3 2023

US Gross Domestic Product (GDP), quarterly annualized rate

Source: Bloomberg, U.S. Bureau of Analysis, Federal Reserve Bank of Atlanta. GDPNow estimate as of Feb. 2, 2026.

GDP GROWTH POINTS TO PROMISING EPS AND RETURNS

If real GDP growth continues to run in the neighborhood of 3%-4% and inflation continues in a range of 2%-3%, that puts the U.S. economy on track for nominal GDP growth between 5%-6% in 2026. And it makes intuitive sense that higher levels of nominal growth tend to translate to stronger earnings growth environments, and earnings ultimately drive stock returns. Data analysis by Natixis Investment Managers found, in fact, that the S&P 500 has seen median growth in forward earnings estimates (EPS) on the order of 10% when nominal GDP is 5%-6%, providing a healthy starting point for returns. Multiple expansion has taken the reins from there, providing median returns of more than 17% during these robust expansionary economic periods. Even moderating nominal growth in the range of 4%-5% has historically seen EPS growth of 8% and S&P 500 returns of nearly 15%. Of course, the return journey almost never occurs in a steady, straight line up and to the right, but the current and forecasted economic backdrop sure paints a constructive backdrop for forward earnings and healthy returns.

Strength Begets Strength

S&P 500 Returns and Forward EPS Growth vs Nominal GDP (9/30/96–9/30/25)

Source: Natixis Investment Managers, Bloomberg.

WHAT’S DRIVING THE U.S. ECONOMY?

With Q2 and Q3 GDP growth exceeding Wall Street consensus forecasts and at the strongest levels since Q3-2023, plus Q4 on pace to match or best those levels, it is hard to criticize the health of the U.S. economy. Those “looking at the glass half empty” suggest AI investment was the savior of an otherwise-stagnant domestic economy.  Indeed, over the last 12-18 months, the AI boom has reshaped market valuations, driven massive investments and record bond issuance to finance data centers. That has heavily influenced GDP, especially since early 2025, and is the crux of the argument that AI spending is the only reason the economy is growing. However, a January report from MRB Partners shows that consumption was the most crucial driver of U.S. GDP growth, which is typical for periods of economic expansion. Artificial intelligence-related capital expenditures were important as the second-biggest driver, but good old fashioned consumer spending was still the top contributor to economic growth despite the popular AI assumptions. MRB Partners U.S. economic strategist Prajakta Bhide, author of the report, told CNBC, “AI is an important part of the growth story, but it’s not the only part of the growth story. That’s a narrative that’s out there, that if we didn’t have the AI capex, GDP would have slumped last year. And that’s simply not true.” In late December, Bespoke Investment Group analysis came to a similar conclusion. Bespoke found that a unique Q1 was responsible for the vastly overstated ‘AI share of Economy’ perceptions. They show that in the second and third quarters of 2025, categories linked to AI spending accounted for just 15% of quarterly GDP growth. Their share of overall GDP is less than 5%.

AI is Not the Only Engine Driving the Economy

Contribution To Quarter-over-Quarter (QoQ) Annualized Percentage Change

Source: Bespoke, *Note: proxy for “Al”, includes all software + IT equipment nonresidential fixed investment.

ARTIFICIAL INTELLIGENCE: BOOM, BUBBLE OR BOTH?

Last month we shared information from Fidelity Investments highlighting the extremely rapid adoption of Artificial Intelligence (AI) services. They posit that AI is emerging as a major long‑term growth driver, with revenues expected to grow more than 30% annually as adoption accelerates from pilots to full production. While early beneficiaries have been technology firms like chipmakers and software developers, the gains are set to broaden across sectors—from utilities and financial services to communications and health care—creating wider investment opportunities as AI boosts efficiency, cuts costs, and enhances productivity across the economy. Clearly, Fidelity thinks the AI cycle is still in the early innings despite some market observers already calling it an AI bubble. Another top asset manager, Capital Group, weighed in on that topic recently. They point to the comparisons some are making to the days of the year 2000 dot-com bubble analogy, but their contention is that if there is a bubble in the making, it’s too early to imply a bubble is about to pop. According to Capital Group, 1998 would be a more apt comparison – i.e., AI stocks still have room to run. As shown in the charts below, their work shows that stock prices for AI leaders—Alphabet, Amazon, Broadcom, Meta, Microsoft, and NVIDIA, among others—are generally supported by solid earnings growth. Moreover, their lofty, headline-grabbing AI-related capital expenditures (and announced future investments) are far better supported than the 1990s dot-com upstarts.

Sources: Capital Group, Bloomberg. As of December 31, 2025.
LEFT: Data aggregates forward 12-month net income (“forward earnings”) and market capitalization (“market cap”) for Microsoft, Cisco, Intel and Dell, four of the largest and best performing companies of that period. As of December 31, 2001.
RIGHT: Data aggregates forward 12-month net income (“forward earnings”) and market capitalization (“market cap”) for NVIDIA, Microsoft, Apple, Amazon, Meta, Broadcom and Alphabet, seven of the largest AI-exposed companies.

CONSUMER CONUNDRUM

In a surprise to Wall Street, the Conference Board’s Consumer Confidence Index plummeted to 84.5 in January from a sharp upwardly revised 94.2 in December (originally 89.1). The January reading was far below Wall Street consensus expectations to come in at 91.0 and is the lowest level since 2014. The Present Situation gauge fell to 113.7 from a downwardly revised 123.6 (from 116.8) the prior month. The Expectations gauge — which reflects consumers’ six-month outlook — fell to 65.1 from an upwardly revised 74.6 (originally 70.7). Directionally, the Conference Board survey noticeably diverged from another prominent consumer survey, the Consumer Sentiment Index published by the University of Michigan. In contrast to Consumer Confidence, Consumer Sentiment ticked higher in January as it bounced off near-record lows reached late last year. Both surveys strive to measure consumers’ attitudes towards their current financial well-being and their future economic expectations, but their methodologies differ and provide unique insights. The Consumer Confidence Index is more influenced by employment and labor market conditions from the employee’s perspective and uses a larger sample size. In contrast, the Consumer Sentiment Index is more focused on household finances, the impact of inflation, and employment conditions from the business perspective. The University of Michigan survey uses a smaller sample size and tends to use more detailed questions that cover a broader range of topics. Most economists tend to view it as a better leading indicator of future consumer spending given its greater focus on personal financial situations. However, others contend the Conference Board index is better at picking up on lagging labor conditions.

US Consumer Confidence and Sentiment Contradict in January

Consumer Confidence Index versus Consumer Sentiment Index (Jan 2006 – Jan 2026)

Source: Bloomberg, Conference Board, University of Michigan.

WATCH WHAT THE DO NOT WHAT THEY SAY

In recent months, we have chronicled a historically large divergence between “soft data”, like the two consumer confidence surveys in the prior section, versus “hard data” which are tangible data points of actual economic activity. Just focusing on the U.S. consumer highlights this broader soft vs hard data disparity. In contrast to the poor consumer surveys above, the high frequency, private-sector measures of consumer spending are holding up quite well, with much stronger than expected results since June. As mentioned, GDP growth estimates for the U.S. are also accelerating broadly. Despite the narrative that all the growth comes from AI, and the lousy consumer confidence and sentiment levels, five of the last six quarters have seen actual consumer spending add as much to growth as it did during 2018-2019.

US Consumer Spending Remains a Clear Source of Economic Strength

US Consumer Spending, Month-over-Month

Source: Bloomberg, Bureau of Economic Analysis.

MIDTERMS MAY MEAN MESSY MARKETS

Capital Group examined more than 90 years of data and found that markets tend to behave differently during midterm election years. Their analysis of returns for the S&P 500 Index since 1930 shows that the path of stocks during midterm years differs noticeably from non-midterm years. Over long periods, markets have typically gone up so the average stock path during an average year steadily increases. But in the initial months of midterm election years, stocks have tended to generate lower average returns and often gained little ground until shortly before the election. Moreover, market volatility is higher in midterm years, especially in the weeks leading up to the election. Since 1970, midterm years have had a median standard deviation of returns of nearly 16%, compared with 13% in all other years. Over the past 23 midterm elections, the president’s party has lost an average 27 seats in the House of Representatives and three in the Senate. This tends to happen for two reasons. First, supporters of the party not in power — in this case, the Democratic Party — usually are more motivated to boost voter turnout. Second, the president’s approval rating typically dips during the first two years in office, which can influence swing voters and frustrated constituents. Additionally, candidates often draw attention to the country’s problems, and campaigns regularly amplify negative messages.

HISTORY SUGGESTS LOWER RETURNS AND HIGHER VOLATILITY

S&P 500 Index average returns since 1931

Sources: Capital Group, RIMES, Standard & Poor’s. The chart shows the average trajectory of cumulative price returns for the S&P 500 Index throughout midterm election years compared to non-midterm election years. Each point on the lines represents the average year-to-date return as of that particular month and day, and is calculated using daily price returns from January 1, 1931, to December 31, 2025.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (Vanguard Total International Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 24% US Bonds, 10% International Bonds, 6% High Yield Bonds, 14% Large Growth, 14% Large Value, 4% Mid Growth, 4% Mid Value, 1% Small Growth, 1% Small Value, 17% International Stock, 4% Emerging Markets, 2% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.