As we moved through the start of 2026, the U.S. economy continued to grow at a pace above its long-term trend. Much of this strength came from steady consumer activity and a services sector that remains highly resilient. Lower mortgage rates also breathed new life into the housing market, encouraging more buyers to return after a quieter period.

Still, not everything is running smoothly beneath the surface. The manufacturing sector has now contracted for ten straight months, signaling persistent pressure on goods producers. At the same time, inflation remains somewhat elevated even though it has eased from prior-year highs. Against this backdrop, the Federal Reserve continues to take a measured approach to future rate cuts while facing increasing political calls for quicker action.

Below is a breakdown of what transpired in January, the forces shaping the current landscape, and the areas we’re watching most closely.

Major U.S. Stock Indices

Small-cap stocks stepped into the spotlight to kick off 2026. After spending years overshadowed by the “Magnificent 7,” smaller domestic companies finally surged, with the Russell 2000 surpassing both the S&P 500 and Nasdaq for 14 consecutive trading days.

This shift suggests investors are broadening their focus beyond mega-cap technology and beginning to explore opportunities in firms tied more closely to the U.S. economy—particularly those that could benefit from gradually improving financing conditions.

By the end of January:

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

Economic Snapshot

The U.S. entered 2026 on strong footing. Third-quarter 2025 Gross Domestic Product (GDP) reached 4.4% annualized—the best showing in two years. Meanwhile, early estimates for the fourth quarter suggested growth in the 3% to 4% range. Even so, it appears momentum may be leveling off. High-frequency data indicates a narrowing growth profile, with more of the activity driven by services and government spending instead of widespread private-sector demand.

Economists now anticipate a gradual return to a roughly 2% trend through the remainder of 2026. This pace is solid but not indicative of an economy firing on all cylinders.

Labor market figures reinforce this shift. December payrolls grew by only 50,000—well under the 2024 monthly average of 168,000. Much of the weakness occurred in manufacturing and retail. Despite this slowdown, unemployment stayed at 4.4%, pointing to a cooling job market rather than significant deterioration. Wage increases have moderated enough to keep inflation in check while still supporting consumers’ ability to spend.

Inflation showed further progress, with the headline Consumer Price Index rising 2.7% year over year in December. Though closer to the Federal Reserve’s long-run objective, it hasn’t yet fully landed at target. A notable development: producer prices saw their biggest monthly jump in five months as tariff-related expenses filtered through supply chains.

At its late-January meeting, the Fed held its benchmark rate unchanged at 3.5%–3.75% and signaled that only one more rate cut is likely in 2026. Officials stressed a data-first approach and reaffirmed their independence amid loud political debate over monetary policy.

Manufacturing continues to struggle, with the ISM index registering 47.9 for the tenth month of contraction. Weak new orders, reduced inventories, and workforce reductions—made worse by tariff effects—are keeping the sector under pressure. Meanwhile, services continue to expand, housing activity increased by 5% in December thanks to improved mortgage affordability, and credit spreads remain historically tight.

The picture is becoming more clearly divided: producers of goods face headwinds, while consumer-facing sectors hold firm.

Our Outlook

The broader environment points to steady but moderating growth, ongoing disinflation, and a Federal Reserve nearing the end of its easing cycle. Encouragingly, market participation is widening. After several years led by mega-cap technology names, smaller companies and economically sensitive industries are beginning to reemerge, offering investors a broader range of opportunities.

That said, we are firmly in a mature expansion phase—one where policy uncertainties and global tensions may contribute to short-term volatility. We are committed to balancing cyclical exposure with high-quality holdings, keeping valuations in check, and reserving capital for compelling openings as they appear. In times like these, avoiding the wrong risks can be just as important as identifying the right ones.

If you’d like to talk through your portfolio or explore any of these developments in more detail, our team is always here to help.