Markets March On But Risks Linger
Equities started off the year positively after a rather bumpy November and December. We thought there might be some early-year volatility, but so far, better economic data and an unexpected shift in the geopolitical landscape have seemed to be taken in stride by investors.
We do not think anyone had a change in leadership in Venezuela on their 2026 bingo cards, but the reaction by investors suggests that getting a new government regime in charge of the world’s largest oil stockpiles is a net positive, at least at first glance. Where this goes as more detail emerges is not as clear.
US economic statistics at the end of the year looked fairly strong, and there is a positive earnings story in the US and other OECD (Organization for Economic Co-operation and Development) markets as well. Upcoming Supreme Court rulings on tariffs may trigger a resurgence of the market volatility seen throughout 2025. The ‘Liberation Day’ shock factor has subsided as the administration has shifted toward fluid negotiating tactics, with several moving goalposts. However, an adverse ruling would force the White House to find alternative legal avenues, altering the timeline and rollout of future trade policies.
The quick turn to individual-country agreements sparked a relief rally and investor enthusiasm. The scare that DeepSeek brought to the AI landscape was also relatively short-lived. Good earnings growth throughout 2025 and a couple of Fed rate cuts helped US equity indices put up another year of double-digit returns (S&P 500 +18%).
A continuing technology capex cycle, combined with some of the fiscal stimulus coming from legislation passed last year, seems to bedriving a consensus that 2026 economic growth will be above trend. This, in turn, has shaped double-digit earnings growth expectations for the S&P 500 for the year. While technology accounts for a good part of that earnings growth, it is also forecast to broaden out to other sectors of the US economy.
As more normalized economic data comes through post the reopening of the US government, the Federal Reserve will be paying close attention to both inflation readings and the labor market. The employment data for January 9thwas reasonably good, while the headline number was a slight disappointment. The higher average hourly wages and a drop in the unemployment rate likely give the Fed time to pause and see how the data look going forward, which means we do not believe they will cut rates again in January. However, the market is expecting a further 2 cuts for the year.
Near-term economic data and the geopolitical landscape are likely drivers of the market, and investors will be on the lookout for any information, positive or negative, about the AI space and the spending anticipated to further the buildout. We expect that, as in 2025, this can add volatility to equity markets, and if recent past is prologue, any dips or scares may well be bought. Recent commentary on the housing market focuses on affordability issues. Still, the recent escalation of tensions with the Federal Reserve and its Chair, Jay Powell, seems to be muddying the waters for interest rates just after a drop in mortgage rates as a result of policies intended to have government housing agencies pick up where the Fed’s balance sheet has left off. How this plays out is not yet clear, but is likely to increase volatility.
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