Markets spent the week digesting three big storylines: a Federal Reserve that is slowing down the easing cycle, a potential leadership change at the central bank, and an earnings season that continues to deliver but might not live up to the hype. The S&P 500 rallied early and topped the 7,000-level intraday before pulling back. Large-cap value stocks outperformed growth, and small- and mid-cap stocks lagged. Friday turned into a chaotic sea of red for precious metals investors.
Despite the choppy week and weak finish, the growth narrative remains intact. Economic growth is holding up, corporate profits are rising, and policymakers are signaling more upbeat assessments than expected. Patience will pay off for investors if they can manage risk well enough to avoid what appears to be an overreaction-prone market. The Fed paused this week, and we’d all do well to do the same. Pause, breathe, and come shovel my driveway. Again.
Via @WillieDelwiche & HiMountResearch
The Fed hits pause
The Federal Reserve held interest rates steady at the 3. 5% to 3. 75% range, ending a four-month streak of rate cuts that wrapped up at the December meeting. The decision was nearly universally expected, but the tone of the statement and press conference stood out. Policymakers upgraded their view of economic activity, citing solid consumer spending and growing business investment. They also noted that the labor market appears to be stabilizing, even as inflation remains “somewhat elevated. ”
The Fed is planning to be more patient as new economic data rolls in for January and February. After three consecutive cuts, officials now want more evidence that inflation is moving sustainably toward the 2% target before considering further easing. We’ll have to wait until March for the next Summary of Economic projections to put down on paper what was implied by Powell in the press conference.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, has cooled, especially in services. At the same time, goods prices have picked up, partly due to tariffs. Powell highlighted the silver lining of tariff-induced inflation: it is easier to manage than overheating demand since tariff effects will fade on their own. The resulting slower progress on disinflation means the committee expects to enact future cuts, but there is justification for waiting.
Marking the end of the worst season of the Bachelor to date, President Trump finally announced his nomination of Kevin Warsh to be the next Fed Chair. He is considered as less partisan than the former front-runner Kevin Hassett, but not by much.
Warsh appears more supportive of lower interest rates than Jerome Powell, given his recent comments, though his views are balanced by concerns about the Fed’s large balance sheet. He believes rate cuts can be paired with balance-sheet reduction to limit inflation risks. This flies in the face of his policy prescriptions from his last stint on the Fed during the Great Financial Crisis. He was an unequivocal inflation hawk at a time when unemployment was double our current level and inflation was less than half.
The true test of Warsh will be any situation that would push him outside or against the political whims of the White House. Balance sheet reduction, if he champions it, may turn out to be the scene of the next skirmish between the Fed and the White House if it risks economic growth.
A selection of Warsh’s comments during his tenure on the Fed as a Governor
Importantly, the Fed is not a one-person operation. The Chair only represents one vote out of twelve. Every voting member gets an equal say in how policy will be set, and as we’ve seen over the past four meetings, members are comfortable with dissent. If Warsh can’t back up his policy prescriptions, the other members aren’t going to go along to get along. There is already a baked-in skepticism over this nomination, given the political drama swirling around the Fed. While Warsh might be one of the better choices from the four finalists, he doesn’t have the same level of nonpolitical legitimacy as prior Federal Reserve Chairs.
The Fed’s term lengths, staggered appointments, and institutional norms are designed to protect independence. That structure still matters and has stood up to recent pressure. If investors ever questioned that independence, longer-term bond yields would likely rise, and markets would feel it quickly. Congressional and Judicial pushbacks have solidified around the importance of independence. For now, the system remains intact.
The confirmation process for Kevin Warsh could also take time, given the narrow margins on the Senate Banking Committee and ongoing political disputes. Additionally, Senator Thom Tillis promised to delay any confirmations until after the Department of Justice investigations conclude. If confirmation proceedings stretch past May 2026, Vice Chair Philip Jefferson would serve as acting chair regardless of whether Jerome Powell chooses to stay on as a Governor on the Federal Reserve committee.
Q4 earnings and forecasts send mixed signals
While the Fed meeting and Chair nomination stole the headlines, earnings did much of the heavy lifting. Fourth-quarter reporting is in full swing, and results from several Magnificent 7 companies beat expectations. Apple, Meta, Microsoft, and Tesla all cleared the bar, although investors were not thrilled with all the details. Google and Amazon report next week.
Microsoft’s stock fell sharply after company leadership highlighted heavy capital spending and slower cloud growth. That reaction says more about high expectations than weak fundamentals. As elevated as valuations are, “good results” aren’t good enough anymore. Bubble-like euphoria, this is not.
Overall, S&P 500 earnings are expected to rise by about 10% year-over-year in the fourth quarter, led by technology, with more than 25% growth. Eight of eleven sectors are forecast to post higher profits. That breadth matters. Broader market leadership reduces dependence on a handful of mega-cap names, and we’re witnessing the benefits as both the cap-weighted and equal-weighted S&P 500 have been hitting highs in January.
Via Edward Jones
Economic data continues to paint a contradictory picture. Consumer confidence dropped sharply in January, hitting its lowest level since 2014. Households are expressing growing concern about both the economy and the labor market. Confusingly, initial jobless claims remain low, and continuing claims fell to their lowest level since late 2024. People feel uneasy, but most are still working and spending through the pain.
Manufacturing-related data leaned positive. Durable goods orders rebounded strongly in November, and core capital goods orders rose, suggesting that business investment remains healthy. Producer prices, however, jumped more than expected in December, driven by higher service margins. That is another reminder that inflation pressures have not fully disappeared and could still challenge the Fed as tax refunds boost demand for goods and services in Q2.
Equity performance during the week reflected this mixed backdrop. Large-cap value stocks outperformed growth. Communication services and energy led within the S&P 500, while healthcare lagged after numerous insurance companies got creamed on disappointing Medicare spending news mid-week. Small- and mid-cap stocks struggled. These companies are more rate-sensitive and more prone to sell-offs when investors get skittish.
Shutdown sideshow
Washington added its own layer of uncertainty. Lawmakers are in the process of finalizing a deal to extend funding for most of the government through September 2026. Still, a partial shutdown extending past the weekend appears likely as the agreement still requires House of Representatives approval when they return to session on February 2nd. Disagreements over Homeland Security funding and immigration policy could complicate passage of the new bill.
We’ve been through this back in October, and the market weathered that event just fine. Short shutdowns typically delay activity, but this one isn’t likely to last any longer than a winter cold. Spending gets pushed back, economic data is delayed, and then things restart. Unless a shutdown drags on to rival October’s record-breaking length, the economic impact will be limited.
What this means for investors (and what’s next)
The coming week will be squarely focused on the January labor market data. A brief shutdown could interrupt the JOLTS release scheduled for Tuesday, but the data exists, so it’s just a matter of time until the release. Given the upbeat point of view from the Federal Reserve, January data (and any prior revisions) may show some rejuvenated openings and hiring. Payroll growth numbers are published on Friday.
For investors, the labor market isn’t as big of a concern as earnings and capex growth trends. There are plenty of heavy hitters releasing fourth-quarter earnings next week. Check out my Numbers to Watch for all the details.
I continue to expect one or two rate cuts this year, assuming inflation keeps cooling. Inflation might hover in the high-2s through Q2 as consumer demand gets a boost from tax refunds. The risk is that inflation reaccelerates into year-end, but I believe that is remote.
With cash yields drifting lower and intermediate-term bond yields remaining attractive, the yield advantage of bonds over cash will widen. Gradually redeploying excess cash into quality bonds or high-quality equities remains a reasonable strategy for many portfolios that need some medium-term stability.
Don’t be fooled, though. Risks have not vanished, and precious metals provided an excellent lesson on why managing risk exposure and position sizing is so important. Last week ended on an ugly note, and the sour market sentiment might continue to carry over into Monday. Elevated valuations mean not only do earnings have to keep delivering, but forward guidance needs to keep impressing too.
Political noise, inflation surprises, or a loss of confidence in central bank independence could all disrupt the current calm this year. Don’t count out unknown or unexpected disruptions in 2026. The risks you expect aren’t the risks that hurt you. The ‘Liberation Day’ of 2026 could be around the corner still, so don’t get complacent after three years of solid gains. \
