Monthly Market Update – January 2026

Equity markets: A modestly positive start

The S&P 500 delivered a gain of roughly 1.45% in January 2026, extending the market’s three‑year winning streak and briefly approaching the 7,000 level during the month. While this advance is less dramatic than some recent rallies, it reflects an environment where investors are still willing to pay up for large‑cap U.S. equities despite higher interest rates and slower economic growth.

The index’s move was broad enough to keep the long‑running uptrend intact, even as day‑to‑day trading remained choppy around Federal Reserve communications and large technology earnings reports. Valuation measures such as the forward 12‑month price‑to‑earnings ratio for the S&P 500 remain above their five‑year averages, suggesting investors are still discounting solid earnings growth in 2026.

Under the surface, sector performance continued to reflect a “quality growth” bias. Companies with durable earnings, strong balance sheets and exposure to secular themes (such as technology and health care) generally fared better than more cyclical or highly leveraged businesses. At the same time, the modest overall index gain shows that investors are increasingly discriminating, rewarding firms that meet or beat earnings expectations and punishing those that disappoint.

Internationally, performance was again ahead of returns here at home. For globally diversified investors, January’s pattern reinforced a dynamic that has been in place for over a year now. Coming off a much lower valuation, international equities have outpaced domestic, despite the dominance of the US tech sector in the headlines.

Inflation: Steady but not fully tamed

Inflation data available in January continued to show price pressures that are well below their 2022 peaks but still modestly above the Federal Reserve’s 2% target. The final Consumer Price Index (CPI) report for December 2025, released in mid‑January, confirmed that headline inflation finished 2025 at 2.7% year over year, with core inflation at about 2.6%.

Month to month, prices rose 0.3% in December, led by shelter and food, with energy also contributing to the increase. These details underscore an important nuance: While goods‑related inflation has largely cooled, key services categories—especially housing‑related costs—remain sticky and are likely to keep overall inflation from dropping sharply in the near term.

Policy and economic research groups highlighted that the 2025 inflation outcome was slightly better than some had feared but still high enough to keep real (inflation‑adjusted) interest rates positive. The risk of somewhat higher inflation later in 2026 remains, particularly if wage growth or housing costs re‑accelerate.

For investors, the key implication is that the “disinflation” process has progressed, but the environment is not yet back to the very low and stable inflation regime that prevailed for much of the 2010s. That reality matters for both bond and stock markets: Bond yields remain influenced by expectations for how quickly inflation converges to 2%, while equity valuations depend on the balance between earnings growth and the discount rate investors apply to those earnings. The nomination of Kevin Warsh as the new chair of the Federal Reserve could influence those expectations over the coming months as his confirmation approaches.

Labor market: Cooler, but still resilient

Labor market data released in January painted a picture of slower—but still positive—job growth as 2025 ended. The U.S. economy added about 50,000 nonfarm payroll jobs in December, a clear step down from the average monthly gains seen in 2024. At the same time, the unemployment rate edged down to 4.4%, indicating that while hiring has cooled, there has not been a sharp deterioration in overall employment conditions.

The December report showed job gains concentrated in areas such as health care, social assistance and food services, while sectors like retail trade shed jobs. Revisions to prior months lowered the estimated number of jobs created in October and November, reinforcing the message that the pace of labor market expansion has slowed meaningfully from earlier in the cycle.

Over the full year 2025, payroll increases averaged just under 50,000 per month, compared with roughly 168,000 per month in 2024, according to Bureau of Labor Statistics figures and related summaries. This deceleration is consistent with an economy working through the lagged effects of tighter monetary policy, as higher borrowing costs gradually feed through to corporate hiring and investment decisions.

A labor market growing at this slower pace can still support consumer spending, particularly if real wage growth (wages after inflation) remains positive. However, the margin for error has narrowed: A further slowdown from here could raise concerns about recession, while a re‑acceleration in wages without corresponding productivity gains could complicate the inflation outlook.

Putting the pieces together

Taken together, January’s information suggests an economy in a “late‑cycle” phase: growth is moderating, job creation has downshifted and inflation is closer to target but not fully anchored. In this setting, it’s notable that the equity market was still able to generate a positive return and maintain elevated valuation levels through the first month of the year.

For diversified investors, January 2026 did not bring a clear inflection point but rather a continuation of trends that have been building over the past year:

• U.S. equities remain supported by earnings and by the absence of a sharp economic downturn, even as volatility around policy and data persists.
• International equities continue to reward diversified investors.
• Inflation is lower and more predictable than it was earlier in the cycle, but key categories like shelter and services keep it modestly above target.
• The labor market is no longer running “hot,” yet it is still generating jobs and keeping unemployment within a range historically consistent with expansion rather than contraction.

As we move further into 2026, markets are likely to remain sensitive to incoming data on these three fronts—growth, inflation and employment—as well as to signals from the Federal Reserve about the path of interest rates. January’s modest stock gains alongside steady inflation and slower job growth illustrate how the current environment can support risk assets, even as it demands close attention to the evolving balance of risks.