The U.S. economy continued to move forward last month, showing momentum that outpaced long-term trends. Strong household spending and a steady services sector helped keep growth on track. Housing also regained traction as falling mortgage
rates encouraged more buyers to reenter the market.
However, not all signs are pointing upward. Manufacturing activity has now declined
for ten straight months, and inflation
is still running hotter than the Federal Reserve would like, despite easing slightly. At the same time, policymakers at the Fed are maintaining a cautious stance on future rate cuts, even as political voices grow louder in favor of quicker action.
Below is a look at the key market movements in January, the underlying forces driving them, and the areas we’re watching most closely.
Major U.S. Stock Indices
Early 2026 delivered a notable shift: small-cap stocks finally stepped into the spotlight. After years of lagging behind the “Magnificent 7,” smaller companies surged, with the Russell 2000 outperforming the S&P 500 and Nasdaq for 14
consecutive trading days.
This shift suggests investors are broadening their reach beyond mega-cap technology and seeking out opportunities in domestically oriented businesses, particularly those that benefit from improving borrowing conditions.
Here’s where the major indices landed:
- The S&P 500 rose 1.37%.
- The Nasdaq 100 edged higher by 1.20%.
- The Dow Jones Industrial Average led the pack with a 1.73% gain.
Economic Snapshot
The U.S. entered 2026 with solid momentum behind it. Q3 2025 Gross Domestic Product (GDP) expanded
at a 4.4% annualized pace, the strongest reading in two years. Early estimates for Q4 pointed to growth in the 3–4% range. However, signs suggest this pace won’t last. High-frequency indicators show the expansion is narrowing, with more of the lift coming from services and government spending rather than a broad base of private-sector activity.
Most economists expect growth to settle closer to a 2% trend through the rest of 2026—a healthy level, though far less elevated than last year’s peaks.
Labor market data also indicate a cooling phase. December payrolls increased by just 50,000, well below the 2024 monthly average of 168,000. Job losses were most pronounced in manufacturing and retail. Still, unemployment held steady at 4.4%, pointing to a gradual easing rather than a sharp downturn. Wage gains have slowed enough to keep inflation in check while still supporting household buying power.
Inflation continues to moderate, with headline CPI reaching 2.7% year over year in December—close to, but not quite at, the Fed’s long-term target. Producer prices, however, posted their fastest monthly rise in five months, largely driven by tariff-related pressures.
During its late-January meeting, the Federal Reserve kept rates unchanged
at 3.5–3.75% and indicated that only one additional cut is likely in 2026. Fed officials reiterated that decisions will depend heavily on incoming data, underscoring the institution’s commitment to independence despite mounting political scrutiny.
The ISM manufacturing index remained in contraction territory for the tenth consecutive month, landing at 47.9 as companies grappled with soft demand, lower inventories, and tariff-related cost pressures. On the other hand, the services sector continues to expand, housing transactions climbed 5% in December thanks to more affordable mortgage rates, and credit spreads remain tight—highlighting a split economy where consumer-facing sectors stay strong while goods producers struggle.
Our Outlook
Today’s environment is shaped by slower yet steady growth, easing inflation pressures, and a Federal Reserve nearing the tail end of its rate-cut cycle. One encouraging development: leadership in the market is widening. After years of concentrated gains in mega-cap tech, small caps and cyclical sectors are beginning to take part in the rally, opening the door to opportunities that had been overlooked.
Even so, this is a mature phase of the economic expansion. Policy uncertainty, geopolitical tensions, and uneven sector performance may continue to spark bouts of volatility. We’re approaching this environment by balancing exposure across cycles, emphasizing strong fundamentals, and keeping capital ready for compelling opportunities as they arise. In markets like these, being selective is just as important as identifying what to avoid.
If you’d like to discuss your portfolio or talk through any of these developments, Next Bloom Wealth is here and always happy to help.