Key Observations
Market Recap
January opened the year with a confident tone across global markets. Markets were focused on the path of monetary policy, early corporate earnings signals and geopolitical developments that shaped sentiment throughout the month. Most major asset classes delivered positive returns to start the year.
Small-cap stocks, as represented by the Russell 2000 Index, rose 5.4% compared to the S&P 500 Index which gained 1.5%. The primary driver here is growing concerns around the impact of generative AI. Softer inflation, improving business surveys and an overall economic backdrop that remains resilient helped fuel the asset class.
International developed equities outpaced U.S. large-caps, continuing the trend from 2025. The MSCI EAFE Index advanced 5.2%, helped by broad strength across Europe and Japan. European equities found support from central bank communication that pointed to a stable policy in the near term, while inflation remained moderate.
Investor concerns surrounding geopolitical tensions in the Middle East and Eastern Europe remained present but did not dampen the regional rally. A weakening U.S. dollar contributed further support.
Fixed income markets generated modest gains as interest rate volatility remained. Treasury yields moved slightly higher during the month as the expectation for the number of rate cuts in 2026 diminished. Credit markets extended the positive tone. High yield bonds, measured by the Bloomberg U.S. Corporate High Yield Index, rose 0.5%, supported by narrowing spreads, resilient corporate fundamentals and a favorable economic backdrop.
Mixed Impact from AI
January saw a mixed impact from AI as investor concerns took hold regarding the potential disruption generative AI would have on software companies. This uncertainty resulted in the software sector being down 13.1%.[1] On the other hand, semiconductor companies, particularly abroad, continue to benefit from the demand for chips and flash memory. In our 2026 Outlook, we highlighted the importance of diversification and exposure to U.S. small and mid-cap stocks as well as non-U.S. equities.
A New Fed Chair Nominated
President Trump has nominated Kevin Warsh to be the 17th chair of the Federal Reserve. If confirmed by the Senate, Warsh would take the lead seat in mid-May when current chairman, Jerome Powell’s term ends. It is important to note that Powell’s term on the board of governors does not end until 2028, unless he voluntarily steps down. The market initially reacted viewing Warsh as a “hawk” based on his past Fed Governor experience and his comments on balance sheet reduction. However, Warsh’s optimistic views on current productivity could help lay the groundwork for future rate cuts.
The nomination has renewed the debate over the Federal Reserve’s independence, a recurring theme for investors over the last 18 months and a debate that has been going on for decades. Warsh, who served as a Fed Governor from 2006 to 2011, has historically championed the necessity of an autonomous central bank. We believe the Federal Reserve should remain independent of short-term political pressure.
Outlook
Overall, January provided a constructive start to the year across global markets. Diversifying positions away from U.S. large-cap equities and into U.S. small and mid-cap equities have been beneficial to start the year. A resilient economy and strong corporate fundamentals are at present, supportive for markets. However, we remain mindful of current valuations, market concentration and uncertainty created by geopolitical events. With all the unknowns, one thing we do expect is a year of continued volatility.
Sources
[1] FactSet. As of January 31, 2026.
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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