Economic Update 1-20-2026

Economic data included consumer price inflation coming in steady, but still elevated, as did producer price inflation. Industrial production and retail sales came in positively. New and existing home sales rose, but homebuilder sentiment continued to weaken. Jobless claims fell, reflecting further normalization after year-end.

Equities fared positively around the world last week, with small cap and international outgaining U.S. core large cap. Bonds were largely down as interest rates ticked higher as inflation remained sticky. Commodities were mixed, with precious metals continuing to lead due to geopolitical considerations.

U.S. stocks fell back on net for the week, with better results from value and small cap stocks, which outperformed large cap growth. By sector, gains were strongest in consumer staples, industrials (defense stocks), and energy, while communications (Meta mostly) and financials (large banks) pulled back by a few percent. Real estate also gained several percent, despite a rise in interest rates across the yield curve.

Monday started off negatively, as the Department of Justice opened a criminal probe into Fed chair Powell. Specially, this was related to allegedly misleading testimony to Congress about the Fed’s expensive ($2.5 bil.) building renovations, although the resistance to the administration’s wishes for even lower interest rates has kept Powell out of favor for some time. This was seen as perhaps another blow to the Fed’s independence, which markets found unsettling. Separately, the administration’s idea to cap credit card interest rates for one year at 10% was also unsettling to banks, in addition to a proposed 25% tariff on imports from countries doing business with Iran.

Earnings season for Q4 has started, with JPMorgan and Citigroup lagging due to lackluster earnings reports, while Morgan Stanley and Goldman Sachs fared better. Per FactSet, Q4-2025 year-over-year earnings growth is pegged to be 8.2%, with leadership from technology, materials (due to higher metals prices), and financials, while consumer discretionary and energy earnings are assumed to decline. Full year 2025 earnings growth is estimated at 12.4%, which is roughly double the long-term average since the late 1980s. Q1-2026, growth is assumed to be 12.2%, with largely the same sector contributors/detractors. Looking even further out, full year 2026 earnings growth is estimated to be 14.9%, with full year 2027 at 15.6%. Obviously, these are quite optimistic, but are hinged on last year’s OBBBA corporate incentives and tax policy, which is assumed to provide a fiscal boost to the economy over the next several years. As ‘stock prices follow earnings,’ as it’s put, that would represent a bullish case for stocks if that held true, despite higher current valuations.

Foreign stocks continued to fare positively, with Japan and the emerging markets leading Europe. Japanese stock sentiment seemed to benefit from optimism that the popular PM will call a snap election in early Feb., taking advantage of this popularity, and seeking a majority for her ruling party bent on economic growth and normalization. Germany ended a two-year minor recession, with slight growth in Q4. In emerging, gains in Mexico, Turkey, South Africa, South Korea, and Taiwan outshined minimal changes in the larger nations, with some of these materials-exposed nations faring well in light of continued rallies for metals/mining, in addition to AI-exposed technology.

Bonds were mixed, with total returns down for U.S. governments, as yields ticked up across most U.S. Treasury maturities, with investment-grade corporates little-changed, and small gains in high yield. International bonds were mixed by currency exposure, as the U.S. dollar rose a bit for the week.

Commodities gained overall for the week, led by precious metals up several percent (with a continued rally in silver), and energy to some degree, which offset declines in industrial metals and agriculture. Crude oil spiked mid-week, which netted out to being only a fraction of a percent higher last week to $59/barrel. This was blamed on the worsening situation in Iran, where government forces have killed up to thousands of protesters, and the U.S. threatening intervention. Iran is more of a near-term large producer, which explains the far stronger impact of that news as opposed to the Maduro arrest in Venezuela earlier. Should the regime be toppled, the lack of clear succession into a new government raises risks of a more chaotic situation, which affects regional stability on top of the oil question (and explains strength in precious metals, which tend to fare well under crises). Threats from the U.S. administration have been a key factor in raising market uncertainty, with prices moving higher vs. pulling back based on various threats.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.