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- Stocks moved higher in January, supported by strong fundamentals and a meaningful broadening of market leadership.
- Economic data point to solid fundamentals, despite weakness in sentiment.
- The new Fed chair pick relieves some uncertainty, but the confirmation process may introduce additional market noise.
- This environment continues to reward discipline, diversification, and staying invested.
Markets Rise and Leadership Expands
Markets moved higher in January, reflecting not just positive performance but a meaningful shift in the sectors that drove returns. In the United States, the S&P 500 Index rose 1.5%, marking its ninth consecutive month of gains. While the Nasdaq Composite also advanced, it lagged behind broader benchmarks, as the Dow Jones Industrial Average and equal-weight indices held up better. After reaching new highs early in the month, markets entered a period of volatility and retrenchment, reflecting a fundamentals-based repricing and rotation tied to positioning and flows, rather than underlying deterioration.
Building on a trend that began in 2025, market leadership continued to broaden during the month. Instead of a narrow group of tech-focused mega-cap stocks driving returns, a wider range of sectors and styles contributed positively to index performance. We observed that, on average, value stocks seem to outperform growth stocks by a wide margin, small-cap stocks appeared to have outperformed large-cap stocks, and the average stock outpaced the index. Higher energy prices supported gains in the energy and materials sectors. International equities appeared to build on their momentum, possibly supported by a weaker U.S. dollar, with developed international and emerging market stocks outperforming U.S. benchmarks. In fixed income, returns were modest amid rising Treasury yields, with credit outperforming duration.
Source: MarketDesk
Importantly, we believe that the current economic and earnings backdrop may support the longevity of this broader leadership. Earnings expectations have improved across a wider range of sectors and regions than before, and small caps, value stocks, and international equities, many of which entered this period with reasonable valuations, have room for price appreciation. This outlook for improved fundamentals and balanced, broad performance may bode well for equity performance this year.
Source: MarketDesk
Weighing Economic Data Versus Sentiment
We continue to experience persistent political and geopolitical noise consistent with 2025, but U.S. economic fundamentals remain solid. January data show resilience in key measures of real activity, including GDP growth, consumer spending, and employment. Despite this constructive data, we’re seeing a persistent disconnect between consumer and business sentiment, both of which have been unusually weak for more than a year. Fortunately for investors, we believe markets tend to follow economic reality rather than survey pessimism, and current data suggest the possibility of continued expansion.
Source: MarketDesk
Trump Announces His Pick for the Next Fed Chair
During its January meeting, the Federal Reserve held interest rates steady, as expected. After three 25-basis-point rate cuts in late 2025, the Fed’s January pause reflects stabilization in economic growth and the labor market rather than concerns about renewed inflationary pressures. Markets expect future rate cuts to be gradual and data-dependent. Importantly, monetary policy is not currently a dominant driver of market performance.
In late January, President Trump nominated Kevin Warsh to be the next Fed chair. After months of speculation, the announcement offered a measure of clarity on the monetary policy outlook. While the confirmation process will introduce near-term uncertainty, it lays to rest considerable speculation about the President’s next move on the Fed. Warsh brings institutional credibility and a clear emphasis on inflation discipline. Markets responded to the news by briefly repricing risk assets and commodities. Overall, earnings and fundamentals remain more important than near-term policy speculation.
Portfolio Implications: What We’re Watching
Over the next month, we will be monitoring fundamentals, particularly the durability of earnings growth amid rising expectations, as well as the pace and persistence of the rotation in market leadership. We are also monitoring financial conditions, including inflation trends, credit spreads, and the U.S. dollar’s relative strength, to evaluate growth prospects. As the confirmation process for the next Fed chair progresses, developments related to the confirmation and policy signaling, along with ongoing geopolitics, will create market noise. We anticipate, however, that markets will continue to respond to earnings, growth, and valuations over the longer term.
For investors, it is critical to let fundamentals, not headlines or political narratives, drive decisions. Staying focused through market swings and maintaining portfolio diversification across styles, market caps, and geographies will help prevent overconcentration in last cycle’s winners while providing exposure to the areas driving returns. We see a greater risk in being underinvested than in being overexposed, and believe that maintaining discipline and diversification will position portfolios well over time.
Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
We undertake no duty or obligation to publicly update or revise the information contained in this letter. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
Cary Street Partners is a broker-dealer and registered investment adviser and does not provide tax or legal advice; no one should act upon any tax or legal information herein without consulting a tax professional or an attorney.
International and foreign securities are subject to additional risks such as currency fluctuations, political instability, differing financial standards, and the potential for illiquid markets.
Fixed income investments have several other asset-class specific risks. Inflation risk reduces the real value of such investments, as purchasing power declines on nominal dollars that are received as principal and interest. Interest rate risk comes from a rise in interest rates that causes a fixed income security to decline in price in order to make the market price-based yield competitive with the prevailing interest rate climate. Fixed income securities are also at risk of issuer default or the markets’ perception that default risk has increased.
Comparative Index Descriptions: Historical performance results for investment indices have been provided for general comparison purposes only and generally do not reflect the deduction of transaction or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices. An investor cannot invest directly in the indices shown, and accurate mirroring of the indices is not possible.
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years). The Russell 1000® Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the companies represented continue to reflect growth characteristics.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The MSCI Emerging Markets is a global stock market index that tracks the performance of large and mid-cap companies across 24 emerging markets. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for global emerging market stock funds.
The Nasdaq-100 Index is a “modified capitalization-weighted” index designed to track the performance of a market consisting of the 100 largest and most actively traded non-financial domestic and international securities listed on The Nasdaq Stock Market, based on market capitalization.
The Bloomberg Barclays U.S. Aggregate Bond Index (U.S. Agg Bond) is a market capitalization weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded due to tax treatment issues. The index includes Treasury securities, Government agency bonds, mortgage-backed bonds, corporate bonds, and a small number of foreign bonds traded in the U.S. CSP2026028
